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

Ladies and gentlemen, good day, and welcome to the IIFL Securities Limited Q2 FY '24 Earnings Conference Call. [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Mr. R. Venkataraman. Thank you, and over to you, sir.

Thank you, and good afternoon, everybody. Welcome to the Q2 FY '24 Analyst Call for IIFL Securities. The global economy has proven to be more resilient than what was expected but outlook continues to remain weak. Most organizations, global think tanks continue to say that Asia is a driver with India leading the way. India's macroeconomic situation continues to remain stagnant. However, geopolitics continues to cast its shadow, earlier we had Ukraine and Russia, now we have Israel and Hamas. That is one dark cloud in the horizon, which refuses to go away. Coming to our business. We are optimistic about the India growth story. We are optimistic of capitalizing on the India growth story and we continue to make investments in talent, technology to make sure that we fortify our competitive positioning. We have put a good performance in Q2 with all business segments getting traction. Our investment banking, especially completed 17 transactions, including 1 M&A transaction, deal pipeline and outlook remains strong. Specifically to September 30 results, consolidated revenues for the quarter INR 534 crores, up 65% year-on-year, 30% quarter-on-quarter. The reason for this year-on-year change is because of brokerage income that has risen 66%, INR 271 crores versus INR 163 crores for Q2 FY '23. Distribution of financial products, distribution increased by 57%, INR 85 crores in Q2 FY '24 versus INR 54 crores in Q2 FY '23 due to sale of high-yield products like AIF, PMS, health, wellness products and insurance. Investment banking has also increased 52%, INR 38 crores versus INR 25 crores in Q2 FY '23. On a quarter-on-quarter basis, again, brokerage income has increased INR 271 crore versus INR 177 crore and that was primarily driven by large transactions in institutional broking. SPV income was flat, INR 85 crore versus INR 85 crore and investment banking has reduced INR 38 crore against INR 55 crore in the first quarter FY '24. Other income has increased significantly, which you can see to INR 27 crores, primarily due to mark-to-market gain on -- in BSE shares. Coming to expenses, employee cost has increased 41% quarter-on-quarter, 43% year-on-year and -- mainly because of bonus provision for the institutional broking and banking business. Finance cost was up 44% quarter-on-quarter, 58% year-on-year because of increase in our borrowing lines and borrowing limit primarily because of growth of NPS as well as margin requirements. Admin cost has increased 22% quarter-on-quarter, 78% year-on-year, mainly because of increase in sub-brokerage [indiscernible], the legal and professional expenses, technology and provisions, marketing expenses also increased because of increased activity and sale of LivLong wellness products. Our assets under management and custody stood at INR 1,69,822 crores, our average daily turnover was INR 2,49,097 crores, this is roughly INR 2,50,000 crores. Brokerage is to INR 2,445 crores in cash and INR 2,47,533 crores in derivatives. Corresponding pickup for the last quarter was INR 2,30,000 crores, INR 1,655 crores in cash and INR 2,29,161 crores in the derivative segment. We have 4.23 lakhs active customers in NSE. And as we have already told earlier, our pace of customer acquisition has slowed down, we have acquired about 50,000 customers in a quarter and primarily because we want to focus on the segment which is affluent. With this, I come to the end of my talk, and we are more than happy to answer any questions that you want. Thank you so much. [Foreign Language].

[Operator Instructions] The first question is from the line of Narendra from RoboCap.

Congratulations on a good set of numbers.

Thank you.

So my first -- hello? Am I audible?

Yes, you are audible.

Yes. So my first question is regarding your average daily turnover. So it has seen a drastic increase over the past quarter also and over the past year also. So what do you think how much of it is sustainable? And what is your outlook for the next, say, couple of years?

Okay. This is a question for which it is very difficult to give a very scientific answer, but let me try and articulate my thoughts to the best of our ability. So if you see the exchange turnover, the bulk of the volume is happening in options. And within options also now there's a big stake -- big, I would say, players that have come in the, what I call the algo-trading platform. And in the past, our algos offerings were not very strong. And we were -- in the last 2 quarters, we have made significant investments in our algo platforms. And hopefully, we are able to see some benefits of that. So these are the typical customers who are what we call as high-volume customers who keep on trading aggressively in the options segment. This is one segment which we continue to, I would say, invest and acquire customers who trades options significantly. But having said that, this is one segment which is very competitive as customers need for lower and lower brokerages. And this brokerage entire there's a race to bottom happening. So it is very difficult to say how much of this growth will happen going ahead also. And as I said, that our agenda is to focus more on the affluent segment and make sure that we get into "a financial planning model" so that we try to increase our cash segment and try selling more and more of financial products.

Okay. Okay. Got it. And what kind of pipeline are you seeing in the investment banking business? So what kind of growth will we see in the next couple of years there?

