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

Ladies and gentlemen, good day, and welcome to Q4 FY '25 Earnings Conference Call of IIFL Capital Services Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. R. Venkataraman, Managing Director, IIFL Capital Services. Thank you, and over to you, sir.

Thank you, and good afternoon, and welcome to the Q4 FY '25 Analyst Call of IIFL Capital. I am R. Venkataraman, Managing Director and Co-Promoter of IIFL Capital, and I'm accompanied with Ronak Gandhi, our CFO. We are living in volatile times and heightened geopolitical tensions continue to be a significant near-term risk. Macroeconomically speaking, India is still on a strong wicket, but geopolitical risks remain a concern. As you know, IIFL Capital is a focused Indian capital markets and wealth management, financial planning player. Our legacy business was retail broking, and we are on way to transform this to a wealth management practice with a focus on asset accumulation and not merely transactional income. To reflect the changed focus, the name of the company was changed from IIFL Securities to IIFL Capital Services Limited. We believe that we have all the pillars to successfully transform the legacy broking business into a wealth practice, be it brand equity, INR 2,500 crores of net worth, distribution reach across India, a critical base of customers, cutting-edge research as well as technology for high-quality user experience. To facilitate this transformation, we recently hired -- we hired Raghav Gupta and Prakash Bulusu. They have taken charge as joint CEOs to grow this business. They are experienced private bankers. And prior to joining IIFL, they had long careers with ASK Group in the private wealth business. The initial signs of this transformation are encouraging. The other update is that Nemkumar joined IIFL Capital in 2007 -- June of 2007 and was the founding member of the institutional equities business. Under his dynamic leadership, IIFL's institutional equities comprising institutional broking and investment banking has scaled up extremely well over the years. Given the current focus on the affluent wealth business and to have his focus on business development, he has been redesignated as Chief Growth Officer, and the Board has accepted his resignation from the post of Managing Director. Subsequently, I have taken charge as Managing Director in the month of May -- in the month of March, sorry. Ms. Rekha Warriar, Independent Director, has been appointed as a Chairperson of the Board. This ensures the roles of the Chairperson and Managing Director are separate, which is a good corporate governance practice. She has been associated with the company since 2019 as an Independent Director with over 30 years of experience in Reserve Bank of India. She will provide the company with invaluable guidance on corporate governance, regulatory compliance and other initiatives. Coming to the results for the full year, consolidated results for FY '25, revenues was INR 2,567 crores, which was up 15% year-on-year. First, I'll talk about the full year number, and then I'll talk about the quarterly numbers. So coming to the full year, total institutional broking and banking, the revenues was virtually flat compared to last year, more or less at about INR 640 crores. And retail brokerage was up marginally at about INR 650 crores. And this retail broking has been impacted for the last quarter because of regulatory changes related to expiry of derivatives, and that has affected the F&O business. And of course, market volatility in the JFM quarter also affected business. Distribution income, that has increased from INR 387 crores to INR 509 crores, up 32% and mainly because of increased focus on asset allocation, which was a key focus area. Other income was up significantly, 132% from INR 70 crores to INR 162 crores, and that was primarily because of mark-to-market gains on BSE shares, some investments in AIF and also gain on sale of real estate property. We made -- we booked a profit of about INR 45 crores as sale -- because of gain on sale of real estate. Increase in interest income by 27% from INR 329 crores to INR 419 crores was primarily because of increase in the margin funding book. Coming to costs. Manpower cost was up 29%, which is at INR 591 crores from INR 457 crores, and that was primarily because of hiring of the new wealth RM. And as a result, the average headcount was up to 232 versus 1,880. And also we had granted ESOP of almost INR 90 crores to senior management. Depreciation declined by 52% from INR 114 crores to INR 55 crores. And that is, if you remember last year, fourth quarter, we had written