EQUITY RESEARCH: IIFL SECURITY

Summary

IIFL Securities Ltd provides capital market offerings in the primary and secondary markets in India. It operates via Capital Market Activity, Insurance Broking, Facility & Ancillary, and Other segments. The employer gives retail broker products and services comprising equity, commodities and currency broker, and equity research; advisory offerings, inclusive of monetary planning, depository participant, mutual funds and bonds, PMS, AIFs, and retirement and estate making plans; dealer offerings; investment banking services inclusive of IPO, certified institutional placement, right issues, preferential placement, follow-on public offer, mergers and acquisitions, share buybacks, tender offers, and delistings; and advisory offerings for non-public equity placements, and mergers and acquisitions. It additionally distributes third-party economic products, including mutual funds, insurance, PMS, AIFs, fixed deposits, loans, and pension products. It serves retail and mass affluent traders, domestic and foreign institutional buyers, sovereign wealth funds, banks, and private equity funds and corporate. The company was formerly known as India Infoline Ltd and changed its name to IIFL Securities Ltd in February 2018. IIFL Securities Ltd was established in 1995 and is primarily based in Mumbai, India.

ABOUT:

One of the major capital market participants in the Indian financial services industry is IIFL Securities Ltd (IIFLSEC). IIFLSEC provides consulting and brokerage services, financial product distribution, institutional research, and investment banking services, along with its subsidiaries. The firm serves more than 3 million clients through a network of 2,500 sites, including branches and business partners spread throughout 500+ locations through own and franchisee offices. As of March 31, 2023, it had over 850 local and international customers on the institutional side. There are 2.5 million total clients and 0.5 million active retail clients. 450 RMs make up IIFLSEC.

The India Infoline Group's former flagship company, IIFLSEC, was founded as Probity Research and Services in October 1995 before changing its name to India Infoline Ltd in March 2000. The business participates in trading on the BSE and NSE. The holding firm for the whole IIFL group was called IIFL Finance, formerly known as IIFL Holdings Ltd. The wealth and securities divisions of IIFL Holdings Ltd were split off to form IIFL Securities Ltd and IIFL Wealth Management Ltd, respectively, as part of a corporate reorganization. IIFL Securities was formally listed on stock exchanges in September 2019.

In February of this year, IIFLSEC completed the buyback of 1.7 billion shares on the open market at an average cost of Rs. 51 per share. In February of this year, the company won the offer for Karvy Stock Broking's demat accounts with NSDL and CDSL, and roughly 1.1 million demat accounts from Karvy were purchased in an official bidding procedure run by stock exchanges and depositories. With a total SIP AUM of Rs. 2100cr, the business averages 1.5 lakh SIP transactions per month. Promoters, Fairfax, and other institutions each control 19.6% of the corporation, while promoters possess 31.1% of it.

SEGMENTS:

Retail broking and distribution:

One-stop shop for financial products:

• Open architecture model in distribution.
• MF and Insurance are retail-focused products with good long-term growth prospects.
• Insurance premiums amounted to ₹974 Million for H1FY24, up by 3% y-o-y.
• Mutual Fund AUM is up by 16% y-o-y to ₹85.9 Billion as of September 30, 2023. SIP AUM is up by 34% y-o-y to ₹22.9 Billion with an average transaction count of ~1.6 lakhs per month.

Retail focus on insurance and mutual funds:

Strong Research Capabilities:

Pedigreed institutional equities team comprising 35 analysts covering over 267 stocks across 20+ sectors accounting for over 74% of India’s market capitalization.

