5paisa Capital Limited (5PAISA) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, I'm Felicia, moderator for the conference call. Welcome to 5paisa Capital Limited Q4 FY '23 Earnings Conference Call. We have with us today Mr. Prakarsh Gagdani, Whole Time Director and CEO, 5paisa Capital Limited; and Mr. Gourav Munjal, CFO, 5paisa Capital Limited. [Operator Instructions] Please note, this conference is recorded. I would now like to hand over the floor to the management. Thank you, and over to you.

Very good afternoon, everyone. Myself, Prakarsh Gagdani, Director and CEO of 5paisa Capital. Me, along with my colleague, Gourav Munjal, who's our CFO, welcome you all for the fourth quarter and the annual conference call FY '23. FY '23 has been a year of consolidation for Capital Markets. Broad market remained range-bound throughout the year with the field practically giving more returns. You see the result of the same and was very clearly demonstrated in the retail participation. ADTO on the cash segment, which is the main indicator of the retail participation, reduced by almost 26% if you compare March '22 versus March '23. And the new demat accounts growth in the industry slowed down. Previous year, which is in FY '22, the industry grew by 81% and added almost 45 million demat accounts in a year. But last year, which is FY '23, the industry just grew by 22% and added approximately 21 million demat accounts, which is less than half of what we acquired the previous year. But despite these tough conditions, we have managed to successfully transform our organization with a vision of providing one of the best trading platforms to our customers. We changed our strategy in Q3 of FY '21, '22 of not just acquiring customers in terms of numbers and being [ at rate ], but to acquire a high-interest trading customers. In last 1 year, this has helped us to reduce not just our CAC, but also our payback time from 8 to 10 months to 6 to 7 months now. We kept technology and product on the forefront. We invested in building our digital team. We increased our manpower in the digital team from almost 208 people to 265 people. This very team helped us revamp our Android application. Today, our Android app has more than 15 million downloads, 4.81 lakh reviews with an improved rating of 4.31 plus. We launched our dedicated terminal, we call it FnO 360 for traders. Today, that has become a go-to platform for high-frequency derivative traders who are looking for tools, data and strategy for derivatives trading. Our efforts on product strengthening helped us to improve our ADTO by 146% if you compare last year March to this year March. Not just that, we have also improved our market share a bit from 3% to 3.1% despite 45% less customer acquisition. Talking about our financial performance. Despite the challenges we faced in the year with respect to subdued market participation, practically no returns in equity investment extrapolated. But we have managed to increase our revenue despite all the problems, we've managed to increase our revenues by 14% from INR 298 crores to INR 339 crores. Despite our investment in infrastructure scale up manpower increase in digital team, our costs have more or less remained the same, which is 1% increase. It has helped us to improve our profitability by 216%. I'm delighted to report our highest ever PAT of INR 43.6 crores for 5paisa Capital. We have not just increased our profits, but also expanded our PAT margins from 5% to 13%. It is also important to note that we have started to get the operating leverage because of scale of our business. We have explained in our presentation that we are broadly able to recover the cost, which is both the marketing costs and servicing costs in the first year with some marginal profit, but a substantial increase in the profit margin comes from second year onwards in the same customer cohort. It is also clear that we are enjoying 50% plus EBITDA margin from customers who complete 3 years in our system. Lastly, talking about our online retail trading acquisition of IIFL Securities, which we announced in Q3 of FY '23. The appointment date of acquisition is April 1, '23. We are currently in the process of seeking regulatory approvals, and I'm hopeful to complete this acquisition, subject to the approvals, in this financial year. With that, I end my opening remarks, and I'll open the floor for question and answer. If anyone of you have any questions, please go ahead and ask. Operator, over to you.

[Operator Instructions] The first question comes from Prayesh Jain from Motilal Oswal.

Congrats on a good set of numbers. A few questions from my side. Firstly a clarification, you mentioned that the EBITDA margin is 65% in the third year or over a period of 3 years?

Overall. So what we -- if you look at the chart, we are seeing that broadly someone who has completed 3 years, if you look at calendar year '20, is approximately 48% overall with second year onwards, it's 68%.

