IIFL Securities Ltd
NSE:IIFLSEC
Earnings Call Analysis
Q3-2024 Analysis
IIFL Securities Ltd
In the backdrop of India's rapid economic growth projections of over 6%, IIFL Securities convened their Q3 FY '24 analyst call. The Indian market, notably the domestic mutual fund industry, ended calendar '23 positively, signifying a deepening capital market. In a climate where government investments remain a stalwart and monetary policy easing is on the horizon for the latter half of calendar '24, IIFL Securities reported a robust quarter.
IIFL's consolidated revenues stood at INR 582 crores, marking an impressive 68% year-over-year increase and a 9% rise from the previous quarter. The surge was primarily due to a 73% increase in brokerage income, reaching INR 268 crores compared to INR 155 crores in Q3 FY '23. Distribution income followed suit with a significant jump to INR 100 crores. Furthermore, investment banking rose by 32%, contributing INR 55 crores to the quarterly performance.
While IIFL successfully reduced employee costs by approximately 7% quarter-over-quarter, the finance costs ascended sharply by 134% year-over-year due to heightened borrowings to support the margin funding book. Administrative expenses saw a dip of 9% marginally but increased 47% compared to the previous year, reflecting the expanded sub-broker network and elevated technology investments.
Under its management and custody, IIFL holds assets amounting to INR 1,81,582 crores, with a substantial part of it, approximately INR 34,000 crores, attributed to cross-sell. The company's average unit turnover for the quarter stood impressively at around INR 2,71,309 crores, indicative of vigorous trading activities.
In line with a strategic pivot made in December 2022, IIFL's focus has shifted away from the high volumes of online retail customer acquisitions toward a more affluent clientele, distancing from their sister company 5Paisa's domain. Consequently, the pace of customer addition has moderated without significant compromise on the service offerings to the customer segments they target.
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Ladies and gentlemen, good day, and welcome to IIFL Securities Limited Q3 FY '24 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. R. Venkataraman. And over to you, sir.
Thank you, and good afternoon, everyone, and welcome to the Q3 FY '24 analyst call of IIFL Securities. Along with me is Ronak Gandhi, who is our CFO. Wishing all of you a very happy and prosperous New Year.
Coming to the global macro, India remains the fastest economy, with real GDP expected to grow upwards of 6% over the next 2 years. Monetary policy easing across the group is expected to start somewhere in the second half of calendar '24, which should support business investment and, additionally, household spending. In an Indian context, government investments will continue to remain high. Downside risks remain due to heightened geopolitical tensions.
Coming specifically Indian markets, calendar '23 ended on a high note for the domestic mutual fund industry. Asia crossed INR 50 lakh crores. Also in the end of December '23, mutual fund ownership of Indian markets was about 8.7%. Retail and other individuals hold another 97%. This is marginally above the IIFL ownership of about 18.2%. These data points point out to a deepening of the Indian capital markets.
Coming to IIFL Securities, we are pleased to announce a strong quarter, primarily driven by an investment banking business, where we completed about 17 transactions in this quarter.
Coming to results numbers. Consolidated revenues for the quarter came at INR 582 crores, which was up 68% year-on-year and 9% on a quarter-on-quarter basis. The reason for this steep increase on a year-on-year basis was that brokerage income increased by 73%, INR 268 crores this quarter versus INR 155 crores in Q3 FY '23.
Distribution income also increased significantly, INR 100 crores for this quarter versus INR 53 crores for the quarter last year, primarily driven by sale of products like AI and PMS insurance. Investment banking increased by 32%, INR 55 crores in this -- coming to a quarter-on-quarter basis, brokerage income was relatively flat, 268 -- at about INR 268 crores. Distribution increase -- distribution income increased by 18%, INR 100 crores versus INR 85 crores. And investment banking increased 45%, INR 55 crores versus INR 28 crores in Q2 FY '24. Other income was INR 24 crores, increased by 373% year-on-year and reduced 12% on quarter-on-quarter basis, primarily driven by mark-to-market gains in [indiscernible].
Coming to expenses. Employee cost was down marginally 7% on a quarter-on-quarter basis. And if you look at finance cost, finance cost was up 42% on a quarter-on-quarter basis, up 134% on a year-on-year basis because of increased borrowings that was -- and the borrowing was done primarily to support our margin funding book.
And look at -- sorry, our admin cost was down marginally 9% and increased 47% due to increase in our sub-broker [indiscernible] as well as increase in technology expenses. Our assets under management in custody, INR 1 lakh 81,582 crores, out of which roughly about INR 34,000 crores in cross-sell. Our average unit turnover for this quarter was at 2 lakhs 71,309 crores, which was -- which is about 2 lakhs 22,495 crores in cash segment and 2 lakhs 68,815 crores in the derivatives segment. Corresponding figures for the previous quarter was 2 lakhs 49,979, which was INR 2,445 crores in cash segment and 2 lakhs 47,500 crores in our derivatives segment.
