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

Ladies and gentlemen, good day, and welcome to IIFL Capital Services Limited Q1 FY '26 Earnings Conference Call [Operator Instructions] Please note that this call is being recorded.  With this, I now hand the conference over to Mr. R. Venkatraman, Managing Director, IIFL Capital Services. Thank you, and over to you, sir.

Thank you, and good afternoon, everyone. Welcome to the Q1 FY '26 Analyst Call of IIFL Capital. I'm accompanied with Ronak Gandhi, who is our CFO. India's macroeconomic outlook remains strong, which is supported by easing inflation, which has linked -- resulted in a lower interest rate scenario, healthy monsoon and benign oil prices. Our economy is showing signs of improving consumption once the interest rate benefits start trickling down.  As you might be aware, we have 2 broad segments, Institutional Equities and Investment Banking and the legacy Retail Broking segment. We are trying and transforming our retail broking segment into a full wealth management and financial planning practice. We believe that we are well placed to succeed in this transformation given the fact that we have a suitable network. We have a pan India distribution reach, a critical mass of customers, technology as well as research credentials.  Coming to the first quarter results. Revenue for the quarter consolidated was INR 680 crores, up 19% quarter-on-quarter, 6% -- up 6% year-on-year. Let me give you the color of the quarter-on-quarter analysis. Institutional and Investment Banking revenue virtually doubled from previous quarter, which is Q4 FY '25 versus first quarter of FY '26. Retail brokerage is also increased 15%. Distribution income, which is financial product distribution income, has decreased 24% because of the insurance effect, which sees a spike in the last quarter of year because of March effect.  Other income has increased 73%, INR 63 crores in this quarter versus INR 36 crores in the previous quarter. That is mainly due to mark-to-market on investments, especially the BSE shares which we have. Employee cost increased from INR 163 crores to INR 176 crores in the first quarter FY '26, mainly because of increase in headcount and some provisions for variable pay. Depreciation has increased marginally. Fees and commission income has -- on expense side has increased 24% because of payouts. Admin expense has increased marginally to 7% -- by 7% to INR 80 crores from INR 86 crores. And as a result, PAT has increased 37% from INR 128 crores in the previous quarter to INR 176 crores in this quarter.  Coming to year-on-year analysis, we have seen a virtual flat impact on institutional and banking income, which is virtually flat from Q1 of FY '25 to Q1 on FY '26. Retail brokerage has declined 28%, and that is mainly because of regulatory changes that came into effect on December 2024, and that is primarily to do with the reduction in the number of expiry dates. Distribution income, SPD distribution income has increased 37% to INR 145 crores in this quarter, basically because of increased focus on asset gathering.  Other income has increased dramatically from virtually INR 4 crores to INR 63 crores, again, because of mark-to-market gains on investments, especially BSE shares. Employee cost has increased from -- 36% from INR 130 crores to INR 170 crores, basically due to increase in headcount and also because of wealth buildup. As you know that we have started building out a wealth franchise and have recruited wealth RMs. Depreciation has increased 40% from INR 12 crores to INR 16 crores because of the increase in investments in technology as well as office. Fees and commission income has increased 5% from INR 128 crores to INR 134 crores. Admin expense is flat, virtually the same INR 83 crores, INR 86 crores range. And as a result, PAT has fallen 4% from INR 182 crores in the first quarter to INR 176 crores in the current quarter.  Some housekeeping numbers. Average daily turnover was INR 2,23,232 crores which was broken down into INR 2,20,263 crores in derivative and cash was -- sorry, INR 2,968 crores in this quarter, which was -- in the previous -- Q4 FY '25 was INR 1,92,871 crores, which was broken into INR 1,90,336 crores in derivatives and cash was INR 2,535 crores. And if you remember, the first quarter of FY '25, which was a bumper quarter, which was INR 3,22,782 crores, broken into derivatives of INR 3,19,455 crores and cash of INR 3,327 crores, which was down almost 30%, and as I mentioned earlier, because of changes in this regulatory norms because of fall and decline in the number of expiry days we have.  Consequently, I think people ask about market share. On a consol full market share basis, we are virtually -- Sorry, 1 second. So on a consolidated basis, overall market share, we have taken the full exchange denominator. We are at an F&O market share of 0.62%, which is broadly in the same range. And for cash market share, it's 2.57%, which was in the previous quarter 2.51%. And again, that is broadly hovering around the same range.  So with this, I've come to the end of my comments, and we are open to answer any questions that you may have.

[Operator Instructions] The first question comes from the line of Prayesh Jain from Motilal Oswal.

Sir, just on this approach towards wealth management, right? So firstly, can you detail as to how many RMs we have added or -- and whether this is -- the quality of RMs would be like the ultra HNI RMs which would have average salaries of INR 50 lakhs and above? What are the kind of RMs that we have hired in the -- for the wealth management business?

