IIFL Capital Services Limited (IIFLCAPS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to IIFL Securities Limited Q3 FY '22 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Venkataraman. Thank you, and over to you, sir.

Good afternoon, friends. Thank you for joining the third quarter analyst call for IIFL Securities. I'm R. Venkataraman, Managing Director and co-Founder of the group. Along with me are Ronak Gandhi, CFO of IIFL Securities; Anup Varghese, who is the group IR in charge. I also take this opportunity to wish all of you a very happy new year and hope that all your near and dear ones continue to remain safe. We are seeing a spike because of the third wave of COVID. But hopefully, this risk is getting subsided due to huge vaccination drive achieved by the government. Broking industry continues to get a boost from significant customer acquisition, not only in Tier 1, but also in Tier 2, Tier 3 and smaller locations, driven primarily by technology. Our book -- as a country are looking, client penetration is very low compared to 10% double-digit plus in developed countries, indicating a huge potential and run rate for growth. Stock markets in January '22 started with volatility and decline because of fears of ongoing lingering pandemic, as well as interest rate hikes, not only in India but across the globe, especially in U.S. Our strategy, as I've articulated in the past, continues to be built on research, technology and people. Because of research, we have an edge in capital markets, and that helps our business lines primarily because all our business lines are centered around capital markets. We continue to scale our efforts to acquire customers and give them a better trading experience. We are integrating best products and services on our platform as a digital fintech ecosystem to ensure a best-in-class experience for our customers. We have 3 revenue streams, retail targeted at mass market tech savvy and we offer not only broking, but also distribution of products and mutual fund insurance, PMS on an open architecture model. We have the other line, which is institutional broking, where we are one of the leading domestic institutional brokers known for our research and ability to execute block deals. And third is investment banking where we are uniquely placed because of our ability to garner subscription in all the 3 buckets of the IPO construct, be it retail, HNI or institution, and leveraging our strong research credentials. We are focused on the agency business of an open architecture distribution model. Coming to our results specifically for the December quarter. Consolidated revenues came at INR 368 crores, up 71% year-on-year and 16% quarter-on-quarter. Brokerage income has increased 47% year-on-year, from INR 99 crores to about INR 145 crores. Investment banking has increased 44%, INR 32 crores for this quarter versus INR 22 crores for the previous year quarter. And distribution income, which has increased to INR 56 crores in this quarter versus INR 39 crores in the previous year same quarter. And that is primarily driven because of higher yield product sales. On a quarter-on-quarter basis, brokerage income has remained flat at 145 crores. Investment banking has grown 16%, INR 32 crores versus INR 28 crores in the previous quarter, and distribution income has increased almost 12%, INR 56 crores versus INR 49 crores in the last quarter. Other income was INR 32 crores, up 67% on a quarter-on-quarter basis, primarily because of treasury income and investment gains. Coming to expenses, employee cost was up 13% quarter-on-quarter, 61% year-on-year because of increase in headcount and incentives. Employee count, we ended the quarter at about 2,460 employees, which was 2,300 employees in the previous quarter, and that same was close to 1,976 in the last year. Coming to finance costs, finance cost is up 30% quarter-on-quarter and massive -- and more than double year-on-year basis and primarily because of borrowing due to IPO finance. Admin cost is at 113 crores, up 12% quarter-on-quarter, 58% year-on-year because of some broker -- increase in some brokerage payout and also because of increased spend in technology and marketing. Our assets under custody stood at INR 1,32,000 crores. Average daily turnover for the previous -- for this quarter was INR 83,546 crores which is INR 1,800 crores -- roughly about INR 1,850 crores in cash and INR 81,000 crores in derivative segment. Corresponding figures for the previous quarter was INR 67,564 crores, which was INR 1,770 crores in cash and INR 65,000 crores in derivatives. And basically, our IIFL markets app and the AAA apps are being used extensively by not only clients but also our partners. 95% of our accounts are opened digitally and if we have also digitized our customer service using the chatbot significantly. Last quarter -- We acquired 223,000 accounts in the last quarter. With this, I come to the end of my opening remarks and key data points. And the floor is now open to answer any questions that you may have. Thank you so much for giving me a patient hearing.

[Operator Instructions] The first question is from the line of Rishikesh Oza from RoboCapital.

Sir, my first question is how many customers are we planning to acquire in FY '23?

See, actually, we have been acquiring roughly about 2 lakh accounts in every -- the last quarter, and that was roughly about 1 lakh -- about 2 lakhs in the previous quarter and [ 1 lakh 50,000 ]. So my guess is that for the -- going ahead, although it's difficult for me to make a forward-looking statement, my guess is that our pace of customer acquisition will be ballpark in this stage only, 2 lakhs per quarter.