Okay. Got that. Got that. Could you break down the INR 111 crores of allied broking income for me into various heads?

Okay. So in the allied broking major part is MTF per income. And our MTF income stands approximately INR 60 crores, and INR 10 crores to INR 11 crores AMP and INR 10 to INR 11 crores is the BPMC and the rest is the transition charges. So this is the [ divide ] of INR 110 crores.

Okay. Okay. Okay. That's helpful. Okay. And so how would you rate the impact of -- in case there is a complete transition to ASBA? And also the upstreaming of funds, how do you see the impact of both these measures to your business?

So the first is ASBA is yet to get implemented. But yes, the ticket size there is, I think, because I think it's a UPI-based ASBA platform, so it will be around 5 lakhs. So it will impact the pains of the smaller ticket sized customers. See, even today, so that -- ASBA will not impact much because even if people use the ASBA, it is for making pains. Even today, and normally pains are done when customers are taking positions or buying delivery. So in most of the case, the money anyway goes to exchange as a part of our pain. The float that brokers enjoy is basically when the customers sell their stock or peer their positions and keep a credit balance. Normally, we have not seen people transferring funds and keeping it idle. So ASBA will not have much impact. On the contrary, it will become very easy for customers to transact because the success ratios now on the UPI-platform is very high. Talking about upstreaming. Yes, so, right now, with the regulatory changes, it will increase our working capital requirement because with this very recent circular, the bank guarantees on the customer funds is not allowed. So that will increase our requirement of working capital by approximately INR 100 crores, INR 125 crores. But right now, for our current requirement, we are internally well capitalized to handle that requirement. So for now, that will not be -- not have much impact.

Okay. But when you are -- when you're selling do you mention about ASBA? Is that in line with generally line vendor, and the individuals [indiscernible] but that will now have to be upstream, right?

Yes. But upstreaming to peering corporations are also allowed in the form of fixed deposits. So it's -- so then brokers will still continue to enjoy the interest on the fixed deposit. Though see anyway, a significant portion of the customer funds that are there are anyway parked in exchange, almost to the tune of 85% to 90%. Anyway parked with exchange in the form of deposits and -- deposits. But that will continue. Like that 90% will tactically become 100%. But it's not that the income is going away because exchange has even now allowed brokers to upstream the money in form of cash collateral also in the form of fixed deposits.

And when you say working capital requirement will grow, what will be the cost for that approximate?

So Right now, as I said, that there will be a very marginal cost increase yes. Gourav will take this question.

So we -- there is a INR 125 crores, INR 130 crores stability requirement. So there can be increase in costing, but that will not be much on that. It can be INR 4 crores to INR 5 crores.

Okay. Working capital increase between INR 125 crores to INR 130 crores?

Yes.

Okay. Okay. Okay. Got that. And with regards to this IIFL customer transition, obviously, you would have looked at the kind of ticket sizes and what is the kind of nature of these customers in the time. So are they kind of relatively better than what customers or what experience you have with the customer with existing customer base? Or would they be similar how would you look at that more qualitative and quantitatively?

See, broadly, with this transaction, we're getting approximately 15 lakh plus customers as a part of the acquisition. Now these are not like selectively chosen customers. They are a part of an online retail trading vertical of IIFL Securities. So the nature of the customers, the behavior of the customers, the customer cohorts in terms of geography, age bracket, genders, more or less are same what our customers are. But then the classification at their end is someone who has still lacks and -- low margin. So that's the reason because there was a cap in this particular vertical, the behavior in terms of ARPU of the customers may not be same as -- I think, it will be a bit less. But overall, the behavior pattern in terms of all the other parameters is more or less the same.

Got that. And so from an outlook perspective, I know I have asked a lot but just last question from my side. So there has been so much talk about FnO activity of retail participants being on the higher side. So, Prakarsh, can you quantify the breakup of revenue in the brokerage side, as to how much is in future and options [indiscernible]? And secondly, what are the measures that the regulator can really implement if they want to kind of constrain this increase in activity?

