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A very good afternoon, ladies and gentlemen, and good day. Welcome to IIFL Wealth and Asset Management's Q2 FY '22 Earnings Call. [Operator Instructions] Please note, 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. Sanjay Wadhwa, the Chief Financial Officer; and Mr. Pavan Manghnani, Head Strategy and Investor Relations. I now hand over to Mr. Sanjay Wadhwa to take the earnings call forward. Thank you.
Thank you so much, Anil, and a very good afternoon to everyone on the call today. Firstly, introducing myself. I have joined the company this quarter as CFO. It's an exciting time to be part of this prestigious organization and what better to kick start my journey here.On the backdrop of the previous quarter, we reported yet another exciting quarter performing exceedingly well and showing good improvement across all key metrics, both on the revenue side in the form of improvement in the AUM steady retentions and by exercising good control over expenses and keeping an overall check on our cost-to-income ratios, thereby improving our profitability. This has been possible due to our relentless efforts on core drivers across clients, product, people and technology.Let me start with a brief overview on the financial performance of the company for the quarter ended September 30, 2021. At the outset, Q2 FY '22 has been another record setting quarter for us, as we reported all-time highest revenue, operating profit before tax, profit before tax and PAT. In terms of our total assets under management, it has been a quarter of key milestones. Our total AUM is now about INR 315,000 crores. Our wealth management AUMs have surpassed INR 200,000 crores. And our asset management AUMs have crossed INR 50,000 crores. In addition, our tangible ROE is at 23.7% for the quarter.Some specific financial numbers, starting with AUM. Our overall AUM has increased 9% quarter-on-quarter and 37% over last quarter to INR 256,000 crores. With custody assets added, our total AUM now stands at INR 315,000 crores. Importantly, our ARR assets increased 12% quarter-on-quarter and over 67% year-on-year to INR 132,000 crores. With this, the share of ARR assets in total AUM now stands at almost 52% as we continue our journey towards steadily increasing the buy of ARR assets.Net flows have been extremely steady, currently at INR 18,000 crores for the first half of this financial year and INR 3,700 crores for the quarter. Our loan book has also increased 7% quarter-on-quarter and 25% over the last year to INR 3,558 crores. On the revenues and retentions front, our total revenues have increased 19% quarter-on-quarter and 45% year-on-year to INR 362 crores, while our revenue from operations was up 11% quarter-on-quarter, 48% year-on-year, to INR 314 crores.Importantly, our recurring revenues have increased 16% quarter-on-quarter and 59% over the last 12 months to INR 222 crores. Share of ARR revenue to operating revenue now stands at 71%, reflecting our constant endeavor in moving towards assets with recurring revenues. Further, the growth in ARR revenues has come from wealth and the asset management business, both seeing a healthy uptick over the last quarter. Total retentions have also held strong, increasing by 4 basis points to 59 basis points over the last quarter. Retention on ARR assets have also been steady with a slight increase to 72 basis points.On the expenses front. Our total expenses for the quarter increased 13% Q-o-Q to INR 174 crores. Of this, the total employment costs increased by 17 -- 16%, sorry, while administrative and other expenses were up 4% over the last quarter. However, you will notice that the overall employment cost as a percentage of revenue is 37% as against 38% in the previous quarter. We expect this to remain within this range going forward as we continue to invest continuously on our pivotal assets, which is our people.Another key milestone, our overall cost-to-income ratio is now below 50%, to be precise at 48% for the quarter. Our constant focus on cost rationalization across the organization has seen the operating leverage play out over the last 2 years, and we expect this to continue with growth in the top line. On the profitability front, the operating profits before taxes have increased 8% quarter-on-quarter and 80% over the quarter 2 of the last financial year. It now stands at INR 141 crores for the quarter, and we have achieved our highest ever quarterly PAT at INR 140 crores, which is an increase of 19% Q-o-Q and 64% Y-o-Y.Importantly, as I noted earlier, our tangible ROE, which is ROE excluding goodwill and intangibles, has increased to 23.7% for the quarter from 20% in the last quarter and 14% a year ago. We aim to further improve our profitability while continuing to return excess capital back to the investors, which we demonstrated last quarter by declaring a special dividend of INR 35 per share. Further, we have announced an interim dividend of INR 20 this quarter. Our guidance on an annual payout of 75% to 80% of our annual PAT as dividend still holds. This is over and above any special dividends that are aimed at [ making our capital structure ].With this, I would like to hand over the call to Anshuman for his comments on the key highlights from a business perspective.Over to you, Anshuman.
