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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Very good afternoon, ladies and gentlemen, and welcome to IIFL Wealth and Asset Management's First Quarter FY '22 Earnings Call. [Operator Instructions] Please note that this conference is being recorded. On the call today, we have with us Mr. Karan Bhagat, the Managing Director and CEO; Mr. Anshuman Maheshwary, the Chief Operating Officer; Mr. Mihir Nanavati, the Chief Financial Officer; and Mr. Pavan Manghnani, Head Strategy and Investor Relations.I now invite Mr. Anshuman Maheshwary to walk us through the key points of the first quarter. Over to you, Mr. Maheshwary.
Thank you, Anil, and good afternoon to everyone on the call today. It's been a good quarter for us at IIFL Wealth and Asset Management. Momentum remains strong, and we have been able to focus on growth on executing well on our critical strategic initiatives and also initiating new ones as we look to sustain the performance and continue our delivery on growth as well as shareholder value. Most importantly, I think we are proud of being able to support our clients with advice, product innovation and the required agility as they and we, together with them, navigate the current environment. Let me start with a brief overview on the financial performance of the company for the quarter ended June 30, 2021. At the outset, quarter 1 has been a quarter of key milestones for us. We have seen our highest quarterly revenues, highest profit after tax as well as highest quarterly net flows in the history of the company. In addition, I think importantly, we've also hit our targeted 20% tangible ROE.Some specific financial numbers, on the assets under management side. Our overall assets AUM increased 14% quarter-on-quarter and 33% over the last year to INR 2.35 lakh crores. With custody assets, our AUM stands at INR 2.83 lakh crores. I think importantly, our ARR assets increased 15% over the last quarter and over 60% over the last year to INR 1.17 lakh crores. With this, the share of ARR assets in our total AUM stands at 50%, a critical milestone in our journey towards the recurring revenue model. Net flows have been extremely strong as well, at over INR 14,000 crores, with growth seen across both wealth management with INR 9,700 crores net flows as well as asset management, which saw INR 4,600 crores of net flows. Even excluding flows from corporate treasuries, wealth management saw very healthy INR 4,500 crores of net flows. While our loan book has marginally decreased to about INR 3,350 crores, revenues have strengthened due to significant focus of the team to lower our cost of borrowings by 40 to 50 bps. On the revenue and retention side, our total revenues for this quarter increased by 27% year-on-year and 6% over last quarter to INR 304 crores. While our revenue from operations was up 43% over the last year and 7% over the last quarter to INR 283 crores. Within revenues, it is important to highlight that our recurring revenues have increased 20% quarter-on-quarter and 50% over the last 12 months to INR 192 crores. Share of ARR is at 67% for the first time, another critical milestone in our journey. Also, the growth on ARR revenues has come both from the wealth management and the asset management businesses. Both the businesses have seen about 20% recurring revenue growth in the last quarter. On the retention side, while total retentions have largely been steady, reducing by 2 bps to 55 bps on an aggregate basis, retention on ARR assets have held strong with an increase of 4 basis points over the last quarter to 71 bps. On the expense side, our total expense for the quarter remained flat at about INR 153 crores. Of this, total employee costs increased by 4%, while administrative and other expenses were down 8% over the last quarter. This is again in line with our strategic focus on hiring and retaining the right teams in wealth as well as asset management, while sharpening our spends on administrative, marketing and other expense heads. Accordingly, our overall cost-to-income ratio decreased from 53% to 50.4% for the quarter, and we expect it to sustain at the 50% to 51% level for this financial year. On the profitability side, the operating profits increased 15% quarter-on-quarter and 90% over the last year to INR 130 crores. And we achieved our highest ever quarterly PAT at INR 119 crores, an increase of 16% over the last quarter and 42% over the last 12 months.Here, I think it's important to highlight once again the tangible ROE, which is ROE excluding goodwill and intangibles has increased to 20% for the quarter from 17.3% in the last quarter and 12.6% a year ago. Another critical milestone for us, again demonstrating the continued focus on driving capital efficiency. We remain on track in our journey towards 20% absolute ROE going into FY '23. As a further mark of our focus on capital efficiency and shareholder value, we have announced a special dividend of INR 35 this quarter. Our guidance on an annual payout of 75% to 80% of our annual PAT holds as dividend still holds.Moving on from the specific financials. We want to share 3 key highlights across on our business front. I think firstly and very importantly, at the beginning of your -- all of you are aware, at the beginning of 2019, we took a bold decision to transform our business model from a transactional revenue orientation to a sustainable recurring revenue-based model. And we've been speaking about it pretty much every quarter thereon. We were the first wealth management company to initiate and attempt such an ambitious