Geojit Financial Services Limited (532285) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Geojit Financial Services Q4 FY '20 Earnings Conference Call hosted by AMBIT Capital. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Udit Kariwala from Ambit Capital. Thank you, and over to you, sir.

Hello, everyone. I welcome you all for the call. We have with us Mr. C.J. George, Managing Director; Mr. Satish Menon, Executive Director; Mr. A. Balakrishnan, Executive Director; Mr. Sanjeev Rajan, Chief Financial Officer; Mr. Liju Johnson, Company Secretary. I welcome the management team on this call. And without further ado, over to you, sir.

Thank you, Udit. Good evening to everybody. This is Satish Menon. I will just take you through the operational results for the last quarter and for the year and some numbers, after which we can open for Q&A. In terms of the operational income for quarter 4 of FY '19/'20, we have done INR 82.31 crores, which is a growth of 8% over the same quarter last year and a growth of 6% over the December quarter. In terms of total expenses, INR 57.82 crores, which is 7% down from the same quarter last year and 1% down from the December quarter. In terms of earning before taxes, we have reported INR 24.86 crores for the March ending quarter, which is 77% up from the last March and 27% up from the December quarter. For the full year, income was a little less than 1% from FY '19 to INR 305.34 crores, and EBT is INR 74.11 crores, which is 13% higher than 2018/'19. We go to product-wise income. The quarter 4 was slightly better for the brokerage and brokerage related income. We have reported INR 63.45 crores income from brokerage and related activities, which is a growth of 5% Y-on-Y and 8% compared to the previous quarter. Financial product distributions INR 14.26 crores of income, which is 50% more from the same period last year and negative 1% from the December quarter. Financial product distribution was split into 2 major items: Mutual fund, it is INR 10.21 crore, which is 17% up from the last year March and the same as reported in the December quarter; insurance has gone up by 447% to INR 3.97 crores and is slightly 3% down from the December quarter. Software income was down 29% Y-on-Y and 1% up from the December quarter. So total operational income 8% Y-on-Y growth and 6% quarter growth. In terms of product mix, quarter 4 FY '19, 80% -- or 79% of the income used to come from brokerage and related activities. It has now come down to 76.74%. And in financial products distribution, we have been able to a little bit diversify into insurance also compared to the year before quarter. Year before, we had insurance contributing 7.6% and in the JFM '19/'20 quarter, insurance is contributing close to 28%. In terms of other key figures, the SIP books stands at INR 164 crores, SIP and STP book. SIP count as of March '20 is around 400,000 SIPs. And SIP AUM is close to INR 1,800 crores. It has dipped from December '19, primarily because of the market fall in the month of March, which happened in the last 10 days of -- primarily, which happened in the last 10 days of March. In terms of our assets under holding, we have INR 23,000 crores of assets under holding in our DP. Mutual fund assets for Geojit, it is INR 4,400 crores -- sorry, it is INR 3,750 crores in March '20 compared to INR 4,400 crores, including debt last year. In terms of new customers, last quarter, we recruited 13,250 clients, slightly better than the third quarter. Over the year, we have recruited 51,000 clients. This year, we have given the gross inflows and the net inflows in the presentation itself, so that people get a better clarity of what's happening on the mutual fund side. For FY '20 the gross inflow of INR 1,564 crores (sic) [ INR 1,563 crores ] in equity mutual fund schemes for Geojit compared to INR 1,805 crores in the year before. Net inflow, this year, we closed at INR 610 crores of net inflow for equity and equity hybrid schemes compared to INR 1,062 crores the previous year, and especially the last quarter with the net inflow of only INR 116 crores compared to INR 279 crores a year before. This is primarily a function of the market. In the fourth quarter, we have seen slightly more redemptions in the mutual fund side. The yield has remained more or less the same. In terms of the blended yields, blended yield is slightly up, it is 0.034% compared to 0.033% compared to the December quarter. And the equity yield is also more or less steady at 0.0118% (sic) [ 0.118% ] compared to 0.0119% (sic) [ 0.119% ]. Average trading turnover is slightly lower than quarter 3 of last year. Whereas cash -- the volume in cash market went up, whereas the volume and derivatives market came down for us. This is as far as the presentation is concerned. We are now open to Q&A.