Anshuman, we request you to unmute yourself.
Apologies for that. Thanks, Sanjay. Moving on from the specific financials, I want to highlight a few aspects across our businesses. As Sanjay rightly pointed out, it has, once again, been a remarkable quarter for us, with all key output as well as input metrics trending in the right direction. As highlighted in the last quarter's call as well, I do want to go back to the significant strategic decision taken by the management and the Board 30 months [ ago ], on moving our business model to the recurring revenue-based one. At that time as the leading wealth manager in the country, highly successful with strong growth and financial performance, such a first-in-the-industry decision was a bold one and possibly not needed immediately. However, in hindsight, it was a remarkable decision that today has disrupted the overall Indian industry.Our success in working through the transition has led all players following suit as well, necessitated by the robustness of the model as well as the ask of the clients. We are very proud of the accelerated success as demonstrated through the share of ARR assets in total AUM increasing to over 50%, share of recurring revenues in revenue from operations increasing to over 70% and retentions on recurring revenue assets holding above 70 bps.I want to highlight 3 specific elements that has driven our success. First is our relentless focus on clients. Even as we went through the transition, how does this benefit the client was the question always top of mind of not just the management, but the entire organization. This is reflected in the high client retention and stickiness of client AUM that we continue to see. Loss of AUM has consistently been below 2% annually and is at a low of 0.5% for H1 of this year. In addition, 95% of net flows have been in ARR assets over the last 6 quarters, depicting significant confidence our clients are showing as well as our bankers are showing in the adoption of this transparent structure.Secondly is our relentless focus on product innovation and building the right investment teams. We have consistently been industry leaders on our propositions and funds, right from the industry-first pre-IPO funds to building the IIFL-ONE and advisory propositions. We continue to invest significantly in each of the investment strategy teams with Navin Amarnani on long short, Amar Merani on real estate and Anshuman Goenka for private equity and so on. We are continuing to build very specific deep expertise in each of the strategies that we are taking forward. Third is our relentless focus on execution on each of the strategic enablers. This is actually a standout across all the teams at IIFL wealth and asset management, whether it be sales, service, operations, technology, et cetera, all working through with a single-minded focus on the client and core input drivers. I believe this has contributed to not only the success of the platform, but also allowed for us to sustain industry-lowest attrition at the senior management level. In addition, the execution focus has also allowed us to bring down our cost to income to below 50%, which we believe is sustainable going forward.Moving on to covering some of the specific parts of the business. On wealth management, our momentum and focus on recurring revenue assets remain strong with wealth ARR AUM increasing to INR 80,000 crores. And within it, IIFL-ONE accounting for 40% of the same. We should specifically see strong client additions on the advisory proposition as well over the next few quarters. Transactional income has also remained strong given the market opportunities and events, and we expect it to continue going on for this quarter and the next. Overall, retentions remain just under 50 bps with retention on IIFL-ONE continuing to remain steady at 33 bps for H1 FY '22. We maintain our expectations of well-sustaining -- a retention level of 50-plus bps.On the asset management side, our alternates-focused asset management business continues to scale new peaks and go from strength to strength. Last quarter, I had highlighted its AUM doubling over the last 5 quarters to INR 44,000 crores. This quarter, we have crossed the key milestone of INR 50,000 crores AUM and have closed the quarter at about INR 52,000 crores. Our focus remains steadfast on the identified key strategies with listed and private equities specifically showing very strong momentum.Momentum has also remained strong from each of our client segments, be it institutions, family offices and HNIs and retentions are at a strong steady state levels of 70 bps plus.Lastly, I do want to call out our continued focus on digital and technology. We have made significant progress on completely reimagining our client and banker journeys and exploring tech-enabled propositions. The journey for the next 12 to 24 months has been laid out, and we are excited to start seeing it gradually come to life. This remains one of our biggest investment areas for the foreseeable future, and we'll speak about it further in subsequent calls.So with that, I would now like to open the session for Q&A.
