IIFL Securities Ltd (IIFLSEC) Q2 FY23 Earnings Concall Transcript

IIFL Securities Ltd (NSE:IIFLSEC) Q2 FY23 Earnings Concall dated Oct. 21, 2022

Corporate Participants:

R. Venkataraman — Chairman and Managing Director

Ronak Gandhi — Chief Financial Officer

Analysts:

Prayesh Jain — Motilal Oswal Financial Services — Analyst

Unidentified Participant — — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to Q2 FY ’23 IIFL Securities 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. [Operator Instructions]

I now hand the conference over to the Managing Director, Mr. R. Venkataraman. Thank you, and over to you sir.

R. Venkataraman — Chairman and Managing Director

Thank you. Good afternoon, friends. At the outset, I take this opportunity to wish all of you a very happy Diwali and best wishes for a very prosperous new year. I am R. Venkataraman. I am the Chairman and Managing Director of IIFL Securities. And along with me are my colleagues; Ronak who is the CFO; and Meenakshi [Phonetic] who looks after Investor Relations for the entire IIFL Group. Thank you for joining the second quarter FY23 analyst call. I hope all your near and dear ones continue to remain safe.

Just as we seem to have come out of the COVID pandemic, the world has entered into a volatile phase once again, this time driven by economic and geopolitical events which are affecting market sentiment. We’re also entering into an era of high-interest rates with central bankers across the globe are going to [Phonetic] rein in inflation. Although Indian market has shown resilience till now, external shocks may keep the market volatile. Broking as a business has started gaining momentum and also IPO activities have picked up and stock markets are stable. Our strategy continues to be built on research, technology and talent. We have an edge in capital market because our research and understanding of economy and corporates that helps our business lines. All our business lines are centered around capital markets.

We have three revenue streams; retail booking targeted at affluent tech-savvy customers. There we offer not only broking but other products like mutual funds, insurance, PMS on an open architecture model. We have — other is the institutional broking. We are one of the leading domestic institutional broker. And third is investment banking, where we are focused on the equity capital markets.

Coming to the September 30 numbers, consolidated revenues for the quarter came at INR323 crores, up 10% quarter-on-quarter. Quarter-on-quarter growth has been in brokerage 12%. Brokerage income was roughly about INR162 [Phonetic] crores. Distribution income again increased 33% on a quarter-on-quarter basis to INR54 crores. Investment banking declined 16%, INR24 crores against INR29 crores in the previous quarter, and that is simply because of the nature of the business because income is booked when deals are closed. On a year-on-year basis, brokerage income has increased 14% and distribution income has increased 6% and investment banking again has decreased, because if you remember, the last year quarter was quite good. Other income has increased by 100% quarter-on-quarter and — at about 6.8% and it has decreased 65% year-on-year basis.

Coming to expenses, I think the big — expenses was flat, which is — employee cost was flat on a quarter-on-quarter basis, but has increased 17% on year-on year basis because of increase in headcount as well as increase in normal pay — normal pay hike which happened last year — which happened during the course of the year, sorry. Finance cost at INR19 crores, flat quarter-on-quarter, reduced 37% on a year-on-year basis, simply because of last year we had borrowed highly for IPO funding. This year this line item was not there. Admin cost is INR126 crores. This has increased 11% quarter-on-quarter, 23% year-on year, primarily because of sub-brokerage payouts as well as increase in technology and marketing costs.

Assets under management custody stood at INR118,000 crores. Average turnover for the quarter was INR135,000 crores, BSE and NSE combined, which was INR1,700 crores in cash and about INR133,000 crores in derivatives. Previous quarter was INR126,000 crores, which was [Indecipherable] above 1,500 in the cash segment. And INR125,000 crores in the derivative segment.

With this, I have come to the end of my remarks and I’ll answer any questions that you may have. Thank you so much.

Questions and Answers:

Operator

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] We have our first question from the line of Dhvanil Shah from Motilal Oswal Financial Services. Please go ahead.

Prayesh Jain — Motilal Oswal Financial Services — Analyst

Yeah. Hi, Venkat sir. This is Prayesh Jain from Motilal Oswal. So just a couple of questions. Firstly, more on the industry front. So firstly, what happened there at the time of the payouts that changed — the rule changed? Did you face any challenges out there or how was the rule implemented?

R. Venkataraman — Chairman and Managing Director

Prayesh, thank you. This payout of money which happened — I think October 7, I think this was an industry-wide phenomenon. And it happened smoothly. So I think that although everybody was fearing that the banking system will come in the loan [Phonetic], but I think given currently almost all brokers had the technology systems in place and the sale happened smoothly. I don’t think there’s a big challenge. Ronak, anything? Yes, it happened smoothly.

Ronak Gandhi — Chief Financial Officer

The payout was — happened smoothly.