transformation in India, and in many ways, this allowed us to be better prepared for many of the regulatory as well as industry changes that have happened since then.When we initiated the journey, the split between our recurring revenue or what we call ARR assets and our transactional or TBR assets was 35-65, 35% being the AUM share. And our revenue mix between recurring revenues and transactional revenues was 40-60, 40% again being the recurring revenue in nature. Today, we are 27 months into this journey, and our AUM split between ARR and TBR assets is equal at 50-50. And our revenue mix between recurring revenues and transactional revenues is at 67% to 33%, which is very much in line with our guidance of getting to approximately 70% to 75% of revenues being ARR in nature by the end of FY '22, which would be 36 months into our entire transformation journey. Also to highlight, over the last 5 quarters, about INR 36,000 crores or 96% of our net flows have been ARR in nature, and we expect this momentum to continue going forward as well. Secondly, again, important to speak about IIFL-ONE. Our momentum and focus remains very strong on IIFL-ONE covering advisory and our PMS, both DPMS and NDPMS propositions. Under IIFL-ONE, we've seen healthy growth in assets. We've crossed the INR 30,000 crore mark as far as AUM is concerned in this particular quarter. The proposition continues to gain acceptance across clients and the broader industry, and we continue to sharpen our proposition very clearly to remain the market leaders in this space. A couple of points specifically to highlight one on retentions. Our retentions in IIFL-ONE has seen an improvement of 5 basis points to 33 basis points, with our DPMS offering tending towards 50 bps for the quarter. This is again in line with our expectations of IIFL-ONE overall yielding 40-plus bps in steady state. The second is, I think we continue to invest in the right sales product and advisory teams, hiring as well as upskilling of our existing teams to meet emerging clients as well as industry requirements. The third aspect of our business that I just want to highlight is our alternate focused asset management business, which continues to go from strength to strength, with AUM doubling over the last quarter to INR 44,000 crores. As we had stated earlier, our focus here remains on 5 to 6 key strategies that we believe can scale to upwards of $2 billion to $3 billion each in the medium term. Momentum remains strong from each of our client segments, institutions, family offices and HNIs, and retention continued to be strong at approximately 70 basis points. This is also an area where we are investing significantly in each of our investment strategy teams to support the growth aspirations that we've highlighted above. Very quickly covering 2 specific strategic focus areas for us, one, as you would recall, we had highlighted our focus on the cost side as well as capital efficiencies. Our focused efforts on reducing cost continues to show benefit, as you can see from the lower cost-to-income ratio for the quarter. It's important to highlight that we remain sharp and selective in our spends with certain spends actually going up, specifically in the areas of digital and technology, balanced with other spends where we are able to tighten and sharpen our spend space.The second area, which is a big strategic thrust for us is digital and technology. It continues to be a big investment area for us across all aspects of our business, from comprehensively reimagining our client and banker journeys with the new age lens to deploying technology to drive operational efficiencies and greater integration even with our external service providers. We continue to also explore digital-first approaches to drive future growth. With that, that summarizes our financials as well as some of our strategic thrust areas. And with that...[Audio Gap]
[Operator Instructions] The first question is from the line of Mr. Mohit Mangal.
Congratulations on a good set of numbers. My first question is that this quarter, we saw the company earning a carry income of around, say, INR [ 30 ] million which although small, but was recorded for the first time in last 2 years. So just wanted to know as to what schemes or strategies did help on this carry income? And how do we see this going forward in the coming quarters?
Thank you, Mohit. So I think the INR 3 million of carry income essentially is the carry which was earned from the sale of our co-investment in Nazara. We've not really still ended up booking any carry on our asset management schemes yet. Most of them will come up for expiries, or maturity rather, between September, October of this year all the way to the next 24 to 36 months. All the schemes continue to be pregnant with carry today. And therefore, assuming markets stay at current levels, I think there's a high likelihood of most of our private equity funds, including the pre-IPO funds, yielding us a good benefit on the carry side in terms of the blind pool investments. What you see in the last quarter is only from a specific investment in the form of Nazara.
Okay. Now moving to NBFC. We saw that the capital employed increased from around INR 1,130-odd crores to around INR 1,230-odd crores. So just wanted to know as to why we are increasing the capital employed in the NBFC business?
It's just a function of retained earnings, Mohit, nothing else. So not really -- no increase in capital, really.
Okay. And any guidance in terms of the NBFC book? I mean it's pretty much stagnant. So just wanted to know a little bit on that front as well.
