Q4 23/24

May 17, 2024

Summary

Q4 revenue grew 74% YoY, led by brokerage, distribution and investment banking. Management cited a robust deal pipeline and long-term market opportunity, while flagging short-term volatility and derivatives concentration.

Ladies and gentlemen, good day, and welcome to IIFL Securities Limited Q4 and FY 2024 earnings conference call. As a reminder, all participants' line will be in listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. R. Venkataraman. Thank you, and over to you, sir. Thank you. Good afternoon, everybody, and welcome to the Q4 FY 2024 analyst call of IIFL Securities. I am accompanied by my colleagues, Nemkumar H, Managing Director, and Ronak Gandhi, CFO. Capital markets, including India, are doing well in spite of heightened geopolitical tensions, which are a significant short-term risk. India stands out as a fast-growing economy, key drivers being strong domestic demand as well as favorable demographics. Short-term volatility due to elections to be announced in the first week of June cannot be ruled out. Outlook for Indian capital market-related businesses is good over the medium to long term, and this is irrespective of any short-term hiccups that we may see. Outlook is strong primarily because of low penetration of financial products, increased financialization of savings, technology developments, and evolved regulatory regime. Coming to our results for March 31, consolidated revenues for the quarter came at INR 704 crores, up 74% year-on-year and 21% on a quarter-on-quarter basis. On a year-on-year basis, brokerage income has increased 66%, which was INR 300 crores for this quarter against INR 181 crores for the previous quarter. Distribution income, financial product distribution income has increased 23%, INR 117 crores for this quarter versus INR 95 crores for the last year, and primarily because of sale of products like AIF, PMS, and insurance. Investment banking has more than doubled, INR 76 crores for this quarter versus INR 32 crores for the last year. For a quarter-on-quarter basis, brokerage income has increased 12%, distribution income has increased 17%, and investment banking income has increased almost 40%. If you look at it for the full year numbers, brokerage income has increased 58%. Indian capital markets had seen a stellar performance last year. Distribution income has also increased significantly, and banking has also increased significantly. All our business lines have done very well in this year, primarily because of favorable capital market situation. Other income has grown because of mark to market on investments. Coming to expenses, big line item is employee cost, which has increased almost 33% year-on-year basis, primarily because of increments as well as variable bonus provisions given the nature of our business. Finance cost has increased 178% year-on-year, 26% quarter-on-quarter because of fund-based requirement, which is used for funding both margin as well as margin trading book. Other costs have increased 44% year-on-year and 13% quarter-on-quarter because of higher partner payouts as well as increased spend in technology. Some line items for housekeeping. Assets under management in custody is INR 1,88,311 crores, which is roughly INR 1,60,000 in custody assets and roughly about INR 27,000 crores in custodial assets. Average turnover for the quarter was INR 3,95 crores. This is BSE and NSE combined, which is about INR 3,120 in cash segment and INR 2,96,975 crores in derivative segment. The corresponding figures for the previous quarter were INR 2,31,309 crores. This was again INR 2,04,095 crores in cash segment and INR 2,68,815 crores in derivative segment. We had announced an interim dividend of rupees three in March, and that has been taken as final. We have been conservative in terms of payouts simply to retain cash, which is now required for the margin requirements for our growing brokerage business. The second thing is separation of the post of chairman and managing director of the company. The board of directors, based on the recommendation of the NRC, has confirmed the appointment of Mr. Nemkumar H as the managing director starting from May 15, subject to requisite regulatory and shareholders' approval. The separation of the post of chairman and managing director is better aligned for better corporate governance. Also, Narendra Jain, whose term ended on May 13, has also been reappointed for a period of five years, subject to regulatory and shareholder agreement. Thank you so much for giving me a patient hearing, and we are now open to answer any questions that you may have. Thank you so much. Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Narendra from RoboCapital. Please go ahead. Hi, good afternoon. Congratulations on a good set of numbers. My first question is, how many AP associates or authorized persons do you have right now? See, we have almost 6,000-plus partners. All right. Okay. What was this number a year ago? I wanted to know at what pace are we growing this number? I do not have the previous year number, so if you send me an email, I will share that number with you. Okay. All right. Understood. Any idea how much revenue are these guys contributing to your business? See, roughly, if you look at the brokerage income on the retail side, these people will be contributing about 35%-40%. Okay. All right. 35% to 40%. Right. Okay. So any target on how we plan to grow this number, the associate number? These partners are a very important element of our growth strategy, and we will continue to acquire more and more partners. Given the fact that India is a wide vast country and we can't be setting up branches everywhere, we will be focused on acquiring more and more. Okay. All right. I know you can't actually predict the markets, but any long-term, say, over the next four to five years, what would we like to be our revenue or PAT, whatever number you are comfortable with. Any aspirational targets about that? No. As I said in my opening remarks, outlook for capital market-related business is very good. As of now, both in investment banking and institutional broking, we have built a very strong brand and we have a very strong competitive position. We hope to build upon that and increase our market share. On the non-institutional segment also, we hope to build our