[Operator Instructions] The first question is from the line of Akshay Jogani from White Oak Capital.

I had a broader question to ask you and understand your views on it. So there -- primarily, currently, the business is the equity broking and mutual fund distribution. Now on the equity broking side, we are seeing that due to various players sort of entering and we can't play as primarily, the yields have gotten compressed and profit pool has sort of reduced significantly. Similarly on the mutual fund distribution, too, the yields have kind of come off because of lesser and lesser upfront, more of SEBI regulation, plus there is a shift to direct that is also kind of happening. So how do you see -- given, both the businesses have some form of headwinds, how do you see this current strategy sort of panning out over a 3- to 5-year period? And what are the things that you want to achieve if you had to take a 5-year view?

Members of the management, can you please confirm. Yes, sir, we can hear you. We can hear you, sir.

Yes. Okay. So we have seen in the brokerage market, the discount brokers coming up. And over the last 1 year, specifically, apart from the largest discount broker, some other brokers have also come up in the ranking side in terms of number of clients. We feel that these clients are primarily related to the futures and options market. But we have also seen that in terms of the COVID situation in April and May, we have seen larger retail participation coming to the market. So itself, there is an increase in the client base. My personal feeling is there is market for both of us. Discount brokers caters to a particular segment of clients and Geojit full service brokers services a particular segment of the client. So I -- my feeling is, in the long run, both will sustain, both will be there and catering to each segment of clients. Coming to distribution, in terms of mutual fund, yes, we have seen the yields going down primarily because of SEBI rules. Over the last 4 years, we have seen distributors commission coming down by almost 35%, 40%. Now we had started our journey to build mutual fund assets in 2016, and the yield what we used to get that time and this time, it is close to 35% less. So yes, the industry has played its role, and the regulators have thought that industry is maturing and the cost to the investors should go down. Of course, subsequently, that the reduction in cost has not yet amounted to increase in volume as of now, which I think is primarily because of the market situation and not to do with anything else. So the yield's affection -- the impact of yield has already happened in the last 1.5 years. I don't further see a reduction in the yield going from now for at least for some more time. To answer your question about the online mutual fund, yes, we have seen online increasing in percentage terms, but this is largely coming from metros and largely coming from well-informed investors. We cater to the -- mostly, we cater to the sub A type kind of cities to retail clients, where they still prefer to do an offline transaction, where the value, the advice received from an offline employee. So my feeling is both will continue and both will grow over a period of time. So India is a very underpenetrated market for mutual funds. I can only see, when the appropriate times come, this number should balloon to maybe 3x or 5x figure in terms of number of clients over the years to come.

Satish, can I -- I'm George here, let me add 1 more point. When we say offline, we are not talking only about offline transactions. The relationship is built offline, and there is a face-to-face human interface in between. So we are able to sell various financial products to the same client and the client's household. The idea is from a client's household, if somebody wants to buy insurance, life insurance or health insurance or auto insurance or mutual funds, derivatives, equities, we will be in a position to advise him. Maybe he will execute online, but his advice could be through phone, through the branches, execution will be through online. So we are seeing definitely a greater amount of interest, and we are not seeing any lack of interest from the side of the clients. And this relationship is helping us in terms of selling all financial products to same client. So it is not a trading-trading kind of relationship, which Geojit is enjoying with the clients. We are there building long-term relationship with the client and the client's family. So that is how we place it. And that business, we are very confident that we can grow that business.

[Operator Instructions] The next question is from the line of Chander Bhatia from Seers Fund Management.

Congratulations to Mr. George and Mr. Menon and the entire team for excellent set of numbers. I have a couple of questions. Firstly, regarding the challenges faced during the lockdown period, with regard to brokerage business, opening of new trading accounts and distribution of financial products. So this is my first question.

