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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, good day, and welcome to IIFL Holdings Limited second quarter earnings conference call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to the management. Thank you. And over to you.
Good afternoon, everyone. On behalf of team IIFL, I thank all of you for joining us on this call. I'm Prabodh Agrawal, Group CFO, accompanied by Nirmal Jain, our Group Chairman; R. Venkataraman, Managing Director; Sumit Bali, CEO of IIFL Finance; and Karan Bhagat, Managing Director of IIFL Wealth Management. I will now pass the mic to our Chairman to comment on overview of the group's strategy and plans.
Thank you, Prabodh, and good morning to all the participants and welcome. So I'll just share my thoughts about the macro environment that our company and our group works in and then broadly on our strategy for our various businesses and then I'll hand it back to Prabodh for a line-by-line discussion on financials. And also for question-and-answer, I also have my colleagues, Sumit Bali as well as Karan Bhagat, who head our NBFC and Wealth Businesses respectively; and also Venkat, who is Managing Director along with CFO, of course.So the economy and market suddenly -- if we were having this call about a week back, the things would have been very despondent, but now they are looking much better and much brighter. And one of the key reason is that crude oil prices have fallen from the recent peak of $85 to $72. And my last 35 years of experience with this -- our Indian economy and market is that crudes actually matters a lot more than even the Finance Minister or RBI Governor for that matter. And whenever crude prices have gone down, our current account deficit, our fiscal account deficit, liquidity and everything looks better, rupee also strengthens and that gives more confidence to our foreign investors. But along with this, we are also seeing a few positive developments in global market. We are seeing that the U.S. bond yield, which you know, people earlier panicking that it will go up to 2% or 4%, but it's stabilizing at 3.15% or thereabout. So the Hong Kong market today had one of the strongest rallies. So most of the market has started recovering and they're looking better. Back home, also liquidity is looking better. I mean, it's not a panicking situation that it was a few weeks ago. Few more positive developments. A few more positive developments if we see then IBC is working, Essar is one big name, but there are many -- other resolutions are happening. I mean, it's a democracy called India where things have to move at their own pace, but still, they are moving in the right direction, and we are seeing positive development. Corporate earnings has been a mixed bag, but still, there are quite a few sectors and companies have shown revival. And whenever -- I mean, most of the companies that are domestically focused are doing better and some of the leading FMCG companies also reported very good results. Coming to our various businesses, the first NBFC, which has been -- the sector itself has been in the eye of storm and people started talking about whether this sector will continue or its past glory is over, the peak -- it has already peaked, the kind of ALM mismatches they have, maybe they have exposure to real estate sector, now they won't go to growth, they won't get any funding. But I just wanted to share some data before we get into a little more discussion on this and our company. Last year, NBFC has accounted for 37% of incremental credit. So today, the situation is that private sector banks, public sector banks and NBFCs almost account for 1/3 each. And a channel or a vehicle or engine, which is serving 1/3 the credit requirement of the country, you just can't take it away, unless we really want our country's growth to be jeopardized in a irreparable way. Not only that, if you really look at it, the debt-to-equity ratio of NBFC sector is around 5.7 or 5.8. These are the rating agencies' aggregate estimates, which if you compare with banks, banks use Basel III requirement for capital is 7% and they require another 2.5% to manage the volatility. In case of NBFC, the Tier 1 capital requirement is 10% and Tier 2 put together capital adequacy requirement is 15%. So while banks do have advantage and a liquidity buffer of SLR, CRR, but still NBFC as a sector -- but -- okay. Important thing to note is in last 20 years, there are quite a few banks that were required to be merged, otherwise, on their own, they had solvency issues, touch wood from 1998 until now, NBFC, really has gone bust. So the capital adequacy requirement really worked very well. Now many times question arises that it's bank funds which NBFCs use. But from a systemic point of view, it's very good because you have a 2 layers of capital buffer. So when banks are lending, they do their diligence. They have their capital adequacy and then it comes to NBFC, and they have their capital adequacy as such. Besides, of course, the advantage of last mile, lower-cost and the specialized skills in credit collection and underwriting in certain verticals, and particularly, the small retail loan. So NBFC don't typically fund the large projects or big industrial houses. And therefore, the relative share in SMEs, the small and medium enterprises as well as the consumption loan, is much higher. And I think that is what is the growth engine for the economy. So I think NBFCs are here to stay. They are an important role to play. And whatever, in a panic situation people can talk about. In the panic situation, we can see stock market valuations also gyrate very widely, but being part of the industry, being part of the -- running an NBFC, I feel very comfortable that these -- once it has settled, people will again see that the sector is very well placed. Then about the liquidity, still now there is a trial by fire for the sector in terms of all kind of rumors, the scare and also whatever happened to mutual funds, it's still -- touch wood, I think, the industry has come out very well. So the things -- whereas somebody can improve, I mean, business burn can improve the liquidity profile, of course, yes, whereas there can be some NBFCs that are highly levered or have more exposure in real estate. That's actually possible. But as far as we are concerned, we see tremendous potential for growth in this business. And also if you look at -- and you would've seen in our presentation in the last quarter alone, we added 208 branches for our NBFC business, which is -- which comprises, of course, the large number of branches are for microfinance, 135 branches, but we also added branches for our other loan product. So we continue to invest in technology, our people and infrastructure as required. And in terms of our growth focus, we have been very consistent, if you see last -- several quarters, we have been talking about it, that we have to focus on retail lending and our focus is on SME, small ticket lending. Our ticket value is just about INR 5 lakh or small ticket home loan again, ticket size is INR 20 lakh to INR 22 lakh, or microfinance loan and gold loan. So these are the businesses that we have to focus on by -- and by implication of our deduction, you can see that construction, finance, real estate, LAP or loan against shares, these are businesses which are growing at a slower pace or degrowing. In terms of interest margins, of course, there is a bit of a fall last quarter and