Sure. So broadly, if you look at our -- the breakup in terms of brokerage and derivatives, close to 75%, 80% is the revenue that -- in today's market condition, that we are getting from derivative. So it is broadly skewed towards derivative as of now. One of the reasons is, obviously, higher participation of retail and derivative, but is also a very, very low participation in the cash segment. So -- but yes, currently, it is in that range. Secondly, there have been talks in terms of the higher retail participation. But you see, if you look at numbers, and this is my analysis of this entire thing. If you look at the real turnover, which is typically the premium into quantity, on the retail side of it is not more than the -- overall derivative turnover is not more than INR 50,000 crores, which is typically the same turnover that cash market segment is generating. So the actual turnover in the retail, which is option trading turnover equal to the cash market turnover. Having said that, yes, there has been an increase in the customers who are trading in derivatives segment. But that has also because of the changes in the regulatory environment in the last 2 or 3 years. A lot of people used to trade in the cash segment before 2021. That entire customer base, which was trading in cash segment also shifted to derivatives because cash segment leverage went away. So in cash segment earlier broker used to provide at least 10x, 12x leverage. Now that has gone. So where do you get 10x is typically rupee, because rupee margin is in the range of around 8% to 9%. So that's where you get leverage. So that customer shifted to derivative. Second, the overall demat account number actually from INR 3 crores, INR 3.5 crores, we are at INR 11 crore demat accounts. So when you have more retail participation coming in overall capital market, the number will go up. Though, yes, there has been advisory -- there have been reports and SEBI has also published a report in terms of how many people are making losses. But I think it's a general behavior today, the leverage has gone out of system. Brokers can't give leverage. Customers have to come with a complete cash. There is absolutely transparency. So I think a lot of measures are already done. What more will be done is something that we'll all have to see. But I don't see that -- this as such a dangerous trend that is being perceived otherwise.

Next question comes from Deepak Sonawane from Haitong Securities.

Yes. Am I audible?

Yes, absolutely.

Yes. Yes. Congrats for the good set of numbers. Sir, my first question is on cost of the acquisition. So we have seen, I mean, quarter-on-quarter, and again, for industry as well, quarterly average acquisition -- I mean, planned acquisition [ initiatives flowing over ] right. But for us, if you see that cost of acquisition has gone upright quarter-on-quarter as well. I mean, that is mainly because of using other OpEx, right? So what, I mean, major item that classified as other OpEx? I mean, we have reported around INR 296 per client other OpEx for Q4 FY '23?

The OpEx -- see, typically, what happens is that because other OpEx also means the call centers, our sales team, which is part of our call center team who assist customers in opening account. Now that is a fixed cost of people, and that cannot change immediately with the quarter. So if there is some drop in the acquisition for a quarter, obviously, the fixed cost of employees, if you divide by the number of customers, that increases. So I think that's the impact on the acquisition, which I feel is just a temporary thing. Broadly, in my previous calls, I have said that we've been working on reducing our CAC. And more or less, that activity is over. And then I somewhere see that our CAC will range between INR 500 to INR 600 depending on sometimes the market scenario in terms of acquisition, sometimes the composition of acquisition that we are doing in terms of paid performance and also the organic growth in the reference. So broadly, this will be the range. A small here and there is only because of the fixed cost of employees and the other OpEx expenses that we have.

Okay. But on marketing side as well, we have seen some kind of uptick rate on a quarter-on-quarter basis from INR 256 to INR 317?

Yes, yes, yes. So there will be a small INR 50, INR 70 movement that will keep happening here. But broadly, the trend will be in the same range. So if you look at the last 6 quarters performance from -- if we were in the range of around INR 750, INR 800. And from that range, we will be in the range of around INR 500 to INR 600. So you should consider that as a broad range.

Okay. Okay. Okay. And my second question is on, I mean, our cash position on balance sheet reduced drastically, right, year-on-year. I mean, from INR 89 crores to almost around INR 21 crores. And as against our borrowings, even, I mean, the same pace they have gone down, right? So any particular reason, I mean, major reason for that?

Okay. So the cash and cash equivalent, we should always see with the bank balance, because it is -- one is a healthy format. One is a liquid cash. So if you combine together, it has gone up. And cash and cash equivalent is just balance sheet based figures that how much cash we are keeping to the exchanges. Okay. Second question is related to the borrowings. Actually, the borrowings is major related to the MTF book. So you can see our loan book, which is coming down from INR 250 crores to INR 172 crores, major impact we have seen in the month of March. And hence, the borrowing has been reduced.