Okay. So in terms of the lockdown period, so March, so in Kerala, we started from a week before the national lockdown happened on March 23, 24. So in the lockdown period, we have not been able to open all our offices, only half of the offices were opened; in some places, it is -- the whole state was not open. But what we have seen in terms of volumes, the volumes have increased March post the lockdown. And in the month of April and May, and also the mid -- the first half of June, the volumes is around 20%, 25% higher than what we have seen over the last year. So in terms of brokerage business, lockdown has actually helped in better revenues. But in terms -- at the same time, in terms of the distribution business for mutual fund as well as in insurance, we have seen that in the last half of March when the lockdown happened, mostly distribution business happens face-to-face unlike brokerage. In terms of brokerage, close to 75% plus of our volumes are online. We had gone particular days above 80% of the total volume coming online. So brokerage business can be done online, but the mutual fund and insurance -- the new sales, which happens primarily offline has taken a little beating in terms of the new collection. In terms of mutual fund AUM, we have reported INR 3,700-odd crores of mutual fund AUM, which is as of March end. But if you look at February mutual fund AUM, it was INR 4,000-plus crores. So what we have seen is the market has come down, the AUM has come down because of the market. But in terms of lockdown, April and May, we have seen actually lesser redemption compared to what we have seen in the same period of JFM. So in terms of new business, lockdown has affected mutual fund and insurance. But in terms of brokerage, actually, the brokerage volumes are a little better.

Okay, sir. And sir, my next question is about brokerage yield is going down since last many years, maybe, say, 8 to 10 years. It was almost, I suppose, double to this what it is today. So where do you see it in next 3 to 5 years?

I see if you look at the...

Satish, I will take this question. The question is, what is the trend that we are going to see in the broker yield, that's right?

Yes.

In the trade execution business, the trade execution business is actually becoming comparable to gaming business. So in the trade execution business, we are, particularly derivatives, big volume, et cetera, we are very sure that the yield will continue to go down. But in terms of investment services business where we are there the client to help the client to make money and create wealth, in that segment, we are of the view that the yield may not go down, rather when we add value to the clients' requirements, we are very sure that the yield can even go up. So there will be a reduction in yield in the near transaction execution trading business, but there will be an improvement in the yield when we add more value to a client. This is our perception, and this is the conviction that we have going forward.

Okay. Okay. And sir, 1 more question. If you can give the number of active demat accounts and accounts which are above the security holding more than 2 lakhs?

We do not have that number at the moment with us.

The next question is from the line of Vijay Karpe from Bryanston Investments.

Congratulations on a strong set of results. And thank you for providing the page on gross inflows as well. How are you Satish ji?

I am fine, Vijay.

So my question pertains to -- sir, this year, we added 50,000 clients, what do you think we can do in FY '21? And what about the cost-to-income ratio? For Q4, it was very strong at 61%; for the full year, it was at 66%. What do you think that should be in FY '21?

Okay. Vijay, we don't give guidance, we don't give forecast. But in terms of what I can tell you for the first quarter of this financial year till now, since the volumes in the market are better, the income should be better, whereas we have seen slight reduction in the cost in terms of offices and all those things. But our feeling is it all -- for us, since a major portion of our income comes from brokerage till now, brokerage volumes will make -- will actually impact the CIR. If the brokerage volumes are better, the cost income will go down. In terms of number of clients, we added 51,000 clients last year compared to 87,000 clients the previous year and 85,000-odd clients in the year before. So last year, there was definitely a dull in the number of clients. Our target for this year is close to what we have done the year before. It all depends on how the COVID situation improves.

Also, I must add one more point. We have started the digital onboarding of clients. So thereby, without much difficulty, even during a lockdown period, even when we are unable to meet the clients, the opening of account will be smooth and almost instantaneous. So this is the service that we launched when we were in lockdown. And this is helping us in getting at a faster rate, getting the clients onboarded. So this will also help this year for us in order to add more clients.

Okay. And anything on the expansion plans? I think so we were planning to open some branches in the North. And have you seen any decline in rentals for us?

Okay. Satish -- we are opening a few branches where we do not have any presence at all. Otherwise, during this COVID period, our focus will be on the places where we are strong, the places where we can easily get new clients. So there will not be significant expansion that we are thinking of this year. But all that depends on how COVID-19 situation is unfolding.

And have you seen any decline in rentals?

See, decline in the rentals on a permanent basis, we haven't seen yet. So wherever we have renewals, that is the time we renegotiate. But at the same time, I must tell you that we got some rent reductions, which are not very small in this quarter. This could be treated as kind of a quarterly savings. But going forward, often when there is renewals, that is the time we will be able to renegotiate. But having said this, for all the branches, the branch managers and regional managers are on the job to renegotiate and re-indulge new contracts with landlords. So we expect some savings there.