one can see that as the liquidity profile of liability changes, there can be some more pressure on NIM, but I will -- we are geared up to make sure that we have the right product mix, and we save on our operating cost and we make up for this. But last quarter, NIM is also impacted because quarter before last, we had a securitization gain coming in with the interest -- it comes in interest, and maybe Prabodh will explain more about it. But going forward, I think there may be some impact on margins, on NIM, but we can easily be made up by -- over a period of time, by product mix as well as having a tighter control on cost.In terms of liquidity, we repaid about more than -- almost more than INR 4,000 crores of CPs as a group. Some new CPs that we have contracted are for 3 months or longer period, so they basically crossover December. Besides this CP, INR 700 crore of NCD which fell due for payment, they were also paid and all the debentures, CPs or bonds, obviously, have been paid in time. And -- so that way, we paid about INR 5,000 crores of debt of short term and long term in this month alone, in the month of October. In terms of liquidity, I mean, we don't want to get into granular details, but I can only assure that we are very -- we are monitoring on a day-to-day basis, the core management team, all my senior colleagues, and we are completely in control and comfortably placed with adequate margin of safety for all our businesses. Coming to our wealth business, Karan is also there. He'll probably take questions and answer and talk more about it. The velocity of the business -- the flow of funds, the new money is INR 5,000 crores, which has been similar number for last several quarters and that shows the fundamental robustness and stability of the business. Very interesting number to note in our presentation if you have seen that overall asset base of [ INR 1,040,000 crores ]. We actually segregate the changes in AUM by showing new money as well as the market losses of profit separately, and this, we have been doing for last several quarters. The market losses on this base is just about INR 1,500 crores, which is -- in last quarter, which is just about 1% on an aggregate basis. That shows that our asset allocation with our client has been fairly prudent, and there has not been excessive exposure to mid-cap or equity, which probably would have resulted in larger losses. And the flow of money also continues. Over a period of time, I think these are the things that we are more concerned about that we keep getting new money, and we make sure that the business remains stable and robust from a longer-term fundamental perspective. Securities business, although I know many people expect this business to be more volatile, but if you look at the earnings then they exhibit similar trends as other businesses. In this business, of course, investment banking was impacted last quarter and there may be more impact in this quarter because our investment banking revenue is mostly from ECM, which depends a lot on IPOs and QIP. At this point in time, it looks like that many issues might have been deferred in this quarter, may be a tough one. But more importantly, the other 2 segments of securities business, that's retail, equities and financial product distribution and institutional business, they're becoming less volatile. They are becoming less volatile because the dependence on foreign capital or FTIs or FIIs has reduced. And local mutual fund for our institutional equities as well as the mutual fund distribution because many retail investors, we have been gearing them towards mutual fund rather than direct equity. And I think this trend will continue, which will make this business more robust and stable from a longer-term perspective. Now coming to corporate reorganization, our demerger is on track. Most of the important approvals like RBI, SEBI have already been received. NCLT, which is equivalent of High Court has convened shareholders' meeting on 12 December. Once shareholders under the supervision of NCLT approve it, I think most of the things are procedural, which basically submits the approved scheme to NCLT and there's, obviously, the process of getting it listed through exchanges. So we expect this to be done in the last quarter of this financial year, which is as per the schedule that we have discussed earlier. So with this, I hand over to Prabodh, who will take you through financial numbers, and then we are all there for the question and answer. Thank you.
Thanks, Nirmal. We are very pleased to report a 29% Y-o-Y growth in our group net profit to INR 301 crore for second quarter FY '19. Net profit after minority interest has grown by 30% Y-o-Y to INR 230 crore, ROE was 16.4% and ROA was 2%.In our NBFC business, the loan AUM has grown 40% Y-o-Y and 8% Q-on-Q to INR 36,373 crore. Profit after tax computed as per Ind AS grew by 70% Y-o-Y to INR 161 crore. Our Tier 1 CAR stands at 15.5% and total CAR at 18.7%. Primary drivers of our AUM growth are small ticket home loans, which grew by 59% Y-o-Y; small ticket MSME loans, which grew by 113% Y-o-Y; and microfinance loans, which grew by 259% Y-o-Y. The latter 2 products growing off a small base. Besides these 3 fast-growing products, we also recorded good growth in gold and CV loans On the other hand, growth in LAP and Capital Market loans was moderate as planned. In home loan, our focus remains primarily on small ticket loans to the salaried and self-employed sections. The fastest-growing segment in home loans is the affordable home segment or Swaraj loan, with average ticket size of INR 13 lakhs. Swaraj loans accounted for 22% of our home loan disbursements in second quarter and 14% of closing loan AUM. Our Swaraj product is specially designed to support the informal income segment in fulfilling their dream of owning a house. IIFL Housing Finance has been a significant player in the Pradhan Mantri Awas Yojana – Credit Linked Subsidy Scheme. Within construction and real estate finance, the mix continues to change towards construction finance for small ticket housing projects. As on 30th September 2018, we had over 7,300 approved housing projects, up nearly 1.5 fold from 5,000 approved projects a year back. All our construction finance loans and 50% of home loans were made through these approved projects. Retail loans, including consumer loans and small business finance constitutes about 85% of our loan book. Another strong characteristic of our loan book is the large proportion of loans that are compliant with RBI's priority sector lending norms. About 50% of our home loan, 56% of LAP, 86 -- 87% of CV, 42% of SME, and nearly all of our MFI loans are PSL compliant. In aggregate nearly 46% of our loans are PSL compliant. The large share of retail and PSL-compliant loans are of significant value in the current environment where we can sell down these loans to rare long-term resources. The share of loans sold down currently stands at 15% of our AUM, and our endeavor is to take this up toward 20% in the next few quarters. We have been selling down both PSL and non-PSL loans in 6 product categories, including home loan, LAP, SME, CV, gold and microfinance. In this regard, we have an ongoing relationship with several government, private and foreign banks. Our average cost of borrowing rose by 10 basis points Q-on-Q and 20 basis points Y-o-Y to 8.7%. Incrementally, our borrowing costs have risen by 75 to 100 basis points due to the liquidity crunch. In a rising interest rate scenario, we are in a position to commensurately reprice our loans. 