See, we're very optimistic about our investment banking business. And this is one business we have done -- we have continued to invest and fortify in the last 5, 6, 7 years. And given the fact that India is in a -- macro economically speaking, India is in a sweet spot. And as the economy recovers and CapEx prices starts, then there will be a big opportunity in the small and mid-cap space, especially in the ECL segment. And there, I think our positioning is quite strong. And the reason for our strong positioning is threefold. I would say, one, we have a very good research, we have good corporate contacts, and third, last but not the least, is that all the 3 buckets of the IPO construct we are able to full on the -- we are able to fulfill on our own strength. Deal pipeline is also good. And I think overall, I'm optimistic about it although it's very difficult for me to give a number. Last 2 quarters have been good because we saw actual closure of transactions. And so this is lumpy income and as and when transactions gets closed, it will come. But overall, directionally speaking, we are very optimistic.

Okay. And one question regarding the BSE has launched its option derivatives segment. So are you seeing any kind of traction over there? Has it also contributed a little bit to the increase in the...

Yes. Actually that's a valid point you have raised, BSE has started Sensex options. And so we have also benefited from that. So yes.

Okay. Okay, because we are seeing humongous growth there so that's...

Yes, we are seeing growth there. Yes.

Yes. Yes. Okay. And my final question would be, a ballpark growth that if you could give on your top line and your margins if it's possible for the next, say, couple of years?

This is something which is very difficult for me to [indiscernible] and also forward-looking statements are generally difficult to make. So I would skip this question, if you don't mind.

Okay. So overall, you are optimistic about the growth, right? I mean because one of the brokers I attended, he said that the next couple of months or next couple of quarters could be a little bit down due to the elections and stuff. So are we on the same line or we are more optimistic?

Actually, I'll answer that question very differently. What happens is that it is very difficult to give a quarter-on-quarter outlook. And because obviously, this -- our business, which is capital market-linked is quite -- I would say, quite linked to the state of the market, for lack of a better word. So my suggestion is that don't look on a quarter-on-quarter basis, but look on a longer trend. So longer trend all the indicators for our business are sanguine simply because I would say economy will move from INR 3 trillion, INR 3.5 trillion to INR 7 trillion. The total amount of assets in the mutual fund will increase, life insurance penetration will increase. And I would say sale of PMS and AIF products will increase, number of DEMAT account holders will increase and people I would think that financialization of savings is also real trend. So given these factors, I would say look at a longer or maybe year-on-year on a larger timeframe because shorter timeframes tend to distort the picture.

Okay. So 1 last question. Now what are our top focuses? I mean, what are the top segments that we are focusing for the medium term?

Yes, so I would answer that question differently. We have 3 segments we are targeting. One is institutional broking, where our team is continuing to do well. We are known for our research. Investment banking, again in the mid-market space we're trying to build capacity. And last but not the least is, I would say, instead of derivatives broking or chasing market share broking we were more focused on the financial planning or the affluent segment.

[Operator Instructions] The next question is from the line of Prayesh Jain from Motilal Oswal.

Sir, firstly, on this option volumes, when we talk to investors, I think there are 2 concerns, which are always cited and would seek your responses to those 2 concerns. One is whether we have reached the -- what would be the best way to judge whether the option volumes can continue to rise from here -- from the levels what we've already seen, whether the markets go up or down, we've always seen option volumes in the last 3, 4 years, just heading north, barring a few months where we could see -- we would have seen some flattish trends. So how do we kind of take this call, whether the option volumes will continue to see an upward trajectory? Second is whether -- how the activity of these customers, now especially the likes of discount brokers, so you have acquired very young customers in the lower-tier cities with a very lower ticket size, what kind of behavior would these customers entail in case of a bear market phase? And possibly, I will just add 1 more is the regulator, whether the regulator will intervene and kind of restrict retail activity participation in the F&O market? So would like your responses to these 3 concerns and whether these are any real concerns for the industry?

Prayesh, it's a very complicated and I would say, a very interesting question. And my -- I'll give you my perspective in the sense that I always thought that when derivatives volume became 90% and cash segment became 10%, I thought this was the peak. Then 90% became 95.5%, then 95.5% became 95% -- 99.1%, now 99.5%, 99.6% to 99.4%, so this entire growth and growth and growth of derivatives has, I would say, for a lack of a better, surprised me because the way this entire growth has happened has really caught people by surprise. And even if you look at the options volume, the bulk of the volumes are also happening in NIFTY. Now Sensex has come -- again, it has formed a new, I would say, NIFTY, BANK NIFTY, FIN NIFTY, then you have SENSEX, then BANKEX and all these things. So my -- so these are the, I would say, triggers which are happening and then you have are ordering what is called as a mini lot also. I think Axis Bank Mutual Fund has written a report, which is called Gamification of India. So -- and they have raised some real concerns in the sense that people are looking at this as more like a, I would say, a game, rather than serious investment. So my -- so this growth is happening for sure, and more and more new people are coming in trading options. So this is the trend. So I'm sure that regulator will look into it and curb whatever unhealthy practices are there. So I -- on that I think it's for the regulator to decide. But my guess is that, frankly speaking, every time I do the call -- in the analyst call, you ask me this question, I think [Foreign Language] and I'm like proven wrong. So this is something which I would now decide not to opine or give any opinion.