Okay. Can you quantify?

Oh, no, I'm sorry. That will lead to giving kind of a guidance.

No problem. And can you tell me what is the current margin trading book that you have, BTST and MTF book at the end of the March quarter? And what was the average?

Just hold the line. I will come -- I will answer this question, Vijay, I need to find out -- take that data of the margin trading book. But we can go to the next question, by the time we'll get the data.

Okay. And the income from the MTF book?

Income from the MTF book for the March ending quarter was INR 1.8 crores.

INR 1.8 crore?

Yes.

Okay. And I think so it will be impacted in the current quarter as well, right? I think so we have -- okay. I'll get back in the queue.

[Operator Instructions] The next question is from the line of Ratish Varier from Sundaram Mutual Fund.

Sorry, if -- I got cutoff in between, if I'm repeating the question. I had a couple of questions. First sir, in one of the earlier gentleman's question, you mentioned that yields you assume to see not going down further. So wanted to clarify this, you're talking about cash market yields, that is number one. And second, sir, if you see last year, our insurance has driven a good amount of growth for us. This year, post COVID, how do you see the business, the insurance distribution business? And do we have any split between protection business and other businesses? And how do you see the fee income there next year?

Satish, I will just answer one part of the question, then leave it to you. This question of on the yield -- the long-term view on the yield, I'm again repeating what I was talking about is the yield in the cash market, where we are not just an execution service providers. We are helping the client to create wealth, that is the way we position ourselves with our -- as far as our relationship with the client is concerned. So there could be some amount of pressure on yield. But at the same time, what we are doing is we have -- as you all are aware, we started selling mutual funds to the client, insurance to the client, life insurance, health insurance, auto insurance, et cetera. So we are basically looking at revenue from a client today rather than just yield on cash market transactions. But I have no doubt in my mind that the derivatives trading transactions as well as the so-called day trading transactions, which I would rather compare with gaming, there the yield will definitely go down, I have no doubt in my mind. I request Satish to answer the other question.

So in terms of the insurance business, so over the last 1 year, we have built the insurance book, and it is primarily coming from life insurance. If you look at all the quarter spread out for the full financial year, in the first quarter, we had close to INR 1.8 crores of premium; in the second quarter, we had close to INR 8.8 crores of premium collected; in the third quarter of INR 15.42 crores; in the fourth quarter, INR 12.44 crores. Normally, fourth quarter is the best quarter, but post March first 10 days, we have not been able to sell insurance. The quarter going right now, April, May, June quarter, we still are affected by COVID, but we all know that first quarter for distribution business is always weaker. Post COVID, I think we'll be able to get the tempo going again in terms of the insurance business. To talk about the split between the insurance business and life insurance, close to 30% of the business is pure protection, that is term, and the balance is coming from normal endowment. Did I answer your question?

Yes. And when we mentioned about the yield, just in addition to that question about yield, what we talked -- spoke about that cash yields, that will continue to be pressured, but our focus is on increasing the clients wallet share. Can you talk about, in the last 2 years, for example, existing clients, how much we would have increased our revenue share from the existing clients by doing lot of various cross-selling some data points will be helpful.

It will be difficult to give you that data at the moment, although we have the data. We have only -- I can only tell you that we have only taken advantage of cross-selling from around 20% of our clients so far. So balanced active client list is there for us to basically change the way we service the client. Okay?

The next question is from...

Operator, before you go to the next question, I just wanted to answer a question remaining from Vijay. To tell you the March 31st margin trading book, it was close to INR 17 crores, 1-7. You may go ahead, operator.

The next question is from the line of Madhukar Ladha from HDFC Securities.

Most of my questions have been answered, just one. Can you give me a split of the broking revenue between BTST fees, depository income, others for the quarter?

For the quarter, the BTST income, I have just answered it one point -- sorry, margin trading, I have answered is INR 1.8 crores. Other BTST and penalty charges is INR 3.03 crores.

Okay. So and...

Depository is INR 4.88 crores.

On depository, you said how much?

That left us pure brokerage of INR 47.51 crores.

What did you mention for depository? Sorry, I didn't get that.

INR 4.88 crores.

