01-01-1970 12:00 AM | Source: ICICI Securities
Buy IIFL Wealth Management Ltd For Target Rs.1,886 - ICICI Securities
News By Tags | #872 #3518 #4080 #580 #1302

Follow us Now on Telegram ! Get daily 10 - 12 important updates on Business, Finance and Investment. Join our Telegram Channel

https://t.me/InvestmentGuruIndiacom

Download Telegram App before Joining the Channel

Encouraging earnings quality; improving capital efficiency towards 20% RoE target

IIFL Wealth & Asset Management’s (IIFLW) quality of earnings was encouraging, reaffirming our confidence on consistent earnings delivery. PAT growth of 16% QoQ/42% YoY to Rs1.2bn was well ahead of our expectations. Heading towards business model change initiated in 2019, ARR asset mix has improved from 40% to 50%. Strong net flow of Rs91bn (excluding Rs52bn of corporate treasuries) supported 15% QoQ/61% YoY growth in ARR assets.

ARR revenue grew 20% QoQ/50% YoY, now constituting 68% of overall revenue. Retention on ARR assets again settled above 70bps. The company announced special dividend of Rs35 per share with focus on improving capital efficiency. IIFLW stayed put on its strategic business priorities focusing on revenue and cost efficiency and capital rationalisation. Revising earnings estimate by 7%/11% for FY22/FY23E, we revise our target price to Rs1,886 (assigning 30x earnings). Maintain BUY.

 

* Net inflows in Q1 at 60% of FY21; alternate assets, PMS and IIFL One witnessed further inflows besides corporate treasuries: Net flows in Q1FY21 were strong at Rs143bn (Rs240bn for full year FY21). This included Rs52bn of corporate treasuries as corporates parked excess liquidity in liquid funds. Adjusting for this, there were net inflows of Rs45bn in wealth management (including Rs14bn in IIFL One) and Rs46bn in asset management (including Rs25bn in alternate assets and Rs20bn in portfolio management). IIFLW expects Rs200bn of net flows in FY22 – led equally by both wealth as well as asset management. 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.

 

* Recurring revenue assets up 15% QoQ constituting 68% of revenue: Strategic focus on ramping-up recurring revenue assets (RRAs) has yielded encouraging results. Overall RRA AUM is up 61% YoY/ 15% QoQ to Rs1.17trn – now constituting 50% of AUM. Relative to this, RRA revenue grew 20% QoQ to Rs1.92bn as retention rates normalised to >70bps (67bps in Q4FY21).

This was primarily due to 10bps rise in retention rates on IIFL One discretionary PMS to 50bps and higher distribution trail fee on managed accounts. Also, relatively stronger flows into high yielding alternate asset management supported this. Retention rates are likely to get a boost as third party transactional assets are mobilised and distributors are churned and rechannelised into revenue-generating assets in different capacities. Due to incremental delta on IPO financing, lending business revenue grew 11% QoQ (despite 2% decline in quarter ending book).

 

* IIFL One continues to gain market acceptance: IIFL ONE continues to show strong trajectory and gain market acceptance, with 9% QoQ/52% YoY rise in AUM to Rs305bn. The reasons would be: i) RMs’ greater focus towards distribution products at hand; ii) time lag on getting licenses, certification, etc; and iii) RM adoption and productivity ratio at 65-70% of optimal capacity. However, the technology on advisory services is now in place and the team too has been strengthened. With this, IIFL One now targets asset growth of around 50-55%.

 

* Staff costs elevated due to higher variable component: Incentivising employees for strong flows continue and employee cost, even on an elevated base of Q3/Q4FY21, was flat QoQ. Nonetheless, admin expenses were well managed, which were down 8% QoQ. Overall, superior income profile helped contain cost to income at 50.4% vs 53.9% QoQ and 54.3% YoY.

For FY22, employee cost is likely to be around the similar levels as seen in Q1FY22, which was Rs0.7bn (including Rs0.45bn towards variable cost). Overall for FY22, we expect staff cost to be in the range of Rs4.6-4.7bn while other admin cost is likely to be in the range of Rs1.6bn (Rs0.4bn quarterly run-rate). We expect 'cost to income' ratio to sustain at 49-51% by FY22/FY23. Large cost rationalisation will come from digitisation of services and making trade execution more seamless.

 

* Special dividend of Rs35 per share; aggressive dividend payout to continue: With focus on improving capital efficiency, the company announced special dividend of Rs35 per share. Besides this, it will continue with aggressive dividend payout in the range of 70-80%. With efficiency, it will move towards tangible RoE target of 20%.

 

* FY22 guidance articulated post Q4FY21: Witnessing the business momentum in FY21 and staying put on ramping-up sustainable recurring revenues, management is now more confident about business transitioning and has revised its FY22 guidance upwards. It has now set a target of 18% AUM growth for FY22 to Rs2.45trn and 16% for FY23 to Rs2.85trn. It has guided for some moderation in retention rate from 57bps to 54bps in FY22 and 52bps in FY23. Revenues are guided to grow at 15% CAGR over FY21-FY23E. With ‘cost to income’ ratio of 49-51%, management expects 20% CAGR in PAT thereby, helping deliver RoE of 16% in FY22 and 19% in FY23.

 

To Read Complete Report & Disclaimer Click Here

 

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

 

Above views are of the author and not of the website kindly read disclaimer