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New opportunities beckon

IIFLWAM is on the verge of transitioning to earning majority of its revenue from a trail-based model as compared to a transaction-based one. It embarked on this journey from FY20 and had targeted to complete the same in three-to-four years. With a supportive market and conscious efforts, the transition is expected to be completed ahead of schedule, with benefits reaped from FY23 onwards.

 Its core focus segment – UHNI (clients with a net worth of over INR250m) –is expected to see rapid grow, with: 1) major monetization of stakes by the founders of startups, 2) the next generation of UHNIs preferring organized Wealth Management platforms, and 3) interest rate remaining low.

Amid this, IIFLWAM plans to: 1) enter into eight cities where it sees large opportunities, and 2) capture a significant market share, leveraging its relationships (via pre-IPO investments or other products) with new age startup founders.

IIFLWAM has been at the forefront of product innovation in AIFs. Having built a strong team, with recent additions, the management aims to leverage its record of delivering industry beating returns to capture significant market share, amid rising demand for these products.

The management plans to enter the INR50-250m net worth segment in early FY24. It has roped in BCG as a consultant to shape its strategy for the same. Its existing products and processes will play a key role in achieving scale in this segment. However, tailor-made products for this segment will be the additional growth driver.

From an estimated AUM of INR2.8t at the end of FY22, we expect IIFLWAM to end FY24 with an AUM of INR3.5t v/s the management’s guidance of INR 3.84t. On a closing basis, we expect AUM under ARR to witness a CAGR of 22.5%, but remain flat for TBR.

The revenue growth in ARR segment is likely to moderate, led by a decline in retentions on AUM under its AMC. AUM under IIFL-ONE is expected to trend higher on rising share of discretionary PMS. TBR yields are likely to see a significant fall as transaction volumes normalize from elevated levels of FY22.

We expect a significant improvement in profitability on the back of a marked reduction in employee costs, due to: 1) completion of the soft landing needed to retain RMs during this business transition, and 2) onetime payments in FY22 to attract new talent. Scale benefits will also help improve PBT margin to 49.3% in FY24E from 42.5% in FY22E.

The stock currently trades at an attractive FY24E P/E of 20.5x, given its strong earnings CAGR of 18% over FY22-24E. We maintain our Buy rating with a one-year TP of INR2,200/share.

Transition to a stronger ARR revenue profile almost complete

IIFLWAM is India’s third largest wealth manager with over 10% market share. Over the years, it has built a robust business model, backed by strong relationships.

Two years ago, it embarked on a journey to create a more resilient and sustainable recurring revenue model. The primary objective of the move was return optimization for clients by eliminating vendor commissions and transaction brokerages. It also aimed to improve revenue predictability as empirically transaction revenue has been quite volatile.

The business transition is being driven by: 1) aggressive expansion in the advisory platform, 2) introduction of its flagship product – IIFL-ONE, and 3) scaling up of the AMC and Lending businesses (credit solutions provided to its own clients).

The shift has progressed at a fast pace and is nearing the end, ahead of its estimated timeline of three-to- four years.

This move led to overall stress on its performance. Going forward, we expect the same to start bearing fruit, with: 1) FY21 revenue already reaching FY19 (pretransition) levels, and 2) completion of the shift in RM payout to trail from upfront in FY22. The management expects FY23 to be the actual representation of its cost structure, with all one-off expenses related to the acquisition of L&T Wealth Management as well as the business model transition getting completed. Its FY22 financials include one-offs to the tune of INR700-800m.

Ultra HNIs (with a wealth of over INR250m) remain its core category

India is one of the fastest-growing Asian countries in terms of its Ultra HNI population. However, only 14% of India’s HNI wealth are under formal advice and management as compared to almost 68% for China. The rapidly growing pie and low penetration thus offer huge growth potential for India’s Wealth Management industry.

Overall industry size in terms of revenue stands at INR80-110b, of which IIFLWAM has ~10% market share.

Going forward, the company expects to grow faster than the industry by expanding its geographic reach. At present, IIFLWAM predominantly derive its clients and assets (71.2% of its AUM) from the top 10 cities.

Increasing wealth in Tier II and III cities provide a huge headroom for growth. IIFLWAM intends to garner incremental market share by increasing its presence in these cities. It has already identified nine cities – Indore, Nagpur, Rajkot, Surat, Aurangabad, Bhavnagar, Jaipur, Baroda, and Coimbatore – where it sees great potential.

These are expected to be satellite offices as the company currently remains wary of raising costs.

Although the cost of acquisition will be relatively higher in these newer geographies, it will not have a material cost impact.

It aspires to tap the wealth of the new-age promoter group by leveraging its huge ecosystem.

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