Okay. As I mentioned earlier also, we have broadly added about 50 RMs and they are a mix of both HNI -- ultra HNI as well as mass affluent RMs. Broadly speaking, the salary range will be in the number which you have said. And we have a higher proportion of HNI, ultra-HNI group RMs, but the entire build-out is happening as we speak.

Okay. And sir, as this kind of scales up, would you segment your customers into 2 different buckets and the wealth management would be reported separately with respect to clients, AUM base, everything? How would the business shape up from here on?

See, as you rightly pointed out, and you're rightly articulating, we have to segment our customers because we have a large base of customers with less than INR 1 lakh -- INR 1 crore net worth and the segment which are targeting will be, say, maybe in the INR 5 crores to INR 25 crores and greater than INR 25 crores. So we have to differentiate. But as we speak, the building -- the business is in build-out phase. And as business reaches a critical mass, and we will be inclined to report. And whatever feedback people like you who track markets closely, we will listen and report accordingly.

Sure. And sir generally, to scale up wealth management practices, you need people, you need products and you need processes, right? People you are hiring, what are the kind of products that we are getting into? Are we getting into manufacturing of PMS, AIFs or -- and in terms of processes, how would be the approach, whether a [ digital ] approach or what kind of approach we will have in terms of processes as well?

See, that's a very valid point you have made because it's a combination of all 3, products, process, people. And so we are -- at this point in time, the people part of it has been built out. On the process part of it, obviously, if you know, we have been doing broking and distribution of -- for a very long time. So we believe that we have the necessary processes and technology in place. But having said that, we have also recruited specialists for wealth because the entire business is more distribution and less broking. And so we have invested in the necessary software as well as people for support, for the operations part of it.  And coming to products, as of now, we are depending a lot on our external manufacturers because the bulk of the new assets which we have gathered has come on the mutual fund side and the AIF and PMS, we are distributing. But having said that, we are also trying to build our own manufacturing practice. And so we are coming -- we are -- if you remember, we have a small AIF and PMS business and which we have recruited people to scale it up. So we will be manufacturing also. But having said that, we believe that manufacturing is one of the products we have. And as a house, genetically and generically speaking, we are more open for an open architecture model.

Okay. And sir my last question would be on your cost-to-income. How should we see your cost-to-income at least for this year and possibly as you build out wealth and your -- the basic teams of investments on AIFs and PMS? Should we think that the cost-to-income will be elevated this year and then only probably from next year onwards some benefits will start trickling down? How should we think about cost-to-income?

Yes. So if you look at our business, we have 2 broad segments. One is the Institutional Equities and Investment Banking, and the other is the Legacy Broking, which we are transferring to wealth, including the build-out of wealth teams. So if you look at our -- the new -- the business, which we call as -- for the transformation of the business, which was the erstwhile retail, so we will see an elevated cost-to-income ratio for sure. And I'll just give you some broad numbers in the sense that -- so basically, we will see -- as we speak, I think the broad cost-to-income ratio for the retail or the non-institutional side will be in the range of 75%. And I think this year it will be elevated, and we hope to see benefits of scale trickling in next year. So this year we will be seeing elevated numbers.

The next question comes from the line of Chetan from Mahindra Mutual Fund.

Sir, just wanted to understand the revenue breakup. So we have INR 617 crores of revenue this quarter, out of which our retail institutional booking and the financial product distribution is roughly INR 483 crores. So this other segment that remains is INR 143 crores -- INR 134 crores, I think, roughly. So what all is included in this? And I think this segment has declined for us on a Y-o-Y basis. So can you explain that? Because if I see your -- the rest of the segments are doing well, but the still revenue trajectory compared to the first half of last year is a decline. So if you can please explain this?

I think there's a big component of interest income, which is broadly about INR 100 crores. And that has been the same because previous year quarter also it was in the same ballpark number. I don't have the exact numbers in front of me, but they were in the INR 100 crores range. Correct, Ronak? INR 100 crores interest in income.

Okay. And sir secondly, this -- the wealth management business that we are building out, so what sort of, say, revenue contribution has started coming in from specifically this new wealth business that we are building in? And what sort of costs are associated directly with this? So if you can quantify both the revenue and the cost on that?

So I'll give you just broad numbers. So revenues have started coming in. So if you see -- I'll give you some broad estimates because last year we had a revenue of roughly about INR 40 crores and the cost was about INR 70 crores. So we had a hit of about INR 30 crores. And this year, we are roughly in the revenue -- this quarter we have -- we had made revenues of about INR 8 crores. And the cost data I don't have right now because we look at this on a full year basis.

Okay. Sir you said INR 40 crores and INR 74 crores, that is for the previous quarter or first quarter or the full year?

Yes.

Full year. Okay.

The next question comes from the line of Keshav from Wise Mind Investment.