Q2 23/24

Oct 18, 2023

Summary

Q2 revenue rose 65% YoY to INR 534 crore, led by brokerage and product distribution. Management expects longer-term growth and margin resilience, while noting volatility, competitive pricing and lumpy investment banking income.

Ladies and gentlemen, good day and welcome to the IIFL Securities Limited Q2 FY 2024 earnings conference call. As a reminder, all participant lines will be in the listen only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the 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, and good afternoon, everybody. Welcome to the Q2 FY 2024 analyst call for IIFL Securities. The global economy has proven to be more resilient than what was expected, but outlook continues to remain weak. Most organizations, global think tanks, continue to say that Asia is a driver with India leading the way. India's macroeconomic situation continues to remain sanguine. However, geopolitics continues to cast its shadow. Earlier we had Ukraine and Russia, now we have Israel and Hamas. That is one dark cloud in the horizon which refuses to go away. Coming to our business, we are optimistic about the India growth story. We are optimistic of capitalizing on the India growth story, and we continue to make investments in talent technology to make sure that we fortify our competitive positioning. We have put a good performance in Q2 with all business segments gaining on traction. Our investment banking especially completed 17 transactions, including one M&A transaction. Deal pipeline and outlook remains strong. Specifically to September 30 results, consolidated revenues for the quarter, INR 534 crores, up 65% year-on-year, 30% quarter-on-quarter. The reason for this year-on-year change is because of brokerage income that has risen 66%, INR 271 crores versus INR 163 crores for Q2 FY 2023. Distribution of financial products distribution increased by 57%, INR 85 crores in Q2 FY 2024 versus INR 54 crores in Q2 FY 2023 due to sale of high-yield products like AIF, PMS, health, wellness products and insurance. Investment banking has also increased 52%, INR 38 crores versus INR 25 crores in Q2 FY 2023. On a quarter-on-quarter basis, again, brokerage income has increased to INR 271 versus INR 177, and that was primarily driven by large transactions in institutional broking. FPD income was flat, INR 85 versus INR 85, and investment banking has reduced, INR 38 against INR 55 in the first quarter FY 2024. Other income has increased significantly, which you can see, to INR 27 crores, primarily due to mark-to-market gain in BSE shares. Coming to expenses, employee cost has increased 41% quarter-on-quarter, 43% year-on-year, and mainly because of bonus provisions for the institutional broking and banking business. Finance cost was up 44% quarter-on-quarter, 58% year-on-year because of increase in our borrowing lines and borrowing limits, primarily because of growth of MTF as well as margin requirements. Admin cost has increased 22% quarter-on-quarter, 78% year-on-year, mainly because of increase in sub-brokerage pass out, legal and professional expenses, technology and provisions. Marketing expenses also increased because of increased activity and sale of Livlong wellness products. Our assets under management and custody stood at INR 1,69,822 crores. Our average daily turnover was INR 249,997 crores versus INR 250,000 crores, broken into INR 2,445 in cash and INR 247,533 in derivatives. Corresponding figure for the last quarter was INR 230,000 crores, INR 1,655 in cash and INR 229,161 in the derivative segment. We have 4.23 lakh active customers in NSE and as we have already told earlier, our pace of customer acquisition has slowed down. We have acquired about 50,000 customers in the quarter and primarily because we want to focus on the segment which is affluent. With this, I come to the end of my talk, and we are more than happy to answer any question that you want. Thank you so much. Thank you. Shall we start with the question and answer session? Thank you very much. We will now begin with the question and answer session. Anyone who wishes to ask questions, 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 questions. Ladies and gentlemen, we will wait for a moment while the question queue assembles. To ask questions, please press star and one. The first question is from the line of Narendra from Robocap. Please go ahead. Yeah. Thanks for the opportunity and congratulations on the full set of numbers. Thank you. My first. Hello. Am I audible? Yes, you are audible. My first question is regarding your average daily turnover. It has seen a drastic increase over the past quarter also and over the past years also. What do you think? How much of it is sustainable, and what is your outlook for the next, say, couple of years? This is a question for which it is very difficult to give a very scientific answer, but let me try and articulate my thoughts to the best of my ability. If you see the exchange turnover, then bulk of the volume is happening in options, and within options also now there's a big, I would say, players have come in the, what I call as the algo trading platforms. In the past, our algo offerings were not very strong, and in the last few quarters, we have made significant investments in our algo platforms, and