Detailed Rationale

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

 

The rating factors in the stable and experienced management, strong market position and comfortable capitalisation of IIFL Wealth Management Ltd. 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 IIFL Wealth Management Ltd and its subsidiaries, including IIFL Wealth Prime Ltd (IIFL Wealth Prime). This is because, these entities are collectively referred to as IIFL Wealth, and have significant operational, financial, and managerial integration. Additionally, they share a common brand - ‘IIFL Wealth’. The ratings factor in business synergies that IIFL Wealth has with other group entities, IIFL Finance and IIFL Securities, which have common promoters and shared brand name ‘IIFL’.

 

Please refer Annexure - List of entities 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

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.

Liquidity: Strong

Liquidity for all the IIFL Wealth Management subsidiaries is managed at a consolidated level. IIFL Wealth Prime’s asset liability maturity had positive cumulative mismatches in all buckets up to one year as on May 31, 2022.

 

As on same date, IIFL Wealth (consolidated) had liquid investments and unutilised bank lines of Rs 946 crore, against total debt of Rs 247 crore maturing till July 31, 2022, (excluding Rs 1,018 crore of commercial papers, which are expected to roll over). Furthermore, IIFL Wealth continues to tap debt capital markets for fresh issuances.

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

 

Environment, Social, and Governance (ESG) Profile

CRISIL Ratings believes that IIFL Wealth’ 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:

IIFL Wealth took various initiatives to lower its power consumption, such as migrating to LED lights, power efficient TFT monitors, and replacing old printers.

• Women comprised 26% of the total workforce, out of which 1% in senior management, 7% in middle management, and 20% in junior management as on March 31, 2021. In the board, one member out of 11, is a woman.
• Out of 11 board members, 4 (36%) 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.
• ESG disclosures of the company are evolving, and the company is in the process of further strengthening the disclosures going forward

 

There is growing importance of ESG among investors and lenders. IIFL Wealth’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.

About IIFL Wealth

In fiscal 2009, the IIFL Wealth group started its wealth management services under the ‘IIFL Wealth’ brand and got licences for insurance broking and venture capital. IIFL Wealth Management, 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.

 

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 2022, profit after tax (PAT) was Rs 582 crore on total income of Rs 1,535 crore as against Rs 369 crore and Rs 1,053 crore, respectively reported in the previous fiscal.

 

IIFL Wealth’s revenue is in the form of commission and trail income from distribution of financial products, brokerage, interest income on the NBFC book, advisory fees, and management fees. As on March 31, 2022, the wealth management segment accounted for 79% of the AUM and asset management formed 21%. Wealth management contributed to 75% of revenue, out of which 36% was recurring and 39% was transactional. Asset management formed 25% of revenue, which was completely recurring in nature. Acquisition of L&T Capital Markets completed in April 2020, which added Rs 9,919 crore to the AUM. On March 30, 2022, Bain Capital announced signing of an agreement with General Atlantic and FIH Mauritius Investments (Fairfax group) to acquire 24.98% equity in the company. This transaction is yet to complete,

 

The company launched a wealth management solution named ‘IIFL One’ in 2018. It is an advisory platform that institutionalises investment options under a transparent single-fee structure.

Key Financial Indicators: IIFL Wealth Management (Consolidated)

As on/for the period ended March 31	Unit	2022	2021
AUM (excl. custody assets)	Rs crore	261,745	2,07,044
Tangible networth	Rs crore	2,474	2,303
Total assets	Rs crore	10,740	8,740
Total income	Rs crore	1,535	1,053
PAT	Rs crore	582	369
Gross NPA	%	Nil	2.2
Return on tangible networth	%	24.4	14.7
Return on assets	%	5.97	3.39
Adjusted gearing	Times	2.2	2.0

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity Level	Rating outstanding with outlook
NA	Commercial paper programme (IPO financing)	NA	NA	7-30 days	2500	Simple	CRISIL A1+