And my second question is, sir, we see all -- almost all of our competitors are growing very fast. And some competitors are somewhere around doing 600 to 700 crores of revenue per year. So in this backdrop, you know the competition is growing very fast. Do we have any internal revenue growth target? Any indicative number will be very useful, sir.

See, actually, to be very honest, so if you look at it, although we have also had internal targets, unfortunately I will not be in a position to share with them. But roughly, let me tell you the elements of our strategy so that you get an idea of what we are doing. First element is that we want to acquire customers, and if you see, we are acquiring about 2 lakh customers in the quarter, and that will remain at the similar level, so maybe go elevated also. Then we streamline the entire acquisition engine properly. The second is we also have a sub-broker network. So our pace of acquiring sub brokers has increased. We are acquiring about 300 partners every month. So that will also be an element going ahead because we think that they have pan-India distribution reach. And these sub-brokers enable us to go out and acquire new customers. At the same time, we also have a channel [indiscernible] HNI segment. So there we'll be focusing on servicing the -- I would say, the HNI segment. Our aim is that we will continue to make investment technology and making our app better so that this new millennium, which is the so-called DIY segment or do-it-yourself segment, also improves. And if you see, yes, we have seen some amount of margin -- marginal market share gain in the derivatives segment. And this was 1 segment which we have ignored in the past, and we will continue to invest and grow this segment. So effectively, what we are -- our aim is to increase customers and increase our market share and revenue to derive number.

But if I see in last 1.5 years, actually, quarter-on-quarter, we will be maintaining many times 20% growth quarter-on-quarter, maybe around 15% at least. So is it fair to assume that quarter-on-quarter somewhere these kind of growth rates will be maintaining?

See, on the [indiscernible] normal state, I think that that's a good number. But you have to remember that there's also a beneficiary of the state of the overall market. So if you see the last quarter itself, investment banking group, we had about almost 32 crores of investment banking. And that is a direct outcome of the state of capital markets and the entire fund raise in the economy. So my guess is that we have to [indiscernible] whatever assumption you make, it has to be overlaid into a broad unknown variable, which is the state of the market. So precisely quarter-on-quarter, whether these numbers we met or not with your guess as well as mine, but on a longer-term perspective, I think we are confident that we are on the right track.

And one last question, sir. Sir, could you please give a broad breakup of your 2,375 employees around by department wise? So like we are looking to understand how many are related to the clients or client facing?

Roughly, if you look at it close to about out of the 2 -- bulk will be -- about 75% will be in sales or customer service. Then others are all support. So it will be 75/25.

[Operator Instructions] The next question is from the line of Sahej Mittal from HDFC Securities.

So my first question was around the activity which we are seeing on the derivative side. So could you throw some color around what are your customers doing in terms of options trading pillar, whether they are the large -- building around the call side because if the markets turn one side or more as a sharp correction, then do we expect these customers some sharp losses and these customers can move out of the market? Or is it fairly distributed? Or are these customers also writing call options or put options? That was my first question. And the second one was around what percentage of your customers use your resource trade basis or using your research provided by IIFL Securities. Yes, those are my first 2 questions.

So if I can understand your first question correct, you want to get some color on our -- on the options customers and second was about leveraging our research.

Right.

Okay, now let me answer the first question first. Now if you look at our total turnover, I'm giving a rough number. Rough number is that we do roughly about 81,000 crores, 82,000 crores of turnover, out of this, bulk, maybe 97%, 98% is options trading. And if you look at the entire options trading, we also have a complete mix of people who get option. So our institutional presence and options presence is quite less. So bulk is retail. And within retail also, there are 2 broad categories, if I can use the word. One is a sophisticated customer who uses algorithms and trade. And I would put in that category who's a so-called sophisticated customer. The other is for lack of a better word, called retail customers. So our retail customers also like in a normal market sense, they keep on buying and selling options. And to answer your question, what will happen if they see losses. As of now, we have seen 1 side market going up post market of 2020, when the market did a low for the last 2 years, I think we have been having a market which has been quite good. So a huge generation of people who [ wouldn't ] have seen sharp losses. So your guess is as good as my mine, what will happen if they see losses. But having -- but let me give you my historical perspective. So what happens is that whenever there is a market crash happens, which is like a significant nature, which happened in, say, 2001, when the Internet boom -- big crash happened or the Ketan Parekh scam happened, or 2008, when global financial crisis happened, or 2013, when the [indiscernible] happened. So lots of -- large number of nuisance get out of the market. But what happens is the market -- the level of activity in the market settles at a higher level. So it will be like just a number of active customers for, but it will be higher than the level which we saw in 2013, '14. And then, the other thing is that the retail customer is also becoming sophisticated or may be knowledgeable because of the entire financial exercise, which has been done by everybody. So what happens is most of them do sit also, they invest in mutual funds also, they invest in IPOs also. And that's what IPOs has done well in the last 2 years. So my guess is that some of them will obviously exit because of leverage positions and huge losses, but most of them will stay because I would say investor. Coming to your second question about retail, we use -- we have quite -- we leverage our research. Large number of customers use our research. We also give so-called head strategies and calls on the nifty. So most of the customers use it, but many of the customers read it, but they don't use it also. So we track, and I think about the customers -- about 20%, 25% of the customers use our research and bulk of them don't use it. But I don't have a scientific basis. This is the sense I get after looking at it all.