A leading investment bank in India:

• Completed 17 transactions in the last quarter and 26 in the half year across capital markets and private equity
• Includes 6 IPOs, 2 QIPs, 2 OFS, 1 buyback, and a number of private placements / private equity transactions
• Completed the largest QIP in the last two years
• Won a number of mandates in private equity and IPOs
• Ranked #1 for IPOs in FY23 and 1H FY24 

CUSTOMER ACQUISITION

SHAREHOLDING PATTERN

MANAGEMENT

INDUSTRY

Indian Broking Industry

Low retail penetration

Over the past ten years, the Indian stock exchange has experienced exponential expansion. Nevertheless, in comparison to the rest of the world, it is still underpenetrated. Only 123 million (NSDL+ CDSL) Indians, or about 4% of the population, as of FY23 had demat accounts. In contrast, more than 50% of Americans are stockholders. Even in China, 7% of people invest in stocks, which is greater than the 4% in India. This suggests there is significant space for the stock market to expand.

ADTO has increased in recent times

Approximately 25 million new demat accounts were opened in FY23 as opposed to 35 million in FY22, according to SEBI, the capital markets regulator. The cash market's average daily turnover (ADTO) surged to Rs 66,800cr in FY22 before declining to Rs 53,500 in FY23. The derivative market's average daily turnover climbed by 10% year over year to Rs 1.61 lakh crore. Strong customer addition and market volatility are important drivers of the derivative segment's rising volumes. The demand for financial products has increased in smaller cities as a result of rising financial literacy, mobile penetration, expanding awareness, and the establishment of Jan Dhan bank accounts. Technology advancements have made financial services accessible throughout India, which not only raises consumer awareness of these products but also lowers the cost to businesses of entering niche sectors.

FINANCIALS

Sharp increases in retail broking and financial product distribution revenues drove the company's overall revenue growth of 40% YoY and 2% QoQ to Rs 409cr. Due to higher cash and F&O turnover, retail broking revenue increased by 16% YoY to Rs 126cr. AIF, PMS, and insurance product sales surged, which resulted in a more than doubling of distribution income to Rs 85 crore. As a result of closing nine deals in the quarter in the areas of capital markets, debt, and private equity, the investment banking division earned income of Rs. 55 crore, an increase of 84% YoY. Employee costs were essentially flat QoQ and are up 4% year over year. The increase in overall borrowing costs is mostly to blame for the 8% QoQ and 12% YoY increases in finance costs. The quarter's net profit was Rs 75 crore, down 13% QoQ and up 71% YoY. AUM and custodial assets rose from Rs. 1.12 lakh crore in Q1FY23 to Rs. 1.47 lakh crore. The first quarter's average daily turnover was Rs 2.31 lakh crore, of which Rs 1,655 crore was in the cash market and Rs 2.3 lakh crore was in the derivatives market. The company increased its product offerings outside the capital markets and submitted two DRHPs to SEBI during the quarter.

KEY INVESTMENT RATIONALE

New demat openings indicate higher turnover

A record number of 3 million new demat accounts were registered in July 2023 and 3.1 million new accounts were opened in August 2023, according to data from the two depositories, CDSL and NSDL, reflecting the expanding retail participation in the stock market. Demat accounts as a whole have reached a new high of 126.60 million. The general mood in the equities markets is still upbeat, thanks to economic expansion, updated infrastructure and real estate construction, a younger population, and a greater public understanding of the advantages of investing for long-term gain. The turnover of cash and derivatives is anticipated to rise as more people start investing in equities, which will lead to greater brokerage fees and eventually increased revenues from the sale of financial instruments.

Buoyant markets to drive higher IB revenue

Since the end of the bull market, more IPOs and M&A transactions have been completed. In total, 37 IPOs were conducted on the Indian market in FY23, raising over Rs 520 billion. 31 Indian corporations raised Rs. 263 billion through main board IPOs in the first half of 2023–2024. Since over 20 deals worth USD 152 billion were completed in 2022, the value of mergers and acquisitions (M&A) deals in the Indian market reached a record high. During FY23, IIFL conducted 29 transactions, including 12 IPOs, 3 QIPs, and 6 debt transactions, as well as a variety of advisory transactions, buybacks, offers for sale, and open offers. Strong momentum in the equity markets is probably going to lead to an increase in IPOs, buybacks, and PE deals in the upcoming years, which will increase the company's revenue from investment banking.