With this, I come to the end of my remarks, and I'm available along with Ronak to answer any questions that you may have. Thank you.
[Operator Instructions] We'll take the first question from the line of [ Hiten Boricha ] from Sequent Investments.
Sir, 2 -- 1 bookkeeping question, and the 1 is on customer acquisition. So can you just give me the breakup of the cash we have in the books, the breakup of cash of the company and the cash of the client or the margins we have or the extra cash in the books?
See, our own cash is about -- roughly about INR 430 crores and clients will be about 3,500.
Okay, sir. Okay. Sir, my question is on the customer acquisition. As we can see in the presentation, we are adding like 50,000, 55,000 customers per quarter since last 3, 4 quarters. So my question is what are we doing to get the customer acquisition more? We used to do around 2 lakhs, 2.5 lakhs a couple of quarters back, I believe, 4, 5 quarters back. What are we doing to add more customers? And are we going to do that to 1.5 lakh customer acquisition per quarter again?
Okay. As you're aware, on December 2022, so we had a strategic decision we have taken because, earlier, we used to acquire a large number of online retail customers. That's the first time we are acquiring lakhs. So we have a strategic shift because we have a sister company called 5Paisa, where this online retail trading customer acquisitions are happening.
So as of now, we are considered -- we are concerned more at looking at more the affluent customers and help the pace of customer acquisition slow down. And going as also, we will continue to focus on acquiring customers with bigger wallet rather than acquiring online retail customers.
Sir, that 2 lakhs kind of number, which earlier was the number that was because of 5Paisa, right?
No, No, no. 5Paisa is a separate company, but we are also trying to -- we are also acquiring customers similar to them within online retail customer.
Sir, no, I didn't get the second. Please explain me again. So sorry.
No -- [indiscernible] customer acquisition was quite large because we used to acquire a large number of online retail customers, spending money on digital channels and social media, et cetera. So as of now, we are focusing on acquiring more affluent customers, hence the cost -- hence, the numbers have come down. .
Okay, okay, okay. So our focused from online has changed to actual customers. Okay. Understood, understood.
Customer acquisition, that's 5Paisa is acquiring in lakhs, which is again [indiscernible].
Okay. So what -- any [ reason ] we are changing the strategy?
It is very simple because in the group, we had 2 companies, which is online retail customers, which is catered to by our sister company called 5Paisa. Here, we are more focused on the affluent customers, which are retail customers, more disposable or higher investment customers. So if you look [indiscernible], we have done this shift.
[Operator Instructions] The next question is from the line of Narendra from Robocapital.
So my first question is regarding your margins. So what do we take as the steady-state margins going higher? This quarter, it was above 40%. So was there any one-off? Or just wanted to get an idea of what is the steady state.
Actually, it's difficult to give a number like a steady state margin for a cyclical business like us because when the markets are good, then things are good. So this -- our customers, there is no one-off. But you have to remember that we have seen huge activity in capital markets for the last 2, 3 months. And they had lots of logged deals, lots of -- and activities like this, which are boosting brokerage income.
Okay, okay. So what kind of deal pipeline are we seeing on the investment banking side for the next...
Because of SEBI, I can't share because -- but the investment banking deal pattern looks very good.
Okay, okay, okay. So are we seeing a visibility -- how much visibility do we have, 3 months, 6 months?
I think it's obviously having given -- I'll give you a standard estimate state of capital markets, but visibility looks very good.
Okay, okay. Got it, got it. And regarding the -- what kind of traction are we seeing on the BSE derivative segment? That's your area for growth...
Yes, derivatives. Yes. We are seeing traction, and we are excited for sure.
[Operator Instructions] The next question is from the line of [ Rishabh Nahar ] from Swan Capital.
Just one question in terms of the customers. So the kind of customers that we're acquiring, it's more on the affluent segment. So what -- what is the life cycle of these customers? Is it very different from the retail discount broking, like the 5Paisa and the other brokers?
Because those customers seem to be pretty cyclical, and their life cycle is 3 months, 6 months, 1 year. So is that -- are our customers a lot longer in terms of where [indiscernible] they're contributing to?
See, actually, that's a good question. We believe that our customers have higher disposable income and more inclined to invest and -- rather than trade aggressively. But it's true, we don't -- we have not done any [ topographical ] and we'll take our modeling of this. So it's like I'm not in a position to give you a very scientific answer.