hopefully we are able to see some benefits of that. These are the typical customers who are what we call as high-volume customers who keep on trading aggressively in the options segment. This is one segment which we continue to, I would say, invest and acquire customers who trade options significantly. But having said that, this is one segment which is very competitive and customers look for lower and lower brokerages, and this brokerage entire there is a race to bottom happening. So, it is very difficult to say how much of this growth will happen going ahead also. As I said, our agenda is to focus more on the affluent segment and make sure that we get into quote unquote a financial planning model, so that we try to increase our cash segment and try selling more and more of financial products. Okay. Got it. What kind of pipeline are you seeing in the investment banking business? What kind of growth will we see in the next couple of years, say? See, we are very optimistic about our investment banking business. This is one business we have continued to invest and fortify in the last five, six, seven years. Given the fact that macroeconomically speaking, India is in a sweet spot, as the economy recovers and capex cycles start, then there will be a big opportunity in the small and mid-cap space, especially in the ECM segment. There, I think our positioning is quite strong. The reason for our strong positioning is threefold. I would say, one, we have a very good research, we have good corporate contacts, and third, last but not the least, is that all the three buckets of the IPO constructs we are able to fulfill on our own strength. Deal pipeline is also good, and I think overall I am optimistic about it, although it is very difficult for me to give a number. Last two quarters have been good because these were actual closure of transactions. So this is lumpy income, and as and when transactions get closed it will come. But overall, directionally speaking, we are very optimistic. Okay. One question regarding the BSE has launched its options derivatives segment. Are you seeing any kind of traction over there? Has it also contributed a little bit to the- Yes. Actually from a balance point of view, BSE has second Sensex option, we have also benefited from that. Yes. Okay. Because we are seeing enormous growth there. Yes, we are seeing growth there. Yes. Yeah. Okay. My final question would be, ballpark growth that IIFL will give on your top line and your margins, if it is possible, for the next, say, couple of years. This is something which is very difficult for me to hazard a guess, and also forward-looking statements are generally difficult to make. I would skip this question, if you do not mind. Okay. Overall, we are optimistic about the growth, right? Because, one of the brokers I attended, he said that the next couple of months or next couple of quarters could be a little bit down due to the elections and stuff. Are we on the same line or we are more optimistic? Actually, I will answer that question very differently. What happens is that it is very difficult to give a quarter-on-quarter outlook, and because obviously since our business, which is capital market linked, I would say quite linked to the state of the market, for lack of a better word. My suggestion is that do not look on a quarter-on-quarter basis, but look on a longer trend. Longer trend, all the indicators for our business are sanguine, simply because, I would say, economy will move from 3 trillion and a half trillion to 7 trillion. The total amount of assets in the mutual fund will increase, life insurance penetration will increase, and I would say sale of PMS and AIF products will increase. Number of Demat account holders will increase, and I would think that financialization of savings is also a real trend. Given these factors, I would say look at a longer or maybe a year-on-year or a larger timeframe, because shorter timeframes tend to distort the picture. Okay. One more question. What are our top focuses? What are the top segments that we are focusing for the medium term? I would answer that question differently. There are three segments we are targeting. One is institutional broking, where our team is continuing to do well. We are known for our research. Investment banking, again in the mid-market space, we are trying to build capacity. Last but not the least, is I would say instead of derivative broking or trading market share broking, we will more focus on the financial planning of the affluent segment. Okay. Thank you so much. All the best. Thank you so much. Thank you. Before we take the next question, a reminder to participants that you may press star and one to join the question queue. The next question is from the line of Prayesh Jain from Motilal Oswal. Please go ahead. Hello. Good afternoon, sir. How are you? All well. How are you? Good to see you. I'm good too, sir. Firstly, on this option volumes, when we talk to investors, I think there are two concerns which are always cited and would seek your responses to those two concerns. One is whether we have reached the threshold. What would be the best way to judge whether the option volumes can continue to rise from here, from the levels what we've already seen, whether the markets go up or down. We've