IIFL Capital Services Limited (IIFLCAPS) Q2 2027 Earnings Call Transcript

Ladies and gentlemen, good day and welcome to the IIFL Capital Services Limited Q2 FY27 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. Should you need assistance during this conference call, please signal an operator by pressing star then zero on your touchstone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Venkat Raman from IIFL Capital Services. Thank you, and over to you, sir.

Good afternoon, and welcome to the Q2 FY27 Analyst School of IFL Capital. I am R. Venkat Raman, Managing Director, and I am accompanied with my colleague, Rana Gandhi, who is the CFO. The global environment remained challenging during Q2, FI27, because of geopolitical tensions, elevated oil prices, high interest rates, and that has led to increased volatility across multiple asset classes. However, India remained resilient. Our GDP is showing signs of growth. I think it grew 7.8% in Q1, FI27, and it has been supported by manufacturing services. In this environment, because of inflation pressure, crude price pressure, currency pressure, and outgoing foreign flows, we have to closely monitor the happenings on a microeconomic front. However, as of now, as we speak now, India's medium-term fundamentals remain strong. We remain focused on discipline growth, prudent capital allocation, governance, and risk management. Coming to our results, consolidated operational revenue for the quarter was 722 crores, up 14% quarter-on-quarter, 22% year-on-year. If you compare Q2, FI27, the retail equities were 316 crores, which was up 6%. We saw a significant growth in our institutional and banking revenues. It was up 18%, 245 crores versus 207 crores in the first quarter of the year. So, basically, we have seen traction in broking as well as banking. FPD income, which is distribution income, was 159 crores in Q2 versus 125 crores, which was up 27%. Employee cost increased 8% because of both hedge fund increase as well as bonus provisions. Finance cost increased 25% to 75 crores due to increase in borrowings, which was up. Then, depreciation increased 6% to 18 crores. Fees and commissions were virtually flat, down 4% to 134 versus 139 crores. Admin expenses grew by 9% to 96 crores, mainly because of investments in technology. Operational PBT, which was before mark-to-market, was 206 crores, up almost 40% on a quarter-on-quarter basis. If you remember last time in the analyst call, I had spoken about the other income which we had seen in the first quarter of FI27 due to mark-to-market gains in BFC. This time, unfortunately, because of adverse price movement, we have a loss of 32 crores. That is primarily because of BFC shares price movement. If you now look at data on a year-on-year basis, Q2 FI27 versus Q2 FI26, then we have seen a retail broking income growth of almost 17%, We have FED income, which was up almost 23%, 159 versus 130. Employee cost increased 26% to 194 crores. Basically, due to both increase in headcount, variable pay, and fixed costs, because on a year-on-year basis, we have to take normal wage increase also. Finance cost increased 40% because of increased borrowing. MTM book has grown. Depreciation increased 16% because of branches and technology investment. Tees and commissions increased 13%. Admin expense grew again 11%, mainly driven by tech. Operational PBT was 206 scrolls before mark-to-market, and it was a gain of about 25%. Other income, as I mentioned, was due to mark-to-market and BSC shares, due to price movement and BSC shares. Coming to year-on-year basis for H-127 versus H-126, then we have seen a 15% increase in retail equity, 613 crores. Institutional booking income was up 16%, 451 crores versus 390 crores. FPD income was virtually flat, 285 versus 275, because in the last year, first quarter, we have seen some exceptional upfront transactional income. Finance cost increased 44% to 135 crores. Repreciation 9% increased. Again, as I mentioned, because of glasses and technology. Fees and commissions increased 8% to 273 versus 253. Admin expense was up 6%. Operational PBT was up 8% to 355 crores before MTM. Primarily, we have investments in BSE, which is a legacy investment. We continue to hold about 5.95 lakh shares of BSE, which is the main driver of the MTM. Coming to some housekeeping data, average daily turnover was 3,573 crores, of which F&O was 3,1785 crores. Cash was 3,288 In Q2, FI27 versus 357.80 crores, F&O, 312.480 crores, and cash was 3,300 crores in Q1, FI27, which was down roughly 3% on an overall ADTO basis. We have actually done reasonably well compared to the overall decline in market volumes. On a year-on-year basis, we have seen a 16% increase because that, the last year, same quarter, it was about 2,63,568 crores. Coming to other updates, first I'll give you an update on the Fairfax investment. If you remember, Fairfax had decided to do a preferential allotment, preferential inclusion of capital in IFL Capital. We have received FIH, Fairfax, Morris Church Investments, has received all requisite regulatory and shareholder approvals for the proposed acquisition of 51% of the company through a preferential allotment, open offer, and other arrangements with the promoters. The press allotment and open offer are under implementation and we are expecting that we will get close in this month of November itself. As consequent to this, FI Fairfax will join the promoter group along with existing promoters. The other updates is we also propose to incorporate a wholly owned NBFC subsidiary, and this basically NBFC aligns with the company's strategy to expand the financial services offerings and develop lending and credit solutions to HNI segment. This is, of course, subject to regulatory approvals from RBI. And last point is about succession planning. A part of our leadership succession, the board has approved appointment of Vasudev Jagannath as initial director and whole-time director for three years, subject to requisite regulatory approvals. Vasu is an MBA from Ion, Calcutta, and he has over, I would say, close to three decades experience in capital markets, of which two decades he has been with IFL Capital. Prior to joining Ithel Capital, he was in the New York desk of CLSA, and also just before joining us, he was the head of sales of CLSA. So he comes with deep experience and has been with the firm for almost two decades. And we believe that Vasu is well positioned to lead the company to the next phase of growth, and he will be designated as managing director with the effect of January 1, 2027. I will continue to be on the board of directors even after that. With this, I think I have come to the end of my opening remarks, and we will be more than happy to answer any questions that we have. Thank you so much.

