IIFL Wealth Management - Stay put on strategic business priorities - ICICI Securities

Given the anticipated regulatory rigmarole, IIFL Wealth & Asset Management (IIFLW) had stayed put on its strategic business priorities - realigning the businesses (transitioning towards sustainable recurring revenues), reorganising advisory services (following SEBI advisory regulations), concluding L&T Wealth integration and focusing on revenue, cost and capital efficiency. Portfolio impacted by SEBI's regulation is merely 3% of AUM and <0.5% of revenues. Earnings in Q2FY21 too were supported by continued build-up of recurring revenue assets (up 24% YoY / 8% QoQ), sustained traction in IIFL One (up 11% QoQ) and cost-control initiatives, more than offsetting flat QoQ transactional revenues (down 33% YoY) and lower return on loans. Steady retention rates, AUM growth of 16-18%, 'cost to income' at 50-52% are expected to support earnings growth of >30% over FY20-23E. Maintain BUY with target price of Rs1,360.

- Enough flexibility to operate in various capacities on a comprehensive platform: To IIFLW's due credit, its disclosures are very comprehensive not only for understanding in what capacities it engages with clients on the comprehensive platform, but also AUM distribution, revenues, retention rates and nature of products/yields in each category. Evaluation of the mix suggests: 1) it has enough flexibility to operate without being adversely impacted by regulatory guidelines (only 3% AUM and <0.5% revenues are affected by SEBI advisory regulation); 2) retention ratios can continue offering high-yielding products (long-short strategy, discretionary PMS, crossover, etc.), or operating in the capacity of portfolio manager/advisor (rather than distributor); 3) retention rates are likely to get further boost as third party transactional assets mobilised as distributors are churned and rechannelised into revenue generating assets in different capacities.

- Transition to recurring revenue model largely achieved (75-80% of target): Due to multiple variables ranging from market volatility to regulatory changes, the business has not fully transitioned on expected lines to a recurring revenue model. However, strategic focus on ramping up recurring revenue assets (RRA) has yielded encouraging results, especially for IIFL One and IIFL AMC. Overall RRA AUM is up 24% YoY to Rs792bn - on a journey targeted to reach Rs900bn by FY21. Retention ratios further moderated (by 4bps to 75bps), which seems due to moderation in the loanbook, distribution-related asset build-up, etc. We expect the broader revenue mix to settle at 55-60% for ARR assets, 10-15% through funding book and 25-35% from transactional revenues.

- AUM scale-up to be led by net inflows as well as market performance: Net inflows of Rs60bn coupled with market performance (Rs100bn) aided 6% QoQ (16% YoY) growth in AUM (even on the higher base in Q1FY21). IIFLW expects Rs120bn-130bn of net flows in FY22. Emphasis continues on increasing wallet share from existing clients, attracting flows from new to firm clients (50-60%) and having material presence in large deal consummation.

- Commendable progress in containing costs; 60-70% cost rationalisation achieved: Steady progress has been made in reducing fixed costs (down 17% YoY), thereby aiding the 'cost to income' ratio to settle at 54%. Episodic recruitments kept ESOP and variable costs elevated (at >50% of fixed costs). Overall, the management expects the 'cost to income' ratio to improve to 50-52% by FY22 (from >60% in FY20). Large cost rationalisation will come from digitisation of services and making trade execution more seamless.

- One-time dividend in the near term; regular dividend policy over medium term: IIFLW, post satisfactory capital efficiency, has the capacity to potentially pay out a one-time interim dividend in the near term. Also, over the medium to longer term, the company would evaluate and propose a regular dividend policy (as payout from earnings).

Source : Equity Bulls

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