Okay. Right. And sir, can you give us some commentary around how are you retaining clients? So over the last 5, 7 years, the firm brokers have emerged as a big competition. And our active subscribers are actually not going anywhere. So for most part of the year, we were down from FY '19, and we're just like flattish in FY '19 and over, let's say, in FY '18, the number of active customers have actually come down. So obviously, we are facing some competition. So maybe you can talk about some strategy on how you see this number? And how you look at retaining clients, which -- in your point of view?

One part of the answer I will give, basically, with regard to this active number of customers, when you see this decline, this should be seen in the context of what we are doing in mutual funds distribution, et cetera. It is not only cross-selling. We are today bringing new investors into the market through the mutual fund route. So we are considering active client as a client who pays us, either through mutual fund commission or insurance commission or through brokerage fees. So we are not basically comparable with the active broking clients data, which is there in the public domain. So the other question, Satish can answer the other side.

So this is the main point. If you look at our active client, like Madhukar said, it has remained steady over this financial year and has slightly gone down compared to the last financial year. But like Mr. George said, in terms of mutual fund, we have added clients, so which is not reflected yet. So it was a conscious decision by the company to try to build up the annuity business for the company by, first, trying to build mutual fund AUM. So you would remember when we started selling SIPs aggressively into [Technical Difficulty] Somebody has put me on hold? Yes. Can I reply?

Yes, sir. I don't know what went wrong.

Okay. So over the year -- over the last 4 years, we have increased our mutual fund AUM by primarily selling it to, of course, existing clients as well as new clients. So like Mr. George said, it is not correct to compare only in terms of active clients to the brokerage market. We need to see active clients compared to both the segments, which was a conscious effort by the company to maybe alienate ourselves from the vagaries of the market to having a sustained steady annuity income, which we have built in from mutual funds. We went up from INR 1,000 crores in 2016 in mutual fund AUM to -- we had one point of time reached INR 5,000 crores in the first quarter of last year. But post the market fell, it is INR 4,000-odd crores. Also -- we will also like to mention that a couple of agencies have told us in terms of the net inflow to the industry, we have published a net inflow for the last quarter as well as for the full financial year in the presentation. And we understand in terms of equity and hybrid equity, we are the 4th largest distributor in the company -- in the country with this net inflow in absolute value, not even in percentage terms, but in absolute value. So that is the addition what we have done. Yes, the markets were bad, especially in the last 2, 3 years, and also what it done in the March. But we feel that in terms of comparatively, not only -- we need to look at both of them together, not separately. So we have done pretty okay in the mutual fund, like I said, at INR 116 crores of net inflow for the quarter, we understand that we are the 4th largest in absolute terms in the industry.

Understood. So but all fair enough, we are still losing ground on pure equity -- in the pure equity brokerage market. So what steps are we specifically taking there, so that -- and this is still our primary revenue source. It is the largest revenue source for us. So how will we be able to defend and detain our market share or our revenues, that is very important still, I suppose. Any thoughts on that?

Your question is very bothering, but we are [ Technical Difficulty ]

Hello?

Sorry to interrupt, sir, your voice is breaking up. Can you please check?

And the income flows, some see who -- hello?

We lost you for the last 30 seconds.

Yes. Mr. George, I would request you to please repeat yourself. Your voice was breaking, sir. We couldn't hear you completely.

Yes. I'm sorry for that. So I was mentioning, this point, we have taken baby steps in insurance, that too in life insurance. We just starting -- we are just starting the health insurance and auto insurance, et cetera. So this distribution business, Satish told earlier, that we had reached INR 5,000 crore of AUM. The whole idea was to build a business whereby we get a stable trail fee income. But that part of the income that comes to us, we don't consider it as a transaction execution revenue, subjected to the market volatility. We are selling mutual funds rather distributing mutual funds on an advisory mode, helping people to create wealth for a long time, that is -- long time, that is why we are focusing more on FIPs. So this is basically not comparable with the equity brokerage revenues, where we see significant cyclical changes. So it is slightly different. So the way we look at is, develop and advice -- eventually, develop a proper advisory business, whereby, if required a customer should buy all financial products with -- from us and they should get it -- they should buy that through proper financial planning. So that is the step that we are taking at the moment.

[Operator Instructions] The next question is from the line of Vijay Karpe from Bryanston Investments.