Prayesh Jain — Motilal Oswal Financial Services — Analyst

Okay. And within how much time the customers’ money would have come back to us?

R. Venkataraman — Chairman and Managing Director

That’s a good question. I think money slowly coming back. So it took almost three, four days to come back.

Prayesh Jain — Motilal Oswal Financial Services — Analyst

So 80%, 85% would have come back in three to four days? That is the right…

R. Venkataraman — Chairman and Managing Director

No. I think by now 80%, 85% would have come back. [Speech Overlap]

Ronak Gandhi — Chief Financial Officer

We have received 80%, 85%.

R. Venkataraman — Chairman and Managing Director

By now 85% has come back, but in the first two days, I think the number would have been close to 40%, 50% instead of 80%. [Foreign Speech] That’s your question, right? I assume that was the question.

Prayesh Jain — Motilal Oswal Financial Services — Analyst

Yes. And sir, how many of your customers would have chosen one month versus three months payout?

Ronak Gandhi — Chief Financial Officer

Mostly, many of the clients are on the three months only, very few numbers are on monthly settlement.

Prayesh Jain — Motilal Oswal Financial Services — Analyst

Okay. And sir, [Speech Overlap]

Ronak Gandhi — Chief Financial Officer

[Speech Overlap] many of them have updated on the quarterly settlement to give their funds.

Prayesh Jain — Motilal Oswal Financial Services — Analyst

Okay. And sir, quarterly settlement is somewhere where we would be earning higher float income, right? Is there a threat that the float income would reduce substantially going ahead because of [Speech Overlap]

R. Venkataraman — Chairman and Managing Director

My guess is that what you say is directionally correct. So, of course, there is a probability of reduction of float income, for sure.

Ronak Gandhi — Chief Financial Officer

But due to increase in interest rate and money is kept for three months. Earlier the regulation was like from the trading days, you have to do the settlement, but now you have to do only once in the quarter. So that money will stay with you for at least three months if the client is on the quarterly settlement.

Prayesh Jain — Motilal Oswal Financial Services — Analyst

Okay. And sir, there is a broader industry-level question, possibly if you can answer this for me. What happens if the broker-wide limit hits and you — so can you do it on a separate card?

R. Venkataraman — Chairman and Managing Director

I think it is a broke-wide limit is — it’s linked to the card and not to your promoters. But it’s a technical question. I think I have to check and get back to you. You are talking about broker-wide positions for F&O unit, right?

Prayesh Jain — Motilal Oswal Financial Services — Analyst

Yes, yes, yes, sir.

R. Venkataraman — Chairman and Managing Director

Yeah. So this is a technical question. I think I should check and give you the correct answer technically.

Prayesh Jain — Motilal Oswal Financial Services — Analyst

Sure sir. Thank you [Speech Overlap]

R. Venkataraman — Chairman and Managing Director

So you are saying is that if I take multiple cards, can I multiply by — so increase the market-wide limit? I think I’ll have to check back because I don’t know, it is a technical question.

Prayesh Jain — Motilal Oswal Financial Services — Analyst

Okay. Yeah, that’s the exact question, sir, because some of the market participants are talking about having a ceiling in that term and that’s the reason there are some issues on Zerodha. So that I wanted to understand, whether if they have another entity — another group entity which has another card, whether they can shift customers there, already the incremental customers can be brought in on that card and individual customers can also trade on Zerodha app. So those were the broad questions which I wanted to [Speech Overlap]

R. Venkataraman — Chairman and Managing Director

It’s a good question, and actually I don’t have an answer for this.

Prayesh Jain — Motilal Oswal Financial Services — Analyst

Sure, sir. Thank you so much and wish you all a very Happy Diwali and a prosperous new year.

R. Venkataraman — Chairman and Managing Director

Thank you so much, Prayesh. It was good to talk to you. And wish you and your family a very happy Diwali and best wishes.

Prayesh Jain — Motilal Oswal Financial Services — Analyst

Thank you.

Operator

Thank you. [Operator Instructions] There are no questions in the queue sir. Any closing comments?

R. Venkataraman — Chairman and Managing Director

We’ll wait for one or two minutes and then…

Operator

Alright sir. We have a question from the line of Dhvanil Shah from Motilal Oswal Financial Services. Please go ahead.

Prayesh Jain — Motilal Oswal Financial Services — Analyst

Yeah, hi sir. Prayesh here again. So just, first of all, a feedback that the conference call invite wasn’t accessible easily. Even on the exchanges it was just an intimation and we did not have any details out there. So first that’s the feedback that not too many people have received the invite on the conference call.

R. Venkataraman — Chairman and Managing Director

Thank you for the feedback. And I thought we had sent it yesterday, right, no, to the mailing list we have? Thank you Prayesh for the feedback. Thank you.

