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

Ladies and gentlemen, good day, and welcome to IIFL Securities Limited Q1 FY '23 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to the management. Thank you, and over to you, sir.

Thank you, and good afternoon, friends. Thank you for joining the Q1 FY '23 analyst call for IIFL Securities. I hope all your near and dear ones continue to remain safe and healthy. I'm accompanied by Ronak Gandhi, who is the CFO; and Anup Varghese, who looks after Investor Relationships. We are passing through interesting times. Heightened geopolitical tensions across Russia-Ukraine conflict has created uncertainties. It has also sent all the commodity prices, especially crude, soaring. In the recent past, we have seen some softening of the commodity prices, but still crude remains at elevated levels. Thanks to this, annual inflation rate has reached 7.8% in April 22, highest since May 2014. And consequently, not only Indian market but global markets have remained choppy and volatile and are likely to remain volatile throughout the year. Central bankers across the globe, not only in India, are taking steps by increasing interest rates to rein the inflation. Coming to our results for the June quarter. Revenues for the quarter was INR 295 crores, up 10% on a year-over-year basis and down 19% on a quarter-on-quarter basis. If you look at the year-on-year basis, the brokerage income has increased 12%. It was about INR 145 crores -- it is INR 145 crores for this quarter versus INR 129 crores for the last year same quarter. Investment banking has increased 28% to INR 29 crores in this quarter versus INR 23.25 crores in Q1 FY '22. Distribution income has decreased by 17% on a year-on-year basis, which was about INR 40 crores in the first -- this quarter versus INR 49 crores for the Q1 FY '22. And the reason for the decrease in equity income is because last year we had, I think, a public issue of NCDs where we garnered good subscriptions. Coming to quarter-on-quarter numbers. Our brokerage income has decreased 20% on a quarter-on-quarter basis. Previous -- last quarter, the Q4 FY '22, we had a brokerage income of INR 156 crores. Investment banking has fallen sharply by almost 55% because if you remember, Q1 of calendar '22 was quite [ prolific ] in deal making, and we had almost INR 66 crores of investment banking income. And that was [ followed ] close to about INR 30 crores in this quarter. Again, our distribution income has decreased 28% on a quarter-on-quarter basis to INR 40 crores, which was INR 56 crores for the fourth quarter -- Q4 FY '22, and that was primarily because the [indiscernible] quarter has remained [indiscernible] [ distribution product, especially insurance ]. Now coming to other income. Other income for this quarter was INR 3.2 crores, which is down both on a year-on-year basis and quarter-on-quarter basis, and the key driver for the decrease in this other income is because of the loss -- mark-to-market loss on [ shares of BSE ]. Coming to expenses. I think our expenses have risen faster than our income, and that is the reason why we have seen margin shrinking and decline in profit. The key drivers of this increase in expenses were employee cost. Employee cost has risen almost 31% on a year-on-year basis primarily because of increase in headcount. The number of headcount has increased, also because of variable pay. And coming to quarter-on-quarter basis, it is down 10% on a quarter-on-quarter basis primarily because the previous quarter we had the larger variable pay provisions. Total number of employees as we speak is now 2,500, which was last year, about 2,136. Coming to finance cost. Finance cost is up to INR 18.68 crores, up 2% quarter-on-quarter, 40% year-on-year. And that is primarily because of increased borrowings because of our growth in our margin trading book. And now coming to admin cost. Admin cost is now INR 56 crores -- INR 55.9 crores, which is down 14% quarter-on-quarter but increased [ 37% ] on a year-on-year basis, and that is primarily because of our increased spend in technology lead generation as well as sub-brokerage [ pass out ]. Some housekeeping numbers. Our assets under management is actually 1 lakh 12,000 crores. Decrease is because of mark-to-market movements in equity assets. Total turnover for this first quarter was 1 lakh [ 26,700 ] crores, which was about INR 1,485 crores in cash, 1 lakh [ 25,215 ] crores in derivative segment. And last quarter, that's Q4 FY '22, it was 1 lakh [ 11,535 ] crores, which was INR [ 1,884 ] crores in cash and about 1 lakh [ 9,651 ] crores in derivative segment. [ In terms of ] admin cost, admin cost was down 14% quarter-on-quarter and up 37% year-on-year primarily because of increase in sub-brokerage payout as well as the increased spending in technology and lead generation [ and advertisement ], finance. And then our assets under management [ in custody ] 1 lakh [ 12,000 ] crores approximately. The fall is because of mark-to-market movement because of the fall of the market. Total turnover for this quarter is 1 lakh [ 26,700 ] crores, registering INR 1,485 crores in cash and 1 lakh [ 25,215 ] crores in derivatives. Corresponding figures for the previous quarter was 1 lakh [ 11,535 ] crores, which was INR [ 1,884 ] crores in cash and 1 lakh [ 9,651 ] crores in derivative segment. We continue to leverage and continue to invest in technology because we think that's a key differentiator in the days to come, and there -- you need to invest in technology for a better customer experience and trade experience. We acquired 1 lakh [ 63,000 ] crores -- 1 lakh [ 63,000 ] per client in the previous quarter. That has become decreased, which is in line with the broader market also. With this, I come to the end of my talk, and we'll be more than willing to answer any questions that you have. Thank you so much.