[Operator Instructions] May I request Mohit Mangal kindly unmute yourself and ask your question, kindly introduce your firm.
Congratulations on a good set of numbers. This is Mohit from Anand Rathi Research. So my first question is towards the net flows. So net flows was around INR 37 billion, primarily affected by the corporate treasury. So I just wanted to understand, will that be a regular feature kind of positive and negative coming to the net flows? Or will it be a one-off?
So I think, Mohit, corporate treasuries will always cause a little bit of dispersion in the flows on a regular basis because corporate treasuries can have inflow and outflow every quarter. But in this specific case, we had a large inflow of INR 5,200 crores in quarter 1, which a large part of it has kind of got mostly reversed in this quarter. So actually, if you club quarter 1 and quarter 2 flows, you will have most of the impact of corporate treasuries moved out and the net flow will be very, very healthy if you look at both put together. So broadly of the net flows in the previous quarter, INR 5,200 crores was from corporate treasuries, part of which has got withdrawn this quarter.
Okay. Perfect. Secondly, on IIFL-ONE yields. I mean last quarter, it was around 28 bps. This time, it's around 29 bps. So just wanted to understand that, when can we see it going to, say, 35, 40 bps? When can we expect that?
So I think, like I explained last time, maybe I think we'll have to look at IIFL-ONE retentions outside of pure corporate advisory. And maybe we'll start reporting that in 2 different line items from next time. But outside of that, I think retention will move towards the 35 to 45 basis points. The corporate advisory will cause a little bit of dispersion because those mandates really are sometimes large mandates with very low fixed fees, and that is [ based ] on the retention. But otherwise, I think IIFL-ONE, per se, will end up between the 35 to 45 basis points.
Perfect. My last question is more towards the industry thing. So we have -- I mean, we recruit RMs from competitors and our RMs also goes to competitors. So just wanted to know whether you see a trend, let me say, suppose an RM comes and joins in, so what type of AUM he actually brings in along with him? And what is the loss to the AUMs if an RM goes out to join a competitor?
So that's a great question, Mohit. I think I myself have been an RM for nearly 40% of my life. And the reality is when you move from one platform to the other, let's say, if you have a book of 30-odd clients, the clients react in 3 different ways. Every relationship manager out of 30 clients would have 2 or 3 clients who kind of love him absolutely, and they are willing to kind of move hook, line, and sinker from one platform to the other. But that typically represents less than 7% to 8% of your client base. So assuming 30 clients, maybe 2 or 3 clients will be of that variety.Then there'll be another 4 or 5 clients, which would be another 10% to 15%, who would be willing to definitely start with you with maybe 20%, 30% of the AUM they've had with you for a longish period of time. So around 25% to 30% of your clients will start, of which around about 10% will start with you in a meaningful way, 20% in a small way. Of the remaining 70%, you'll typically see half forget you. So 35% to 40% won't even remember you because they have a large stickiness to the platform that you are already in. And the remaining 30%, 35% will be willing to listen to ideas. So they'll be open. They will say, stay in touch, get settled into the new platform and depending on what value addition you are doing, I'm willing to do business with you. So really, I think a relationship manager moving from one platform to the other, from an immediate perspective, it's only a small impact of maybe 5% to 15%.Finally, it's going to be about 2 things, which are going to be more critical: a, how is the platform which he's moving to and how is the platform able to add value to the client; and b, if the relationship manager is moving out, who is the new relationship manager coming in from the platform. Because the new relationship manager is equally good and is able to maybe add more value, you're unlikely in the longer term also to lose the client. So more important than the relationship manager moving out, I would personally feel the platform and the ability of the platform plus the new relationship manager coming in his place are going to be 2 important aspects to decide whether the client remains with you or doesn't remain with you on the platform.