always seen option volumes in the last three, four years just heading north, barring a few months where we would have seen some flutter trends. How do we take this call, whether the option volumes will continue to see an upward trajectory? Second is, the activity of these customers, especially the likes of discount brokers who have acquired very young customers in the lower tier cities with a very lower ticket size. What kind of behavior would these customers entail in case of a bear market phase? Possibly, I'll just add one more is, the regulator, whether the regulator will intervene and kind of restrict retail activity participation in that kind of market. I would like your responses to these three concerns and whether these are any real concerns for the industry. You know, Prayesh, it's a very complicated, and I would say a very interesting question. I'll give you my perspective, in the sense that I always thought that when derivatives volume became 90 and cash segment became 10, I thought this was the peak. The 90 became 95.5, the 95.5 became 99.1. Now 99.5, 99.6 to 0.4. This entire growth and growth and growth of derivatives has, I would say, for the lack of a better, surprised me, because the way this entire growth has happened has really caught people by surprise. Even if you look at the options volume, the bulk of the volume is also happening in Nifty. Now Sensex has come. Again, it has formed a new, I would say Nifty, Bank Nifty, FINNIFTY, then you have Sensex, then Bankex and all those things. These are the figures which are happening and then we are ordering what is called as the mini lots also. I think Axis Mutual Fund has written a report, which is called Gamification of India. They have raised some real concerns in the sense that people are looking at this as more like a, I would say, a game rather than serious investment. This growth is happening for sure, and more and more new people are coming and trading options. This is a change. I am sure that regulator will look into it and curb whatever unhealthy practices are there. On that, I think it is for the regulator to decide. But my guess is that, frankly speaking, every time in the analyst call you ask me this question, I think, and I am proved wrong. This is something which I would now decide not to opine or give any opinion. Okay. Interesting. Secondly, on your client acquisition strategy now. I know that you spoke that you will be focusing on affluent client acquisition. What are the channels of these acquisitions of clients and how do we see this further scaling up from here? If you could just give some numbers as to on the acquisitions that you would have made in the first half, where are these customers from, lower tier cities, what age cohorts these are from, and what income cohorts these are from, that would be helpful. No, I do not have these questions like age and income cohort, but reality is that we have two, three channels to acquire. One, we have a sub-broker channel from which we are acquiring, and we have our own RMs to acquire. And the pace of acquisition is slow. This is not something where I can talk, saying that I am going to acquire lakhs and lakhs of customers. We are more focused, as you said, on the affluent segment and the quality of customer rather than getting customers for the sake of customers. And that is a process. As we said, we have articulated this strategy some time two, three quarters ago, and hopefully over a period of time we will gain traction. Sir, recently we had seen one of the traditional brokers, which is bank-based brokers and HDFC Securities in particular, they have launched a proposition for a discount broker. While I understand we already have a group entity, which is 5paisa, is that in the strategy that everything will go to 5paisa in terms of discount broking and IIFL Securities will be finally running in the traditional format and looking at the brick-and-mortar business? Is that the right way to think about- Sorry, can you repeat this question because I missed you. No. Basically what happened was IIFL Securities, they have recently launched an app, a discount broking model, where they will be focusing on basically competing against Zerodha, Upstox, those kind of companies. But we already have a group company called 5paisa which will be focused. So that approach will continue to be in that form, that discount broking will be in the 5paisa and the main business will be, or the traditional broking business will continue to be in the IIFL Securities. That is the right approach, right? That will continue. Yes. We are very clear that those tech-savvy, do-it-yourself customers will be focused on 5paisa. This is more like financial planning type of customer where there is human intervention and human assistance. Because the cost to serve for a human, we need to target a more affluent customer. Okay. So last couple of questions. On our distribution side, where would the focus be? Because in life insurance we've seen there are some changes in the taxation rates, which have impacted some business. And one of their key competitors has shown a very muted performance in life insurance. And even for you guys, I think the life insurance business was kind of muted in this year. Yeah. Yeah. Which products, whether loans- Actually, our