So I think the NBFC book will be, as I've kind of pointed out earlier, will not be proportionately growing to the AUM. I think it will, kind of -- there are 2 things really which are there on the NBFC and the investment side, I'll address both together. I think on the NBFC book side, I think we'll stabilize over the next 6 to 9 months in a range of around INR 4,000 crore, INR 4,500 crore book at around about our equity capital of INR 1,100 crores, INR 1,150 crores. At best, the book might move towards the INR 5,000 crore mark, but most likely to remain in the INR 4,000 crores, INR 4,500 crore mark. Obviously, INR 300 crores to INR 400 crores of addition on an average, right now, is happening because of the buoyancy on the primary market side. But on a steady-state basis, I think INR 4,000 crores to INR 4,500 crores is the book we have to look at. I think the improvement on earnings is a function also of the lack of excess or rather an optimization of the excess liquidity, which was there last year. And on the investment side, also, we are seeing a lot of efficiencies in being able to reduce our sponsor and non-sponsor investments in our own apps. Historically tended to be in the region of 1.75% to 2.25%. But as we are becoming larger and the brand is more powerful, in the sense, where we don't need to put that amount of money to show our alignment of interest with clients, we are hoping to get it down to around about 1% to 1.25% of the overall AUM on the altered asset management side. So I think that investment book should also over the next 6 to 9 months, see a reduction of around INR 200 crores to INR 250 crores.
Perfect, perfect. My last question is more generalized one. So I just wanted to understand how a junior RM in your company's groomed? Is he given a specific training or a senior RM share some kind of a portfolio with him? Just wanted to get a sense as to how a junior RM is groomed in the company.
So we really have, for the lack of a better word, 2 profiles. One I can call as a banker and the second is a senior banker. The banker really, for us, would be an individual who spends 7 to 8 years in a priority bank already. So in that sense, it's not his first exposure to managing money. He would have spent at least 6, 7 years on the priority banking side. But I think his largest exposure, in that sense, therefore, comes around 3 things. First, I think, and the most important is on-the-ground training while sharing portfolios with the senior banker. The senior banker traditionally would have at least 12 to 15 years experience and the ability to have managed at least 5 to 10 relationships above INR 100 crores over the last 5 to 7 years. The second one is, we run a structured kind of training program more on the softer skills. So that's kind of run through the year, and that's fairly focused. And especially through times like the last 15 to 18 months, I think it's been extremely valuable because it allows people to kind of stay fairly focused. And lastly, we run a fairly tight program on domain knowledge. But that's something which is, I guess, in some ways, fairly standard, but keeps all our relationship managers fairly well engaged. But from a product standpoint and our ability to kind of communicate, I think one of the things which we've been able to build well is, we do very, very regular town halls with all our bankers, senior and junior. And that serves us a very important place for all of us to engage. And it's a forum where everybody is able to contribute to new ideas and make it a big success. So in that sense, I think there is a fair degree of ability in spite of us now having 250, 300 bankers for everybody to learn and also contribute.
We now move to the next question. We have a question from the line of Mr. Prashant Shridhar.
This is Prashant Shridhar...[Audio Gap]
Prashant, your voice is not very clear. If you could adjust your mic and...
Sure. Is this better?
Yes, better.
So just wanted to check in the NBFC as on FY '21, we had some NPA of around INR 80 crore. Any details around this as to how many accounts it would be spread over [Technical Difficulty] What would be the status as of today?
No, Prashant, I don't think so the number is correct. NPA of INR 80 crores?
Right, which I read. This is in some... [Technical Difficulty]
No, no. There's no NPA of INR 80 crores. There was one loan of INR 75 crores, I think, to one of our clients, I think, called -- what's the name of the loan? I think, Mihir, do you remember? Sorry? Mihir, you're on mute.
So don't know the name of the firm readily, but yes, there was one account which is under [Technical Difficulty] the settlement that we entered into.
Yes. So it's basically to one of the promoter entities of a general called [ Asit Koticha ]. So effectively, there was a restructuring, which we entered into. It's not an NPA. And on account of the restructuring, we have taken a INR 5 crore additional provisioning. That's the only loan which is there. There's nothing else.
So -- and this would be unsecured?
No, it's fully secured, fully secured, fully secured.
And what is the collateral around [Technical Difficulty]?
No, so it's fully collateralized against shares. So it's not an issue at all.
Okay. The other question was generally in your [Technical Difficulty] number of families, the employee [Technical Difficulty] any details around that? Has there been any change on the [Technical Difficulty].