46% of our loans are on a floating rate basis. In the last 4 months, we have raised our home loan rate by 90 to 100 basis points, LAP, construction finance, CV, gold and SME loans by 150 basis points and Capital Market loans by 200 basis points. Our NIM was at 6.8%, contraction of about 50 basis points Q-on-Q and about 75 basis points Y-o-Y, primarily due to upfront gain of INR 40 crores booked on direct assignment portfolio in the previous quarter. In this quarter, we did asset sales of INR 1,492 crore versus INR 2,400 crore in the previous quarter. So the volumes were slightly lower. The upfront gain booked in the current quarter was completely offset by the reversal of gains in the previous quarter. Medium and high-yielding assets currently constitute 52% of our AUM. This includes microfinance loans, MSME loans, gold, CV and construction finance. The other half of our AUM consists of relatively low-yielding assets, including home loan, LAP and Capital Market loans.90% of our AUM comprises of loans that are secured and about 10% of loans are unsecured. We believe our AUM mix is well balanced, with some scope of a share of high-yielding and unsecured assets to go up. We continue to add branches in our HFC, gold and microfinance businesses. Total number of NBFC branches have grown by 52% Y-o-Y to 1,755. [Consolidated GNPA and NNPA recognized as per RBI's prudential norms and provision as per the expected credit loss, or ECL method prescribed in Ind AS stood at 2.2% and 1% of loans, respectively. As a result of implementation of the expected credit loss provisioning under Ind AS, provision coverage on Stage 3 assets stood at 53% and on standard assets at 191 basis points. Return on assets for the NBFC was 1.9% and return on equity was 16.7%.Some update on the liquidity position. We have a positive ALM mismatch across all our buckets. On the asset side, our loan book has a relatively short maturity pattern, with 28% of loans having maturity of less than 6 months and 40% of loans having maturity of less than 12 months. Our funding mix is well diversified, including 18% from LCDs, 5% from subordinate debt, 35% from bank term loans, and NHB refinance, 16% from off-balance-sheet borrowings and 24% from commercial paper. During the month of October, as Nirmal mentioned, we were able to contract new CPs and repay old ones. In October, we have repaid and prepaid CPs worth INR 4,725 crore. Also, we repaid NCDs worth INR 795 crores. We had liquid investments of INR 2,400 crore and undrawn credit lines of INR 1,535 crore as on 31st October. On digitization, we have continued our focus on digitization encompassing every aspect of customer loan journey. Of the total 8.18 lakh loans disbursed in second quarter, 99% were onboarded digitally. We are focused on back-end process digitization through multiple innovations as well as partnerships, helping us achieve process efficiencies. With 162,000 mobile app downloads since second quarter and 4.4 lakh cumulative downloads, IIFL loan mobile app is growing steadily, fulfilling account management and servicing needs of our customers. Consequent to the change in policy regarding usage of Aadhar, we have moved to non-Aadhar-based KYC processes across businesses. On analytics, we continue to drive the use of credit scores and automated decisioning across products and strengthen risk mitigation by developing and deploying behavioral scorecard for purpose of providing repeat funding of existing customers. We have retrospectively deployed advanced analytics in CV business. We have tightened our credit approval threshold in regions, we anticipate greater onboarding risk. There is continued focus on cross-sell and win-back, with our analytically driven gold loans win-back generating strong volumes for both gold business as well as group-wide products. Analytics' triggers are also being used by fraud control unit, or FCU, to eliminate fraud applications in pre-disbursal stage as well as for initiating proactive action in post-disbursal stage.Some commentary on the wealth management business. IIFL Wealth PAT computed as per Ind AS was at INR 100 crores. Our assets under advice management and distribution have grown 3% Q-on-Q and 23% Y-o-Y to reach INR 1.45 trillion. IIFL Wealth raised equity capital of INR 746 crore in June 2018, through a prior placement of 6 institutional investors. Out of this amount, we had allotted shares worth INR 652 crores and the same forms part of net worth as on 30th June 2018. Allotment of the balance INR 94 crores worth of shares was completed in August 2018. We hired 10 bankers during the quarter, taking the total number of bankers to 358 to further drive the growth momentum. We now have presence in 24 locations and 9 geographies. IIFL Wealth offers a broad range of products and services to participate in the larger share of the client wallet. This includes financial product distribution, advisory, brokerage, asset management, credit solutions and estate planning. We raised net new money of [ INR 5.7 crore ] in second quarter FY '19 versus average quarterly run rate of around INR 6,000 crores last year. AIF assets have grown 53% Y-o-Y to INR 13,676 crore. IIFL Wealth Finance, which offers loan against securities and margin funding to high net worth clientele grew its loan book 28% Y-o-Y and 10% Q-on-Q to INR 6,191 crore. Average lending rate for this book is around 10.5%. Some commentary on capital markets. IIFL Capital Markets, which largely comprises of retail broking, institutional broking and investment banking businesses grew its net profit by 23% Y-o-Y. During the quarter, our average daily cash turnover was up 9% Y-o-Y to INR 1,334 crore versus 19% Y-o-Y growth in the exchange cash turnover. Our average daily total turnover, including F&O, was up 59% Y-o-Y to INR 21,070 crores. Our NSE market share in the cash segment was around 3.7% and in total around 1.9%. We are continuously enhancing our offerings on digital and mobile platform for retail customers in our broking business. Our mobile trading app IIFL Markets has had over 2.1 million downloads. Presently, about 44% of our retail broking customers trade through the mobile app. We completed 4 transactions in investment banking. With that, now we'll open the floor for Q&A.
[Operator Instructions] The first question is from the line of Viral Shah from Crédit Suisse.
This is Sunil Tirumalai from Crédit Suisse. Sir, my -- I have 3 questions. Firstly, continuing on the discussion on the liquidity situation. So we understand going ahead into November, also you have a fairly large INR 7,000 crores, INR 8,000 crores odd of maturities, redemptions coming. Just wanted to understand how are you approaching it? I mean, is it through bank clients? What additional costs do we see over and above the 75 to 100 basis point that you mentioned in opening remarks?
Well, we don't have INR 7,500 crores maturing in November. Actually, maybe if you are talking about total CPs, it will be different, but we got INR 4,000 crores liquidity with us which is INR 2,500 crores of cash and INR 1,500 crores of undrawn bank line. Besides that, as you mentioned in our presentation that INR 2,000 crores of securitization is going to conclude in next -- maybe is very advanced stage. So we should expect it in this week itself. So that meets all our requirement for the month of November.
Okay. And overall, what outlook would you give for your growth -- loan growth?
