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

Ladies and gentlemen, good day, and welcome to IIFL Securities Limited Q3 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, everyone, and welcome to the Q3 FY '24 Earnings Call of IIFL Securities. Along with me is Ronak Gandhi, who is our CFO. Wishing all of you a very happy and prosperous New Year. Coming to the global macro, India remains a fastest growing economy, with real GDP expected to grow upwards of 6% over the next 2 years. Monetary policy easing across the globe is expected to start somewhere in the second half of calendar '24, which should support business investment and, discretionary household spending. In an Indian context, government investments will continue to remain high. Downside risks remain due to heightened geopolitical tensions. Coming specifically to the Indian markets, calendar '23 ended on a high note for the domestic mutual fund industry. AUM crossed INR 50 lakh crores. Also in the end of December '23, mutual fund ownership of Indian markets was about 8.7%. Retail and other individuals hold another 9.7%, which is marginally above the IIFL ownership of about 18.2%. These data points point out to a deepening of the Indian capital markets. Coming to IIFL Securities, we are pleased to announce another strong quarter, primarily driven by an investment banking business, where we completed about 17 transactions in this quarter. Coming to results numbers. Consolidated revenues for the quarter came at INR 582 crores, which was up 68% year-on-year and 9% on a quarter-on-quarter basis. The reason for this steep increase on a year-on-year basis was that brokerage income increased by 73%, INR 268 crores in this quarter versus INR 155 crores in Q3 FY '23. Distribution income also increased significantly, INR 100 crores for this quarter versus INR 53 crores for the quarter last year, primarily driven by sale of products like AIF, PMS and insurance. Investment banking increased by 32%, INR 55 crores in this -- coming to quarter-on-quarter basis, brokerage income was virtually flat, INR 268 -- at about INR 268 crores. Distribution increase -- distribution income increased by 18%, INR 100 crores versus INR 85 crores. And investment banking increased 45%, INR 55 crores versus INR 28 crores in Q2 FY '24. Other income was INR 24 crores, increased by 373% year-on-year and reduced 12% quarter-on-quarter basis, primarily driven by mark-to-market gains in [ BSE shares ]. Coming to expenses. Employee cost was down marginally 7% on a quarter-on-quarter basis. And if you look at finance cost, finance cost was up 42% on a quarter-on-quarter basis, up 134% on a year-on-year basis because of increased borrowings that was -- and the borrowing was done primarily to support our margin trading book. Employee -- sorry, our admin cost was down marginally 9% and increased 47% due to increase in our sub-broker passed out as well as increase in technology expenses. Our assets under management and custody, INR 1,81,582 crores, out of which roughly about INR 34,000 crores in cross-sell. Our average daily turnover for this quarter was INR 2,71,309 crores, which was -- which is about INR 2,495 crores in cash segment and INR 2,68,815 crores in the derivatives segment. Corresponding figures for the previous quarter was INR 2,49,979 crores which was INR 2,445 crores in cash segment and INR 2,47,533 crores in our derivatives segment. With this, I come to the end of my remarks, and I'm available along with Ronak to answer any questions that you may have. Thank you.

[Operator Instructions] We'll take the first question from the line of Hiten Boricha from Sequent Investments.

Sir, I have 2, one bookkeeping question and the other one is on customer acquisition. So can you just give me the breakup of the cash we have in the books, the breakup of cash of the company and the cash of the client or the margins we have or the actual cash in the books?

See, our own cash is about -- roughly about INR 430 crores and clients will be about INR 3,500 crores.

Okay, sir. Okay. Sir, my question is on the customer acquisition. As we can see in the presentation, we are adding like 50,000, 55,000 customers per quarter since last 3, 4 quarters. So my question is, what are we doing to get the customer acquisition more, like, we used to do around 2 lakhs, 2.5 lakhs, like, a couple of quarters back, I believe, 4, 5 quarters back. What are we doing to add more customers? And are we going to do that to 1.5 lakh customer acquisition per quarter again?