Thank you. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and 2. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles.

The first question comes from the line of

Keshav Karwa with White Pine Investment. Please go ahead.

Hi, sir. Thank you for the opportunity. I have few questions. This quarter, how many RMs were added, and could you also please comment the breakup between the institutional broking and investment banking revenue?

See, this quarter, I don't think we added any, even if we have added RMs, it will be in single digits. I think, I am assuming you are asking, so net increase has been marginal. Coming to institutional broking and investment banking, I think that for this quarter, it was roughly about 450 crores, all of which I think the split would be about 250 crores of broking and 200 crores of institutional investment banking.

So my second question was on Fairfax, how are you planning to deploy the funds?

See, actually, I think we have the fund investment will happen and bulk of it will go for, I think, margin funding. So, repayment of borrowing will be one, use of funds, and margin funding book will be the other use of funds. These are the broad, I would say, use of funds. I'll do one thing, I think whatever we have published, open of a document we have given, I'll communicate to you separately. So, if you can drop an email at venkat.iflcapital.com, I'll give you the exact details.

Okay, sir, sure. And my third question was, your PMS even had declined this quarter, could you please provide an update on it?

We have seen some decline in the PMS AVM, finally, because we have seen some outflows in the NDPMS, which we hope to recover in the coming days. So, that was the reason.

Okay, sir. Thank you so much.

Thank you so much.

A reminder to all participants, you may press star and want to ask a question. The next question comes from the line of Neha with Abacus Investment Managers. Please go ahead.

Hi, thank you for the opportunity. Congratulations on a good set of numbers. So, just a couple of questions. So, on the FPP, the distribution income, the ARR assets have grown by 5% sequentially. So, going forward, what do you think will be the key drivers for this segment for us?

See, in the FPD income, the key driver earlier was, there were some components, which was the ARR income, some amount of transaction income, some insurance income also. I think going ahead, in the next two quarters, at least we should see some uptake on the insurance income, and the key driver will be growth of AUM. So, ARR, AUM should increase, and that will drive the income.

So, sir, this quarter, our yields have increased. Is that coming from insurance or that's been coming from the other segments? So, this quarter, insurance has underperformed.

So, we have seen actual growth in the ARR income.

Right. And that's largely coming from the fixed income and mutual fund, right?

Yes. AI, PMS, and mutual fund.

Got it, sir. And also on these assets, so if you could just give a broad sense of how much would be from the U.S. United Lens?

Ah, I don't have that detail. So, I think that's a good question. We have generally, I have looked at it on a consolidated basis, but let me call that number and get back to you.

Sure, sure, sir. And, sir, with respect to our broking business, so what kind of impact did we see because of the RBI regulations that came into effect from second quarter? So, I mean, have we seen any impact of that? I mean, of course, we have done much better.

We have seen marginal impact, nothing to write home about, because we have no prop. So, I don't think we have any impact, if I can say.

And so, lastly, just on the employee cost, so you mentioned that the increase is because of the headcount increase. So, where is the headcount increase coming from? Because you mentioned that in the wealth, we have not added RMs as such. So, where is the headcount increase coming from?

I talked about the wealth RMs, but in wealth, we have the AMC business. So, there we have I have seen some headcount, and headcount has not been so dramatic also. So, if you see the overall expense, employee expense has increased 8% only. So, it is, and on a quarter-on-quarter basis because of some bonus provisions and a few increase in headcount. And on a year-on-year basis also, it has increased 26%. That was because we already, we have taken, we have roughly about some 5% increase in the headcount, and then also we have seen some increase because of variable pay, and on account of So, overall, year-on-year inflation, and this year, inflation has been quite, full inflation has been quite high.

Understood. So, sir, this 194 number is what we can expect to see continue for the rest of the year, right? 192 per quarter.