So we typically kind of update it once every 6 months, but because there's no large change in terms of employees, but there is no significant change in either the attrition numbers at all. It's all business as usual. I think from an attrition perspective, it continues to be fairly low. Over the last quarter, I think -- I can't think of a single senior banker who's exited the firm. I think from an employee perspective, I think on the wealth management side, we continue to be the employer of first choice. We continue to attract good talent. And we continue to kind of invest heavily towards ensuring that the platform is the most optimal for all our wealth managers. On the asset management side, I think we are beefing up our team substantially. I think we've got a very strong and complete team on the listed equity side. On the credit and real estate fund side, we have added 1 person who's kind of come in over the last quarter. On the credit side, we'll be building a substantially larger team over the next 3 to 6 months. And we've also got a CIO for the private equity business joining us over the next couple of months. So on the alternate asset management side, I think we continue to beef up the team. And on the wealth management choice side, I think it's pretty much business as usual.[Audio Gap]
Karan sir, I don't think we are able to hear.
Karan, we are not able to hear you.
Is this better?
Yes, yes. Now it's better.
We would want to add 10 to 15 senior bankers through the year. And I think we are well on our course to do that. That's going to be important from our perspective to be able to kind of ensure that we are able to consistently meet our net flow targets.
[Audio Gap] And the current count of senior managers would be around 60, 70.
Yes, around 70 senior managers.
The next question is from the line of Saptarshee.
This is Saptarshee from Centrum PMS, and congratulations on a superb quarter. So my question is related to the asset management on the debt side, although the debt is very good, but yield had been around 16 basis points versus [Technical Difficulty] 40, 50. Is there any structural change here?
Sorry, Saptarshee, we can't hear your question. Can you just repeat it?
So in the asset management, when I see under mutual fund, debt side, the yield seems to be slightly lower on the 16 basis points, 1-6, versus 40, 50 earlier.
No, so on the fixed income side, on the bond front, we just reduced the management fees, nothing else.
Okay, okay. And on the asset management side, only in the equities, listed equity space, when I see your last year, Q3, it was around INR 4,300 crores or INR 4,500 crores kind of a equity -- listed equity. But last 6 months have been very good run for the equity space, but our AUM has not increased in that but it has been reduced. Is there any movement from listed equities to other assets?
Saptarshee, which specific section? Because listed equities has increased substantially from INR 4,300 crores. Are you specifically referring to a subsection there? Or...
Yes, INR 4,300 crores, the current number regarding to that is, I think, INR 3,700 crores right? INR 3,670 crores.
I think, Karan, here the reference is specifically to AI, not including the discretionary as well as the mandates that gets covered under listed equities.
No, so I think, Saptarshee, that's just a vehicle issue. The larger collections have happened either in PMS or in AIFs or in institutional segregated managed accounts. As a consolidated, I think the entire pool has moved from around about INR 4,300 crores to nearly INR 15,000 crores, INR 16,000 crores of listed equities over the last 7 to 8 months. It's just a specific vehicle issue. There -- it really may have just moved from one vehicle to the other, nothing else. Overall, there's a very good growth. And it's -- in the AIF structure, there was a specific fund, which was long-term growth fund, reorganization fund, which matured and a large part of...[Audio Gap]but new flows essentially moved into other vehicles. That's about it.
Okay. And just a broader question, like, we are seeing a huge increase in the basket size in the mutual fund space, mostly on ETFs and [indiscernible] funds. And therefore, the question is on the large cap funds and their yields on the mutual fund space and expensed ratios. So just curious, does that impact on our mutual fund yield in any interest?
No. So I think the impact of a lower fee possibility in active mutual funds because of ETFs is something which is real, and it will play out over a period of time. But at the same point of time, our overall dependence on the -- of our business on active mutual funds is fairly, fairly small. And as we go along, I think it's a trend which the entire industry will have to look at on the mutual fund side. If and when we build our mutual fund business, I think that's something which we'll be very, very cognizant of. And we will have to build the business, keeping in mind the fact that active mutual funds, even on the equity side, may on the longer term move towards the 50, 60 basis points yield. And ETFs will become a larger portion of the net new money in the market. So I think both those points have to be considered while building out a large mutual fund business. We, obviously, over the last 2, 2.5 years have not kind of invested massively on building a distribution vehicle on the mutual fund side. But as and when we do it, we will need to build it differently because the economics on the mutual fund business are surely going to be impacted by ETF flows as we go along.
Okay. And just one last question is, we have seen a lot of disruptions, both in terms of AMCs and broking industry, in terms of fintech acquiring the market shares, not so much on the lending sites. But in cases of AMCs and both in brokings, we have seen a lot of fintechs or maybe convenience-based players are giving market shares. Do you see any kind of threats, although it is a human-intensive business, it requires current holding of the clients. But do you see any kind of disruptions because of new players, like, let's say, [indiscernible] money kind of players? Do you see any disruption coming down here?