So I think, loan growth in the -- our focus segments will continue. Maybe last month was a bit of a -- where everybody was in a state of uncertainty. But it is stabilizing very soon. So I mean, if you look at maybe next quarter or this quarter or next quarter, then our core businesses, which is gold loan or small ticket home loan or SME, that should be back on normal. Except for one target, which is that the interest will go up then that can impact the demand itself. So it will be really difficult to figure out at this point in time whether interest will go up in a permanent way or will stabilize, again, back to the normal level. So -- but without that variable, I think, yes, if you keep that -- if you ignore that for a moment, then otherwise, the real economy is doing well, and we don't see any letdown in growth.
Okay. On your GNPA number, there seems to be a fairly sharp rise, I mean, just on the absolute rupees crore terms, it seems to be like an 18%, 20% jump on a quarter-to-quarter basis. What's happening there? Which are the segments? And what's the outlook on this? Is it something that we should be worried about?
So there are 2 things; one is real estate and CVs. In commercial vehicles, what happens then, we recognize GNPA on a 90-day basis, many times truck drivers don’t have a culture or the -- in terms of availability also and even one installment missed becomes basically GNPA. So that is one problem that we are dealing doing with and grappling with that how do we get this under control. And other than that the real estate sector has lumpy loans. So these are the 2 -- so we also given GNPA of each product category separately. So if you really notice then, other than these 2 most other businesses have remained stable. There's not much change.
So in the real estate book, can you give some color, I mean, is it how many accounts are in the problem and which geographies?
So real estate, we have basically -- so we have exposure to all over the country, but most of the accounts that we are talking about, we have adequate collateral which is clean and in case, we can recover our money. So our book there was fairly diversified, it is not really focused on one geography. And in terms of customers, in terms of borrower segment also, it's not really a concentrated exposure. But I think the sector has been under a bit of a stress and more from the cash flow and not from the point of view of value or the quality of collateral. So over a period of time, we are confident that we'll recover all the money.
Yes. But -- so the real estate sector stress that you mentioned, is it something at an industry level, you would be worried about in terms of liquidity for the builders? And then...
Yes.
And then probably on home loans, some people may be going slow, so maybe that's impacting some home sales, et cetera. Some color on that would be helpful.
So I think the major issue will be in a very high priced luxury segment of Bombay, primarily followed by maybe some other areas in Gurgaon, they are premium properties. But as far as affordable is concerned, either a small ticket home loan or the builders, they are building either in the suburbs of larger cities or smaller cities those -- there, I think, at least until now things have been stable and moving. And in terms of about the industry, so our exposure is limited. We don't have -- as to the whole sector, as out of our INR 36,000 crore AUM, the builder developer-sensitive segment is not even 10%. So I really can't talk about the industry, but obviously, what I'm hearing what is here. The stress in the high-priced, high-value segment because the offtake or sales are slow and, therefore, cash flow is slow and that is causing concern.
And the last question is on the wealth management piece to Karan. Having had a quarter or more to discuss with various AMCs on the SEBI changes on upfront commission and Tier 1, et cetera. And how is it now playing out? I mean, we see that your yields on Slide 25 is down sharply, quarter-on-quarter. I mean, is it an effect of that? I mean, how do we see this going into the long-term?
Karan? Karan?
Mr. Bhagat, please unmute the line from your side.
Yes. Can you hear me now?
Yes. Yes.
Yes. So...
Excuse me, this is the operator. Mr. Bhagat, we can't hear you.
Hello? Hello?
Yes. From an AMC side, there are not too much changes from what we discussed last quarter. I think the broad impact on the retrocessions and commissions has not really changed. From an yield perspective, I think on the mutual fund side as we go forward, there will be a greater migration towards direct plans as compared to broker plans. The mutual fund part of the business is going to transition to an advisory business over the next 12 to 18 months, where plants will essentially, as I've said earlier, put in a mix between direct plan and broker plan. And slowly, the market will move towards an advisory flow. The small variations or the little bit changes in yield is a function of little bit more of asset class investment. So for example, in the last quarter, investments are more fixed income biased as compared to equity. That causes a little bit of variation in yields over a quarter-on-quarter basis as opposed to any large change in mutual fund commissions.
Mr. Shah, do you have any further questions?
Sorry. Yes. So the 65 basis point yield that we have now, where do you see that settle given what you said over the next 12 to 18 months, the trends?
I think retentions will be in the region -- they continue to be in the region of round about 75 to 80 basis points, which will be a function of -- a combination of fee-based income as well as fund-based income. I think the fee-based income on a consolidated basis will hover around the 60 basis points -- 55 to 60 basis points. And the fund-based income will add another 15 to 20 basis points going forward.
The next question is from the line of Anitha Rangan from HSBC.
I had a question on Slide 17 and Slide 18. So in Slide 17, you've mentioned that your cumulative inflow is about -- for 6 months is about [ INR 15,484 crore ] and your loan maturity in the next slide on the 0 to 6 months is about INR 8,729 crore. So I just want to understand in the liquidity flow, what is the difference between these 2 inflows here?
Slide #18 is based on historical past data, which is how do our loans mature and what is the loan book. But in reality, it's a going concern, so we'll also have a flow of new disbursals as well as corrections. So what is the amount, how -- which amount you are trying to reconcile?
The inflow amount in the 6-month bucket, like cumulative inflow. This is INR 15,000 crore versus like INR 8,700 crore. So...
No, this -- it will also -- no, no, no. One second. This inflow -- yes. So just INR 15,000 crore in a 6-month cumulative bucket versus INR 8,000 crore. So this INR 8,000 crore is just the repayment of loan, but the INR 15,000 crore is including the new loans and also, it includes only liquidity, which is around INR 4,000 crores.
Okay. Okay. Understood. Understood. Okay. And the second question is in this Slide 18, you mentioned like loan book, I mean, the 0- to 6-month bucket is about INR 8,700 crores. Does that include any prepayments here in the loan book of business?
Yes. It is based on the historical trends. So what we had done is that we take a past data of the foreclosures and prepayments and also the normal payments and then based on that we work on percentages for each product category and then also we keep updating as the trends change.
