360ONE — earnings call
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Prepared remarks
Moderator · Conference Operator
A very good afternoon ladies and gentlemen, and good day and welcome to IIFL Wealth and Asset Management’s Q2 FY 23 Earnings Call.
As a reminder all participant lines will be in listen only mode.
There will be an opportunity for you to ask questions after the management shares their thoughts.
Should you require assistance during the conference, please signal the host by tapping on the raised hand icon.
Please note that this conference is being recorded.
On the call today we have with us -Mr. Karan Bhagat, Managing Director and CEO, Mr. Yatin Shah, Co-Founder of IIFL Wealth & Asset Management and Jt.
CEO Wealth, Mr. Anirudh Taparia, Co-Founder and Jt.
CEO Wealth, Mr. Anshuman Maheshwary, Chief Operating Officer, Mr. Sanjay Wadhwa, Chief Financial Officer.
I now hand it over to Sanjay to take this conference forward. -
Assets Under Management (AUM)
Our Total AUM is now more than Rs.
333,000 Crs, up 5.8% YoY, up 6% QoQ.
Excluding custody, our overall AUM increased 5% YoY and 6% QoQ to Rs.
2.68 L Crs, with Wealth management AUM at Rs.
212K Crs and Asset Management AUM at Rs.
56K Crs . - Importantly, our ARR Assets increased 8% QoQ and 17% YoY to Rs.
1.55 L Crs.
With this, the share of ARR Assets in total AUM stands at almost 58%, as we continue our journey towards steadily increasing the pie of ARR assets. - Happy to share, that despite the market volatility, our Net flows have been relatively strong for the quarter at Rs.
6,104 Crs. - Our loan book also for the quarter was at Rs.
4,284 Crs, marginally up by 3% sequentially. - Revenues & retentions - Our Total Revenues increased 12% YoY and 10% QoQ to Rs.
405 Crs.
As compared to Q2 FY22, our Revenue from Operations was up 22% YoY and 2% QoQ to Rs.
382 Crs. - Importantly, our Recurring Revenues have increased 5% QoQ and 17% YoY at Rs.
261 Crs.
As a percentage of operating revenue, recurring revenues comprise 68%. - This quarter has seen stable transactional revenues at Rs.
122 Crs. - Our Retentions across Wealth and Asset Management segment hold steady – with Wealth Management Retentions at 54 bps and Asset Management Retentions at 79 bps. At an aggregate level, our overall Retentions stand at 59 bps. - Expenses - For the quarter, our Cost to Income has improved to 44% from 45% in Q1 FY23 as we continue our focus on costs. - Our Total expenses for the quarter are up 7% QoQ and up YoY by 3% to Rs.
179 Crs. - Administrative & Other expenses is up 12% QoQ at Rs.
48 Crs. - Profitability - As stated earlier, we recorded our highest PAT at 173 Crs, an increase of 23% YoY and up by 8% QoQ. - Importantly, our tangible ROE (i.e., ROE excluding goodwill & intangibles) has further improved at 28% for the quarter from 24% levels in Sep 2021.
With that we come to the end of the Financial highlights.
I’ll hand it over to Anshuman to cover key business and strategic highlights. - Mr. Anshuman Maheshwary – Chief Operating Officer, IIFL Wealth & Asset
The last few months have continued to be dominated by geopolitical events and global macro-economic events.
Amidst this, the three core tenets of our strategy – Growth, Resilience, and Agility – stands firm and we continue to measure our decisions as well as performance against these strategic principles. - At the outset, as Sanjay shared, our overall financial performance – the final output metrics – remains strong.
Specifically highlighted by the continued ARR AUM and ARR revenue growth of 17% and 23% respectively for the first half of FY23 and the strong Profit after Tax which stands at Rs.
333 Crs for H1, a growth of 28% over last year. - Some key positives underlying the final financial performance gives us confidence to sustain the positive momentum. - Not only have net flows at over Rs.
6,000 Crs remained strong in the current environment, specifically retentions have held firm at 71 bps on ARR and over 60 bps on aggregate.
Specifically, we have seen our highest ever quarterly net flows in IIFL One at Rs.
3450 Crs.
To put in perspective, our full year net flows for last year was around Rs.
3500 crs.
This is a reflection of the robust build up of our advisory proposition and strong client traction for the same. - While overall net flows for the Asset Management business is low at Rs.
53 Crs for this quarter, it is important to note two specific aspects underlying this – We had planned distribution from some of our older AIFs of ~Rs 465 Crs in this quarter and liquid MF, which we know will remain volatile, saw net outflows of over Rs.
300 Crs.
Adjusting for these two, flows remained healthy, driven by the strong traction on our Credit strategy which saw net flows of over Rs.
750 Crs.
We understand market cycles and our diversified strategies on alternates – across listed, unlisted, credit, RE & Infra – allow us to go through these cycles with a higher resilience. - We continue to invest significantly on talent acquisition and technology.
We are seeing senior people join us across Wealth Sales, Investments as well as the operating functions, specifically technology and digital.