Okay. As you're aware, in December 2022, so we had -- a strategic decision we have taken because earlier we used to acquire a large number of online retail customers. And that was the first time we were acquiring in lakhs. So we have a strategic shift because we have a sister company called 5Paisa, where this online retail trading customer acquisitions are happening. So as of now, we are considered -- we are concerned -- we are more looking at -- more the affluent customers and hence the pace of customer acquisition has slowed down. And going ahead also, we will continue to focus on acquiring customers with bigger wallet rather than acquiring online retail customers.

Sir, that 2 lakh kind of number, which earlier was the number that was because of 5Paisa, right?

No, No, no. 5Paisa is a separate company, but we are also trying to -- we are also acquiring customers similar to them within online retail customer.

Sir, no, I didn't get the second. Please explain me again, sorry.

No -- [Foreign Language] customer acquisition was quite large because we used to acquire a large number of online retail customers, spending money on digital channels and social media, et cetera. So as of now, we are focusing on acquiring more affluent customers, hence the cost -- hence, the numbers have come down.

Okay, okay, okay. So our focus from online has changed to actual customers. Okay. Understood, understood.

Customer acquisition that 5Paisa is acquiring in lakhs, which is again a sister company.

Okay. So sir, like, what -- any rationale behind changing the strategy?

It is very simple because in the group, we had 2 companies, which is online retail customers, which is catered to by our sister company called 5Paisa. Here, we are more focused on the affluent customers, which are retail customers, the more disposable or higher investment surplus. So if you remember in December 2020 -- 2022 we have done this shift.

[Operator Instructions] The next question is from the line of Narendra from Robocapital.

So my first question is regarding your margins. So what do we take as the steady-state margins going higher? Like this quarter, it was above 40%. So was there any one-off? Or just wanted to get an idea of what is the steady state.

Actually, it's difficult to give a number like a steady-state margin for a cyclical business like us because when the markets are good, then things look good. So this -- first of all there was no one-offs. But you have to remember that we have seen huge activity in capital markets for the last 2, 3 months. And we had lot of block deals, lot of -- and activities like this, which was boosting brokerage income.

Okay, okay. So what kind of deal pipeline are we seeing on the investment banking side for the next...

Investment banking deal I can't share because -- but the investment banking deal pattern looks very good.

Okay, okay, okay. So are we seeing a visibility -- how much visibility do we have, 3 months, 6 months?

I think it's like obviously having giving -- I'll give the [ standard estimate ] state of capital markets, but visibility looks very good.

Okay, okay. Got it. Got it. And regarding the -- what kind of traction are we seeing on the BSE derivative segment? That's your area for growth...

Yes, yes, BSE derivatives. Yes, we are seeing traction in BSE derivatives for sure.

[Operator Instructions] The next question is from the line of Rishabh Nahar from Swan Capital.

Just one question in terms of the customers. So the kind of customers that we're acquiring, it's more from the affluent segment. So what -- what is the life cycle of these customers? Is it very different from the retail discount broking, like the 5Paisa and the other discount brokers? Because those customers seem to be pretty cyclical, and their life cycle is 3 months, 6 months, 1 year. So is that -- are our customers a lot longer in terms of the retention there, the revenue that they're contributing to?

See, actually, that's a good question. We believe that our customers have got higher disposable income and more inclined to invest and rather than trade aggressively. But it's true, we don't -- we have not done any psychographic or analytical modeling of this. So it's, like, I'm not in a position to give you a very scientific answer.

Okay. And sir, is it also, like, are we focusing on some sort of trading community, like, for example, like Zerodha has a strong...

No, what you say is absolutely correct. But there is a segment of what we call as the algo traders the large volume -- high-volume traders. So historically, we have not done very well in that segment and -- primarily because of very low yield. And so -- but that is one segment which is growing very rapidly. And as a -- I would say as a full-service broker, we need to improve our offering there.

Okay. Just one last question. So what kind of brokerage model do we provide because from whatever ground research that we have done, we see that you also provide a discount brokerage model, which again -- which is a little confusing. So just wanted to understand that?