Okay. Okay. And another thing I also want to understand, this INR 4,700 crores of CP, which you have repaid was the entire repayment? Or there has been like some rollovers also and you're able to prospectively get some rollovers in the market?
There have been some rollovers also and some prepayments also. So there are some -- so I think up to 9th November whatever I've mentioned, we already prepaid. Many of the mutual funds are reluctant to take the money back early, but -- so it's a bit -- it's liquidity then there's a bit of negative carry. So that comprises both the normal repayments as well as prepayment and that which is rolled over as well.
Okay. And also one thing is when you talk about 5,000 -- like close to INR 5,000 crores of liquidity in terms of unused bank lines and securitization -- everything put together, this is at a group level, right? Or is this for individual business?
Yes. This is at the finance level. So I'm talking about INR 4,000 crores liquidity as of 31st October, just day before yesterday INR 5,000 crores what you referenced was 30th September, both the numbers are there in the presentation. So there is...
Okay. Okay.
Liquidity at INR 2,500 crores of cash and INR1,500 crores is [ new line ] this is over and above what we have in IIFL Wealth Finance.
Okay. Okay. Understood. Just one last question on the real estate side. Your average ticket size is about INR 11 crores here. So I just want to understand, I mean, what would be the highest, like say, on the peak side, what kind of lenders you would have lent to? And like can you give some color on the geographies and kind of apartment fees developers are selling?
So INR 11 crores is the average size, but on the higher side it can go up to INR 150 crores to INR 200 crores also. And so -- and there's no-- so this is diversified spread all over the country, and so most of it is in the affordable segment where the apartments are at the lower value.
But any kind of stress or anything you're seeing in any of the larger ticket size developers?
Yes. So there is -- there are 1 or 2 cases that we have seen in the last quarter have gone into the NPA bucket [indiscernible], but as I said that in all cases we have adequate collateral, which in the value of quality is good. In case we ever recover then we can liquidate the collateral or maybe of course sell the collateral. So in terms of, we are fully covered, but there are liquidity stress in the system that impacted real estate sector more than anything else.
The next question is from the line of SivaKumar from Unifi Capital.
So can you revisit the AUM growth target and the margin trajectory from the NBFC point of view?
So as of now, situation is very fluid because one doesn't really know how this will -- so more important thing - okay, there are 2 parameters, one is liquidity and the other is interest rate. So unless we are fixed on interest rate it is very difficult to rework the growth numbers because that is something that will impact home loan business more and which is very significant. I mean, almost half of our business is coming from mortgages. So there it's relatively interest-sensitive because people will defer their home buying if the interest is growing double-digit then there is a lot of resistance. So I think -- and maybe it's too early to get onto that, but we will wait and watch how [ resolvement ] goes in terms of liquidity and how the whole sector and industry recovers from this.
Sir, and how is the mutual fund industry behaving as in post September 20, are the lines with mutual funds open? Or are they still figuring out as to how they should go forward?
So maybe there are 2 types of mutual funds. So one of them are figuring out and some of them have started doing business back at a slightly higher yield. And what we are seeing is that the yields is getting concentrated more with the larger mutual funds. So if you really look at the yield then some of the larger mutual funds may be at a level higher than what they were prior to the prices. And so the smaller funds are getting decimated completely.
Right. Right. Sir, and coming to the wealth finance business given the volatility that we are seeing in the market, how has been your risk management practices in that particular segment, because if we were to take a case, we read from the media that -- in the case of Ashapura, intimate you had to actually take ownership of the shares, which were actually given to you as collateral. So has there been such cases? Have you seen an increase in such cases? And have you taken some kind of provision for any losses in such cases given the volatility in the markets?
I think -- so you have 2 different questions. So one is about IIFL Wealth Finance and the other is about Ashapura. So let them be taken separately. Maybe if I'll ask Karan to talk about asset wealth finance in a minute, but before then I'll just talk about Ashapura. So in case of Ashapura, we had exposure through NBFC as well as through margin funding, the main NBFC. Now what will happen to this company, has been very unexpected and unusual, but the company had a business, which has been at a good track record and has a brand, which is -- which is Valentine, and there's one other brand, and there are ready to take over the company also. So we have not taken over the share, but what we did is that we -- so there was a pledge created on that and because of the large amounts of that pledge has got reported and what you are seeing is that pledge that we have on those [ sales ]. And because being liquid, nobody will take much larger cover. So it appears to be the significant part of the company. But I think the family and even the key people in the company are working on a transition of ownership and along with that management also. So I personally feel that we won't have any losses there. So it's just question of -- the family as a company might be a part to [ just fill ] but as far as we are concerned, we are fairly well covered. We are almost about 32%, 33% of company's equity for cover and I quoted about INR 40 crores from both of these put together. So that is one part of it. The second part of the question, which you asked earlier is that how is risk management and asset wealth financed and are there any stress losses? Maybe Karan, do you want to take that?
Yes, I'll take that Nirmal. So on wealth finance side, our loan book is fairly conservative. We work on a 50% margin and typically most of the book is funded back to our wealth clients against their portfolios. In India, like we typically see clients don't typically borrow to invest, they borrow against their investment portfolios for temporary liquidity means. We've been doing this business under the ages of wealth finance for the last 2.5 years, 3 years. And before that we were kind of had a compartment within IIFL Finance itself. Over the last 10 years, at least, we have not had a situation even once since 2008 where we've had to incur a single rupee of loss as of now. Even in the current stress over the last 30 to 45 days, we've not really encountered a situation where we need to -- or we had -- even on a marginal case of not being able to recover money. So there is really no need for looking at any kind of provisions, on our loan against shares book on the asset wealth finance book.
Right. Karan, just staying put with the wealth business. What will be the mutual fund AUM in the overall AUM? And what is your ballpark effect on the yield that we'll get to see once the SEBI rules on commission are implemented?
