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Recurring revenue assets scale up on track; variable costs elevated

IIFL Wealth & Asset Management (IIFLW) reported Q4FY21 consolidated PAT of Rs1.03bn (up 5% QoQ) thereby exiting FY21 with PAT of Rs3.7bn (in line with our expectations). Earnings were characterised by continued build-up of recurring revenue assets (up 13% QoQ / 63% YoY), sustained traction in IIFL One (8% QoQ), and an uptick in transactional revenues too, more than offsetting elevated variable costs and lower return on loans.

IIFLW stayed put on its strategic business priorities focusing on revenue and cost efficiency and capital rationalisation. There is improved visibility on steady retention rates, AUM growth at a CAGR of >15% for FY21-FY23E and ‘cost to income’ at 51-53%, which will support earnings CAGR of >15% over FY21-FY23E and scale up RoEs to 17% by FY23E. Maintain BUY with a revised target price of Rs 1,527 (assigning 27x FY23E earnings, earlier Rs 1,487).

* FY22 guidance revised upward:

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 upward. 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 the ‘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.

* IIFL One assets traction slower than guided, but geared for ramp-up:

IIFL One assets, despite growing 8% QoQ / 58% YoY, exited FY21 with slower than expected traction. The reasons would be: i) RMs’ greater focus towards distribution products at hand; ii) time lag on getting licenses, certification, etc; 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 at around 50-55%.

* Recurring revenue assets breach target of Rs1trn:

Strategic focus on ramping up recurring revenue assets (RRAs) has yielded encouraging results. Overall RRA AUM is up 63% / 13% QoQ to Rs1.02trn – breaching the target set for end of FY21. Relative to this, RRA revenues grew 13% YoY in Q4FY21 and a mere 9% for full year FY21 primarily due to drag on lending business revenues (down 17% in FY21). Retention rates on RRAs further declined 6bps to 67bps. This was primarily due to ramp-up of discretionary institutional mandates in PMS and lower yield on alternate asset management. Retention rates are likely to get further boost as third party transactional assets are mobilised and distributors are churned and rechannelised into revenue generating assets in different capacities.

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