However, we are doing this with a judicious view on sustaining our cost to income to around the current level of 44-45%. - As you would recall, we have had a strong focus Capital Efficiency over the last couple of years.
Accordingly, we are happy to report that our tangible ROE is at 28% and absolute ROE is at 23% vis-à-vis 12.5% at the end of FY21 and 20% at the end of FY22. We expect to sustain this at the 23-25% levels.
In line with the above, we are pleased to announce the third interim dividend of Rs.
17 per share– this aligns with our Dividend policy of 70 to 80% PAT pay-out to our shareholders and also continues to position us fairly uniquely as a high growth and high dividend yielding company. - Mumbai Angels – We await SEBI approval given that Mumbai Angels has a Cat 1 AIF license and expect to complete the transaction in the current quarter.
We are developing strategic plans for taking this remarkable platform forward and will share further details post the completion of the transaction. - Mid-market Segment – Our work on developing a strong, digital lead proposition for the next segment of Wealth clients continues and we are on track to showcase further by the end of the financial year. - With that, I would like to handover to Karan and open the session for Q&A -
Moderator · Conference Operator
Thank you Anshuman.
I request all of you, please click on the ‘raise hand’ icon in case you wish to ask any questions.
We will give it a minute for the questions to queue up. - First in line we have Mohit Mangal.
Kindly unmute yourself and ask your question.
Also request you to please introduce your firm before you ask your question.
Thank you. - Mr. Mohit Mangal – BOB Capital Markets Limited: - Good afternoon everyone.
This is Mohit from BoB Capital.
So congratulations on reaching the Rs.
170 Crs net profit mark.
I have specifically three questions.
First is in terms of the net flows, I believe that even if I take that two outflows that were planned, I believe that it would be lower than your expectations.
So can you elaborate on plans so that we have a higher net flows for the H2 FY23? - Mr. Karan Bhagat – MD & CEO, IIFL Wealth & Asset Management Limited: - Yes Mohit.
I think that's a fair statement.
I think the net flows are slightly lower than what we would have ideally liked.
I think on a full year basis, we would ideally like net flows of somewhere between the Rs.
35,000 - 40,000 Crs.
But most importantly, I think we are striving to ensure that the ARR net flows, which is the AUM giving us a recurring revenue, should be closer to the Rs.
30,000 odd Crs mark.
With this figure in mind, we are close to Rs.
10,000 – 10,500 Crs for H1 which means we are short about Rs.
3000 – 4,000 Crs.
But given the focus we have, I feel we will be fairly close to that Rs.
30,000 Crs for the full year.
Maybe Rs.
1,000 – Rs.
2,000 Crs short but not dramatically lower than that. - Mr. Mohit Mangal – BOB Capital Markets: - Perfect!
In terms of the net flow, just a follow up on that, what are the flows coming from the existing versus new clients? - Mr. Karan Bhagat – MD & CEO, IIFL Wealth & Asset Management Limited: - I think it's a combination.
Honestly, I think it continues always like it is in every financial year.
I think our market share with most of our older clients is fairly high.
It is in the region of somewhere between the 40% - 70%.
In terms of new clients, lumpy flows kind come in.
So typically, if you see on a quarterly basis, the split would be closer to the 2/3rd - 1/3rd.
So 65% to 70% would be coming from new clients.
30-35% would be coming from the older clients. - Mr. Mohit Mangal – BOB Capital Markets Limited: - Perfect!
My second question is on the carry income.
So we saw Rs.
35 Crs of carry income in the first half and I think in the earlier calls you have guided for around Rs.
75 Crs.
So, I mean, something you stay with your numbers or… - Mr. Karan Bhagat – MD & CEO, IIFL Wealth & Asset Management Limited: - Yes, I think carry of round Rs.
70-75 Crs is a fairly predictable number and more or less a given number over the current year and the next couple of years.
Outside of the Rs.
75 Crs of carry income every year, there will be potentially some more lumpy carry income which can come in the next year and the year after that.
But on the Rs.
75 Crs number, there's a fairly high probability and degree of certainty of accrual over the next 6 months and also over the next two financial years. - Mr. Mohit Mangal – BOB Capital Markets Limited: - Okay.
My last question is broadly industry based.
So I was reading somewhere that a lot of HNIs and UHNIs have shifted their geographical base outside India post-COVID.
How our business is affected by this and what are the results, what are the return expectations of these clients? - Mr. Karan Bhagat – MD & CEO, IIFL Wealth & Asset Management Limited: - So I think I'll answer your question in three parts, Mohit.
I think the quantum of such people over a base of our entire client population is still in single digit percentages.
So it's not a disproportionately high number.
It would still be in the region of 2%-7%.
Most of these clients are not themselves fully shifted out.
In some senses they have their left leg outside the country.
So in some cases it's a spouse or in some cases it's a brother who may have become an NRI in those cases of 7-8% of our clients.
Within that you essentially have two kind of flows which go out.
One you have the capital flow and the other is the current income flow.
So capital flow is also subject to a cap even once you become an NRI of close to a million dollars per financial year.
So even though you end up becoming an NRI, the quantum of money moving out will take a fairly long period of time.
What goes out obviously is the current income.