Next in line, we have Kunal Shah.
Yes. Hello. Can you hear me?
Yes, Hi, Kunal.
Yes. So am I clear?
Yes, absolutely.
Yes. So the question is, sir, when we look at it in terms of the inflows into IIFL-ONE, so I think, firstly, thanks for the detailed disclosure on equity and debt. But there were outflows, particularly on the debt side. So should we see this to be more of a one-off kind of a thing and it should happen and we will see a good growth coming in on the IIFL-ONE side because it was only 3% quarter-on-quarter. So how should we read into that? So that was the first question. And second, in terms of the alternate assets, so the private equity AUM for asset management has also gone up. And when we look at maybe in terms of the distribution assets of the managed accounts, that too has gone up. So would there be any overlap in terms of alternate assets being distributed, say at the wealth management level and that is also getting accounted in the managed accounts?
So I'll answer your first question, and then I'll come to the second. So in terms of the debt outflows, it is going to be a little bit reflected from the corporate treasuries angle. But partially, it's also a function of the market. So I think a little bit of the flows are moving out of fixed income to equity. But outside of that, there is no long-term trend. I think overall debt flows will stay healthy. And between the 2, I think, in a very longish term, I think 45-odd percent of our flows would always move towards the fixed income side and 55% would move on the equity side. So I really don't see that as a long-term trend.Having said that, the net flows, obviously, in managed accounts, portfolio management products as well as alternates put together are substantially higher right now in a market like this as compared to, let's say, a pure IIFL-ONE proposition. In general, clients right now over the last 3 to 6 months, especially over the last 3 months, have been a little bit more oriented towards taking investment decisions rather than setting up advisory or engagement platforms. So the momentum on the market is such where there is a preference for direct investments, co-investments first, followed by funds and then finally followed by setting up long-term asset allocation basis principles portfolios. So I think it's just a function of times a little bit. I don't think so. These are long-term trends. I think just the momentum of markets the way they've been over the last 3 months has resulted in a little bit more episodic, single-transaction kind of activity from clients as opposed to what you would see typically.In terms of the products distributed alternates, obviously, on the asset management side, ends up being distributed broadly, give or take of our alternate around about 50%, 55% to 60% incrementally of domestic [indiscernible] is sold by our wealth management business. So to that extent, obviously, we are kind of accruing both the management fees as well as the distribution fees wherever applicable on either side of the business. So -- but approximately, it's a falling number. If you go back 4.5, 5 years back, maybe it was 85%, 90% of the distribution. Today, for the domestic alternates, it will be 55% to 60%. And for the overall asset management pool of INR 50,000 crores, the blended number might be 35% to 40% distributed by the wealth business.
So the increase, which is there in private equity and managed accounts, so there would be an overlap?
There would be an overlap, yes.
And what could be the reason for then a decline in the retention rates out there maybe so -- no doubt, Q1 itself was slightly on a higher side, okay? But again, it has normalized on the distribution managed assets to almost 79-odd basis points.
I think the long-term number is around 80 basis points. There was a bit of an aberration in Q1 because one of the funds had -- one of the large funds had extended its closing and therefore, there was a larger amount of [ trail ] commission payable in Q1, which came in as a bit of a lump sum. And therefore, for that quarter on an annualized basis, though the absolute impact was small, it took the annualized retention to 1.2%, but the steady-state number is around the 75, 80 basis points.