[Operator Instructions] The first question is from the line of Mudita Nahar from Abakkus [ AMC ].

Just one question. The margins have been impacted in this quarter, do I understand because of the top line impact and [ glide in ] expenses. But going forward, what can -- on a steady-state basis, what can we expect on the margin front, sir?

See, actually what you say is correct because last year -- last quarter, we had a significant impact because of both increase in employee costs as well as admin costs. So we will take steps to improve the margins on the days to come. So I hope that in this coming quarter, we should see an improvement.

Sir, so what would be the strategy going forward to do that, sir? Is there any change in the strategy from our end?

Actually, it is very difficult to have a dramatic change in strategy on a quarter-on-quarter basis. So -- because if you see the costing, we have added manpower. So we are -- so the increase in manpower cost is because of -- both because of actual number in the headcount increase as well as because last quarter, there was a variable pay -- last quarter, there was an annual increment also. And if you -- and the reason we had to be generous with the annual increment is simply because we are coming off a good market and people's expectations are high [indiscernible]. So because of all this combination, we have seen this increase. So it is why investment in both technology and manpower is needed for the long-term steady-state [ of the business ]. I can't make a commitment that [indiscernible] dramatically here. But obviously, we have to increase [indiscernible]. So we are taking steps towards that.

Sir, on the top line basis like for increasing the revenue, is there any strategy that we are going to [ towards ]?

See, [indiscernible] more customers and try to cross-sell more and hope that the investment banking pipeline [indiscernible]. We have a healthy pipeline [indiscernible] if conditions improve, that we should [indiscernible].

Okay. So on a steady-state basis, can we like close the year end by like a 40% margin? Or how would you see that, sir, EBITDA margin?

See, last year, we had a big kicker from investment banking because we [indiscernible] investment banking. So that's a highly profitable business. So [ in fact, if ] the market conditions improve and [indiscernible] investment banking income picks up. So then we should see a reversal of -- improvement in margins.

[Operator Instructions] The next question is from the line of Kajal from ICICI Securities.

Sir, 2 things. One is have you gained market share in cash in spite of decline [ in review of the business ]? And second is in terms of customer acquisition, now how much share you are seeing on the new customers on new plan and old plans and whether -- how much is happening digitally, digitally meaning without any manual assistance or something like that?

Okay. To answer your question on the market share basis, on an F&O basis, on a fully -- [ that's a full ] market basis, not only we have managed to increase some market share. So 1.15% has become 1.18%. In the [ cash ] segment, we have seen marginal decline in our market share. We are now at 2.6%. That was about 2.9% in the previous quarter, and that is primarily because of some loss of market share in the institutional segment. Coming to the other question about customer acquisition, as you know, we'll make efforts to increase customers. But we want to optimize our cost of customer acquisition. And my guess is that, I don't have the exact figure, but approximately 60%. 70% of the customers are absolutely do-it-yourself, without any human intervention of the acquisition. [indiscernible]

Okay. Out of the 100% that you acquired, 70% must be doing do-it-yourself [indiscernible]?

You're talking about brokerage plan? My guess is that -- see [indiscernible] talking about the customers who get onboarded completely digitally without any human intervention. Now coming to the brokerage plan, my guess is that 90% of the brokerage will be on the [ discount plan. That's why we have high brokerage sub ].

90% of new customers will be under that plan?

Yes.

Coming onto that plan?

Yes. But I'll check and get back to you. I think -- my guess is that much, but I'll get back to you with exact numbers. I will e-mail [ the answer ] to you.

[Operator Instructions]

Actually, we can end it here. So thank you so much. We are always available. So anybody has any questions, please feel free to send at [email protected], and we'll be more than happy to answer all your questions. Thank you so much for your time.

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