Next question comes from Kajal G from ISec.

Congratulation on good set of numbers, sir. One was on the [indiscernible]. Can you just explain more on the Slide #12 3, that you have shared in the first, second, and third year. And the second one on the increasing turnover which you mentioned sequentially. So is this led by increasing number of orders at [indiscernible] per order, what is the color on that?

Kajal, I am sorry, but I could not get your question very clearly. If you can repeat both your questions, we can answer one by one. What was your first question?

First one, I want to ask about Slide 12. So I wanted to understand more on the Slide 12, what we are explaining out there? And the second was whether the increase in turnover essentially what we have seen is led by rising orders or rising ticket size?

Yes. So I think the first question was related to the customer cohort that we have shown and the high LTV, right? That's the question?

Right, right.

Yes. So what we're trying to show here is that whenever we acquire customers, there's an acquisition cost and then there is servicing cost. This is that what is the revenue that we -- what is the profitability that we achieve in every year. So if you look at calendar year '18, then that customer set has completed 6 years with us -- sorry, 5 years with us, and this is the CY '23, which will be the sixth year. So in 5 years, what is the margin that we are getting and subsequent years, and how much are we earning from that customer on an overall basis in 5 years. So if you look at the idea of sharing this was, that broadly in the first year, barring last 2 years because we were investing heavily in technology and infrastructure, you see here first year negative returns in terms of losses. But broadly, we are seeing that in the first year, we recover the cost, both in terms of acquisition and also servicing. And post that, there is a high profit margin give. And we are clear that our customers are there with us for 3 years, the margins will increase. Now this also means that going ahead, because of the steady state of business, our overall margin of the business, which our PAT margin stands at around 13% today, will continue to increase over a period of time. So the whole idea of getting the operating leverage in a model where at some point, your cost gets fixed, and then it's only incremental revenue, which increases your profitability. The idea of this was to show that. So second point about the ADTO. The rise in ADTO is a combination of 3 things. One, it is increasing number of customers, which also translate to increasing number of orders and also the ticket size. It's a combination of both that we are seeing an increase in the overall ADTO sequentially.

Next question comes from Rishikesh Oza from RoboCapital.

Sir, my first question is regarding the brokering rates. So how do you see the broking rates to evolve going ahead, given that the compliance costs should be increasing and the floating income would be reducing?

See, I have said this in the past also that the kind of regulatory changes which are coming, it is increasingly getting difficult to maintain margins in business. As of now, till date, the changes which have been proposed is not having a significant impact on the cost. And that's why brokers are able to provide a INR 20 per order. But incrementally, if there will be an impact on the income that we generate, for example, the treasury income that we generate on our deposit, there is -- if there is an impact on that. Or if there is any other impact which leads to a reduction in the derivative turnover or any other change brought in by regulator, then obviously, the cost of running business is as it is fixed, we will not be left with any choice but to increase brokerage rate. So I think that may not be next couple of quarters, but suppose that there may be a probability -- there's a higher probability that the rates may go up.

Okay. Okay. And also, sir, what is your customer acquisition for FY '24?

We acquired close to 7.5 lakh customers in FY '23.

And for...

Are you asking for projections for this year?

Yes, yes.

So I won't be able to give you an exact number. But we will be in the range of same 7.5 lakh to 1 million kind of a customer.

Okay. Okay. And also my -- 1 more question, sir. What is the other operating income of INR 18 crores?

So this is -- again, that float income that [indiscernible].

Okay. Okay. And also, if you could provide any metrics on daily active users and monthly active users?

I'm sorry, we don't share that data.

[Operator Instructions] We have a follow-up question from Deepak Sonawane from Haitong Securities.

So my -- I mean, I have only 1 question, especially on our LTV NMI, the calculation that we have shown in Slide #12. So instead of -- if you look at -- I mean, let's say, can you give us any color on, let's say, for CY '18 on first year, that generated around INR 100 revenue. So for subsequent years, what would be that revenue? I mean, because 14% EBITDA margin would be mainly impacted by CAC, right? But if you just look at our revenue and growth revenue, gross booking revenue, so what would be the trend?