Sir, we do have the gross inflows and net inflows number for Q4. Is it possible to share the SIP inflows for Q4? And how have been the flows for -- in the current Q1 quarter?

Q1 quarter is too early for us to say. And secondly, that is why we have given the gross inflow. It is very difficult for us to distinguish SIP inflows from the other inflows. That is why we have disclosed the full inflows.

All right. And Satish ji, can you tell me about how the premiums will shape up in FY '21? And where the yields are expected to stabilize? Because since it is a new business, our yields will look a little higher. And for the current quarter, they seem to be at 32%. So can you tell me for the current year, where these yields can stabilize? And how much of premiums are we targeting for the current year?

Vijay, as mentioned earlier, we're reluctant to give any guidance, Vijay.

Having said that, the COVID-19 situation continues and continues as serious as it is today, there will be some difficulty in terms of processing business. But at the same time, what we have seen is we are also seeing some traction for this business, some pull effect for this business in the COVID situation. So we are not in a position to make any kind of statement at the moment more because there is uncertainty with regard to COVID situation.

Okay. No problem. And can you tell me the number of clients in mutual funds separately and insurance, which are common, to a total brokerage business?

Insurance, we have penetrated only [ Technical Difficulty ] of our client. In terms of mutual fund clients with holding...

Satish, although it is a small number, we have 10,000 clients who have taken insurance, who are not among our client list at the moment.

And in terms of mutual fund, the number of holding client as of March, 240-odd-thousand clients.

The next question is from the line of Udit -- sorry, from the line of Udit Kariwala from Ambit Capital.

Sir, so the question I had was on the AMC side, the asset management business, we were discussing earlier in the call about how the impact has been on account of the decrease in the TER. But in terms of the distributor, how are your contracts designed? So let's take at a point in time, you're getting, let's take, 50% of the overall commission. Going forward, the proportion, how does it change when the yield kind of decline or increases? So if you could give some color around that, that will be helpful.

So this is AMC analogy that you share 50%, 60%, 70% of the TER after expenses with the distributor. We don't actually get into such broader discussion. What we can say is bigger the size, bigger the commission you can negotiate with the AMCs. So what we have seen is over the last 1.5 years, when B30 became trail and then TER effect came in from April of last year, we are today, the 19th largest distributor in the country in terms of total AUM, and I told you the 4th largest in terms of net inflow for the last full year and for the year before also, maybe better than this. So we have a little better bargaining power than the smaller AIFs, but there are larger distributor than us. I'm sure they will have a little better bargaining power than Geojit. So all depends on the size.

Sir, that is understood. What I was asking effectively is that you would have done some business 3 years back, let's say. So whatever you had contracted them without getting into the percentage, would that hold today, or does that also change your contract with them? How frequent -- how definitely frequently would it change?

No, no. Okay. Sorry, yes. Sorry, I didn't understand your question before. For example, if I had sold some mutual fund 4 years back, and I was getting, say, 0.8% as trail in 2017/'18, for this...

Correct. So the question is, sir, if I could just give a match rate. So let's take the 2 -- TER and that time 2% and you were getting 0.8% at that time, which effectively boils down to 40%. Now today, let's take that TER has come down to 1.5%, right, would you still be getting 0.8% on that business? Because at that time, it was 0.2% (sic) [ 2% ], or would you get 40% of 1.5%? And if not, how frequently does your contract change with -- in general, with most of the AMCs? That's the simple -- without -- the idea is not to get into a number, it's just to get the structure.

So theoretically, the contract changes every quarter, but practically the rates don't change. Rate changes only when either SEBI comes out with a [ defect ] or the AUM crosses the threshold limit of the next charge. So whatever, let us say, 0.8% after the TER, when the TER went down by 20-odd percentage, our 0.8% naturally went down by 20%. And this 20% is then negotiated as per the size of the distributor.

Thank you. As there are no further questions from the participants, I now hand the conference over to Mr. Udit Kariwala for closing comments.

Thank you so much the whole management team for taking us through the numbers for 4Q FY '20. I am sure this was very helpful to all the participants in the call. Thank you so much. And looking forward to have you back with us. Thank you so much.

Thank you very much.

Thank you.

Thank you. On behalf of Ambit Capital, that concludes the conference. Thank you for joining us, and you may now disconnect your lines.