focus on this segment will be all products, PMS, AIF, mutual fund, bonds, insurance, general insurance, wellness. We are focused on that. My opinion is actually because of tax changes, this has been affected. But over the course of time, people get adjusted and become normalized. My feeling is that because everybody had a bumper fourth quarter, now people are, for lack of a better word, I would say, going slow, but soon it will catch up. It will be all kind of advisory products. Okay. Sir, lastly, your take on the NCLT transition that has happened now, whether for us it has been smooth and whether are we facing any issues with regards to the software transition which has happened yesterday or day before yesterday. Are we facing any challenges or is the transition has been smooth? Actually, to answer that question, there were teething problems, but more or less smooth. I think it's like a non-issue because the transformation has happened. Okay, great sir. Thank you so much and all the best. Thank you so much. Thank you. Participants who wish to ask questions, please press star and one on your touch-tone telephone. The next question is from the line of Sumit Jankar, who's an individual investor. Please go ahead. Thank you for providing me the opportunity. Congratulations for good set of number. I wanted to know the current cash market share, derivatives, and commodities market share. My second question, also the brokerage sharing for the cash and derivatives. My second question will be regarding MTF. How much percentage of MTF is outsourced? It's out. No, I didn't understand last question. MTF is outsourced? I mean, your MTF book size is around INR 895 crores. So out of Yes. INR 895, how much it is outsourced? As per regulator, we can do 50% from own fund and 50% from the borrowed fund. What is the question? Outsourced. I mean, how much of MTF is taken from banks or like How do we fund it? That funding is 50% own and 50% borrowed amount. As you know, our own balance sheet is about INR 3,800 crores, so that we can manage. Coming to market share, I would say, one second. Where is market share? Here, right? Our cash market share is approximately 3%. F&O market share is about 0.8%, but there we have taken the total divided by total. We have not taken retail and bond. Denominator is total exchange volume. Commodity is about 0.5. What is the sharing of derivatives in total brokerage and cash and derivatives sharing? For the cash will be about 60/40. 40 cash, 60 derivative. I have one general question regarding the derivatives client. Currently, the derivatives retention is very important, I guess. What can be the two reasons so that the retention can be increased? Also the client can make few losses, because the client accounts are blowing up and heavy margin losses they are facing. What client should do and also for retention of the company, what are the two main reasons which can help? My guess is that, first of all, the client should become more educated and know about how to trade options rather than coming and doing what I call the "Blind Fata" or I would say just "Khelo India, Khelo." The client has to be educated. Second thing is that now they are lost. Basically, you should put stop loss or be careful. Second thing is to increase. We as a broker, we spend lot of time and energy educating customers and telling people that derivatives are for sophisticated people and it's better to put money in mutual fund and cash segment, take delivery, and hold for the long term. Because the entire option is for one month only. In one month, the market can go anywhere. My guess is that people trade, make mistakes, learn, and then become, I would say, more intelligent investors. Yeah. All right, sir. Thank you for giving the insight to answer. Thank you. Thank you so much. Thank you. Participants who wish to ask questions, please press star and one. The next question is from Mahesh Awate from Poddar Diamond Private Limited. Please go ahead. Oh, hi. Thank you for this opportunity, and congrats on good sets of number. Just this going forward that we are actually growing on top line and bottom line. Going for next 2 to 3 years horizon, are we going to maintain the same trend, first of all, and whether these margins will be maintained going ahead? Sorry. I think going forward on a three-year forward, I think growth trend should continue. Although, as I said earlier, also difficult to predict on a quarter on quarter basis. Given the overall, I would say quote-unquote, "The trend is your financial because of finances saving overall trend," I am quite optimistic. Regarding margin, I think we should be able to protect the margin. Fine. There is also increase in employee costs and finance costs this quarter. Yes. Employee costs have increased because of bonus provisions. Finance costs have increased because our borrowings have increased as the margin trading book has increased. Yeah. Any plans for going forward to get out of this debt burden? Because you are increasing the debt. Our debt is not a "debt burden," because as the margin trading book comes down, debt will reduce, and other component of usage of funds is because of exchange margin. Because of tightening of SEBI regulations, our funds are getting locked in exchange. These are two uses of