So our ballpark AUM of mutual funds would be in the region of around about INR 50-odd-thousand crores, which is kind of broken up into 2 segments, one is mutual funds which would go under the broker plan and second mutual funds which would go under the direct plan, they will function as, what is called an RIA, which is a registered investment adviser. Under the broker plan, it'll be in the region of INR 28,000 crores to INR 30,000 crores. RIA would be another INR 20,000 crores to INR 22,0000 crores. Typically on the RIA, we do not get any commission as we speak now. We work on advisory fee basis from the client. On the INR 28,000 crores, the retro session on a trail basis, because we've discontinued upfront from more than a year on mutual funds, is in the region of region of round about INR 135 crores to INR 140 crores a year, which is around INR 25 crores, which makes up round about 14% to 15% of our overall net revenues. This may come down by round about 5-odd-percent, 5% to 6%. So effectively 14% of our revenues will be down by around 5%. So there will be an impact of around about 0.8% of our revenues because of the semi-change in DER commission loss.
And getting back to the holding company, we have been reading in the media about this commodity license issue which has been tackled by SEBI. And also that fit and proper clauses were under consideration. Would you like to comment as to how severe is the issue there? And it seems there was a meeting between SEBI and the brokers about 2 weeks back. So what's the consensus there?
I think -- okay, this is my personal view, but nobody knows how the argument verdict will come. So I don’t see any serious or significant cause to worry there. Now this is a case, which is almost now 5, 6 year old. This was going to come out, we have not done any proprietary training we never had any funding exposure, but this notice was given to 5 top brokers. And now I think SEBI issued notices to 281 brokers. So it was a systemic issue because everybody relies on NSEL and there are so many brokers doing more or less similar things. Of course, SEBI's show-cause notice was there and they were hearing, but it was a vague -- I think this is getting reported in the media and obviously, I can't really know or tell you who's behind that, but it's a very -- somebody is trying to put it in a very exaggerated manner or a very one-sided manner, which is wrong picture to the people who are reading. But the fact of the matter is that they were EOW investigated based on that SEBI picked it up. So being a regulator, they have issued show-cause notices and they have investigated the matter. So they basically called the top 5 brokers, they've done hearing. I think 1 or 2 rounds of hearing, and all the hearings are over. Now the next process which SEBI has asked for written submission if any, which are called additional written submissions of beyond what were given to a so-called notice. And based on that they will pronounce the final verdict. If brokers are not happy, they can go direct to SAT or they can go to higher courts also. But interesting thing is that now this investigation has started it's almost about 300 brokers. So whatever will happen has to happen to all of them and not to just 1 or 2 brokers. And certainly one more thing, I will tell you, this was done through a commodities company, a subsidiary company, which has been investigated. The commodities business has shifted to the parent -- the step-up parent company, which is securities company under the unified license.
And the next question is from the line of Nishchint Chawathe from Kotak Securities.
Just going back to Slide 17. I was just wondering how one should be reading this. So let's look at the 6-month bucket. When you say cumulative outflow of INR 12,339 crores, this means what, that these are the redemptions of your borrowings? Or these are the redemptions of your borrowings plus the disbursements that you'll need to make?
No, so this is static liquidity, so these are redemptions of the borrowings and the committed payout.
Okay. Okay. So whatever the disbursements that you would do in 6 months, or would be over and above this?
And the collections also.
Of course. Sure. On the NII part, you did mention that there was some adjustment, and I think there was some assignment income booked in the second quarter of last year and you did...
No, sorry, first quarter of this year.
First quarter of this year. Okay. And you did some assignment in the second quarter as well. But there was effectively no assignment income booked because of some write-backs. So I didn't quite follow that. Is there something...
Yes. So Nischint actually what has happened is that a new Ind AS accounting standard have come into effect from this financial year and we're also just trying to understand and get ourselves stabilized in terms of how the accounting will take place. So what happened that when the last year's accounts were recast, so based on the -- those things, that provisions were created for every quarter separately. This year, first quarter, we are in assignment on which INR 40 crores of income was there upfront, which is booked. But in hindsight, we realized that maybe this was a little aggressive booking of the income because there is some prepayments that happen and the actual accrual may vary from quarter-to-quarter and eventually it maybe the a little lesser than this. Out of that there are some reversals this quarter and whatever new assignments we've done. So that's what Prabodh's mentioning that out of INR 40 crores we had a reversal this quarter of almost about INR 14 crores, which is -- more or less matches with the income on the new assignment. So that's why you see -- quarter-over-quarter, you see a fall in Ind AS accounting profit for IIFL Finance.
Sure. So I believe when you're doing the assignment income, you would, I guess, normally be accounting for prepayments, right?
So what happens in assignment income is, when you're doing assignment income without recourse, it means the risk is fully transferred to the buyer of the asset. Then you can take the full income up front. But what you take care is that you have to really estimate how the portfolio will behave in terms prepayments, foreclosures and that will become very critical in taking the income going forward.
So I guess the last quarter you had not assumed the prepayments and now you've recasted the portfolio to assume...
What we assumed then is what actually was happening a little different, so then we again just tried to balance it properly.
And just finally, on the fund mobilization side on the IIFL Wealth business, how should really be thinking about it in terms of the AUA growth going forward?
No, so I think as we have guided earlier, I think around about a 20% growth in corpus, year-on-year, approximately with a plus/minus 5% variation is what we should be looking at. So effectively this year, around INR 22,000 crores, INR 25,000 crores of net assets flow into the business, is essentially the guidance number which effectively translates to around about INR 5,000 crores to INR 6,000 crores of corpus on a quarter-on-quarter basis, stripped out for the mark-to-market impact on the portfolio.
And mark-to-market can be either way.
And incrementally, if you look at the next 6 months or possibly looking forward to the next year, which asset classes or which kind of products you think will drive this mobilization?
I think from a portfolio allocation perspective, it's kind of a diversified portfolio with a broader mix between fixed income and equity. As we stand today, nearly 54% to 55% of the assets would be in equity and equity constituents. 45-odd percent will be broken up into fixed income. Within fixed income, most of it would be in AA+ to AAA kind of categories through mutual funds or direct holdings. And on the equity side, again, it'll be a combination of mutual funds, alternative investment funds, PMS and a little bit of direct equity. So it's a fairly diversified portfolio. I don't see any change, and I think clients would continue to spread that allocation between all these instruments. On an asset allocation basis, I think if markets continue the way they've been for the last 20 to 45 days, you might see round about a 5% shift from equity to debt, but that's about it. So I expect it to be in the region of the 45% to 60% in fixed income and 45% to 55% in equity going forward. From an instrument perspective, not many radical changes, obviously only high net worth side alternates are -- alternates as in alternative investment funds, have a bigger share of new flow that's compared to equity funds. So that's the only kind of new trend we've seen over the last 12 to 18 months. But barring that, really it's the same old instruments.