off the entire investment we had made in Karvy acquisition and because of which it has fallen down. Fees and commission expense increased marginally from INR 477 crores to INR 496 crores, mainly due to increase in -- basically, these expenses pass out marketing expenses paid for customer acquisition to external wealth partners for distribution income. Admin costs decreased 9% from INR 353 crores to INR 321 crores because of marginal benefits of cost optimization. And as a result, profit after tax went up almost 40%, from INR 513 crores to INR 713 crores. Now coming to the quarterly numbers. For the quarter ended March 31, 2025, if you compare March 31, '24 with March 31, '25, which is a year-on-year basis, total revenues decreased 20% approximately from INR 704 crores to INR 573 crores, primarily due to fall of exchange volumes due to tightening of norms for derivatives expiry as well as muted primary market conditions. Institutional -- and as a result, institutional and banking revenues also decreased from INR 215 crores to INR 97 crores. And because of which our IB income has seen some decline. Retail brokerage was down from INR 194 crores to INR 117 crores, but distribution income increased by almost 62% from INR 117 crores to INR 190 crores. Other income also increased from INR 18 crores to INR 36 crores, mainly because of mark-to-market on investments made in AIF and BSE and as well as some book profits on other financial instruments. Interest income declined marginally from INR 105 crores to INR 97 crores. Employee expenses increased 33% from INR 122 crores in last Q4 FY '24 to INR 163 crores in Q4 FY '25 due to ESOP, increase in headcount and bonus provisions. Our depreciation fell sharply from 75% from INR 63 crores to INR 16 crores, mainly because of the impact of hit we had taken in last year, and that I've already spoken about it earlier. Our fees and commission income fell from INR 129 crores in Q4 FY '24 to INR 108 crores in Q4 FY '25. Admin also fell from INR 98 crores to INR 80 crores as a result of some cost optimization. Due to this, primarily driven by the revenue decline, the PAT fell from INR 181 crores to INR 128 crores in Q4 FY '25. If you compare December quarter with March quarter, revenue again fell INR 646 crores in December to INR 573 crores in March, down 11%. Institutional broking fell and that was primarily driven by a steep decline in investment banking income. And then retail brokerage also fell from INR 150 crores to INR 117 crores, which was down 23%. Distribution income increased because of more focus on selling -- more focus on getting cross-sell income. Interest income fell from INR 111 crores to INR 97 crores because of a relative decline in the MTF book. Employee cost increased INR 149 crores to INR 163 crores, mainly because of headcount and bonus provisions, flattish depreciation. Fees and commission income was also virtually flat at about INR 118 crores to INR 108 crores. Admin expenses increased marginally from INR 71 crores to INR 80 crores because of spending in marketing as well as technology. As a result, PAT declined from INR 197 crores in Q3 FY '25 to INR 128 crores in March quarter FY '25. Now coming to some housekeeping numbers. Our average daily turnover was INR 1,92,871 crores in F&O, which was -- of which cash was INR 2,535 crores and derivatives was INR 1,90,336 crores. And this was almost INR 3 lakh crores in the Q4 FY '24. And as I explained earlier, this was because of the tightening of derivatives, particularly related to expiry of indices. And F&O was in March 31, 2024 was F&O volumes were INR 2,96,975 and cash was INR 3,120 crores, which was down almost 36% and the same number was INR 2,78,267 in the December quarter, which was INR 2,75,520 in F&O versus cash of INR 2,747, again, down almost 30%. Now coming to income tax, the income tax authorities had conducted search activity during the month of January '25 at the registered office and other premise of the company. We extended full cooperation to income tax official during the search and provided all details, clarification documents. We have not received any subsequent communication from the department regarding the outcome of the search. Hence, the impact on financial statements, if any, is not determinable. Dividend, the Board of Directors on February 11 declared a dividend of INR 3 per share, and this has been already paid and the same was considered as final. And with this, I come to the end of my opening remarks, and we'll be more than happy to answer any queries that you may have. Thank you so much.

[Operator Instructions] We have our first question from the line of Nidhesh from Investec.