[Operator Instructions] Next in line, we have [indiscernible].
Am I audible?
Yes.
So 3 questions from my side. Firstly, could you highlight about the transition from what kind of volumes you've seen from transition from your traditional assets to the IIFL-ONE? And that would be my first question. Secondly, is there any carry income that has been reported during the quarter? Or any thoughts there about? And thirdly, like if you look at the guidance which was given in March, we have surpassed some of those numbers already. So how would you stack up your guidance right now?
Thank you, [indiscernible]. So I think I'll take your questions in the order you asked them. I think -- to answer your first question, I think the IIFL-ONE movement of INR 30,000 crores, INR 35,000-odd crores has been encouraging. But as I said earlier, I think -- that's one front we would have liked to see grow faster on. I think there are a lot of legs there. It's just that the way the markets have been over the last 3 to 6 months, I think it's resulted in a fair degree of hectic activity on more single positions, single stocks, direct stocks and maybe a little bit of alternates as compared to the traditional segmentation and building of the IIFL-ONE book. But overall, we are very enthused because the book is very, very strong. And most importantly, if you look at our entire wealth management AUM, the alternates obviously is a smallish portion of the wealth management AUM. And it leaves a lot of scope for us to be able to convert slowly but surely a lot of our core assets into the -- into platforms like IIFL-ONE, whether on the advisory side or on the nondiscretionary payment side or on the discretionary side. So I think that's a journey we are fairly excited about, and it will yield results through different market cycles. Though obviously, in the current market cycle, over the last 3 to 6 months, we've seen a little bit more excitement on the distribution and the alternate side.To answer your second question, the last quarter really doesn't have any carry book on the asset management business. We did receive a small amount of carry of around about $1 million, which is reported in the transaction in the TBR revenue, but that was more as a distributor of a fund as opposed to a manufacturer of the fund. So we've really not got any carry booked in the financials for quarter 2. Having said that, we've kind of given some detailed disclosures in the data table this time around on details of maybe 9 or 10 funds where we've made -- we've got the probability of potentially booking a carry, which are funds essentially, which are closing over the next 12 to 24 months. And we've kind of tried in our best possible way to actually represent the names of the funds as well as the size of the funds in terms of our potential to book carry over the next 24 months. Sorry, I forgot your last question.
It was -- Karan, it was on the guidance that you...
Yes, yes, yes. So guidance, you are right. I think we surpassed our own guidance and our expectations in terms of the growth of the business, largely coming on account of both I think a good faster movement and transition to ARR assets, most importantly, and followed obviously by a little bit of improvement in net flows. And thirdly, obviously, a little bit of contribution from the mark-to-market. All these 3 have resulted in, obviously, the guidance getting surpassed. The first 2, obviously, are more permanent in nature. And therefore, we'll need us to revise our guidance for the next year and the year after that. Just as a practice, we want to kind of do it at the end of the quarter 3, and that's really where we'll kind of come out with our guidance both for the year after and the year after that. So that's really where we are. We definitely see a better guidance because of the 3 facets really, which contribute to the wealth management business on one side, obviously, you have a number of clients, relationship managers. AUM contributed by net flows predictability of the business. And lastly, obviously, is the mark-to-market. So out of these 5, I think, all 5 have contributed towards an upward division and guidance in the last 6 months. The first 4 are obviously more permanent in nature, and therefore, we feel confident about having a much better guidance than what we had given end of quarter 3 last year. So we'll kind of work on that and towards the end of next quarter, post our quarterly results kind of work on the guidance for the next 2 years.On the asset management side, obviously, again, there's been a phenomenal growth much beyond what we had expected in terms of net flows. So that itself also has a positive impact. Even there, there is some positive impact on account of mark-to-market. But I think it's nearly 80% -- 20%, 80% of the impacts on account of net flows and new strategies, and 15%, 20% account is on account of the mark-to-market. So we will be conservative in our guidance when we factor in the mark-to-market. But net flows and new clients are definitely variables which are here to stay.
