Detailed Rationale

CRISIL Ratings has reaffirmed its rating on the commercial paper programme (IPO financing) of 360 One Wam Limited (360 One; erstwhile IIFL Wealth Management Ltd) at 'CRISIL A1+'.

 

The ratings factor in the stable and experienced management, strong market position and comfortable capitalisation 360 ONE. These strengths are partially offset by the limited diversity in lending operations and exposure to regulatory risk.

Analytical Approach

CRISIL Ratings has consolidated the business and financial risk profiles of 360 ONE WAM Ltd and its subsidiary, 360 ONE Prime Ltd (erstwhile IIFL Wealth Prime Ltd). This is because, these entities are collectively referred to as 360 ONE, and have significant operational, financial, and managerial integration. Additionally, they share a common brand - ‘360 ONE.

 

Please refer Annexure - List of a Consolidated, which captures the list of entities considered and their analytical treatment of consolidation

Key Rating Drivers & Detailed Description

Strengths:

Strong market position in the wealth management business

360 ONE group is one of India’s largest non-bank wealth management payers. Its wealth business asset under management (AUM) grew by 12.29% in the first quarter of fiscal 2024 to Rs 3.82 lakh crore. AUM excluding custody assets stood at Rs 2.74 lakh crore and Rs 2.61 lakh crore at end fiscal 2023 and fiscal 2022 respectively.

 

360 ONE caters to premium wealth clients, and offers a full suite of services, including distribution, advisory, asset management, broking, and lending. Currently, wealth management business is targeting UHNI segment and going forward, the management aims at increasing its reach to HNIs i.e. the mid-market segment.

 

360 ONE’s asset management AUM grew by 10% in the first quarter of fiscal 2024 to Rs 0.64 lakh crore from Rs 0.58 lakh crore and Rs 0.56 lakh crore at end fiscal 2023 and fiscal 2022. The asset management business houses the alternative investment funds (AIFs) business, discretionary portfolio management services and Mutual funds. While other two are still in growth stage, 360 ONE has a leadership position in the AIFs business in India with AUM of Rs 0.37 lakh crore as on June 30, 2023 (Rs 0.35 lakh crore as on March 31, 2023). In AIF business, private equity, listed equities, private credit, Infra and RE are key strategies, and this business segment is expected to be the key driver to 360 ONE’s growth in the AMC business.

 

Experienced and stable management

The management is well experienced with a track record of over a decade in the wealth management domain. Mr Karan Bhagat (Managing Director and Chief Executive Office) and Mr Yatin Shah (Executive Director) were instrumental in setting up the business in 2008. Both acquired the promoter status, after IIFL Group entities were demerged in May 2019. The company retains its market leading position on the back of innovative wealth products and adoption of global best practices.

 

Comfortable capitalisation; supported by presence of marquee institutional investors

Capitalisation is comfortable, with tangible networth of Rs 2574 crore and gearing of 2.8 times as on June 30, 2023 (Rs 2521 crore and 2.7 times, respectively, as on March 31, 2023). Transition of revenue model from a distribution-based to advisory-focused model has lowered the capital requirement for business growth. The company uses capital primarily to support the NBFC business, sponsor-commitment in AIFs, and to cover operating expenses in the interim.

 

It has raised funds from external investors in the past, including Rs 750 crore in fiscal 2019 from General Atlantic, Steadview Capital, HDFC Life and others. The wholly owned subsidiary, 360 ONE Prime Limited had a networth of Rs 1,386 crore and gearing of 4.8 times as on June 30, 2023 (Rs 1,397 crore and 4.3 times, respectively, as on March 31, 2023). Parent supports subsidiary’s capital position and had infused Rs 500 crore in the fiscal 2019, apart from Rs 962 crore in fiscal 2016.

 

Weakness:

Exposure to regulatory risk in the wealth management business

Unlike lending operations, wealth management is largely a fee-based business, due to which any credit event has a relatively lower impact on the capital base. However, the wealth and asset management businesses operate in a highly regulated environment, and any unanticipated changes can adversely impact the business model. In the last few years, regulations that prohibited upfront commissions and reduced in mutual fund total expense ratios, led to a sharp erosion in commission income. Profitability of many players, including 360 ONE WAM, suffered as they adapted to the new environment by modifying their respective business models. The overall retention rate on average annual recurring revenue earning assets was 0.73% for 1QFY24, against 0.78% for FY23 and 0.74% in FY22.

