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 September 30, 2022, AUM (excluding custody assets) was Rs 2.68 lakh crore, up from Rs 2.62 lakh crore as on March 31, 2022 (Rs 2.07 lakh crore as on March 31, 2021). 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 32,869 crore as on September 30, 2022 (Rs 32,500 crore as on March 31, 2022). As on March 31, 2022, it had 59 team leaders and 228 relationship managers (RMs) across 25 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 3931 crore as on September 30, 2022 (Rs 3,862 crore as on March 31, 2022), 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 2,522 crore and low adjusted gearing of 2.2 times as on September 30, 2022 (Rs 2,474 crore and 2.2 times, respectively, as on March 31, 2022). 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 1,907 crore and gearing of 2.5 times as on September 30, 2022 (Rs 1,898 crore and 2.6 times, respectively, as on March 31, 2022). 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 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 and remained at similar level as on September 30, 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. AUM stood at Rs 3931 crore as on September 30, 2022, as compared with Rs 3,862 crore as on March 31, 2022. As on September 30, 2022, which comprised of 88% loans against securities (LAS), 5% loan against property (LAP) and 7% others, which includes unsecured loan, and margin trading facility.

Gross non-performing assets (GNPAs) were nil as on September 30, 2022 and March 31, 2022. GNPA was 2.2% a year back as on March 31, 2021. 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.

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 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
• IIFL Wealth 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 28% of the total workforce, out of which 1% in senior management, 7% in middle management, and 20% in junior management as on March 31, 2022. 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.

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.

Key Financial Indicators : IIFL Wealth Management (Consolidated)

 Key Financial Indicators: IIFL Wealth Prime

Annexure - Details of Instrument(s)

*Yet to be issued

Annexure - Details of Rating Withdrawn

Annexure – List of entities consolidated

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