capital. Theoretically speaking, we have not borrowed and put money in plant investment to that extent. Effectively, they are just working capital and can come back fast. Okay. Thank you. Thank you. Thank you. A reminder to participants that you may press star and one to ask questions. The next question is from Varun, from Abakkus Asset Manager. Please go ahead. Hello. Yes. Yeah. Hi, sir. Just one question. Why is the other income so high at INR 26 crores as compared to Other income is very high because of mark to market gain in BSE shares. As you know, we are having BSE shares in our investment, so it had a mark to market gain. Okay. Got it. Thank you, sir. Thank you. Thank you. The next question is from the line of Pranay from JNJ Holdings. Please go ahead. Thank you so much for this opportunity. Thank you. What is the status of, basically, that 5paisa transaction, and when do we expect the shares? See, actually, the 5paisa transaction is pending for regulatory approval. We have sent, I think NSE, BSE has sent the asking queries, and they have answered all the queries. So hopefully we should get the approval. Okay. Sir, seeing your cash flows and the requirement of cash, basically, is there any thought process of doing a buyback and basically rewarding the shareholders as well as the promoters? Basically, is there any thought process on that? You know, the board will decide on this at an opportune time and as of now, it is not proper for me to comment on that. So I would guess is that depending upon what the full year looks like, the board will decide. But having said that, I think we should be cognizant of the fact that because of new regulations, margin requirements have gone up. So the company might like to retain cash so that it can fund its exchange margins as the business grows as well as margin trading book. So it has to be a balanced decision, and I would guess the board will take upon it. Okay. Last question from my side. Is there any, basically, that real estate sale which was going to happen or which was planned? Yeah. Last quarter, we sold one property in Ahmedabad. Okay. Going forward, by this year end, any targets of- See, actually, I made this comment in the call also, I do not want to repeat it. We are trying to sell. As and when we get a good deal, we will exit. Thank you so much. Thank you. Thank you so much. Thank you. To ask questions, please press star and one on your touchtone telephone. The next question is from Prayesh Jain, from Motilal Oswal. Please go ahead. On this upstreaming of funds to the clearing corporation, did we have any impact of additional interest costs wherein we had to replace bank guarantees with some borrowings? Sorry, what? This upstreaming of funds to clearing corporation, the bank guarantee was removed, right? Instead of bank guarantees, there are mutual funds which was your overnight mutual funds that could have been placed. I know one of your competitors has cited that they would have an additional burden of an interest cost because of this. Are we facing any such issues? No. Basically, exchanges are taking fixed deposit and overnight mutual funds. Only the working capital requirement is put in the form of cash. Okay. We did not- Bank guarantee was anyway allowed, but you have to now create it from your own funds. There is nothing linkage with upstreaming of funds with the bank guarantee. Okay. Got that. Secondly, on the mutual fund side, we have seen your SIP count to be kind of plateauing in the last two and a half, three years. Is mutual fund distribution facing some challenges because you are focusing on other products? Secondly, also on this trajectory, because in the affluent category, there is more shift towards AIF and PMS and that is the reason the mutual fund AUM for a mutual fund SIP count or the folio count is not in line. To be honest, we are focusing on mutual funds. Yes, you are right that we have already seen significant SIP traction. One year ago it was 100,000, now it is at 160,000. Obviously growth could have been bigger, but it is not been so much. Mutual fund assets are at about INR 9,000 crores. We will continue to grow this. Okay. All right, sir. Thank you. Thank you. Thank you. Participants who wish to ask questions, please press star and one. The next question is from Sumit Jankar, who is an individual investor. Please go ahead. Thank you for providing opportunity. My question is regarding the algo trading. You mentioned about the algo trading. How much is the quarter-on-quarter growth in turnover? I do not have the exact data on how quarter-on-quarter growth of algo has taken place, but it has grown. Okay. Do you have numbers of market share of algo separately? No, I don't have market share of algo. Okay. Thank you. Thank you. Thank you. If there are no more questions, can we end it or Yes, sir. That was the last question in queue. Okay. Thank you. Dear friends, thank you so much for joining the analyst call. If you have any other questions, you can send an email to our investor relations and we will be more than happy to answer. Thank you so much once again, and have a nice day. Thank you very much. On behalf of IIFL Securities Limited, that concludes this conference. Thank you for joining us, ladies and gentlemen. You may now disconnect your lines. Thank you.