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Transactional revenues offset spike in opex; upbeat guidance articulated for FY23/FY24

IIFL Wealth & Asset Management’s (IIFLW) earnings growth of 10% QoQ/59% YoY in Q3FY22 to Rs1.55n was ahead of our expectations of Rs1.4bn. ARR revenue grew 10% QoQ/59% YoY, now constituting 58% of overall revenue. Besides this, earnings were primarily buoyed by transactional/brokerage revenue of Rs1.33bn (Rs920mn/Rs210mn in Q2/Q1FY22) and other income of Rs420mn (Rs1.11bn in 9MFY22). This was offset by a sharp spike in opex of 28% QoQ (46% YoY) with cost to income at 52.9%. The company has laid out guidance for FY23/FY24 that is 5% higher than our estimates. It targets: i) ARR asset growth of 25-30%, ii) overall retention ratio of 55bps, iii) reduction in cost to income ratio to 45% in FY23 and 41- 43% in FY24, iv) PAT CAGR of 20% over FY22-24E, v) tangible RoEs of >25% for FY23 and toward 30% for FY24. We revise our earnings estimates by 7%/11% for FY22/FY23E. Assigning 26.5x to Sep’23E (ttm) earnings, we revise our target price upwards to Rs2,217 (earlier: Rs2,109). Maintain BUY

Recurring revenue assets up 5.3% QoQ, retention rates improve marginally to 74bps: Relentless focus on clients, product innovation and building the right team continues to ramp-up recurring revenue assets (RRAs). Overall RRA AUM is 5.3% QoQ/53.5% YoY crossing Rs1.39trn – now constituting 53% of AUM. Relative to this, RRA revenue grew 10% QoQ/59% YoY to Rs2.45bn as retention rates improved marginally to 74bps (72bps in Q2FY22). 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. Lending AUM was up 37% YoY/17% QoQ due to incremental delta from IPO financing. However, with NIMs being maintained at 5%, interest income was up 30% YoY (3% QoQ) to Rs590mn, constituting 14% of revenues.

Net inflows led by mutual funds and PMS institutional mandates: Management highlighted that overall sentiment remains upbeat, with allocations towards risk assets still increasing, albeit at a slower rate. Net flows improved to Rs28.3bn (Rs142bn in 9MFY22) in wealth management business and Rs35.6bn (Rs102bn in 9MFY22) in asset management. In 9MFY22, it has witnessed net inflows of Rs242bn, equivalent to flow for full-year FY21). Wealth management witnessed Rs45.6bn inflows into equity AUM while debt AUM saw net run-down of Rs23bn. In asset management, mutual fund witnessed strong accretion. Overall, 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

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