See, it will be difficult to give the exact number for each year because our acquisition numbers and the quality of acquisition for each year was different. So the purpose of showing this was that, if at all, a customer is generating INR 100 in overall tenure of his life cycle, in the -- if I look at the cohort of CY '18 customer, then we are talking about that all put together, we have only spent INR 34 in servicing, acquiring plus servicing, and we have got INR 66 as the income. Now it also means that the -- and because we are -- with every incremental year, the life cycle of customer is also increasing. The overall impact of that on our overall business will be high going forward. So one is that the inference of -- from this data should be, one, that post 3 years, the margins of a customer is 50% plus. Second, with every incremental year because customers are retained and they train the trade, the overall impact on the revenues and profitability will be higher and the margins will improve.

Okay. Okay. So just 1 question. So let's take an example of CY '22. So for CY '22, first year, I mean, particularly the way, I mean, customer has generated around INR 100. So for CY '22, the second year would be, I mean, the revenue generated by the similar customer would be up to 80%. Will that be a fair assumption?

In the span of -- if you check the span of 6 years, yes, you're right, it is coming up.

But for calendar year '22, we are getting a 69% margin in the second year. So in the second year, you only have the servicing cost so the acquisition cost has already gone in the first year.

We have a follow-up question from Prayesh Jain from Motilal Oswal.

Just question on the cross-sell income. That has grown by just 5% in the current year, FY '23. How do you kind of see this going ahead? And what was the reason for the slow growth?

See, right now, so, our focus has been more into our broking business. because I said that our product revamp, our investment in technology, all was targeting the broking revenues. So as an organization, the focus was on broking and that's the reason cross-sell is more of a small enabler of the product, but it's not a major focus area for us now. Having said that, yes, we are planning to introduce lending products and bond and other some fixed income products on our platform. But those -- the other cross-sell income products do not contribute substantially to the overall income. So broadly, the reason why there is just a 5% growth is because the focus was more on building our product on the broking side of it.

And how would you see the margin funding book growing?

See, margin funding book growing typically is directly correlational to the cash market turnover. So as of now, it be close to around INR 270 crore for last quarter. And because it is -- the market scenario is very subdued, the growth is not there. Pricing, it will increase as and when the market increases.

And just coming back on this chart on the [ slide #12 ]. If I -- for example, if I look at the third year margin, which is a light blue box. Okay. Or for that matter, even the end of the second year margin, right? So margin has been declining signing except for the second year number, which kind of [ CAC ]. But if I look at the blue box or if I look at the pink box, they have been declining from the year. So while there is no customer acquisition cost out there, there is kind of any servicing costs there, then why is the margin kind of sloping downward for all these years?

See, one factor -- interesting observation. See, one factor where the margin has been a bit reduced as compared to the customers that we acquired in calendar year '18, '19 to '20. The reason is scale. Because in the first 2 years, we acquired -- we were only at around 3.5 lakh as a customer base. But in just last 2.5 years, from 3.5 lakh, our customer base increased to from 3.5 lakhs to 35 lakhs. So that's a massive increase in our customer base. So what happens is that when you acquire a large number of customers, the quality of the customer is not the same as you were acquiring earlier. And that's why there is -- it will have an impact on the margin because typically, the cost of servicing is the same. But the revenue that customer brings in will vary. And that's why you see a drop in that.

Okay. And sir, in a way from next year onwards, this year focused approach on acquiring more quality customers now, these margins should improve, right?

Absolutely.

[Operator Instructions]

Operator, can we end this?

Sure, sir. There are no further questions. Now I hand over the floor to the management for closing comments.

Thank you very much, everyone, for joining our conference call. If you have any questions, you can write to us at [email protected]. We'll be more than happy to answer your queries. Thank you very much, and have a wonderful holiday ahead.

Thank you, sir. Ladies and gentlemen, this concludes the conference call for today. Thank you for your participation and for using Door Sabha's conference call service. You may disconnect your lines now. Thank you, and have a good day.