So effectively any dividends, rent or interest post you becoming NRI effectively kind of starts moving out. - If you kind of combine both, which is the 7-8% of the broader client set and the fact that it is going to be more current income as opposed to capital, the quantum of money moving out of the existing base is fairly low - Mr. Mohit Mangal – BOB Capital Markets Limited: - Right, that's very helpful and wish you all the best. - Mr. Karan Bhagat – MD & CEO, IIFL Wealth & Asset Management Limited: - Thank you Mohit. -
Request you to please click on the ‘raise hand’ icon to ask your question.
Next in line we have Prayesh Jain.
Kindly unmute yourself and ask your question. - Mr. Prayesh Jain – Motilal Oswal Institutional Equities: - Hi, everyone.
This is Prayesh Jain from Motilal Oswal Institutional Equities.
Karan firstly, Anshuman mentioned about the advisory business in IIFL ONE.
Could you elaborate more as to what it is and how do you think that this would scale up because that is kind of dilutive to your overall IIFL ONE yields, and I think we had guided for 40 bps kind of yield for IIFL ONE over a medium term.
So then both of them don't kind of corroborate with each other.
So what's the thought out there and could you give us more details as to what is this advisory? - Mr. Karan Bhagat – MD & CEO, IIFL Wealth & Asset Management Limited: - So I think there are lots of terms which are being used in some senses fungibly.
So maybe I can kind of help clarify.
There are two kinds of segments and three levels of service.
So effectively in terms of levels of service, it is discretionary and nondiscretionary/advisory services.
So typically we've seen retentions on the discretionary side being closer to the 60-65 basis points whereas on the nondiscretionary advisory side they are closer to 35 basis points and on a blended basis they are close to 40 basis points.
Where the equation really breaks is, if you are doing advisory for corporate treasuries.
That really happens more for a nominal fixed fee as opposed to having a retention of 35 to 60 basis points.
So the 40 basis points guidance for us is excluding the corporate treasuries.
Outside of that, we really don't see any change to the hypothesis.
On the nondiscretionary advisory side, we continue to see around about a 35 basis points retention.
On the discretionary side, we continue to see a 60 basis point retention.
So stripped for the corporate advisory portion, retention will continue to be in the region of 40-45.
So maybe we'll take an input from your question and also start reporting corporate treasury separately within IIFL ONE so that you get a better idea of the ongoing yield. - Mr. Prayesh Jain – Motilal Oswal Institutional Equities: - Yeah, that would be a helpful.
And secondly Karan, just extending the previous participant’s question on the net flows, what gives you confidence of getting to that Rs.
30,000 Crs kind of a mark?
Given that the kind of environment we are in, whether you look at the global scenario or even in India, we're talking about high interest rate environment, what gives you confidence of reaching that Rs.
30,000 Crs for the full year? - Mr. Karan Bhagat – MD & CEO, IIFL Wealth & Asset Management Limited: - So there are two elements to the net flow.
On the ARR element of reaching the Rs.
20,000 Crs incremental, we've got around about 30% to 35% of that net flow essentially coming from AUM which sold earlier where upfront was received but essentially maturing over the next 18 odd months.
We've seen a very high ability to convert a large part of that AUM into the ARR AUM bucket.
And we believe that over the next 6 to 18 months, if I just break it up into 6 months and the 12 months bucket, we have at least 30% to 40% of that AUM maturing, and we are fairly confident nearly 2/3rds of the AUM we would be able to move into the ARR bucket.
So if I would just see out of the incremental Rs.
20,000 odd Crs, I think Rs.
4,500 – 5,000 Crs or maybe Rs.
6,000 Crs across the next 6 months would be a kind of a function of our ability to convert some existing non-revenue bearing AUM to revenue bearing. - The remaining Rs.
13,000 - 14,000 Crs is something we'll have to get out and get the net flows.
There it's going to be a combination as I said earlier, between 2/3rds coming from net new clients and 1/3rd essentially adding volume share from our existing clients.
I think to a certain extent obviously that is subject to a little bit of market volatility.
But typically, what happens is a lot of these transactions have already got consummated or are in the process of getting consummated.
So, I think our ability to add close to around Rs.
5,500 to Rs.
6,000 Crs of quarter net new flows with a little bit of volatility in the market should be there.
So, I think if I look at the Rs.
20,000 Crs of incremental ARR assets, I would break it up into saying Rs.
5,000 Crs to 6000 Crs is going to come from older assets which are going to move from assets which are non-revenue bearing to revenue bearing and I think we should reach the current quarter numbers of Rs.
5,000 Crs to Rs.
6000 Crs net new flows coming 2/3rd from new clients and a third from existing clients. − Mr. Prayesh Jain – Motilal Oswal Institutional Equities: − Just last question this is more on RM count basis, have you seen any increased attrition with regards to complete new model in terms of pay-outs.
So, have you seen any increased attrition or what would have been the attrition in the first half and any thoughts going ahead as to how do you see the entire industry panning out given that there is a lot of money which has been invested in your competitors where they would go in for RM acquisitions, so any thoughts around that would be helpful.