Can you share some trends on the retail ADTO market share for us in FY '25 over FY '24, last 2 or 3 years trends. That is one. Second is, as we are now changing our strategy and building more towards wealth management, can you speak about how that -- how the approach towards business will change as we move towards the wealth management business and away from our broking business?

Okay. Overall market share for Q4 FY '25 was about 0.96%. Overall total on the exchange NSE volume and which was about 2.62% in cash and 0.96% is F&O. And the same was about virtually flattish for Q3 FY '25 at about 2.61%, and actually F&O was about 0.87%. So the trend is more or less the same, if you look at the last 3, 4 quarters. The cash is more or less roughly at about 2.6%, 2.7%, and F&O is about 0.8% to 0.95%.

Is this data including institutional business as well or is it just for retail?

Everything.

Okay. And how are the trends on the retail business, if you can share that?

See, retail, I don't have things separately on the retail part of it, but I'll get back to you on the retail market share.

Sure. Sure. And secondly, if you can share with the change in strategy and moving towards more towards wealth business, how should -- how will that change the approach towards business, let's say, how we look at the customer level profitability, overall profitability in that context?

See, basically, what we think is that if you look at our -- the way we are positioned, so if you look, we have a significant presence in investment banking and institutional broking business. And we think that this is a synergistic with our best practice because if you have client relationships at client levels, you have multilevel offering to the client, which helps us to deepen market share. It helps us to get deal organization as well as cross-selling. It helps us to overall drive the -- it's a synergistic benefit on the franchise. We also get some benefits on economies of scale. And also we share a lot of market intelligence and research. And the way we look -- the way historically, we have been structured or we have been positioned is that we have focused more on transaction income. And the entire firm was driven for, I would say, with a focus on transaction. And asset gathering was not a very -- I would say, was not a measured metric. So the big shift, I would say, in the mindset is that the focus will be more on asset gathering, focus will be more on selling, I would say, annuity products like mutual funds, AIF and PMS. And -- so basically, we believe that the entire broking industry has become a tech-driven and hence, the role of the RM is more towards client acquisition, servicing and asset gathering. So this, I would say, is a big mindset change that will happen in the next 12 months.

And sir, will that have an impact on the cost-to-income ratio for us?

Yes. Of course, it will have some impact on the cost-to-income ratio in the short term simply because since as the build-out is happening, there will be increase in manpower costs, and that has been evident because our manpower cost has risen. But this is a cost to pay for the long-term gain, and we are cognizant of it, and we will incur that cost.

Okay. And lastly, if you can share the data in terms of institutional revenue breakup, in terms of brokerage and fee income for the full year?

I think the full year income for -- roughly full year income was about INR 640 crores for broking -- for institutional.

Can you break up this INR 600-odd crores in institutional equities broking business and fee income, investment banking?

So listen, this is a combination of institutional broking and banking. I think the ratio will be about 60-40, right? Roughly, it will be about 60-40. Actually -- sorry, to the other question if you send an e-mail to our investor relations or [email protected], I will answer that.

We have our next question from the line of Pavan Kumar, an individual investor.

So there is a significant jump in distribution income from INR 100 crores to INR 257 crores despite the distribution AUM growing from INR 262 billion to INR 313 billion. So it's about like a 19.5% or 20% growth in the AUM, but the jump in the revenue is significant. Can you explain how that is? I'm referring to PPT Slide #17.

One second. Yes, that is because we have also had some amount of transaction income booked in that because we had distributed certain shares of unlisted -- certain unlisted shares, especially NSE. So that gain has been booked there.

Got it, sir. Could you be able to quantify the NSE or unlisted transaction income share? And what would be the MFPMS and AIF distribution...

That actually -- I can tell you how much is that mutual fund and AIF. Out of a total distribution assets about INR 13,000 crores, we have about -- mutual funds of about roughly INR 14,500 crores and more or less roughly about INR 7,000 crores, INR 8,000 crores of PMS and AIF and the rest is fixed income bond. So this is a rough distribution of the assets, cross-sell assets.