Prayesh Jain — Motilal Oswal Financial Services — Analyst

Sir, secondly on the F&O options volumes, they have actually gone really very high and have been sustainably increasing every month-on-month. What is the way you think about this venture? Is there further room for growth in terms of F&O volumes, or possibly going ahead we might see some muted trends or even decline? How would you see this?

R. Venkataraman — Chairman and Managing Director

Prayesh, to be very honest, if you had asked me this question 10 years ago when we were together, that time I would have thought that the exchange volumes are 90/10 and that has peak derivatives. Now it is 99/1 in favor of derivatives and against cash. And out of that [Indecipherable] is also, like 90% or more than that is options. So the tremendous, stupendous write-off options volume has really surprised me. And so at this point in time, like you, I am also thinking it has picked up, but given my past mistake I am afraid to stick my neck out and say that it has peaked out. So like you, I’m also concerned.

Prayesh Jain — Motilal Oswal Financial Services — Analyst

Okay, okay. Right sir.

R. Venkataraman — Chairman and Managing Director

My guess is — if you ask me to take a guess, I would say that it is — it has peaked out, because — yeah.

Prayesh Jain — Motilal Oswal Financial Services — Analyst

Okay. And how do you see the primary market behaving from now on? And so, first, this half would be — continue — second half would be challenging as what you’ve seen in the first half?

R. Venkataraman — Chairman and Managing Director

My guess is that if the market remains stable, the way they have been in the recent past, so IPO activity will be good, because I think the month of October was good for IPO activity and November also looks to be good as of now. So my guess is that I’m quite — I would say it won’t be as good as last year, because last year was a blowout year, but I think I’m optimistic for the next two months.

Prayesh Jain — Motilal Oswal Financial Services — Analyst

Sir, in your broking business, how has been the trend between institutional and retail?

R. Venkataraman — Chairman and Managing Director

See, retail has been growing, institutional has been growing. So I think both are growing.

Ronak Gandhi — Chief Financial Officer

Both the businesses are growing. Right.

Prayesh Jain — Motilal Oswal Financial Services — Analyst

Both have seen growth in this quarter?

R. Venkataraman — Chairman and Managing Director

Yeah.

Prayesh Jain — Motilal Oswal Financial Services — Analyst

Okay. All right, sir. thank you so much.

R. Venkataraman — Chairman and Managing Director

Thank you so much. Thank you. [Operator Instructions] We have our next question from the line of Varship [Phonetic] Shah from Envision Capital. Please go ahead.

Unidentified Participant — — Analyst

Yes, sir. Hello. Thank you for taking my question. Am I audible?

R. Venkataraman — Chairman and Managing Director

Yes, you are audible. And thank you.

Unidentified Participant — — Analyst

If I look at the other expenses, that has gone up significantly year-on-year. So I just wanted some more information as to the investments you’re making in technology and your employees, just small details on that.

R. Venkataraman — Chairman and Managing Director

See, the bulk of the other expenses growth has been on technology and marketing. So those are the two items which has seen growth. So, these are the — so basically, going ahead also, I would say that our marketing actually will be — I think that won’t grow so much. Technology, you know, it’s a wild card. You have to keep on investing in technology to be [Speech Overlap].

Unidentified Participant — — Analyst

Okay. And one of the slides in the presentation speaks about collaborations with FinTech partners. Could you throw light on that?

R. Venkataraman — Chairman and Managing Director

Sorry?

Unidentified Participant — — Analyst

Collaboration FinTech players, like the presentation speaks about. So just wanted more details on that.

R. Venkataraman — Chairman and Managing Director

So basically what has happened is that earlier we used to — we have projects which we have delivered [Indecipherable]. So in the last one year, we realized that the FinTech partners are there who are doing far better job. So we have a large number of FinTechs with whom we work. So I think we work with Trendlines [Speech Overlap] and we are well set for [Technical Issues]. So we have tied up with most of them. Any specific thing you want to know?

Unidentified Participant — — Analyst

No, no, no.

R. Venkataraman — Chairman and Managing Director

And I think this is a trend across the industry because most of the industry players are doing one thing is that because of open APIs, all of them are — instead of developing features, they are taking open API and adding features.

Unidentified Participant — — Analyst

All right, thank you, sir.

R. Venkataraman — Chairman and Managing Director

Thank you so much.

Operator

Thank you. [Operator Instructions]

R. Venkataraman — Chairman and Managing Director

Okay, thank you so much for everybody who joined in. And wish all of you a very Happy Diwali and best wishes for a prosperous new year. If you have any questions, please feel to reach out to either Ronak or Meenakshi and we’ll be more than glad to answer. Thank you. Thank you and have a nice day. Thank you. [Operator Closing Remarks]