IIFL Securities Ltd

NSE:IIFLSEC

Earnings Call Analysis

IIFL Securities Reports Strong Revenue and Profit Growth

IIFL Securities demonstrated robust financial performance in Q4 FY '24, with consolidated revenues rising 74% year-on-year to INR 704 crores. Brokerage income surged by 66% to INR 300 crores, and distribution income grew 23% to INR 117 crores. Investment banking income more than doubled to INR 76 crores. Operating expenses increased due to higher employee costs and finance costs. Overall, the company benefited from favorable market conditions and expects a positive outlook for Indian capital markets. Key growth drivers include strong domestic demand, low financial product penetration, and technology advancements.

Strong Performance in a Growing Market

IIFL Securities has reported strong financial results for Q4 FY'24, showcasing a consolidated revenue of INR 704 crores. This reflects an impressive increase of 74% year-over-year and 21% quarter-over-quarter. The brokerage income, a significant part of their revenue, surged by 66% compared to the previous year, reaching INR 300 crores, supported by favorable conditions in the Indian capital markets. The overall performance is buoyed by robust domestic demand and a growing financialization of savings.

Diverse Income Streams Contributing to Growth

In addition to the strong brokerage income, IIFL has seen substantial growth in its financial products distribution, which increased by 23% year-over-year, totaling INR 117 crores. Investment banking income has more than doubled, reflecting strategic expansions, now standing at INR 76 crores for the quarter. The overall performance across all segments is attributed to favorable market dynamics and a supportive regulatory environment.

Future Outlook Amidst Caution

Despite the current strong performance, there are cautionary notes regarding potential volatility due to upcoming elections in June. However, the long-term outlook for the capital markets remains positive, with expectations of sustained growth driven by continued penetration of financial products and innovative technology developments. IIFL's executives expressed optimism in building their competitive positioning and increasing market share further over the medium to long term.

Expenses and Financial Strategy

Expenses for IIFL have also seen significant increases, particularly in employee costs, which rose by 33% year-over-year, attributed to higher increments and bonus provisions. Financial costs escalated by 178% yearly due to increased fund-based requirements for margin trading. Despite these increases, the conservative dividend payout policy allows them to retain cash for further investments in growth. The final dividend remains at INR 3 as part of a conservative strategy.

Asset Management and Custody Figures

IIFL's assets under management and custody stand at INR 1,88,311 crores, with approximately INR 1,60,000 crores in custody and INR 27,000 crores in cross-sell assets. Revenues and growth in this sector will be critical as IIFL continues to focus on expanding its portfolio and client base.

Management Changes and Governance Improvements

The earnings call included crucial announcements regarding management restructuring. Mr. Nemkumar is set to become the Managing Director starting May 15, subject to regulatory approvals, which aligns with enhancing corporate governance by separating the roles of Chairman and Managing Director. This shift is aimed at improving oversight and strategic implementation.

Market Position and Growth Aspirations

IIFL aims to bolster its distribution network, which currently includes over 6,000 partners contributing around 35% to 40% of brokerage revenues. Plans include expanding this network as a cornerstone of their growth strategy, with the intent to deepen client relationships across various financial products, particularly in wealth management and investment banking segments.

Investment Banking Pipeline Looks Promising

Executives indicated a robust deal pipeline in investment banking, suggesting an optimistic outlook for the upcoming year. They believe their strong research and distribution capabilities solidify their position in both institutional and non-institutional segments, likely driving further growth in their investment banking revenues.

Earnings Call Transcript 2024-Q4

[Operator]

Ladies and gentlemen, good day, and welcome to IIFL Securities Limited Q4 and FY '24 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. R. Venkataraman. Thank you, and over to you, sir.

[Rajamani Venkataraman, executive]

Thank you. Good afternoon, everybody, and welcome to the Q4 FY '24 analyst call of IIFL Securities. I'm accompanied with my colleagues, Nemkumar, Managing Director; and Ronak Gandhi, CFO.

The 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 demographies. Short-term volatility, due to elections to be announced in the 1st 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. And those are primarily -- outlook is strong primarily because of low penetration of financial products, increased financialization of savings, technology development 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 Products distribution income has increased 23%, INR 117 crores for this quarter versus INR 95 crores for the last year and only because of sale of products like AIF, PMS and insurance. Investment banking has risen, 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%, which was -- distribution income has increased 17%, and banking -- investment banking income has increased almost 40%. If you look at for the full year numbers, brokerage income has increased 58%. Yes, 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. Then coming to expenses, big line items, employee cost, which has increased almost 33% on a year-on-year basis, primarily because of increments as well as variable bonus provisions, given the nature of our business.

Finance costs have increased 178% year-over-year, 26% quarter-on-quarter because of fund-based requirement, which is used for funding both margin as well margin trading book. Other costs have increased 44% year-over-year and 13% quarter-on-quarter because of higher partner payout as well as increased spend in technology.

Some line items or housekeeping. Assets under management and custody INR 1,88,311 crores, which is roughly INR 1,60,000 in custody assets and roughly about INR 27,000 crores in cross-sell assets. Average turnover for the quarter was INR 3 lakh crores -- INR 3,00,095 crores, which was BSE and NSE combined, which is about INR 3,120 crores cash segment and INR 2,96,975 crores in derivatives segment.

The consolidated figures for the previous quarter was INR 2,71,309 crores, which was again INR 2,495 crores in cash segment and INR 2,68,815 crores in derivative segment. So we had announced an interim dividend of INR 3 in March and that has been taken as final. The dividend has been kept, we have been conservative in terms of payout for simply to retain cash, which is now required for the margin requirements for our growing brokerage business.