competitive position and access more customers, and these are the only high-level numbers which I can share. Okay. Final question, how is IB pipeline looking right now for the next year or so? The deal pipeline is very strong and as you know, we have a very strong competitive positioning in banking, given the fact that we have a very strong research franchise and we have a very strong distribution franchise and our distribution cuts across both institution and non-institution, which is retail. Deal pipeline is robust and we are running as of now multiple transactions which are at various stages of execution and we are very optimistic. Okay. All right. Thank you so much. Thank you. All the best. Thank you. Ladies and gentlemen, before we take the next question, a reminder to all the participants that you may press star and one to ask questions. The next question is from the line of Prayesh Jain from Motilal Oswal. Please go ahead. Yeah. Hi, sir. Good afternoon and congratulations on a great set of numbers. Firstly, more of a broader level question. We recently heard the FM commenting on the retail F&O participation that needs to be checked. But on the other hand, if you look at the exchanges, they have been launching new products, expiries on a daily basis, lot sizes have come down. So how do you see this F&O activity picking up from here on? Whether we see that, is this the peak or how do we see this? Definitely from a cash market perspective, there is a lot of scope but from an F&O market participation, there is a lot of talk around that our share of notional turnover is far higher than even most of the developed markets. So how do we look at this and how do you see the F&O market trajectory going ahead? You see, Praesh, I think when we had met some time ago, personally also, you had asked me the similar question and this is one question for which I don't have an answer because if we had met five years ago or 10 years ago and asked me to predict the way options volume would have exploded in India, I don't think I was capable of making this prediction. What you say is absolutely correct. In India, derivatives volumes have taken off. Even in derivatives, options volumes have taken off and options in cash, options on Nifty, Sensex and Bank Nifty and all have gone through the roof. This is the lopsided nature of the market that 99.9% or 99.7% or 99.8% is happening in derivatives is a cause for concern. As and when it happens then we have to take it on a side because we are invested at phenomenal. Got that. From IIFL Securities standpoint and the strategy going ahead, the distribution partners that you just alluded to, about 6,000 partners we have and they contribute about 35% of our brokerage revenues. How are you thinking about building them from a distribution standpoint? How much of the distribution revenues come from them and do you think that this is a channel which can really bring up or scale up the distribution platform? See, actually, what we are saying is that earlier we were mostly focused on the brokerage part of it. Over time we realized that these partners have client relationships to whom we can sell other products also. So it's a gradual process and it will take time and we are working towards it. Okay. Got that. Sir, another point was on the investment banking side where we have so many mandates and the promoter exits that can bring in a lot of wealth management opportunities. Do we see this coming in-house in terms of opportunities of managing funds or how do we see this? Sir, managing funds meaning what? When the promoter exits the fund, exits a 5% stake he sells. And those funds that goes back to promoters, where do you think that Do you think there is an opportunity to manage these funds via the distribution arm, or how do you think about this? There is an opportunity, and we have to work towards marketing our services and getting those funds. Got that. That is about it. Thank you so much, sir. Thank you. Thank you. A reminder to all the participants that you may press star and one to ask questions. The next question is from the line of Abhijeet Sarkare from Kotak Securities. Please go ahead. Good morning, sir. Sir, on the distribution income side, is it possible to give a detailed breakup, in terms of mutual fund commissions, insurance, or any other products? Actually, I do not have the data readily available. But see, distribution income has income from insurance, mutual fund, AIF, PMS. These are the broad components. Bonds also are there, sorry. Okay, got that. Second one, you mentioned about the need to retain capital for margin requirements, but how do we think about this, or how do we budget this? Is there a thumb rule that you can share wherein, let us say, market volumes grow 20% or by X billion rupees, there is a certain number that you have in mind which you need as a working capital for this business? There is no such number, but if you look at our MTF book, which is roughly about INR 1,035 crores, we think that this book can grow easily, and we make good return on that. So it is better to retain cash for this. And one more, sir. The margin requirement has more of a role to play in the retail business, right? Not really much on the institutional side. No. Mainly on the institutional side. All right. Okay, got it. Thank you so much. Thank you. Thank you. Ladies and gentlemen, you may press star and one to ask questions. A reminder to all the participants that you may press star and one to ask questions. Ladies and gentlemen, you may press star and one to ask questions. A reminder to all the participants that you may press star and one to ask questions. Go ahead. Ladies and gentlemen, you may press star and one to ask questions. If there are no questions, then we can end this call, and anybody who has any further questions can reach out to either our CFO, Ronak Gandhi, or Meena Sri, who handles investor relationships. Okay, sir. As there are no further questions, I would now like to hand this conference over to Mr. R. Venkataraman for closing comments. Thank you so much. Our CFO and Head of Investor Relationships, Meena Sri, is available, and if you need any further questions, please feel free to reach out to them. Thank you so much, and have a nice day. On behalf of IIFL Securities Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.