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Strong net inflows; healthy beat on profitability

* PAT grew 13% QoQ and 42% YoY to INR1.17b (14% beat) in 1QFY22. The beat on profitability was driven by: a) a 12% beat on net revenue (+7 QoQ and 43% YoY to INR2.8b) owing to both Annual Recurring Revenue (ARR, 10% beat) and Transactional/Brokerage Revenue (TBR, -16% beat), b) better operating efficiency (CIR of 54% v/s our estimate of 56.5%), and c) a lower tax rate of 22.6% (est. 24%).

* 1QFY22 saw strong net inflows of INR143b (including corporate treasury inflows of INR52b), of which INR97b/INR46b belonged to ARR/TBR. Net inflows were strong across ARR assets – INR14b/INR46b/INR36b for IIFL ONE/AMC/third-party assets. Unlike 4QFY21, net inflows were more granular in 1QFY22.

* Gross AUM (excluding custody assets) grew 14% QoQ and 33% YoY, with a continued shift in the mix towards ARR assets. ARR’s share rose 75bp QoQ to 50% (v/s 41% YoY). The share of ARR in overall revenue stood at 67%, reaching targeted levels of 70-75%. Within ARR assets, AMC and Distribution AUM grew 19% QoQ. 1QFY22 also witnessed an increase in the share of high-yielding DPMS assets within IIFL ONE assets.

Gross AUM reaches INR2.35t; shift in mix favors ARR assets

* ARR assets rose 15% QoQ and 61% YoY to INR1.18t. TBR assets were up 12% QoQ and 14% YoY to INR1.18t.

* While IIFL ONE continued to gain traction, with AUM up 9% QoQ and 52% YoY to ~INR305b, other segments within ARR (AMC/Distribution) outpaced growth with 19% QoQ growth. The share of the Discretionary portfolio (the highest yielding portfolio) in IIFL ONE improved to 35% v/s 31% in 4QFY21.

Overall yields flat QoQ; but mix favors granular ARR assets

* Net revenue beat our estimate by 12%, driven by a beat in both ARR/TBR by 10%/16%. ARR grew 20% QoQ and 52% YoY to INR1.9b, and TBR grew 26% YoY, but declined 14% QoQ on a higher base.

* ARR yield improved by 4bp QoQ to 71bp, whereas TBR yield returned to the 30-35bp range at 33bp. Net operational yield was largely stable QoQ at 52bp. Within the ARR segment, net yield improved to 33bp/58bp (+5bp/+9bp QoQ) for IIFL ONE/Distribution assets. Distribution yield was driven by managed assets yield of 1.28% (+22bp QoQ).

* Decline in direct stock brokerage and lower lumpy transaction revenue was the key reasons for the decline in TBR yield.

* Total opex remained flat QoQ, but was up 18% YoY to INR1.5b (7% miss). Operating efficiencies continued to play out, with CIR down to 54% v/s 64% a year ago.

Highlights from the management commentary

* Dividend payout to be 70-80% of annual PAT going forward.

* The management expects 12-15% AUM CAGR, with profit CAGR of 18-25% over FY21-26.

Other highlights

* The board declared an interim dividend of INR35/share. The proposed dividend would lead to an outflow of ~INR3.1b and reduce tangible (excluding goodwill of INR5.3b) net worth to ~INR21.3b.

* After the dividend payout, allocated net worth to the Wealth/AMC businesses would decline to INR5.6b/INR3.4b (v/s INR7.7b/INR4.1b). The allocated net worth of the NBFC business would remain largely stable at INR12.3b (v/s INR12.6b earlier).

* The NBFC loan book remains largely range bound ~INR33b.

Valuation and view

Over the past decade, IIFLWAM has evolved into one of the best wealth management franchises in India. It has also become one of the largest alternate asset managers, with unique product offerings. With IIFL ONE, the company is looking to change the way wealth management is offered in India. Traction in ARR assets and IIFL ONE, in particular, remains healthy.

1QFY22 witnessed a glimpse of improving yield on IIFL ONE, which reached (reported: 33bp) targeted levels of 40bp. Over the last two quarters, net flows have been encouraging. We upgrade our estimates by ~13% for FY22/23 and ~9% for FY24. Buy with a TP of INR1,775/share (26x FY23E EPS).

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