IIFL Capital Services Ltd: Exposure to uncertainties inherent in the capital market businesses

  • IIFL Capital Services Ltd: Exposure to uncertainties inherent in the capital market businesses

  • Exposure to uncertainties inherent in the capital market businesses and tightening regulatory environment:
  • The company's key broking business remains exposed to economic, political, and social factors that drive investor sentiments. 
  • Given the cyclical nature of the business, brokerage volumes and earnings are highly dependent on the level of trading activity in capital markets. 
  • This makes earnings and profitability volatile. 
  • However, the impact on earnings is partially offset by the high share of business coming through franchisees, resulting in a more variable cost structure.
  • Over the past couple of years, the broking industry has witnessed a dynamic regulatory environment. 
  • With the objective of enhancing transparency, limiting misuse of funds and safeguarding investor interests, Securities and Exchange Board of India (SEBI) has introduced several changes. 
  • Some of these include margin pledge/re-pledge mechanism, daily client collateral reporting and disclosure, collateral allocation at clearing corporations by brokers, and upfront margin collection for intraday positions
  • With increasing compliance intensity, associated costs are expected to increase. 
  • Crisil Ratings understands that most large brokers and some mid-sized companies, including IIFL Capital have streamlined their systems in accordance with the revised regulations. 
    • However, this could impact small and mid-sized brokers with not-so-advanced IT infrastructure and risk management systems. 
    • Fundamentally, while these revised regulations will benefit the broking industry in the long term by increasing transparency and lowering risks for customers, the changes do increase the compliance costs for brokers and require them to adapt their business models to keep pace.
  • SEBI had placed a ban on IIFL Capital to acquire new broking clients for two years as per an order dated June 19, 2023, based on various inspections carried out over 2011-17. 
    • Subsequently the company approached the Securities Appellate Tribunal (SAT) and obtained a stay order on June 27, 2023. 
    • On December 07, 2023, SAT has set aside SEBI’s ban on IIFL Capital on acquiring new clients and reduced the penalty amount. 
    • SEBI has now appealed against the SAT order before the Supreme Court.

1. https://youtu.be/RIQfGd2f60M?si=v03VR1G-M_lhjfX9

2. https://youtube.com/shorts/jXsFsOblX10?si=TnRHcqZo03yyFmAM

3. https://youtube.com/shorts/AQHrRbNnGkI?si=IQ5ytIsUQ4NjCfZ8

I love broking business because of the margins it makes.

The future of broking business also holds good potential

  • Q1 24  
    • Total Income stood at ₹411.0 Cr for Q1 FY24 (up 39% y-o-y) 
    • Total Comprehensive Income stood at ₹73.9 Cr for Q1 FY24 (up 75% y-o-y) 
    • Assets under management and custody stood at ₹1,47,090 Cr  
    • For the quarter, the average daily market turnover (including F&O) for the broking business was ₹2,30,816 Cr (BSE + NSE), up 82% y-o-y and 18% q-o-q 
    • Insurance premium stood at ₹44.3 Cr for the year ended June 30, 2023, up 30% y-o-y. Mutual Fund AUM was ₹7,945 Cr as at June 30, 2023, up 15% y-o-y and SIP AUM grew by 44% y-o-y to ₹2,101 Cr 
    • Q1FY24 had been a strong quarter for investment banking segment. Investment banking division completed 9 deals across capital markets, debt advisory and private equity. 
    • Return on Equity (%) :  22%
    • Customer centric goalbased offering targeting affluent segment (AUM INR 10 Lakh+) combined with innovative product wrappers and portfolios
  • FY 2023
    • 4.8 Lakhs NSE active customers   
    • Profit after tax 18% decline: 305 (220, 249 (23)   
    • Return on Equity (%) :     29% (22), 20% (23)  
    • Insurance premiums amounted to ₹2,788 Million for FY23, up by 48% y-o-y   
    • Leading investment bank in India:  Completed 29 transactions in FY23  
    • DPS: 3 (22), 3 (23)  
    • EPS:  7.0 (21), 10.1 ( 22), 8.2 (23)
    • 800+ institutional (domestic and foreign) clients.
    •  3 Million Client base
    • 10.4 Lakhs NSE active customers
  • Management:
    • Mr. R. Venkataraman, Managing Director, commented on the financial results: “Broking business has started gaining momentum and is expected to grow in the second half of financial year. It was a good quarter for our investment banking segment with 6 completed transactions. Our continuous endeavor to invest in technology will provide better outcome in the coming quarters.”

Thank you for contacting Rounaq! Please let us know how we can help you. 

Whatsapp: 7838491131

SEBI registered RA : Rounaq Bakshi
Waheguru

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