Got it, sir. Sir, what would be the revenue or the yield on these, MF plus PMS plus AIF assets?

Actually on a blended basis, I think the yield will be about 0.75, 0.8, 0.9x.

0.75% to 0.8% would be the blended yield. And on the insurance side, you have about the income that -- not the income, I mean the reported premium that you have reported, like the life insurance premium is around INR 735 crores. Is this entirely first year premium? If so, what would be the...

Sorry, Sorry. It is not INR 735 crores, INR 73 crores.

Yes, sorry, INR 73 crores. Pardon me, sir, I missed you. What was -- sir, I missed you. Can you please repeat it? What would be the renewal premium?

This is not renewal premium. It's a first year premium.

I understand, sir. I understood. What would be the renewal premium is the question?

So I don't have the data right in front of me. I'll share it. I'll share with you. If you can send an e-mail to [email protected], I'll share that with you.

Understood, sir. And in terms of the cost-to-income ratio, you were mentioning to the earlier question. What would be the cost-to-income this year for FY '25? And what is your guidance for FY '26? Can you give numerical numbers?

We are not giving any forward-looking statement. That's why I won't be able to comment on the cost-income ratio for FY '26.

And for FY '25 full year, what is the sub-brokerage charges as a percentage of overall retail brokerage? Retail brokerage is INR 650 crores revenue, right? Out of that, how much is paid out to sub-brokers?

See actually, retail brokerage income is about INR 650 crores, roughly about 45% comes from the -- roughly 45% comes from sub-brokers.

So out of this 45% that you get, how much you pay...

See the industry norm is anywhere from about 75%, 90% depends upon the scale of the sub-brokers and other qualitative factors.

[Operator Instructions] We have our next question from the line of Prayesh Jain from Motilal Oswal.

So just on this wealth management business, we had earlier seeded 360 One or we had started this business way back. And we did it via the getting the -- getting people on board. And similar is the strategy now that we are doing? Or what's the strategy there? And where is the RM count today for the ultra HNI piece, in particular?

See basically, as I mentioned earlier that we have all the pillars to succeed because we have the brand, we have the balance sheet, we have the technology, we have the client reach. So -- and given the way the broking industry is panning out, and what is happening to the entire transaction space, it is imperative for us to do this transformation. And as of now, we have about 450 of the affluent RMs and roughly about 50 for the, I would say, HNI or Ultra HNI RMs.

Sir, could you repeat those numbers?

50.

5-0, 50 in the Ultra HNI.

Yes.

Okay. Okay. And how many more do you plan to add in the next, say, 1 year or so?

I think in the next 1 year, the headcount will go from about 50 to about 100 or 120.

Okay. Okay. And sir, on this insurance premium, life insurance premium has come down quite sharply now. Obviously, not -- we cannot compare it with FY '23 base because of the change in taxation at that point of time. But even then Y-o-Y basis, even then this year, it's kind of down. How do you see this kind of business picking up from here on?

See, actually, we think that this business will not show a big spike, but it should get back to slowly upward sloping graph in the mid-teens.

Okay. And sir, just one last question on the IB business. How much of the IB business that we were getting earlier was with respect to the relationship that we had earlier with 360 One. And how much of the business we were doing organically?

See, actually, it's very difficult to differentiate between what was organic and what was relationship driven because even if you have a relationship unless you have proven capable to execute, nobody trust their fundraising plans with you. So we think that we got most of the business on banking part of it because we have a strong research, we have linkages in both domestic and foreign institutions. And third, which is extremely important, the distribution amongst all the channels. So yes, there were differences, but I think the deal closure happened because of our own strength. And so hence, that is the reason why it's very difficult for me to give an exact number how much came because of that and how much came because of this.

Got it. And sir, last question, do you think that the pain on the retail side from a broking standpoint is now behind and that the implications of all the regulations are now behind us. should we see an upward trajectory if the markets are supportive?