So, Saptarshee, I think globally and in India also what we've seen as the following, I think brokerage businesses are the first to adopt. I think they move online very, very quickly and get disrupted very quickly also, which we've seen in many formats over the last couple of years. The -- for the lack of a better word, the lower end of the wealth management pool, which essentially, if I'm just going to use, let's say, INR 10 lakhs to INR 1 crore, also typically has moved online much faster globally. And I think in India also, even today, that segment is not well serviced by anybody. So that INR 10 lakhs to INR 1 crore is right for a disruption from a good fintech player, which can build a good interface. The INR 1 crore to INR 5 crore segment today is largely serviced by -- or maybe INR 1 crore to INR 10 crores is largely serviced by priority banks. So all your large retail banks have a very, very good, effective priority banking teams, which cover the wealth management needs of clients between INR 1 crore to INR 10 crores. I think that's where, again, we've seen the evolution of, for the lack of a better word, phigital models, which is a combination of physical plus digital assist models globally, where financial advisory with some bit of assisted touch has really worked well.Above the INR 10 crores, INR 15 crores, globally and even in India, I think it continues to be a fairly heavy touch model with the client. I think the ability to adopt and execute large fund trades above INR 10 crores, INR 15 crores, INR 20 crores has typically not happened. What has happened, however, is the interface with the client: the CRM package, the ability to provide analytics, the entire what-if analysis for an investment, all of that moves very quickly to a better user interface. But the actual execution of the trade and the interaction with the client, globally and also in India, I think, is far away from moving to a full-fledged digital model. So I think I don't want to kind of overture by saying that it will never happen. But I think the pace of adoption is at least the highest in the INR 0 lakh to INR 1 crore category between the INR 1 crore to INR 10 crore, INR 15 crore category will be a kind of digital assist model. And I think in the segment we operate, which is broadly in the INR 2 million-plus category, I think the largest impact of the digital kind of evolution will be on the way we manage the clients rather than them actually going online and executing the trades. That -- those are the trends we've seen. And also in India, it seems to be that way, and that's the way I think it will kind of head towards.
[Operator Instructions] Next in line, we have Sanjay Kumar.
This is Sanjay from [indiscernible]. Karan, first question on the top line. We are paying out dividends and shrinking balance sheet, so we're not looking at acquisitions, I guess. So in that case, what would be your medium-term growth guidance, say, 2025, '26?
No, so I think from a growth guidance perspective and paying out of dividends, I think, in that sense, both are not necessarily massively correlated in that sense. I think from a dividend perspective, as we pointed out earlier, I think from the core business perspective, we felt that there was an ability outside of acquisitions to pay out 2 tranches of dividends of INR 40 last year and INR 35 this year, which is what we've more or less done. The second part of the dividends, obviously, is something which is coming out of the operating profits every year. I think there, we are fairly clear from a continuous perspective of growing our business and adding AUM, both on the wealth and the asset management side. We really don't need addition of capital. But if we were to get into, let's say, growing a new business at some point of time, let's say, if you want to build out a mutual fund, we may want to kind of maybe use 5% to 10% of our profits. But outside of that, really -- 85% to 90% of our profits should be kind of be able to be distributed as dividends without really impacting our growth projections for 2025, 2026.As far as the projections for '25, '26, I think both the businesses we are in wealth management as well as alternate asset management continue to have a fairly long growth. And if we can maintain our edges in terms of kind of ensuring that we are top of the line, both in terms of the advisory piece of the business on the wealth management side and the product innovation on the altered asset management side, I think there is no reason why the AUM can't grow at a clip of around about 12% to 15% and correspondingly profits don't grow by 18% to 25% every year.So I think that's the way I would look at it. Obviously, there will be elements of operating leverage kicking in, in different points in time. But I think at 12% to 15% AUM growth and 18% to 25% profit growth is possible given the 2 businesses we are in.
Okay, so with that, you mentioned operating leverage. The reason is, we are back to FY '19 levels in terms of profitability. Say, PBT margins, it was 50% in 2019, we are back at 50% this quarter. So are we doing any initiatives to work either on our cost or to enhance our competitive edge. You did mention about tech and digital, but if you could speak a bit more in detail than periodical, in terms of building a moat in our business.
