IIFL Wealth Management - Focused on revenue and capital efficiency; variable payout skews cost expectations - ICICI Securities

IIFL Wealth & Asset Management (IIFLW) Q3FY21 earnings were characterised by continued build-up of recurring revenue assets (up 28% YoY/14% QoQ), sustained traction in IIFL One (up 17% QoQ/61%YoY), transactional revenues also on an uptick, more than offsetting 14% QoQ increase in cost, and lower return on loans. IIFLW stayed put on its strategic business priorities: realigning the businesses (transitioning towards sustainable recurring revenues), reorganising advisory services, and focusing on revenue and cost efficiency and capital rationalisation. There is improved visibility on steady retention rates, AUM CAGR of ~20% for FY20-23E and 'cost to income' at 51-53% which will support earnings CAGR of >30% over FY20-FY23E and scale up RoEs to 15% by FY23E. Maintain BUY with a revised target price of Rs1,487 (assigning 30x FY22 earnings, earlier Rs1,360).

- Recurring revenue model breaches target of Rs900bn: Strategic focus on ramping recurring revenue assets (RRA) has yielded encouraging results, especially for IIFL One and IIFL AMC. Overall RRA AUM is up 28% YoY/14% QoQ to Rs905bn - meeting the target set for end of FY21. Retention ratios improved 3bps sequentially to 50bps (adjusting for double counting of distribution assets) primarily flowing from better yields in alternate investments and AMC. Retention rates are likely to get further boost as third party transactional assets are mobilised and distributors are churned and rechannelised into revenue generating assets in different capacities. 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 led more by market performance as well as net inflows: Net inflows of Rs20bn coupled with market performance (Rs114bn) aided 7% QoQ (16% YoY) growth in AUM. There has been realignment of flows away from distributor capacities (of Rs35bn) in favour of focused segments, namely portfolio management (flows were >15% of existing AUM) and alternate investment manager (>6% flows). Besides, there were Rs71bn outflows in custody assets (though not a focused segment). 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.

- Variable costs and one-time legal charges skew expense management expectations: Operating expenses grew 14% QoQ/5%YoY due to business incentives to wealth management RMs that kept variable employee costs elevated (up 63% QoQ/95% YoY). Also, one-time legal and other related costs involved in winding up offshore funds, led to 22% QoQ rise in admin expenses. Nonetheless, steady progress has been made in reducing fixed costs (down 11% YoY), thereby aiding the 'cost to income' ratio to settle at 54%. Overall, the management expects 'cost to income' ratio to improve to 51-52% by FY22/FY23 (from >60% in FY20). Large cost rationalisation will come from digitisation of services and making trade execution more seamless.

- Interim dividend in line with guided dividend payout policy; regular dividend policy over medium term: IIFLW, post its satisfactory capital efficiency, has proposed an interim dividend of Rs30 per share, which is line with its guidance of ~60-80% dividend payout. Also, over the medium to longer term, the company would continue with similar dividend policy (as payout from earnings).

Source : Equity Bulls

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