And sir, could you quantify this customer base like you highlighted that a sophisticated and algo -- there are 2 set of customers, one is sophisticated and algo customers. On the other side, you have simple option buying and selling customers. So what would this mix look like?

I don't have the data right now in front of me. I'll get this answered.

Sure. And just on the auction base. So are we seeing these new customers who have been coming to the market in the last 6 months? So are these customers also writing call option or put option? They don't understand writing and they just do the buying or calling [ put ] option?

It's a mix of both. Although -- it's a mix of both. I don't have a scientific answer for that. It's a mix. The people write also, people buy also.

Right. And sir, just 1 data-keeping question. What was your retail broking revenue for the first quarter of FY '22?

First quarter or last quarter?

No, no, first quarter. I have a number for the first half at 189 crores. So if you could give me the numbers.

[Foreign Language] 9 months is 505 crores. Correct, retail booking? 505 crores, which -- So it was Q1 rate, 170 [ crores ] and maybe 370 [ crores ]. 130 [ crores ] will be the number, my guess is. I'll check and get back to you.

Actually, in your investor presentation, the retail brokerage income is -- for the 9 months shows at 297 crores. On Page #7, printed Page #7.

[indiscernible] Only brokerage you want because retail brokings -- So this -- for the 9 months, 300 crores, and I've given you 500 crores because it includes demat charges with [ DP charges ] for retail customers and everything, et cetera.

Got it. And against this 300 crores, what was

the complete breakdown how much of the retail booking income for the full year.

On the staff cost side, sir, given that we have in the equities business as well. So what would the staff cost for the retail business look like.

Retail staff cost -- I don't have the number upfronted between. So I will -- We want to slip with the retail. Retail will be roughly at -- I'll get back to you on this. On your other question, you want the brokerage income for the last 3 quarters on pure brokerage income, excluding demat charges and other charges. And second thing is you wanted to exactly employee cost for the institutional business?

For the retail business.

I'd appreciate if you can send an email to Anup Varghese, so that you get the answer back surely.

Sure, sir. I'll do that.

[Operator Instructions] The next question is from Parin Jhaveri from JNJ Holdings.

Many congratulations on a good set of numbers and great dividend. I just wanted to understand this facility and that line item, which is quarter-on-quarter gone from 18 crores to 30 crores. If you could just throw some light on that.

I'll just give you 1 simple line answer for that. That said, this is business to income, like one is interest income and the other is rental income. And the interest income is primarily because of some amount of IPO income, which is booked in this. IPO financing income part of it gets booked into this.

IPO financing?

[Foreign Language]

And sir, what is your net cash position, sir?

Net cash position is that we have a load of about [indiscernible] crores, cash about 350 crores. So net cash is about 160 crores.

160 crores. Okay, and sir, what is the progress on our real estate asset, we are planning to sell some ....

Last quarter, we could not sell anything. And as I said earlier also, it's a long-haul process, and we are slowly and fairly trying to sell everything.

And the valuation as earlier -- in earlier calls, you have pointed out, it is in the range of about 550 crores, 600 crores, right?

I think it will be the same range only.

And any color on this other income part, which has rose quarter-on-quarter and year-on-year?

Sorry, which one?

Other income.

See the other income, which has grown up, as I said in the opening remarks, has gone up to INR 32 crores primarily because of treasury income and investment gains. And coming to your real estate...

Yes, sir.

Yes, property valuation is close to 600 crores. I think you said a figure of 550 crores. So I would just want to tell you that it will be around 600 crores. That's the only point. But the 550 crores, 600 crores, is anyway the same ballpark.

[Operator Instructions] The next question is from the line of [Audio Gap]

derivatives and cash.

Okay. And institutions [Foreign Language], we must not be having too much...

100% cash. It is 99%, [ 95.5% ].