Okay. And so is it also are we focusing on some sort of trading community, like, for example, like a [ leader ] that has a strong...
No, it's absolutely correct. But there is a segment of what we call as the algorithm of the large volume, high-volume traders. So historically, we have not done very well in that segment and -- primarily because of very low yield. And so -- but that is one segment which is growing very rapidly. And I would say as a full-service broker, we need to improve our offering there.
Okay. Just one last question. So what kind of [indiscernible].
I'm sorry to interrupt. Sir, your voice is breaking.
I can't hear you. I think you have to speak closer to the mic.
Yes. So just one last question, sir. So what kind of brokerage model do we provide? Because from whatever ground leases that we have done, we see that you also provided discount of mortgages and [indiscernible], which is again -- which is very confusing. So just wanted to understand that.
No, no. Actually, it also had this, I would say, the [indiscernible] broker's equity, which we used to have. So now they are discontinued. So very rarely, on special cases, we give. But otherwise, we are in a [indiscernible] broker's equity. So you're right, actually, historically, we were offering that.
Okay. So now any new customers that are coming in, we are not offering that anymore.
We don't offer [indiscernible] in the market. Supposed somebody comes in and said, so it is on the case to case basis as it happens. But it is not such a big thing.
Okay. All right. So -- and then who decides that? Does the sub broker decide that? Or is that within the company?
No, no, no. It is controlled by actual level. I think the person previous to you also asked this question. So I was trying to explain him that the online retail customers who is a discount pricing model, we are no -- we are more or less trying to exit that.
[Operator Instructions] The next question is from the line of [ Tushar Sarda ] from Athena Investments.
I wanted to understand breakup of your revenue. I can find 3 items in the presentation: retail brokerage; fixed income product distribution -- financial product distribution; and investment banking, but it doesn't add up to the total. So what are the other items?
There is -- investment banking income has given in the presentation.
Yes, yes. So retail brokerage is INR 448 crores for 9 months. Financial product distribution is [indiscernible]. And investment banking is INR 148 crores. Total income is INR 1,400 something. So what is the breakup? I'm not able to reconcile this number.
See, I'll tell you what. The component of income are broadly investment banking income, financial products distribution income. There's something on other income there. There's mark-to-market and other interest income item. Then there's some what we call interest income, rental income. And in brokerage-related income, there are a lot of things, apart from retail brokerage, institutional brokerage, BP income, DPC income and et cetera. So for your point, the second is [indiscernible] -- so the results table has all the details. But next time, we'll bridge the -- we'll show it openly, so that all the numbers are -- so your concerns are there.
Okay. And is there any plan with respect to 5Paisa? Will that continue as a separate entity? Or any plan to...
It will continue as a separate entity.
It will continue -- so you have no plans to merge or takeover.
Yes.
[Operator Instructions] The next question is from the line of [ Rishabh Nahar ] from Swan Capital.
I have just one question in terms of the 5Paisa. You were going to transfer the retail clients. And then I think there was a notification from 5Paisa that has been withdrawn. Is that true? Is that...
That's true because we've also given a similar notification. So I'll just tell you what is happening. So as you know, in December 2022, we have done a scheme with 5Paisa where we were transferring our online retail customers to them. So just the entire activity, we have made applications after all those approvals to stock exchanges and SEBI. We had a number of observations. And so basically, what has happened was that since there was a lapse of time because almost it's not close to 1 year or more.
So basically, there was exchanges. SEBI said that we have to refine the scheme in a digital certification document, including valuation. So now we had a Board meeting yesterday. The Board decided, given the fact that just the base of customers valuation, market conditions, [ gaming ] conditions, everything has changed substantially in the last 12 months.
So we don't say that you have to give a new and then come back to the Board and revalue the scheme. So that's the reason why both the partners, which is 5Paisa and us, we have decided to go back to the drawing board and reevaluate the scheme.
[Operator Instructions] The next question is from the line of [ Tushar Sarda ] from Athena Investments.
How much is your institutional brokerage? Because you mentioned there a lot of large block deals and all that because of injecting [indiscernible]?
Yes. Roughly about 60-40 split of brokerage, retail and institution.
60, 40.
40.
Okay, okay. And last quarter, what was it?
60-40, sir.
[Operator Instructions]
Okay. Since there are no further questions, I take this -- thank all of you for taking trouble and joining us on this call. As you know, we are available. So you can send an email to, what's the e-mail, investor.relations@IIFL.com, and we'll be more than willing to answer any questions that you have. Thank you once again, and have a nice day.
Ladies and gentlemen, on behalf of IIFL Securities Limited, that concludes this conference. We thank you for joining us, and you may now disconnect your lines.