Focus on affluent customers

IIFLSEC is expanding its customer base (especially in the HNI/affluent category), developing an AUM-led model, and diversifying its revenue streams. In accordance with the reorganization plan endorsed by its Board of Directors, the Company has shifted its strategy to focus on wealthy consumers. The Board of Directors authorized the transfer of the online retail trading business of IIFL Securities to 5paisa Capital Limited as part of the reorganization plan. Going forward, clients that require the assistance of RMs or retail clients using sub-brokers will stay with IIFLSEC, while the remainder may switch to 5Paisa. Demerger completion is anticipated within the next 4-6 months. A share of 5paisa Capital would be given to shareholders in accordance with the Scheme of Arrangement for every 50 shares of IIFL Securities held. 15 lakh clients and 5% of income would be impacted by the migration. The corporation will put its attention on increasing revenue and profitability rather than competing for market share. It might take another 4-6 months for this deal to materialize.

Real Estate sales could provide a boost to profits

Some of the huge properties that IIFLSEC owns in places like Chennai, Hyderabad, and Pune are on the market for sale. There may be future sales of additional Mumbai and Delhi homes. Property's total book value is Rs 230 crore, however, the estimated market value is Rs 650 crore. The sale of these properties might significantly increase the company's profitability.

SEBI order stayed by SAT

The company had been barred by SEBI from accepting new clients as stockbrokers for two years as of June 23, 23. This relates to inspections completed for various time periods between April 2011 and 2017. The Securities Appellate Tribunal (SAT) has, however, suspended this order after the corporation filed an appeal against the judgment. Following the implementation of the enhanced supervisory circulation in 2017, SEBI has not discovered any issues. The management is certain that the injunction will be revoked and have no impact on how the business operates.

RISK AND CONCERNS

Market volatility

Volatility risk is a natural part of the capital market. Growth in volume for the broking industry is highly correlated with market volatility, particularly downward volatility. Therefore, any extended period of poor equity market returns might negatively impact a company's sales.

Competition

The brokerage sector is becoming more cutthroat and technologically driven, with new format players spawning price- and technology-based challenges. Due to rising discount broker competition, it is currently under a lot of strain. Even while the capital market cycle has been favorable and volumes have made up for falling yields, a reversal of investments in financial assets will have a severely negative impact on asset prices and trading volumes, which will in turn significantly reduce broking revenues and earnings. Limited gains from customer growth and volume growth went to IIFL SEC. contrary to its

Adverse regulatory change

New regulatory reforms may have a short- to medium-term negative impact on volume in the brokerage industry. Additionally, any unfavorable regulation change or rule violation could hinder a company's expansion.

Market share loss

Due to significant volatility, a sharp increase in passive flows, competition from bargain brokers, and underwritten blocks, IIFLSEC's overall market share decreased from 2% in FY19 to 1.1% in FY23. The stock price of the company can be negatively impacted if the trend persists. Further share loss (particularly among active consumers) could arise from splitting off retail online customers. However, the business has chosen to put more of an emphasis on increasing sales and profitability rather than market share. limited advantages of customer and volume growth contrary to its contemporaries.

VALUATION:

One of the major capital market participants in the Indian financial services industry is IIFL Securities Ltd (IIFLSEC). The business offers a wide range of goods and services. For both retail and institutional clients, it provides equities (both in cash and as derivatives), commodities, and currency brokerage. Targeting retail and HNI clients, the financial products distribution (FPD) business provides a variety of products such as mutual funds, insurance, IPOs, bonds, AIF, and others. It also includes a division for investment banking (IB). To compete with bargain brokerages, the organization also continually launches new innovative products and makes technology investments. A strong rise in investment banking and financial products distribution revenue has been brought on by the booming equity markets. Its real estate holdings could be sold to provide additional funds for financial services investments. We predict that the equities markets will stay robust in the near future, boosting IIFLSEC's revenue and profitability. We assign a BUY rating, with 110 as target price.

SOURCE:

STOCX

COMPANY WEBSITE