And just one last thing, on the AIS side for the -- on the PMS side, do you really see a risk of realizations going down given the fact that mutual fund [ tiers ] have come down as well?
I think to be fair, alternative investment funds and PMS' fees have been much more competitive than mutual funds for the larger ticket sizes. So contrary to typical perception for clients who put in a INR 5 crores or a INR 10 crores check into alternative investment funds and PMS, unlike the mutual fund you've a tiered fee shares for management fee structure. So as soon as the client is putting in INR 5 crores or INR 10 crores, even today, before the reduction of tier of mutual funds, he was able to get a management fee share class, which was nearly 50 to 70 basis points cheaper than a regular share class of mutual funds, and possibly 25 basis points cheaper to what he would get in a direct plan in a mutual fund. So mutual fund of PMS and AIF investments have already been fairly competitive. In case direct plan fees in mutual funds come down even more, right now on an average, they are 125 basis points, direct plans. And more or less most large clients cutting in, let's say, a INR 5 crore check in either a PMS or an AIF would already be getting that fee structure or possibly even lower. In case direct plan fee structures come even lower on the mutual funds, then we may see some 25 basis points reduction in fees in PMS or AIF. But otherwise, I really don't see it because that change has happened practically over the last 2 years for our large clients.
[Operator Instructions] The next question is from the line of Keyur Shah from Emkay Global.
You mentioned that you've seen that there is some stress in high price and premium segment developer inventories due to a lower off-take. So do you see that continuing for some time? Or how do you think that it's shaping up?
Yes. I think it will continue for some time. So the best case scenario in my opinion is time correction with the prices remaining static and it becomes -- value of interest and money becomes cheaper or [ negative correction ]. When I say high priced segment, I am talking about the Parel, Worli area and a lot of construction that has happened there, so it will continue for some time.
Okay. And do you see any prices going down due to this situation?
I guess so. I think they're already coming down. So if you have money, you're set to go with the check, they will -- -- the price is yours. So if you -- today, if you really want to buy a house, a premium apartment in Bombay's premium area at the heart of the city, then, as I said, Worli, Parel, maybe 2-kilometer radius from our office in Parel, then you can -- if you have a check, then you ask your price and get a discount.
The next question is from the line of Atul Mehra from Motilal Oswal Asset Management.
So just one clarification on this Ashapura incident. Does this trigger an open offer for us in any form? Is there regulatory clarification on that?
No. It doesn't, because it's just pledge, we have not done anything beyond that.
No. The point is that if you were to acquire the shares and resell it to anybody who's interested in that...
No, we'll not acquire the shares, they will sell in the market only. We'll never acquire the shares.
Got it. And secondly sir, on Wealth Management, what is the mix of equity in the new -- net new money this quarter? And in -- on the fixed income side that we would have raised the money, is it coming in liquid instruments, which are like very low yield? Or is it coming in any other structures we would have in fixed income?
I'm sorry. I won't have an exact breakup of the equity and the net new money. But in the gross flows, fixed income is a large portion of this quarter. Fixed income will be nearly 70%. 70% would be the breakup of fixed income in the gross flows. Net new money, I can come back. My quick number would be exactly the inverse of that. It would be around 20% approximately, but I don't have that number handy with me, I can come back, but approximately gross flows 65% to 70% has found its way into fixed income and related instruments, 20-odd percent in equity on the gross flows side. Net flow, breakup of corpus, I don't have. I will come back.
And there is one more thing on the same question. In terms of fixed income, is it money coming on extremely low-yield liquid kind of instruments? Or is it any other structure that you may have?
No. So it's been a combination. So most of the money in the last 20 days specifically has come into fixed maturity plans. So fixed maturity plans, obviously, have a lot of flavor but typically a 3, 3.5 years SDL kind of FMPs. So typically low risk FMPs is something which has gotten a lot of attraction. We also closed the large private equity fund, which was essentially a private equity fund of professional entrepreneurs, so really where the fund owns a majority of the business, so with that fund we close around INR 1,000-odd crores. So a large part of that collection happened in the last quarter. That also in a sense is immune to market levels and the fund is more or less sitting in cash right now because we entered the business pretty much at face value.
The next question is from the line of Dipan Mehta from Elixir Equities.
My question relates to the operating expenses in IIFL Finance, and those are consistently going up quarter-on-quarter, year-on-year as well at a much, much faster pace than the net interest income or even the total income, which is the reason, but resulting in that flat kind of preprovisioning profit. So what is the main reason for such sharp increase in the operating expense. I understand you're opening branches and so on and so forth, but there has to be some synchronization with the net interest income increases as well?
So what you are saying is a very valid question, and the number of branches, the number of people have grown up very significantly. So if you see the number of employees almost up 85% Y-o-Y because these microfinance and business that we've taken, we are also building strength in our housing finance and gold loan. But going ahead, it should taper off. The pace of growth will slow down for sure. But in last year if you see the number of people that we've added has been very, very large number. So the primary reason is the branches and people actually. And microfinance and housing finance these are businesses where we added lots more people and also gold and branches.
No. By what point of time do you think Q3, Q4...
As we are in the process of -- as I said, the incremental growth will be slower as compared to what has been in the past.
Okay. And the second question relates to what the CFO said about the interest write-back. It was not very clear. So is it that for Q2, we would have INR 40 crores more of net interest income? Or what exactly was the effect on [ doing this ] transition?
In Q1 there was securitization profit of INR 40 crores.
Okay.
Which is not there in Q2.
Okay. Karan, but even if you're then assuming that is the case then the net interest income growth is hardly 20% for Q2 over Q2 FY '18. So that, I mean, is a sharp slowdown from what we have seen in earlier...
That's what I'm saying, the INR 40 crores gets accounted as interest stripping in the interest income. The securitization gain that comes, it gets clubbed with the interest income. So that's why you're seeing interest income being not growing.
The next question is from the line of Jehan Bhadha from Nirmal Bang.