 

Proactive transition to an advisory platform (360 ONE) and recognition of revenue on trail-basis, lends stability to the top-line. Client’s adoption of 360 ONE, which has been slower than earlier anticipated by the management, and any regulatory change that potentially impacts the business, will remain key monitorables.

 

Low diversity of lending operations

360 ONE Prime, which commenced operations in fiscal 2016, provides LAS to client of 360 ONE WAM. In general, size of the book is strongly correlated to ebbs and flows of the capital and money market, and are affected by both domestic and international events. AUM stood at Rs 4480 crore as on June 30, 2023, as compared with Rs 4837 crore as on March 31, 2023. As on June 30, 2023, which comprised of 83% loans against securities (LAS), 9% loan against property (LAP) and 8% others, which includes unsecured loan, and margin trading facility.

 

Gross non-performing assets (GNPAs) were nil as on June 30,2023 and March 31, 2023. Asset quality remains vulnerable to the vagaries of capital markets.

Liquidity; Strong

Liquidity for all the 360 ONE subsidiaries is managed at a consolidated level.

 

As on same date, 360 ONE (consolidated) had liquid investments and unutilised bank lines of Rs 2,549 crore, against total debt of Rs 2255 crore maturing In September 2023. Excluding commercial papers of Rs 1918 crore, of which major portion is expected to roll over, the liquidity as on August 31, 2023, is sufficient to meet repayments till up to January 2024. Furthermore, 360 ONE continues to tap debt capital markets for fresh issuances.

 

360 ONE Prime’s asset liability maturity statement as on August 31, 2023, had positive cumulative mismatches in all buckets.

 

Environment, Social, and Governance (ESG) Profile

CRISIL Ratings believes that 360 ONE WAM’s ESG profile supports its already strong credit risk profile.

 

The ESG profile of financial institutions typically factors in governance as a key differentiator. However, wealth management is primarily a fee-based business, with limited impact on social parameters. Also, the business does not directly impact the environment adversely.

 

Key ESG highlights:

• 360 ONE WAM has decided to source its energy from renewable sources in order to reduce its emission. It has entered into an arrangement with TATA Power for procurement of green energy
• 360 ONE WAM took various energy efficiency initiatives such as installation of capacitors and thin film transistor (TFT), migrating to LED lights, automatic shutdown of idle monitors, and restricted access to printers
• Women comprised 32% of the total workforce. In the board, one member out of 11 members, is a woman.
• Out of 10 board members, 4 (40%) are independent directors. Further, the company has split within chairman and executive positions. Additionally, the company has mechanisms for redressal of investor grievances and extensive disclosures.

 

There is growing importance of ESG among investors and lenders. 360 ONE’s commitment to ESG will play a key role in enhancing stakeholder confidence, given substantial share of foreign investors as well as access to domestic capital markets.

Rating Sensitivity Factors

Downward factors

• Dilution in risk management practices, straining the asset quality, coupled with a weakening of margin
• Significant deterioration in AUM with high attrition among clients and relationship managers
• Adverse impact of regulations, constraining the business risk profile significantly

About the Company

In fiscal 2009, the 360 ONE group started its wealth management services under the ‘IIFL Wealth’ brand and got licences for insurance broking and venture capital. 360 ONE WAM, along with its wholly owned subsidiaries, is primarily engaged in distribution, advisory, asset management, broking, and lending solutions for clients in the wealth management segment.

 

In January 2018, IIFL Finance Ltd (IIFL Finance; earlier IIFL Holdings Ltd) announced plans to reorganise its corporate structure and list the three entities – IIFL Finance (loans and mortgages business), IIFL Wealth (wealth and asset management business), and IIFL Securities (capital markets and other businesses). In May 2019, as part of this restructuring scheme, IIFL Wealth and IIFL Securities were demerged from IIFL Finance. Further, in September 2019, IIFL Wealth Management was listed on the stock exchanges, followed by a name change to 360 ONE WAM Limited’ in January 2023

 

Change in the revenue recognition model to trail basis across distribution, AIF and portfolio management services impacted profitability. Margin was also affected by the company’s plans to transition to an advisory model from the distributor fee model, though the move aimed at reducing volatility associated with distribution fees.

 

In fiscal 2023, profit after tax (PAT) was Rs 658 crore on total income of Rs 2064 crore as against Rs 578 crore and Rs 2078 crore, respectively reported in the previous fiscal.

 

Further, for first quarter of fiscal 2024, the company reported PAT of Rs 183.6 crore on total income of Rs 567 crore.

Any other information: Not applicable