I think that's a great question, and I'll address it both from -- actually from 3 angles, from a revenue angle perspective, from a productivity perspective and also from a cost perspective, because all 3 parts are equally kind of relevant. Let me start with the revenue piece itself, okay? So I think from a revenue piece itself, I think the wealth management industry itself is going through a fairly large change with advisory being at the forefront as compared to distribution. I think within advisory, we have all different facets to offer. The pure advisory business, the nondiscretionary PMS business as well as the discussion PMS business. I think as our AUM converts from transaction to stock, even at a retention of 40 to 50 basis points of the pure advisory assets, the overall revenue actually increased because the overall yield on transactions are obviously kind of structurally headed downwards. I think from an overall revenue perspective, the size of the revenue pool, we will be able to get on the wealth management side will largely be a function of our ability to be able to move away from the pure distribution transaction income to moving towards the -- building the assets under advice in any of the 3 formats, which I discussed earlier. And overall, I think that will increase the revenue pool substantially. From a cost perspective, I think a lot of our costs are slightly front-ended, and front loaded in that sense, because as we are going through this -- going through this journey, our relationship managers need to be slightly overcompensated for the change they are making from distribution all the way to advice. And while the firm goes through this transition process, it can be a slow -- it needs to be a slower transition process for the relationship managers. So I think the employee costs have continued to be elevated relative to the quantum of revenue for the last 2 years, and we see it elevated for the current year and the next financial year. Post that, we see it coming down as a percentage of our overall revenues. So in the current year, for example, it's nearly close to around about 45%. Give or take, it is nearly close to 40% of our -- 38% to 40% of our revenues. I think on a stable, steady-state basis, I see it somewhere between the 32% to 35% of revenues, but it's not going to happen in '21, '22. It's not going to happen in '22, '23. But subsequent to that, I think the employee costs will kind of be more in the region of 32% to 35% as opposed to being in the region of 38% to 40% for the current year and next year. And the large reason for that is the fact that we are kind of front-ending some of the RM compensation for the assets we are moving from distribution to advisory. Lastly, coming to the productivity side. I think that's where digital comes in, in a big way. I think our ability to change the engagement from distribution to advice as well as make the RM and the client more digitally enabled for the lack of a better word. And when I say digitally enabled, it can be a slew of things, right, from analytics all the way to execution, all the way to account opening. As we make both the entire ecosystem in that sense, digitally enabled, I think our ability of senior bankers to handle 35 to 50 relationships as compared to, let's say, today, 25 to 30 relationships with the assistance of 1 junior banker will be real, and their own productivity will be nearly 50% to 60% higher as compared to what it is today. So in that sense, I think the operating leverage is going to be a function of all these 3 things. It's not going to be a function of one thing. And I think there is a lot of operating leverage in the business, but we'll have to work very hard on all these 3 aspects to ensure that we are able to get the best out of it.
[Operator Instructions] Next online, we have Mr. [ Shubhranshu Mishra ].
I'm slightly new to the business model as such, fairly basic questions, 2. So first part is, how many RMs do we have? What's the vintage with our firm? And what's the average ticket size and relationships that they carry? That's the first, just to understand the business driven by. Second is, you didn't explain about the fintech part. But any kind of tech investments that we ourselves are doing in order to minimize some amount of human intervention? There's 2 questions. I'm slightly new to this.
No problem at all. So I think the answer to the first question is, we have approximately about 300-odd bankers interfacing with clients. We service around about 6,500, 7,000 families across the country. So broadly speaking, a banker is interfacing with around about 20 to 25 active families. We would have around about 70 to -- 68 to 72 senior bankers, which effectively means we have a 3.5:1 ratio in terms of senior bankers to junior bankers.Typically, the cost economics work in a way where the minimum cost-to-serve ratio for us for a client to be profitable for us in the longer term, at a retention of around about 50 basis points, works out to around about $2-odd million. So that's typically north of $2 million in terms of financial assets with us, is typically our target segment, which would represent those 5,500, 6,000 families. And from an economics perspective, broadly speaking, on a steady-state basis, employee cost would be in the region of 32% to 35%. And the remaining cost would be in the region of 15-odd percent, leading to a cost-to-income ratio of around about 48% to 50%. That's the broad economics.And in terms of the ability of bankers to handle relationships, I think what we've seen globally with the aid of technology, it can move up from 2025 to around about 35 to 40. But that's on the banker side. I think one of the key abilities to see a proportionate growth in the number of clients relative to the bankers is also the ability to hire senior bankers, because really, the junior bankers are able to go out and get the right set of clients only if they have the right set of assistance within the firm. So that's something which needs to go hand-in-hand along with the addition of junior bankers for us really to be able to multiply that number by 25 or 30 or even 35 or 40 in the long term to arrive at the right size of number of families, which we can service. On the technology side, I think there's a full -- there are a lot of opportunities across the entire stack. So when you say reduce human intervention, that's absolutely correct. While we don't expect clients to go and execute and actually take decisions online, it does not reduce their expectation or their desire for human intervention in terms of processes and analytics to become the best possible. So whether it's our own relationship managers, bankers as well as our clients, the expectation is very large from us to be able to have all the processes, all the analytics, all the review processes as digitized as possible. We are running a fairly large project with Accenture over the last 3 to 4 months, which will extend over the next 12 to 18 months, through which we are hoping to achieve close to maybe 85% to 90% digitization as much as possible, all the way from account opening to portfolio analytics and review decision making with clients. So we've been ahead of the curve, especially in terms of our portfolio aggregation tools with clients, with the acquisition of Altiore, which we made a couple of years back, but I think a lot of improvement is possible. And as Anshuman pointed out in his initial opening notes, I think that's where a disproportionate part of our incremental spend is being invested in.