Sir, in the presentation, it is shown that the NBFC has an ROE of about 16.4 and consolidated number for ROE is about...
Excuse me, this is the operator, Mr. Bhadha, may we request to use the handset, please. There is some...
I'm on the handset. Yes. So broadly, sir, the NBFC and the consolidated ROE is at a similar number. So my question is on the wealth side, I mean, so ROE, again they should be at similar number. So what is the outlook going forward? Can this number of ROE go up to 25-odd percent? And what are the levers that will push that number higher?
Where we raised capital in last quarter, and that is what has depressed ROE of wealth and thereby for the group. So as we start using this capital more effectively over the next few quarters, then we'll just see our ROE moving up to the target level.
Okay. Okay. And do you have any targets in mind as to what can be the steady state ROE for the wealth business?
So steady state ROE business for ROE for the wealth business should be around the 25% to 27% region. Obviously, we had acquisitions in mind over the last 3 to 4 months, which was a part of the reason for raising a bit of the capital. And secondly, obviously, we wanted to kind of -- even in the Wealth Finance side, reduce our dependence a bit on CPs. So that essentially led us to raise a bit of capital in the second quarter of the calendar year. And essentially, as Nirmal pointed out, over the next 12-odd months, as we chart out on our next growth path. And the third reason for -- a third utilization of the capital is essentially to act as sponsor for alternative investment funds. That business is growing fast. We've nearly got $3 million, INR 20,000 crores of capital commitment in that business. We end up putting 1% to 1.5% on sponsor's money as our own capital contribution. So these 3 things essentially is where the capital will get utilized. And as the business scales up, the ROE should move up, which you see over the last 3 to 4 years consistently we've been around the early 20s in terms of ROE. So it's a just quarter since we raised the money effectively. So over the next 12 to 18 months, we should be closer back to the 20%, 25% ROE number.
The next question is from the line of Megha Hariramani from the Pi Square Investments.
Most of my questions have been answered. Just on the same IIFL Finance consolidated numbers, the loan loss provisioning has come down. Any substantial reason for that?
Yes because last year provisioning was abnormally higher for the new accounting Ind AS in which we have to consider expected credit loss on each and every item. So relatively that's very low because last year is extraordinarily high.
Okay. And lastly on the expected growth going forward, how do we see our AUM and the net interest income growing going forward?
So historically, we have given in a guidance of 20% to 25%. So I don't see any reason to change, but of course, we have seen very extraordinary things happening in the liquidity of the -- for the sector as well as one doesn't know this uncertainty at all how the interest rate trajectory will be from here on. So at this point in time, I mean, there is no change, but -- and my personal view is that, the sector will continue to do well and will grow at that pace only with around 20% to 25% on the top line. And if you can be managing your business efficiently into the margins, then 25% to 30% on the bottom line.
Okay. And one more, if I may. On the IIFL Wealth consolidated results, in the footnote you have mentioned that in Q2 FY '19, we had a lower weightage of offshore subsidiaries in the PBT. So is it like the offshore subsidiaries are also slowing down for a particular reason?
I think -- this is about the tax, I think, you are mentioning, because the tax insurance is very high in Q2 because we have provided for our dividend distribution tax on the dividend basically from our overseas subsidiary. Karan, do you have the numbers, you can just clarify this?.
Yes, yes, I will. So there are 3 basic impacts because of the tax calculation. One, we've done a dividend out from our offshore subsidiary to India. So there is an incremental 15% impact from the dividend. It obviously helps us save on the cash flow of the dividend distribution tax. Second, our NBFC business was taxable at 25% last year because of the business we acquired last to last year. Therefore, the revenue was less than INR 250 crores. So that business is back to 24% in terms of tax. And third, like you're putting it rightly, the offshore business contribution to profit is not in the same percentage terms as it was over the last 2 years. So it is not to say that it is not growing the proportionate growth in the domestic business is much larger than the offshore business, which is having a small impact on the tax rate. But the larger impact on the tax rate is on account of the dividend distribution tax and the NBFC moving from 25% to 24%.
And this dividend distribution tax can be completely offset against the dividend that Wealth will pay, simply because this is a Wealth subsidiary. And I think Wealth has already declared interim dividend of INR 5 per share this quarter. Am I right?
Yes. That's right.
Yes. So this quarter we ended up paying INR 5 per share dividend. So against that, that dividend distribution tax will be offset. But if you see the numbers on a quarterly -- Y-o-Y basis, then the tax provision has gone up significantly because of that.
The next question is from the line of Shubhranshu Mishra from Motilal Oswal Securities.
My question is around your construction book that you have. Can you give us some color on that? What kind of names we have? What kind of -- how many SPVs we have? What kind of geographic domicile it has?
I'm afraid I can't give you details specifically, [ it is spread out ], so we ask if you really look at our book, when I say INR 11 crores average ticket size is a larger number of cases.
And what about the geography?
I don’t think it's fair to disclose the names unless there is a reason for that.
Right. So what I'm trying to figure out is that do you have exposures to [ Amrapali, Vatika, Supratech ], these kind of names?
Not to all of them. And I don't have -- we don't have any [ explicit rules to protect around Amrapali ] and we have -- so actually we have some [ exclusive ] at [ Vatika ]. But as I said, these are the things that, as with any issue, whatever, they'll obviously get classified as GMP and gets reported there.
And what percentage of this is exclusive charge? And what percentage would be pari passu.
So almost our entire book is exclusive. We don’t -- so our primary charge is to be the first charge, an exclusive charge.
Right.
And all the [ partners ] that we have is by our internal policy, we just -- there has to be exception for able to say pari passu but almost entirely or predominant part of our collateral is exclusive and not pari passu.
Right. And if you can just give us what percentage of the book is in MCR, MMR, Bangalore, Pune and so on and so forth?
I don't have that breakup with me right now.
Okay. Sure.
But fairly spread out, as I said.
Ladies and gentlemen, that was the last question. I now hand the conference over to the management for closing comments.
Thank you so much. And if you have any more questions, please feel free to write to us. And I also take this opportunity to wish you, your families and loved ones a very, very happy Diwali and a very prosperous new Samvat year as well. Thank you so much.
Thank you very much, sir. Ladies and gentlemen, on behalf of IIFL Holdings Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.