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MOSL : IIFL WEALTH: Revenue in line; PAT misses

.  IIFL WEALTH: Revenue in line; PAT misses by 3%

(IIFLWAM IN, Mkt Cap USD2b, CMP INR1822, TP INR2300, 26% Upside, Buy)

• IIFL Wealth (IIFLWAM)’s PAT increased 20% YoY and 10% QoQ to INR1.7b (3% miss) in 2QFY23. The miss on profitability was led by 4% higher-than-estimated operating expenses (OPEX; up 7% QoQ).
• The sequential increase in OPEX was attributable to a sharp 18% rise in variable employee expenses. Administration costs grew 12% QoQ.
• The cost/income (C/I) ratio of IIFLWAM contracted 810bp YoY, but expanded 240bp QoQ to 46.9% (est. 44.6%) in 2QFY23.
• Sequentially, net inflows were steady at INR61b (excluding custody).
• Revenue/op. profit/PAT rose 27%/52%/27% YoY, respectively, in 1HFY23.
• IIFLWAM’s Board approved a dividend of INR17/share.

Gross AUM increases QoQ to INR2.7t; a shift in mix favors ARR assets

• Total AUM on a closing basis grew 5% YoY and 6% QoQ to INR2.7t. This was slightly better than our expectation of INR2.6t. ARR AUM grew 17% YoY and 8% QoQ to INR1.6t. TBR AUM declined 9% YoY, but grew 4% QoQ to INR1.1t. The contribution of ARR assets to total AUM stood at 58% in 2QFY23 v/s 57%/51% in 1QFY23/2QFY22, respectively.
• AUM for IIFL ONE grew 13% QoQ to INR366b. The sequential growth was led by a 38%/8% increase in non-discretionary PMS/advisory assets, respectively. MTM gains on ARR/TBR assets stood at INR48b/INR53b.

Marginal contraction in yields

• Reported retentions in total revenue (including other income) stood at 63bp v/s 59bp/59bp in 2QFY22/1QFY23, respectively. ARR retentions were at 71bp v/s 72bp/72bp in 2QFY22/1QFY23, respectively. Overall, retentions were lower than our estimate.
• Retentions in IIFL-ONE dipped QoQ to 31bp as the share of advisory and non-discretionary assets increased. NIM in the loan book was higher by 18bp QoQ to 5.9%. AMC retentions were weak QoQ, with a 7bp decline as retentions on AIF assets fell and the share of PMS assets increased.

 

OPEX rises QoQ led by variable employee and administrative costs

• Total OPEX grew 7% QoQ and 4% YoY to INR1.8b (4% above our estimate). In 2QFY23, variable employee costs surged 18% QoQ.
• Administration cost also increased 12% QoQ to INR481m.

Highlights from the management commentary

• The company expects to maintain C/I ratio in the 44-45% range and sustain tangible RoE around 23-25% with  a dividend payout of 75-80%.
• For the mid-market segment proposition, strong digital platform is worked upon and a launch is expected by the end of current fiscal.

 

Other highlights

• Other income stood at INR220m in 2QFY23 v/s a negative INR60m in 1QFY23 and our estimate of a positive INR200m.
• IIFLWAM’s NBFC loan book was steady at INR42b in 2QFY23.