And what will be like incrementally now we are also spending on technology and upgradation. So technology as a cost in total cost, any color.

See, actually, the entire admin cost, technology cost will be the biggest line item. So if you look at it technology cost is 20%.

Around 20%?

Maybe 25%, 30%, you can take is the cost of the technology.

Any color on type of customers now that we are acquiring, it has gone up in last 2 quarters? So is it just the new plan that you also offer the...

Actually, if you look at the bulk of the customers, which are getting acquired, it is in the [ respondent ] plan. So roughly, if you look at it, I think 60%, 65% -- 70% will be on the [ respondent ] plan.

70% is -- and when we say it's on the [ respondent ] plan, like are we exactly matching take somewhere in the [indiscernible] plan? Or we ...

Or I think -- All these or discount brokers have this flat brokerage plan. So everybody is now in the same boat, roughly speaking. So we are also there.

But then incrementally, if we get 70% of customers in this plan, do we see the revenue turn that fast, as you may be having a higher revenue in the world of customers?

So as I said, the new customers are contributing little to the brokerage. So it is just a [indiscernible] and we see the benefits of this customer acquisition in the days to come.

And what will be the average cost of acquisition like? Is it...

Average cost of customer acquisition is roughly about 12,00, 13,00.

But these new customers that are acquired digitally also are falling in this bracket?

Yes. So this is the cost of acquiring customers literally and plus whatever it -- I can't say this is a bit, but this is the cost of customer acquisition on the online channel.

Then, sir, you have algo customers in your retail or...

We have algo customers, but they don't call them retail because they're reasonably more sophisticated.

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

Very happy New Year to the entire team of IIFL Securities. My first question is, what proportion of our revenues do we derive from flat sales and how much from the percentage, that is first. And the second question is, what kind of growth in the number of orders did we see on a quarter-on-quarter basis?

We can give you the orders or data and the order book. So we saw the orders increase by 14%.

Okay, 14%. And we saw a growth of 8% on the retail broking side.

Yes. So I might get to that. Bulk of the new order growth that has happened on the flat brokerage scheme.

Okay, and how much do we derive from flat fees in terms of revenues for this quarter?

Sorry, from the flat fees?

Yes.

I don't have the data right now. My guess will be about 10%, but I'll reconfirm and check.

Okay. Also, how much is our NPS book in Q3? And how much was it in Q2 on an average basis and also at the end of period, if possible? NPS book.

Once again, I'll give you -- NPS book is roughly about 190, yes? 225. NPS for the quarter end was 225.

And how much was it in Q2?

190 has become 225.

So we've also talked about the technology investment. So on an absolute basis, how much was it? And how will it help us in our broking business and also in our distribution business, one.

What's the question, sorry?

My question is how much was our absolute investment in technology? And how will it help us in our broking side as well as on the distribution side?

If you look at our absolute cost, I don't have. But technology investment is very important because in this entire world for our distribution business or for broking business, UI -- user interface, user experience, speed of order execution, stability of platform, all of them are very important. So we have to -- we have no choice, but we continue to invest and upgrade our tech infrastructure.

Okay. So this was mentioned to be 25%. So this is 25% of the other expenses, which were at INR 58 crores?

Yes. 25%, 30% will be there.

Okay. One last question. Did you see any impact of third wave on the distribution business? And also, how is it looking for Q4.

See, -- as of now, it's very difficult for us to comment on the impact of distribution business on the third wave because it is too early. And we have seen the third wave coming in the last week of December to maybe 2 weeks of January. So -- my guess is that because of customer meetings getting postponed, sale of high-yield products will get affected. But as I said, it's too early for me to comment.

The next question is from the line of Bhuvnesh Garg from Investec Capital.

Sir, can you please provide the breakup of broking revenue into pure retail broking, institutional broking and institutional IB shared revenue?

See, IB, I gave that income. IB is -- brokerage and related income is about 172 crores for this quarter. And IB is about 32 crores.

So that is the institutional...

Brokerage and related income, broking will be about -- out of this [ INR 170 crores ], INR 140 crores will be broking, INR 32 crores other stuff, which is demat and investment banking is INR 32 crores.

Okay. And this INR 140 crores includes both retail and institutional, is it?

Yes, it will be about maybe 60/40 split between retail and institution.

60/40 split. Okay.

[Operator Instructions]

I think there are no further questions. We'll end the call. And as I said, Anup is always there to answer all the questions. Thank you so much for participating. And [email protected] is our Anup's e-mail. And whatever query you have, please send them, so that we can look into it and reply. Thank you so much.

Thank you very much. On behalf of IIFL Securities, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.