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

Ladies and gentlemen, good day, and welcome to IIFL Capital Services Limited Q2 FY '26 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to the management for the opening remarks. Thank you, and over to you, sir. .

Thank you. Good afternoon, and welcome to the second quarter FY '26 Analyst Call of IIFL Capital. I am Rajamani Venkatraman, I'm the Managing Director; and along with me is Ronak Gandhi, who is our CFO. First and foremost, India's economy has continued to demonstrate resilience and strength in spite of facing global trade tensions and higher tariffs imposed by U.S.A. Fortunately, GST reforms, festive season spending and incipient revival in both manufacturing and services have supported steady economic growth. Looking ahead, we think second half for FY '26 will be better, and that is supported by policy stability, demand growth, lower GST rates spurring consumption and also a benign liquidity environment. Coming to our results, consolidated revenue from operations for the quarter stood at INR 592 crores, down 4% quarter-on-quarter and 8% year-on-year. Coming to quarter-on-quarter basis, retail equities was at about INR 271 crores for this quarter versus INR 264 crores for the Q1 FY '26, which is up marginally 3%. Institutional income, which comprises both broking and investment banking has decreased 9%, and it is now standing at INR 186 crores versus about INR 204 crores for the previous quarter. And financial product distribution income has decreased 10%. It is now at INR 130 crores versus INR 145 for the previous quarter, and that is because of certain transaction income, which was lower in this quarter. We have -- there's a hit on our MTM investment, and that is primarily because of price reduction on the BSE shares which materialized in the previous quarter. Employee cost has decreased from INR 176 crores to INR 150 in this quarter, basically because of lower provision for variable pay in this quarter. Depreciation has decreased marginally by 7%. Fees and commission increase has decreased 12%, INR 134 crores versus INR 119 crores in the previous quarter, which is in line with the revenue trends. Admin expense was flat at INR 87 crores. Operational PBT, which is before other income and MTM income is at about INR 160 crores, which is flat on a quarter-on-quarter basis. Coming to an year-on-year basis, retail equities income was INR 271 crores in Q2 FY '26 versus INR 356 crores Q2 FY '25, a decline of 24% and this decline is primarily on account of the new regulatory norms on F&O trading. Institutional income which was -- has increased 5%, INR 186 crores versus INR 177 crores in the same quarter last year. Equity income has increased 22%, INR 130 crores versus INR 106 crores because of increased focus on distribution products and income. Employee cost increased 3%, INR 149 crores to INR 150 crores. And the depreciation has increased 13% from INR 13 crores to INR 15 crores. Fees and commission income has been decreased 17% to INR 142 crores to INR 119 crores, again, in line with the revenues. Admin income was flat. Operating PBT has -- is at INR 160 crores before MTM, and that is a decline of almost 20% year-on-year basis. Coming to some housekeeping numbers. Our average daily turnover was INR 2,63,568 crores, which is a split of F&O at INR 2,60,956 crores and cash was INR 2,600 crores approximately in the quarter that went by compared to INR 2,23,232 crores of which F&O was INR 2,20,263 crores and cash was about INR 2,968 crores. And basically, there was an increase in average daily turnover from -- in Q2 versus Q1, and that was primarily because of the increase in F&O. If you compare with the quarter last year, same quarter last year, FY '25, that quarter, we had a turnover of INR 3,32,186 crores, which was about INR 3,28,728 crores in F&O and INR 3,450 crores in cash, which was a decline of almost 21%, 22%. If you look at our market share, consequently, the market share, our market share after adjusting for -- our market share, if you consider overall market share, that is basically unchanged at about 0.64% which is about cash market of about 2.52% to 2.55% and F&O was about 0.64% to 0.62%. But the good news is that if we remove noncrop because we believe that the large segment of crop, which is not addressed by us, then noncrop market share, we have seen an increase in both F&O as well as cash. Now cash is about 3.87% and F&O is about 2.65%. The other number is about our cross-sell assets. We have seen growth in our cross-sell assets. Currently, cross-sell assets stands at about INR 44,000 crores, which is 60% is ARR and 40% is non-ARR. ARR assets is mutual fund, PMS and ARR, which is now standing at about INR 27,000 crores. So with this, there are other -- with this, we are open for any questions that you may have. Thank you so much.

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

Sir, first question is on this SEBI consultation paper that spoke about brokerages going down sharply from 12 bps to 2 bps. And obviously, there has been some media talks around it that the regulator might consider increasing that lower limit of 2 basis points. But either way, what could be the impact that we could see on our earnings because of that.

See, if you look at this, this discussion paper is yet to become a law. But as you said, there has been media reports that the 2 basis points might also see some increase. So on the institutional sector, a bulk of our brokerage comes from our foreign institutional investors. And where the capping is not applicable. Mutual funds, however, are still a significant player on this. So if there is a reduction in the broking -- brokerage charge, then there will be an impact on our income. But at this point in time, it is very difficult to ascertain exactly what will be the impact. But for sure, if the brokerage fails and there's a cap, then there will be an impact.

Sir, can you share some insight into what is the share of revenues of domestic mutual funds in your institutional equities revenue?

Unfortunately, I'm not able to share that details with you.

Sure, sir, no worries. Sir, the other question was on the distribution income that has seen a sequential drop. Ideally in this quarter, it's -- unless it's insurance related, which could have possibly impacted by GST sales, but financial product -- distribution revenue sequentially has gone down. What would you...