And the second thing, the succession of the post of Chairman and Managing Director of the company. The Board of Directors, based on the recommendation of NRC, has confirmed the appointment of Mr. Nemkumar, as the Managing Director from -- starting from May 15 subject to requisite regulatory and shareholders' approval. The separation of the posts of Chairman and Managing Director is better aligned for better corporate governance.

Also, Narendra Jain, whose term ended on May 13th has also been reappointed for a period of 5 years subject to regulatory and shareholders 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.

[Operator]

[Operator Instructions]

The first question from the line of Narendra from RoboCapital.

[Narendra Khuthia, analyst]

Congratulations on a good set of numbers. Sir my first question is that how many AAA associates or authorized persons do you have right now?

[Rajamani Venkataraman, executive]

See, we have almost 6,000-plus partners.

[Narendra Khuthia, analyst]

All right. Okay. And what was this number a year ago? I wanted to know how much -- at what pace are we growing those number?

[Rajamani Venkataraman, executive]

I don't have the previous year number. So if you send me an email, I'll share that number with you.

[Narendra Khuthia, analyst]

Okay. All right. All right. Understood. And any idea how much revenue are these guys contributing to the business?

[Rajamani Venkataraman, executive]

See, roughly, if you look at our brokerage income on the retail side, these people will be contributing about 35%, 40%.

[Narendra Khuthia, analyst]

Okay. 35% to 40%, right? Okay. Okay. So any target on how we plan to grow this number -- associate number...

[Rajamani Venkataraman, executive]

So we have actually -- these partners are a very important element of our growth strategy, and we'll continue to acquire more and more partners. And given the fact that India is a vast country and we can't be setting up counters everywhere. So we will be focused on acquiring more and more.

[Narendra Khuthia, analyst]

Okay. All right. All right. And any -- I know you can't actually predict the market, but any long term, say, over the next 4 to 5 years, what would we like to be our revenue and -- revenue or PAT or whatever number you're comfortable with, any aspirational targets about that?

[Rajamani Venkataraman, executive]

It's very -- as I said in my opening remarks, outlook for capital market related business is very good. So as of now, we have -- both in investment banking and institutional broking, we have built a very strong brand and we have a very strong competitor positioning and we hope to build upon that and increase our market share. And on the noninstitutional segment also, we hope to build our competitive position and acquire more assets, more customers and these are the only high-level numbers, which I can share.

[Narendra Khuthia, analyst]

Okay. And final question, how is IB pipeline looking right now for the next year or so?

[Rajamani Venkataraman, executive]

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 and this pipeline is robust and we are running as of now multiple transactions, which are at various stages of execution. And so we are very optimistic.

[Operator]

[Operator Instructions] The next question is from the line of Prayesh Jain from Motilal Oswal.

[Prayesh Jain, analyst]

Congratulations on great set of numbers. Sir, firstly, more of a broader level question. We recently heard that, I'm 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 what -- how do you see this F&O activity kind of picking up from here on.

Whether we see that is the peak? Or how do we see this? Definitely from a cash market perspective, there's a lot of scope. But from F&O market participation, there is even a lot of talk around 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 head?

[Rajamani Venkataraman, executive]

See, Prayesh, I think, when we have let some time ago, personally also, you had asked me a similar question. And this is one question for which I don't have an answer because we had met 5 years ago, 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. So what you say is absolutely correct. In India derivative volumes have taken off. Even in derivative options volumes have taken off and options in cash, options on NIFTY, sensex, and all this -- bank NIFTY and all have gone through the roof. And 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. And as and when it happens, then we have to take it on our stride because it will be an industry-wide phenomenon.

[Prayesh Jain, analyst]

Got it. And sir, from IIFL Securities standpoint and strategy going ahead, the distribution partners that you just alluded to about 6,000 partners we have and we contribute about 35% of our brokerage revenues. How are we 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?

[Rajamani Venkataraman, executive]

See, actually, we are -- what we are saying is that earlier we were mostly focused on the brokerage part of it. And over time, we realized that these partners have client relationships to whom we can sell other products also. So this is a gradual process, and it will take time, and we are working towards it.

[Prayesh Jain, analyst]

Okay. 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?

[Rajamani Venkataraman, executive]

So managing funds, meaning what?

[Prayesh Jain, analyst]

So when a promoter exits the fund, exits a stake, 5% stake he sells, 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?

[Rajamani Venkataraman, executive]

So there is an opportunity, and we have to work towards marketing our services and getting those funds. So...

[Operator]

[Operator Instructions] The next question is from the line of Abhijeet Sakhare from Kotak Securities.

[Abhijeet Sakhare, analyst]

Sir, on the distribution income side, is it possible to give a detailed break up in terms of mutual fund commissions, insurance or any other products?

[Rajamani Venkataraman, executive]

So actually, I don't have the data readily available, but see, there are -- distribution income has income from insurance, mutual fund, AIF, PMS, so these are the broad components. Bonds also are there.

[Abhijeet Sakhare, analyst]

Okay. Got that. And second one, so 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's 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?

[Rajamani Venkataraman, executive]

There is no such number. But if you look at our NPA book, which is roughly about INR 1,035 crores, we think that this book can grow easily. So -- and we make a good return on that, so it's better to retain cash for this.

[Abhijeet Sakhare, analyst]

And one more, sir, the margin requirement is more of -- has more of a role to play in the retail business, right, not really much on the institution side?

[Rajamani Venkataraman, executive]

Limited in the institution side.

[Operator]

[Operator Instructions]

[Rajamani Venkataraman, executive]

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 Veenashree, who handles the Investor Relationships.

[Operator]

Okay, sir. As there are no further questions, I would now like to hand the conference over to Mr. R. Venkataraman for closing comments.

[Rajamani Venkataraman, executive]

Thank you so much. And our CFO and Head of Investor Relationships, Veenashree 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.

[Operator]

On behalf of IIFL Securities Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.