Key Rating Drivers & Detailed Description
Strengths:
- Strong market position in the wealth management business
IIFL Wealth is one of India’s largest wealth advisors, by assets under management (AUM). As on March 31, 2022, AUM (excluding custody assets) was Rs 2.62 lakh crore, up from Rs 2.07 lakh crore in the previous year. The company caters to premium wealth clients, and offers a full suite of services, including distribution, advisory, asset management, broking, and lending. Additionally, IIFL Wealth is among the largest managers of alternate investment funds (AIFs) in India, with AUM of Rs 32,500 crore as on March 31, 2022 (Rs 23,700 crore a year before). As on March 31, 2022, it had 60 team leaders and 167 relationship managers (RMs) across 27 offices. The company is likely to maintain its leading position in the wealth management business over the medium term. Its wholly owned non-banking financial company (NBFC), IIFL Wealth Prime, had AUM of Rs 3,862 crore as on March 31, 2022 (Rs 3,620 crore as on March 31, 2021), to wealth clients.
- 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 2,474 crore and low adjusted gearing of 2.2 times as on March 31, 2022 (Rs 2,303 crore and 2.0 times, respectively, as on March 31, 2021). Transition of revenue model from a distribution-based to advisory-focused 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, IIFL Wealth Prime had a networth of Rs 1,898 crore and gearing of 2.6 times as on March 31, 2022 (Rs 1,694 crore and 2.5 times, respectively, as on March 31, 2021). Parent supports subsidiary’s capital position, and had infused Rs 500 crore in the fiscal 2019, apart from Rs 962 crore in fiscal 2016 .
Weaknesses:
- 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 IIFL Wealth, suffered as they adapted to the new environment by modifying their respective business models. The overall retention rate (revenue earned/average AUM) declined to 0.57% in fiscal 2021 and 0.54% in fiscal 2020, from 0.74% in fiscal 2019. It improved to 0.63% in fiscal 2022.
Proactive transition to an advisory platform (IIFL ONE) and recognition of revenue on trail-basis, lends stability to the top-line. Client’s adoption of IIFL 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
IIFL Wealth Prime, which commenced operations in fiscal 2016, provides LAS to client of IIFL Wealth. 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. Loan book stood at Rs 3,862 crore as on March 31, 2022, as compared with Rs 3,620 crore a year before. As on March 31, 2022, which comprised of 87% loans against securities (LAS), 7% loan against property (LAP) and 6% others, which includes unsecured loan, and margin trading facility.
Gross non-performing assets (GNPAs) were nil as on March 31, 2022. GNPA was 2.2% a year back as on March 31, 2021, due to one wealth client who was restricted from liquidating ESOPs. Nevertheless, the account had sufficient security cover, and was resolved during fiscal 2022 without incurring any credit cost.
Asset quality remains vulnerable to the vagaries of capital markets.