No, no. Actually, if you remember we have also had this, I would say, the flat brokerage [ z20 ] pricing scheme, which we used to have. So now we've discontinued it. So very rarely, on special cases, we give. But otherwise, we are on that ad valorem brokerage rate. So you're right, actually, historically, we were offering that.

Okay. So now any new customers that are coming in, we are not offering that anymore.

We don't offer but suppose -- in the market suppose somebody comes and says so it is on a case to case that happens. But it is not such a big thing.

Okay. All right. So -- and then who decides that? Does the sub-broker decide that? Or is that within the company?

No, no, no. It is controlled by HO level. I think the person previous to you also asked this question. So I was trying to explain to him that the online retail customers who is a discount pricing model, we are no longer -- we are more or less trying to exit that space.

[Operator Instructions] The next question is from the line of Tushar Sarda from Athena Investments.

I wanted to understand breakup of your revenue. I can find 3 items in the presentation: retail brokerage; fixed income product distribution -- financial product distribution; and investment banking, but it doesn't add up to the total. So what are the other items?

Where -- investment banking income as given in the presentation?

Yes, yes. So retail brokerage is INR 448 crores for 9 months. Financial product distribution is [ INR 270 crores ] and investment banking is INR 148 crores. Total income is INR 1,400 crores something. So what is the breakup? I'm not able to reconcile this number.

See, I'll tell you what. The components of income are broadly investment banking income, financial products distribution income. There's something on other income there. There's mark-to-market and other interest income happens. Then there's something on interest income, rental income. And in brokerage-related income, there are a lot of things, apart from retail brokerage, institutional brokerage, DP income, DPC income, et cetera. So for your point is taken. Next we will...

You can refer to the results.

So the results table has all the details. But next time, we'll bridge the -- we'll show it properly, so that all the numbers are -- so your concern is addressed.

Okay. And is there any plan with respect to 5Paisa? Will that continue as a separate entity? Or any plan to...

No, no. That will continue as a separate entity.

It will continue -- so you have no plans to merge or takeover.

Yes.

[Operator Instructions] The next question is from the line of Rishabh Nahar from Swan Capital.

I have just one question in terms of the 5Paisa. You were going to transfer the retail clients. And then I think there was a notification from 5Paisa that has been withdrawn. Is that true, like, Is that...

That's true because we've also given a similar notification. So I'll just tell you what is happening. So as you know, in December 2022, we have done a scheme with 5Paisa where we were transferring our online retail customers to them. So just this entire -- we have made the applications after all those approvals to stock exchanges and SEBI. SEBI had a number of observations. And so basically, what has happened was that since there was a lapse of time because almost it's now close to 1 year or more. So basically, there was exchanges and SEBI said that you have to refine the scheme with additional certification document, including valuation. So now we had a Board meeting yesterday. The Board decided, given the fact that database of customers, valuations, market conditions, trading conditions, everything has changed substantially in the last 12 months. So we don't say that you have to revalue and then come back to the Board and revalue the scheme. So that's the reason why both the partners, which is 5Paisa and us, we have decided to go back to the drawing board and reevaluate the scheme.

[Operator Instructions] The next question is from the line of Tushar Sarda from Athena Investments.

How much is your institutional brokerage? Because you mentioned that you had a lot of large block deals and all that because of huge activity.

Yes. Roughly about 60-40 split of brokerage, retail and institutional.

60-40.

40.

Okay, okay. And last quarter, what was it?

Same, 60-40, sir.

[Operator Instructions]

Okay. Since there are no further questions, I take this opportunity to thank all of you for taking trouble and joining us on this call. As you know, we are available. So you can send an email to [email protected], and we'll be more than willing to answer any questions that you have. Thank you once again, and have a nice day.

Thank you, members of the management. Ladies and gentlemen, on behalf of IIFL Securities Limited, that concludes this conference. We thank you for joining us, and you may now disconnect your lines.