Sequentially, income has gone down by almost 10%. As -- we had some NCD issuance in the previous quarter and other such products where we have had some upfront income. That is the reason for this decline.

Okay. And sir, how is the wealth management business shaping up. How much, how many RMs have you hired so far and...

Actually -- to be honest, I think last time also, the same question was asked. So as of now, we are roughly about 50, 55 RMs in that range. This quarter, we have not seen some significant increase in RM because it's virtually flat. And the business is shaping up well, and we are seeing some assets coming that are coming, relationships happening. And so as of now, if you ask me, I'm happy with the state of the progress of the wealth business. And additionally, what is also happening is that as a rub-off effect, our own existing 450 RMs, which are there in our broking business have also started slowly upgrading and focusing on getting more cross-sell assets, and that is evident in the fact that our cross-sell assets is going -- has reached about INR 45,000 crores -- INR 44,000 crores.

Sir, how many RMs are there on the retail business and how many of them are worth upgrading to our wealth RM.

So our aim, see, we have about 450 RMs in there, and we hope that a bulk of them will get upgraded.

Okay. And sir, this 50, 55 RMs that you've added, these would be RMs of high caliber and income and that salary levels upwards of INR 50 lakhs or it's more in that INR 15 lakhs to INR 20 lakhs range, what kind of RM...

This will be the affluent and SNI RM. So their salary will be higher.

Okay. Got that. Any data that you want to share with respect to -- apart from the AUM data that you've mentioned, any number of families, incremental number of families that you've been able to onboard in the last -- in this first half.

Actually, once this business scales up, maybe after 2, 3 quarters, we should be able to share more details.

And sir, last question on the broking business. We've seen a very strong uptick in volumes in October. And in all these talks about regulations on the F&O side have mellowed down both by FM as well as the government. Do you think that the run rate what we've seen in October can be sustained going ahead? And if there are no further or any major regulations, how should we kind of -- I know it's a crystal ball gazing, but any thoughts of yours would be helpful too.

Exactly -- you rightly pointed out, it's a crystal ball gazing. So as of now, there's no clarity about what will happen. Although like you said, we are getting different signals from the regulators and the powers to be. But having said that, I think one should not we look at on a quarter-on-quarter basis on et cetera, because India is still an underpenetrated market. So we think that as the Indian economy goes support maybe INR 4 trillion to INR 6 trillion and INR 8 trillion in the next 10, 15 years. So there will be a secular increase in equities volumes. So the long term -- if you have a long-term perspective, then the trend is clearly upwards sloping.

Sorry, sir, just 1 last question. Any breakup of revenue between F&O and cash that you can share on the broking side?

So I think our broking business, roughly, it is about 60-40. It will be broadly in the 60-40 range. 60 F&O and 40 cash.

Our next question comes from the line Harsh Shah from HSBC AMC. .

Just a few questions is, one, carrying forward from Prayesh's question on wealth management. So from a business perspective, if you look at our existing business in this first half, we have done around INR 1,200 crores of revenue. Again, I'm not trying to understand anything from a quarter-to-quarter perspective. But over the course of, let's say, next 2 or 3 years, what is the contribution you think that our distribution or wealth management business can do to our overall IIFL Capital as it stands now?

See, we hope that over the next maybe 2 to 3 years, this business will become profitable. As of now, we have continued to invest and build this up. So it will be a big crystal gazing part on my part to give an exact number. But we think we are quite optimistic because we think that asset gathering and getting ARR revenue is the way to go. And as I mentioned to you when we -- earlier also that our focus is to get assets. So we are at about INR 45,000 crores of assets, out of which INR 27,000 crores of assets in mutual fund and PMS, and we should -- our aim is to grow that component.

What proportion of this INR 44,000 crores incrementally has been onboarded by the new team that you hired in the last 1 or 2 years?

Basically, I think my -- so on an incremental basis, it's difficult to say which -- because what has happened is after the new team has joined, both existing team and the new team have been focused on getting ARR assets. So it is a combination and synergy effects of both. And as I told Prayesh also earlier, once the business scales up, then we'll be sharing more details on...

Understood. And in the retail business, I just have 1 or 2 data questions, retail business that you reported, what is the breakup in retail broking and the interest income that you earn on the employers book.

So our NPL book is roughly about INR 1,500 crores.

That breakup we have already given. You can see that breakup in...

Okay. So the INR 105 crores will be the interest income and I think INR 160 crores will be the retail booking. Is that correct?

That's correct. yes.

And -- okay. So that is one part. And just last thing is for me I understand that this is a long gestation period, you see this with other wealth companies also. Once they start making money, they make a lot of money. But just to understand current context, how much investment that you have done in this new wealth business in this financial year?

In this financial year, if you look at investment, basically, manpower cost is the biggest investment, and we have invested. So as of now, last year, we incurred -- we made a loss of about INR 20 crores, INR 24 crores. And this year, for the first half, we would have lost about INR 20 crores, INR 25 crores. .

Understood. Okay. So you have intensified investments in this year.

Yes. Because recruiting RM is becoming a big challenge because of competitive pressure. So we are -- we are being prudent. .

[Operator Instructions] Our next question comes from the line of Aditya Bhatia from Electrum Capital. .

Could I just get the split between the I and IB...

So on the total institutional income, it is about INR [ 1,986 ] crores. So it will be roughly about I think like...

Is it still 60-40?