That's helpful. Just extending the point on the asset management piece where you were talking about new strategies, anything that's lined up for the rest of the year or in future in the next year or something?
No, for sure, we have a couple of strategies lined up. I think we're very excited in general on the yield side. I think with rates being where they are at 4.5%, 5%, 5.5% and AAA bonds and AA+ bonds extending maximum between 5.5% to 6.75%. I think post tax returns on fixed deposits being at 2.5%, 3%, there's a definite need for yield assets, especially with our set of clients. And their interesting strategies ranging, depending on the risk, from 8%, 8.5%, 9% to 13%, 14%. So that's a segment we continue to remain excited about. Within that, obviously, you've got a huge space right from a little bit of collateralized credit all the way to InvITs and REITs and so on and so forth. So that's a space we are broadly excited with. And it's also a space where we can add a lot of value as well as deploy a lot of capital. That's on one side.On the other side, we continue to be excited a little bit on some of the strategy, especially on the private equity side, on the fund of funds side, where we are able to kind of navigate with multiple sets of managers. So -- and thirdly, obviously, we've done a lot of work, again, on the discretionary side to serve as a platform for some of the LRS investments. So these are some of the 2 or 3 things we continue to remain excited about. And these are all strategies which most importantly, have a fairly long rope to kind of build out on. And those are the strategies we're really kind of built towards.In each of these strategies, we've kind of invested a lot in building our teams. In some of them, we are fully complete with the teams and some we are getting there, and we'll kind of launch them depending on when our platform is fully complete to be able to handle some of these opportunities.
Can I slip in one more?
Go for it.
Yes. Okay. So just on the loan book side, there's substantial growth in this quarter, Q-on-Q basis. What's the reason for the same? And what's the view going ahead?
So a little bit of the growth, if I'm not wrong, around about 3.5%, 4% of the growth. So there will be an average additional INR 150 crore. I might be off by INR 10 crores, INR 20 crores there, but the average AUM increase would be INR 150 crores, INR 200 crores on account of the AUM -- on account of the IPO funding, right? So the IPO funding obviously spikes to INR 1,500 crores, INR 2,000 crores maybe 3 or 4 or 5 times in a quarter and therefore kind of contributes for 7 days each, therefore, contributes to an average AUM book increase of around about INR 150 crores, INR 200 crores, INR 250 crores. So that's one reason for the increase. And outside of that, I think it's a little bit of traction on [ IPO ] funding or businesses which are just getting listed, where the promoter wants to exercise some shares and so on and so forth. So I think broadly, kind of in the normal course of business, nothing spectacular in that sense. But I feel the loan book will be more or less -- continue to be steady around that INR 3,500 crore to INR 4,500 crore kind of number.
So just on the IPO funding part, the new norms, how are they going to impact the IIFL Wealth in terms of overall revenue impact?
Revenue is negligible on IPO funding, honestly. So -- practically 0. So it's like INR 30 lakhs, INR 40 lakhs per IPO. It's an activity which you have to do to service your clients. It's not really a revenue activity. So -- from a revenue perspective, there's no impact on the -- from a new regulation perspective.
[Operator Instructions] Next in line, we have Shubhranshu Mishra.
So I just wanted to understand how many individuals do we have servicing in the wealth management? How many clients do we have? And what is the concentration there? I mean what would be the top 20 clients attributing to? What would be the top 50 clients attributing to [ which envelope that ]? And also what percentage of their own wealth are we managing?