Okay. Okay. Okay. Interesting. Sir, secondly, on your client acquisition strategy now like you spoke that we will be focusing on affluent client acquisition. So what are the channels of these acquisitions of clients and how do we see this further scaling up from your whether -- what kind of -- so if you could just give some numbers as to on the acquisition that you would have made in the first half where are these customers from lower-tier cities? What age cohorts these are from that -- and what income cohorts these are from, that would be helpful?

No, I don't have these questions like gauged in income quote, but reality is that we have 2, 3 channels to acquire. One, we have a sub-broker channel from which we are acquiring, and we have our own RMs to acquire. And the pace of acquisition is slow so this is not something where we -- I can talk saying that I'm going to acquire lakhs and lakhs of customers. So we are more focused, as you said, on the affluent segment and the quality of customers rather than getting customers for the sake of customers. And that's the process. So this -- as we said, we have articulated this strategy sometime 2, 3 quarters ago, and hopefully, over a period of time we will gain traction.

Okay. Sir, and recently, we have seen one of the traditional brokers, which is bank-based brokers, HDFC Securities in particular, they have launched a proposition for a discount broker while we -- I understand we already have a group entity which is 5paisa, is that will be the strategy that everything will go to 5paisa in terms of the discount broking and IIFL Securities will be timely running in the traditional format and looking at the brick-and-mortar business? Is that the right way to think about it?

No, sorry, can you repeat this question because I missed you?

No. So basically, what happened was HDFC Securities they've recently launched an app -- a discount broking model, where they will be focusing on -- the way which we're competing against Zerodha, Upstox, Groww, those kind of companies. But we already have a group company called as 5paisa, which will be focused. So that approach will continue to be in that form and discount broking will be in the 5paisa and main business will be -- or the traditional broking business will continue to be in the IIFL Securities. That is the right approach, right, that will continue?

Yes. We are very clear that the -- and though that tech savvy, do-it-yourself customers will be focused on 5paisa, this is more like financial planning kind of customers where there's human intervention and human assistance because the process of -- for a human, we need to target a more affluent customer.

Okay. So last couple of questions. On distribution side, where would the focus be? Whether you would -- since in the life insurance, we've seen there are some changes in the taxation rates where -- which have impacted some business. And one of the key competitors have shown a very muted performance in life insurance and even for you guys, I think the life insurance business was kind of muted in this year, yes, so which products whether loans, distribution...

Actually, our focus on this segment will be all products, CMS, AIF, mutual funds, bonds, insurance, general insurance, wellness. So we are focused on that. And my opinion is that because of tax changes, this has been affected, but over time, people get adjusted and become normalized. So my feeling is that because we have -- everybody had a bumper first -- fourth quarter, so now people are, for lack of a better word, I would say, going slow, but too soon it will catch up. So it will be all kind of advisory products.

Okay. And sir, lastly, your take on the MCX transition that has happened? Now whether for us, it has been smooth and whether are we facing any issues with regards to the software transition which has happened just day before yesterday? Are we facing any challenges or the sort of the transition has...

Actually, to answer that question, there were [indiscernible] problems but more or less smooth, but I think it's like an issue -- it's a nonissue because the transformation has happened.

[Operator Instructions] The next question is from the line of [ Sumit Jankar ], who is an individual investor.

Congratulations for a good set of numbers. I wanted to know the current cash market share, derivatives and commodities market share? And my second question, -- also, the brokerage sharing for the cash and derivatives? And my second question will be regarding the MTF. So how much percentage of MTF is outsourced?

It's out -- no I didn't understand last question, MTF is outsourced?

I mean your MTF book size is around INR 895 crores. So out of INR 895 crores how much it is outsourced?

So as per regulator, we can do 50% from own fund and 50% from the borrowed fund.

What is the question? Out?

Outsourced. I mean, how much it is -- now how much of MTF is taken from banks like...

So how do we fund it? Okay. That funding is 50% own and 50% borrowing, borrowed amount. And as you know, our own balance sheet is about INR 1,300 crores, so that we can manage. And coming to market share, I would say 1 second [Foreign Language]. Cash market share is approximately 3%. F&O market share is about 0.8%. But there, we have taken the total -- divided by total. We have separated retail [indiscernible]. So denominator is total exchange volume and commodity is about 0.5%.