Quarter, yes, mota, mota, that will be the number.

Understood. Okay, thank you.

Thank you so much.

Participants, please press star and want to ask a question. The next question comes from the line of Krish Agarwal with New Asset. Please go ahead.

Hey, Krish, this side. I wanted some clarity on the difference between the fee charges in the assets that we are distributing by ourselves and the third-party assets. We have our own distribution AUM in the SPD business, and we are also distributing the third-party products. So, I want you to know what's the differential fee that is being charged between the third-party distribution?

Typically, on the equity products in-house, we get about two, two-and-a-half, two-and-a-quarter maybe, and third-party products will give you about a 50% cut. I think these are rough numbers. I hope I give you directionally the answer.

Okay, so 2% on our own products and 25% on them. 1% on the third-party. Got it. Thank you.

A reminder to all participants, please press star and want to ask a question. Participants, please press star and want to ask a question.

The next question comes from the line of Akshay Shah with VVD Asset Managers. Please go ahead.

Thank you for the opportunity, sir. Sir, I joined later, so pardon me if there is a repeating question. Sir, how do we see the direction of breaking even in our FPD business?

See, actually, in the wealth business, I'm assuming you're asking a question regarding the wealth business, right? Because the FPD has got components from both our existing broking business which have migrated to H&I broking. So the new business wealth we have started, so we hope that we should break even in the next maybe 6 to 18 months. But what has happened is that subsequently we have started in-house manufacturing also, and we are close to roughly about in-house manufacturing, and we are investing in that. So that, I think, will take a longer time to break even.

Okay. And, sir, what was the loss of equity business for H1? The equity business? No, Malab, your wealth business is making loss as of now, so what was the future?

We are making loss in the wealth business. I'll do one thing. I'll call you separately and give you the figure. I don't have the figure right now. Okay. Thank you so much, sir.

The next question comes from the line of Abhijit Sakhare with Kotak Securities. Please go ahead.

Hi, good afternoon, everyone. Sir, pardon my lack of information on this, but the Fairfax transactions, the ultimate end goal is that it all rolls up into the banking license rate. Just reading through what Fairfax has put out in their disclosures on the transaction.

Actually, you have a very good point you have made. So, actually, the Fairfax press release mentions about that, but it says that ultimately the interest of both GoDigit and IFL Capital will get subsumed into the bank, maybe become a part of the bank as a subsidiary. So, I think that's what will happen in the long term, although this question is better answered by Fairfax people themselves.

Got it, sir. That was your idea.

Thanks a lot. Thank you. A reminder to all participants, you may press star and want to ask a question. Next question comes from the line of Akshay Shah with VVD Asset Managers. Please go ahead.

Yes, sir. Our insurance business has not performed much well. So what is our target in insurance business going forward? Are we focused more on a capital market business in distribution business, or are we focused on insurance business?

Actually, that's a good question, because this entire insurance business has become marginal, And in the last two quarters, we have seen some amount of dip. And for the next two quarters, we will focus on this because, you know, before the new regulations kick in. But on the long term, if you ask me, will you focus more on the capital markets distribution rather than insurance distribution?

Okay. So, if there is an opportunity, you will sell it out of this business? Is that possibility?

Actually, yeah. We are open to all discussions to enhance her other values. So, I think we will explore. Okay. Thank you, sir.

Thank you. Participants, please press star and want to ask a question.

The next question comes from the line of Devansh

Jain with NEO Wealth Management. Please go ahead.

Hey, this was regarding the open offer. Whether promoters intend to tender their shares in the open offer? Other than the promoters selling shareholders?

No, no. Actually, let me clarify. The way that open office is structured is they will make an open offer. If they don't get shares to go up to 51%, then we will sell to make them 51%.

Okay. But other than promoter who are selling their shoulders to make that 51%, can tender in open offer or not?

No, we are not tendering.

They are not tendering.

I am talking on behalf of the reporters, not for everyone.

Okay. Okay. Thank you.

Thank you. So, I think, let me clarify the question that NIO, I forget your name, what's your name, sorry?

Devansha.

Devansha of NIO. See, the way we have structured the transaction is that the promoters and the promoter group will not offer shares in the open offer. As and when the open offer gets concluded, if they don't make it to 51%, only then we will give shares to them. I hope I have answered your question.

Oh, yeah, thank you. Thank you.

Thank you.

A reminder to all participants, you may press star and want to ask a question. Participants, please press star and want to ask a question.

Anyway, if you don't have any more questions, so first of all, thank you so much to all the participants. And as I mentioned, venkat at islcapital.com is my email. And both Ronak and I are available to answer any further questions that you may have. And thank you so much for giving me a patient hearing.

Thank you, sir. Ladies and gentlemen, on behalf of IIFL Capital Services, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.