My view is that in the short term, I would still say that there will be some amount of recalibration happening. But if you don't have a short term, maybe 1 or 2 quarter view, I think that -- I believe that given the low penetration of equity participation in the country, we will soon -- and of course, as you rightly pointed out, the markets are supportive, we should see an upward sloping graph. But at least for the next 1 or 2 quarters, I'm still -- I'm constructive. And I think we should -- because of volatility, we should see some amount of headwinds.

[Operator Instructions] We have our next question from the line of Kshitij Saraf from Tusk Investments.

I wanted to understand on the asset management side, you've made a few key hires, and you mentioned this in your presentation as well, and we see an IIFL Fintech fund with a INR 400-odd crore AUM, if I'm not wrong. So could you just share some light on the plans and the hiring thereof? And how much do you look to scale this to? And what's the plan ahead?

See, on the asset management side, actually, we have one fintech fund, which has been with us for almost 2, 3 years. We also have a derivatives advantage fund, which is, again, like not exactly a long-term fund, but something similar. And we also have equity fund, which has -- which we are going to reposition. So we have already recruited a fund manager for equities, and he's joined us. And so at this point in time, I would say that we have roughly about close to about INR 800 crores, INR 900 crores of assets under management. And this, we think should easily double in the next 1 year.

That's helpful. And are you planning to launch mutual funds as well?

No, no, it's unlikely, at least in the next 12 months, it's unlikely. At this point in time, whatever discussion we had with the Board, it looks unlikely.

All right. And with respect to wealth, are there any new offerings we saw there are things such as estate planning mapped out there? What's the size of the opportunity you see? And also because the competition over here is intensifying across the country, what would be your sort of unique differentiation in this space?

See, first of all, I would say that this competition in India in business is given. And so -- but what we have to look at is the size of the opportunity. And we are not selling credit cards in Singapore. So that's the way I tell everyone that that is the cause of optimism because India is a large country, and I think we are just seeing the beginning of the industry and the growth. Coming to what we think our unique -- so you're right that we have started succession planning trust. And these are important, I would say, services to be offered to the HNI, Ultra-HNI segment. And we have also started a family office -- offering. So these are, I would say, essential offerings, especially targeting the U.S. Ultra-HNI segment. And as I mentioned earlier, we think that we have the element of success because we have a brand, we have balance sheet, we have the relationships, we have a critical mass of customers. And last but not the least is cutting-edge research. And the fact that we have a strong banking and institutional equities practice, which effectively reinforces the relationship because in some case, we can help the HNI monetize well. In the other case, they can also invest. So these we think are the -- maybe the critical elements for our success.

[Operator Instructions] We have next question from the line of Pranay from Johnson & Johnson.

My first question is basically in wealth management piece, when do we -- I mean what sort of a cash burn do we expect? And where do we see this management -- wealth thing in the next 3 years?

See, it's very difficult to give a cash burn number because it's a function of team build-out, business mood, et cetera. As I said that we are -- at this point in time, we are doing a build-out phase. So my feeling is that since it's very difficult for me to make a forward-looking statement. So the key element to track is how our cross-sell assets grow. And we think that this should -- this is the part which should rise. So obviously, in the short term, because of people take time to join and become productive. So there will be some amount of burn simply for the employee -- on the employee cost part of it.

Okay. And sir, my next question is basically one of our subsidiaries has invested in Avanti Feeds. They have taken a 4%, 4.5% stake. So what is the rationale being behind IIFL Capital and IIFL facilities investing in this...

No, no. Actually, there's a wrong information. It was taken for selling purposes, and it's already off our books.

Okay. So we don't own any more shares in Avanti Feeds.

We don't own any Avanti Feeds as of now.

Either IIFL Capital or IIFL facilities?

In IIFL Capital, IIFL facilities or which are the company you have spoke about, we don't have Avanti Feeds.

[Operator Instructions]

So anyway, if people have come to the end of the question, I would like to thank all the participants for participating and also asking questions. If you have any follow-on questions, please feel free to reach out to our investors desk. And thank you so much for joining us today, and I really appreciate your time. Thank you.

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