So Shubhranshu, thank you. Thanks for the questions. I think in terms of clients, it's around about a larger client base is approximately around about 10-odd thousand clients is whom we are kind of dealing with. We're fairly diversified. Unfortunately, I won't have the exact data for top 20 or top 50 clients. But maybe I can help in terms of percentages. I think the top 20% would be accounting for around about 60% to 65% or -- top 25% would account for 60%, 65% of our revenues and maybe 50% of our AUM. Or maybe I have Pavan get back with the exact data, but 25% to 30% would account for 60% to 65%, pretty much like what it would be in most other businesses. But the interesting thing there, obviously, is the middle leg is more often than not maturing and getting more and more pregnant with us in the sense that it's a developing base. So it's not as if it remains small, it keeps developing. And both the tenure of the client as well as the RM proportionately add both in terms of the AUM as well as in terms of market share.In terms of the wallet share we would be managing typically would range 30% to 70%. More often than not, most clients have 2 relationship managers, especially of the 2 wealth managers, especially of the clients of the size we deal with, not necessarily with an equal market share, equal wallet share, but they would definitely have 2. And there's always a third one lurking around in case the first 2 make some mistake. But typically, I think our wallet share would be -- on an average would be in the region of 40% to 60%, where we are dealing with clients. There would be 5% of our clients who maybe large and would have 100% of the wallet share with us, but more often than not at least 2 wealth managers is what clients have. And I would be nearly tempted to say 2.5, but 2 definitely and 0.5 lurking around somewhere or the other.
[Operator Instructions] Next in line, we have Prashant Sridhar.
Prashant from...
Could you speak a little louder, please, Prashant?
Is it better?
Yes, I can hear you, Prashant.
I think most of my questions are answered. Just had a doubt on one of the slides where you've given the ticket size, the breakup of clients how do we interpret percentage loss of AUM? I think it was Slide 14.
So basically, the percentage loss of AUM is from clients who have gone beyond the relevant number -- below the relevant number. So basically, what we're trying to say is that any client who's got -- either exited from the system or has a probability of exit, from those clients, we lost less than 2% of the AUM. Anshuman, do you want to add there?
Yes, sure. I can add there. I mean if you look at the number of 10,747 relevant clients, and we define relevant clients as having a minimum AUM of INR 1 crores. So of these relevant clients, as Karan said, who moved out -- whose AUM has moved out of the system, that is what is included in the loss of AUM. So that is 0.5% for H1 and about 2% last year and again, about less than 2% the year before that as well.
So what we're broadly trying to say is the yield's fairly sticky. It's -- the annual retention rates are more than 98%, 99% typically.
Fair point. So this is by AUM, not by...
Yes. The 0.5% is by AUM, absolutely.
There's just a few other minor things on the P&L, the P&L commission expense has increased quite a bit. Any specific reason?
So I think P&L commission expense, I think there was a direct referral expense for one of the transactions. But outside of that, there's no specific increase. So it will be a direct cost for a referral expense booked on account of a transaction. But outside of that, nothing recurring.
And last year, I think, last time, you had mentioned on the lending group, there was one account that was restructured. Any updates there? And how are the delinquencies looking on the NBFC book?
So nothing really, no delinquencies at all on the NBFC book, pretty much going as per standard. There's no surprises at all. On the one account which we discussed, I think it's already the underlying asset, which we have as collaterals already got sold. So it's awaiting CCI approval. It's realizing more than what we had given out as a loan. So that's well underway.
[Operator Instructions] Next in line, we have Dipanjan Ghosh.
This is Dipanjan from Kotak Securities. Just 2 questions from my side. One is if you look at the variable expenses, obviously, in line with good traction in markets, we have seen the expenses going up. So how should one think of it going ahead? This is the first question. On the second part, transactional revenues have broadly been flat if I look at over the past 1 or 2 quarters. So how should one think of it incrementally?
