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A mixed quarter

* IIFL Wealth Management (IIFLWAM)’s 3QFY21 PAT grew 32% YoY to INR966m. The 21% beat was driven by healthy revenue and higher other income, partially offset by an increase in operating expenses.

* In 9MFY21, core revenue (excluding other income) was largely flat at INR6.5b, while PAT was up ~30% YoY to INR2.7b. Excluding the impact of other income, core operating profit was down 10% YoY to INR2.3b. Our earnings estimates remain largely unchanged for FY22/FY23E. We expect a 19% core PBT CAGR over FY20–23E. Reiterate Buy, with TP of INR1,250 (20x FY23E EPS).

Net flows down QoQ; AUM reaches INR2t

* After a strong performance in 2QFY21 (INR60b), net new flows declined sharply to INR20b. This was driven by sharp net outflows in Distribution as well as in the RIA/Estate Planning segment.

* Driven by MTM gains, total gross AUM increased 7% to INR2t from INR1.87t sequentially. Notably, the company has changed its classification of AUM to include AMC assets sourced by its own team.

* Annual Recurring Revenue (ARR) assets continue to drive AUM growth – ARR assets grew 14% QoQ to INR905b v/s 2% growth reported in Transactional/Brokerage Revenue (TBR) assets. Note that in 9MFY21, the share of ARR assets in total AUM increased 400bp to 45%.

* IIFL ONE continues to gain traction, with AUM up 17% QoQ / 61% YoY to ~INR260b. The share of the Discretionary portfolio (this portfolio is the highest yielding) in IIFL ONE increased to 32% from 22% sequentially.

Segmental yield intact; opex disappoints

* ARR yield was intact at 73bp. In the AMC segment, yield continues to expand (up to 77bp from 63bp over the past two quarters). TBR yield was also largely stable at ~30bp.

* Total opex grew 15% QoQ to INR1.53b – 20% above our estimates. This was driven by 12%/23% QoQ growth in employee expenses / opex to INR1.1b/INR430m. We await clarity from the management on the same

Other highlights

* The NBFC’s loan book remains largely range-bound at ~INR30b. With lower cost of funds, spreads improved 40bp QoQ to 2.5%.

* The company announced an interim dividend of INR30/share. Total dividend in FY21 amounts to INR70/share.

* RM count declined to 205 from 231 QoQ and 288 YoY.

Key concall takeaways

* It is on course to achieve INR110–120b net inflows in FY21. It targets INR120–150b net new flows on a run-rate annual basis.

* It is projecting lower retention yield for FY22 due to the assumption of lower TBR revenue from slower capital market activity and on account of lower other income.

Valuation and view

◼ Over the past decade, IIFLWAM has evolved into one of the leading wealth management franchises in the country, giving tough competition to the private sector and foreign banks. Over the past five years, it has become one of the largest alternate asset managers in India with unique product offerings. With IIFL ONE, the company is looking to revolutionize the way wealth management is offered in India. Traction on IIFL ONE remains healthy; however, improving the retention ratio is important. While in the near term, net inflows could be modest, we expect these to improve over the medium term. FY22 could see moderation in TBR and other income, offset by healthy traction in ARR revenue. We largely maintain our FY22/FY23E EPS estimates. Buy, with TP of INR1,250 (25x FY22E EPS).

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