[Operator Instructions] Next on line, we have Atul Mehra.
This is Atul here from Motilal Oswal Asset Management. So just one question to begin with. In terms of how do you see the risk of fragmentation in wealth management industry? Because given it's all very lagged, say, for example, each RM is managing INR 1,000 crores, we have seen that over the years, some RMs have moved out and been on their own, and they're doing fairly well in some sense. So how do you see the risk, especially now that we are listed, most of the ESOPs are in the money and so on and so forth? It's not like the young stage that we had 10 years back when a lot of ESOPs were in the money to a very large extent. So how do you see that risk for you in the next 3 to 5 years?
That's a great question. I think if you see globally also, I think at the end of the day, the number of private banks has remained consolidated. I think if you also see across maybe Asia, the private banks, which are really large, are only 4 or 5 right. So I think India has also seen a similar consolidation in the private wealth firms. The largest competition eventually may end up coming from independent financial advisers or external asset managers, which actually is what you're referring to in terms of disaggregated relationship managers who quit from their earlier jobs. However, having said that, what's happened is the following: these relationship managers end up working with the clients, but really need a platform to execute. And the ability of each of these clients to go out and set a platform is really, really difficult. 9 times out of 10 or maybe 8 times out of time, we still ended up seeing all these ex-relationship managers who was running family offices for clients still ending up appointing 2 or 3 wealth managers to be able to execute pretty much everything. So what that does more often than not is not substitute our work but maybe formalize the process for the client a little more, help him set up more processes, but it's not really eliminating us because the dependence of all of those individuals to come to us in terms of both deal access as well as execution access continues to be very, very high. It's not something which is kind of -- which can be built by every individual in every family office in his own way, that's going to be really, really tough. And when I say the platform, it means everything, right? It means everything from products, the investment team, the entire technology piece, aggregation of the portfolios. It's not possible to be done by one individual in one sitting in one client's office. So I think in that sense, you will see more and more of that happening. But it's unlikely it is going to substitute the 4, 5 of us from an advisory perspective with the client. I think we will be interfacing with one more individual in the client's office, who's slightly more savvier than, let's say, what the client was traditionally. But outside of that, I don't see too much of an engagement change. On your specific question in terms of IIFL Wealth and ESOPs and so on and so forth, honestly, we've, Atul, we've crossed that curve because a large part of the ESOPs were even vested to the employees nearly a couple of years before we listed. And even prior to listing, we've had 3 rounds of private equity raise from GA and from a second round just before listing and a third round which was close to listing. So I think in that sense, employees had the option to exit their ESOPs at different prices over many, many years. I think what's really kept our attrition rates low -- is not either a big participation or low participation in ESOPs, it's essentially the ability of the platform to allow the relationship manager to go and get the highest wallet share from the client, and I think that's the true test. Everything else is a function of that. I think that's -- when the relationship manager feels that he's representing the platform where he's going to be able to get the highest amount of business from the client. That's the platform he wants to be in. Once he's made up his mind on that, then everything else needs to fall in place. Then it's about compensation, which can be either in the form of ESOPs, incentives, bonuses, salaries. But that's a subset, it's not the primary set in itself. So I think that's the way I would look at it. And if you ask me what is our biggest threat over the next 3 to 5 years on the wealth management side, I would not necessarily say people, I would not necessarily say size of the market. I would say it's internal to us to ensure that our platform is the most efficient and represents a platform where relationship managers find it easiest to get the highest wallet share from their clients, and that's a positioning we can't really lose.