I think, Dipanjan, great question. And from a variable expense perspective, like I pointed out in my earlier calls, I think we will see a slightly heavier tinge of variable expenses for the transition period, essentially, as we move from the regime of kind of moving our business from transactional to an ARR perspective. I think more or less, in our mind, large part of the journey winds down towards quarter 1 of next year. I think until that point of time, we would see variable employee expenses be in the region of somewhere the 37% to the 40% kind of range, largely being a function of the revenues of that quarter. I think on a steady-state basis, post quarter 1 of next year, I think we would expect it to come down to the region of 32.5%, 35%. And when I'm talking about these numbers, I'm not only talking about the variable expenses. I'm talking about the total employee expenses, which includes fixed and variable. So I think the way to look at it is for quarter 3, quarter 4 and quarter 1 of next year, I think we will be between the 37% to the 39% or 37% to the 40% range. But from quarter 2 of the next year, I think we should be able to get this down to around about 35%. And once our transition is over, more or less optimize it at 32.5% to 35%. So I think in the longer term, I think on a steady-state basis, we would like to move to 32.5% on employee expenses. And around about 12.5% on other expenses come into a cost to income of 45%. But I think we will take some time to get there. So the 37%, 38% on employee expenses will come down to 32.5%, 33%. And other expenses would be broadly in the region of 12%. So the way to look at it is for the next 3 quarters, this will continue to be in the region of 37%, 38%. Dropping post that progressively towards 35% and finally down to 32.5%, 33%.
Sure. And on the transactional revenues?
Sorry, what was the question there?
So basically, if I see the transactional revenues, they have been around that INR 90 crores to INR 100 crores sort of a range. So...
Yes. So I think what we've seen typically is around the INR 75 crores number is more or less a given kind of -- so we have INR 30 crores, INR 40 crores coming out of pure brokerage itself. INR 75 crores is fairly steady number of transactional revenues. I think that's not a number we'll typically kind of see a big [ duration ] on. The extra INR 10 crores, INR 15 crores, obviously, is a bit of a function of the markets that can become higher, but unlikely to go massively below INR 75 crores. I think as a percentage of our overall revenues, it would today be around about, give or take, 20%, 25% of our revenue, maybe 25% of our revenues. Ideally speaking, over a 12- to 24-month horizon, we would want this to be closer to 15-odd percent or 20% of our revenues, maybe towards the 15-ish. But I think we'll get there over the next 7-odd quarters. And we will not see the transaction revenue increase much, but the ARR revenue move substantially higher. So effectively -- as revenue moves up from the INR 1,300 crores number to, let's say, whatever, INR 2,000 crore number over the next X number of months, I'm not defining it, but let's say, X number of months, it will be largely driven by the growth in the ARR revenue and not on the growth in the upfront revenue or the transaction revenue. So the transaction revenue will remain more or less at the same region, while the other revenues essentially goes up from whatever INR 1,300-odd crores to INR 2,000 crores. So that will get the percentage of transaction revenues down from 25% to 15% over a period of time.
Sure. Just one question. If I look at your inflows for the last few quarters, how would it stack up between inflows from new client additions that inflows from clients who have probably -- whose money is getting churned from the erstwhile upfront model out there?
No, clients whose -- no, so those...
I mean there will be some portion of the money which was -- under which income would have been booked upfront back in...
Yes, but that won't come into net flows, honestly, Dipanjan, because that's already -- that's canceling off. So that's not a net new inflow. It's just changing from one category to the other, but that's not resulting in a net new flow. So net new flows would be money net new into the system. But to answer your question, I think 55% to 60%, I think maybe in the last 6 months, slightly higher. 65% to 70% of all our old assets where revenue was booked earlier is finding its way into either newer products or into ARR assets, for sure. So that transition has been good.
[Operator Instructions] Karan, in case you have any closing remarks?
No, that's it. Thanks a lot. Thanks for the call. And please do reach out to our Investor Relations team. Mohit is here or to Pavan or to Sanjay, me, Anshuman in case of any queries. Thanks a lot. Thank you, everybody.
Ladies and gentlemen, thank you. I know it's a hectic day of calls for all of you. This brings us to the end of the conference call. Look forward to your participation next quarter. Thank you once again.
Thank you.