Very interesting. Just one other question. You spoke about it in the -- some -- in one of the questions during the call. So the target today for IIFL-ONE, an IIFL Wealth is primarily around $2 million plus in terms of clients. But the mass of India, in a way, is less than that in a way. And given that you have technology being such an enabler today, so would you have any thinking or purposes to have that as a target at some point in time? Because that is a very large addressable pool as well, so maybe a differentiated product, maybe your fintech-oriented product, anything which is on those lines?
So I think it's a great question, Atul, I think we continuously keep grappling with it ourselves. But there are 3 thoughts which I can share with you. And these thoughts are neither conclusive, not complete, right, because you kind of keep evolving as you go along. But I think the first thought is the size of the market, $2 million plus is increasing in a very, very large way. So I think while there is no doubt about the fact that a larger part -- a larger number of clients and the larger quantum of wealth will be there between INR 1 crore to INR 15 crores, just the sheer size and the number of increase of number of clients and families above INR 15 crores is also fairly among this. Reality is the competition set there is lower, and the number of people and players who have been able to get our successful proposition out there, so these set of clients is also a smaller number. So we feel that there is a very, very long rope out there. Now that's the first thought which we have. The second thought, obviously, is while doing that, why can't we address the set of INR 1 crore to INR 15 crores. So there, I think we've been traditionally, okay, traditionally, and I'm using the word traditionally very repetitively a couple of times because traditionally, we believe that the distribution economics don't really work out in that segment for stand-alone nonbanking firms like ours because INR 1 crore to INR 15 crores purely on an advisory fee basis, if you see at 35, 40 basis points, may, from a cost-to-income ratio might be really, really difficult to service. From a transaction perspective, the transaction income is going to go lower and lower. And we've seen that over the last 3, 4 years, how mutual funds on the direct plan is kind of replaced mutual funds through the distributors on a net sales basis. It first happens in the larger categories, $2 million plus, but eventually it will find its way even to the INR 1 crore to INR 15 crore kind of segment, and the ability to collect fees there is something which is not easy. Plus, we don't have the normal lines of banking revenue. We don't have a current account, saving account revenue. We don't have the ability to book revenue on account of either home loans or mortgages. You don't have the ability to book income on account of ForEx. You don't have the ability to kind of have a salary account, plus the cost of origination is much higher than that is there for a bank because in the case of a bank, this individual between INR 1 crore to INR 10 crores is 9 times out of 10 entering the bank because of a salary account. So I think both on the cost of origination as well as the ability to book different lines of revenue, a pure wealth management firm will be a little bit more challenged than a bank. So therefore, the distribution economics is not easy. Can it now be -- can all of this be now improved better and more efficiently delivered through a more digital fintech platform to make the distribution economics work, I think, is the golden question. And that's all -- that's something which we are all solving for. How to solve for it either through a more product format, either through the mutual fund format or through a pure fintech advisory format is the question we are all grappling with. I don't think we are -- we have the right answer just yet. But it's something which we keep working on. And sooner than later, once we have the right answer, we'll think about it. But as we speak right now, a pure, pure fintech advisory for a client segment between INR 1 crore to INR 10 crores, INR 15 crores is something which is not immediately making sense from a pure economics perspective. I think if you can package it in some constructive format where it can be offered as a product, we can make the right economics on it. And yet we are able to kind of offer a phigital kind of service where it's a digitally assisted platform. I think it will work, but it needs a little bit more of a thought and approach from our side.
Thank you, Atul. We have the last few minutes to wrap up the call. Karan, would you like to say any closing remarks?
So thank you. Thank you, Anil. I think thanks for all the questions. I think from an industry perspective, we're extremely excited. I think the wealth management business as well as the alternative asset management business has a lot of runway. I think in both the businesses, we've built a competitive edge and a platform which is unique. We will continue to work very hard to use technology to enhance both of these platforms and continue to build on our leadership position.I think there are 2 other interesting businesses out there, which we continue to evaluate. One is obviously the advisory piece or the financial planning piece between the INR 1 crore to INR 15 crores client segment, and second is obviously the mutual fund piece. But both these businesses are something which in their own unique ways have different sets of challenges. And as we go along and continue to kind of build out our dominance on the wealth and the altered asset management side, these 2 businesses continue to always be on our left brain. And as and when we find ourselves having some U.S. peers to be able to get into the market for these 2, we would look at it. So with that, thanks a lot for joining in the call. And for any other clarifications at all, please feel free to get in touch with Pavan and team, and we'll be happy to kind of come back with the details. Thank you.
Thank you, Karan. Ladies and gentlemen, this brings us to the end of this conference call. Stay safe, and look forward to your participation next quarter. Thank you all once again.