Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL A1+' rating on the commercial paper programme of IIFL Securities Limited (IIFL Securities).

 

CRISIL Ratings has taken note of the scheme of arrangement for the demerger of online retail trading (ORT) business of IIFL Securities into 5Paisa Capital Ltd (5Paisa), as announced by both the companies on December 6, 2022. The scheme has received approval from the respective board of directors and now awaits shareholders' and various regulatory and statutory approvals. As per the proposed scheme, around 15 lakh customers of this business are expected to move to 5Paisa. However, the ORT business was only 4.5% of the overall revenues of IIFL Securities in fiscal 2022. Thus, the rating is expected to remain unaffected by this development. CRISIL Ratings will continue to monitor the progress on the announced demerger.

 

The rating continues to reflect the strong market position of IIFL Securities in the broking and investment banking businesses and its adequate capitalisation. These strengths are partially offset by exposure to uncertainties inherent in capital market-related businesses.

 

As the broking business is cyclical, volume and earnings are highly dependent on trading activity in the capital markets. Since March 2020, the stock markets have seen high retail participation and daily trading volume, coinciding with the lockdown to contain the Covid-19 pandemic and people being confined to their homes. The industry saw significant proportion of clients added in the age bracket of 25-30 years, with many participating in the capital market for the first time. This trend has benefited all broking players, including IIFL Securities. 

 

The company onboarded 3.2 lakh customers in first of fiscal 2023 (7.8 lakh customers in fiscal 2022, 3.8 lakh in fiscal 2021, 1.5 in fiscal 2020). It has served around 30 lakh customers as on September 30, 2022, out of which 10.4 lakh customers were active[1]. Market share has remained at 1.1% overall, and 2.6% in the cash segment. Average daily turnover has more than doubled year-on-year in second quarter of this fiscal to Rs 1.35 lakh crore. Retail brokerage income increased 35% year-on-year to Rs 411 crore in fiscal 2022 (Rs 229 crore in the half year ended September 30, 2022) from Rs 304 crore in fiscal 2021.

⁽¹⁾As per NSE active clients

Analytical Approach

For arriving at the rating, CRISIL Ratings has combined the business and financial risk profiles of IIFL Securities and its subsidiaries. The rating also factors in the business synergies from other promoter group companies.

 

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 retail broking and investment banking businesses

IIFL Securities is one of the leading players in the retail broking segment. The company has pan-India presence with more than 10.4 lakh active clients as on September 30, 2022. It had market share of 1.1% of the aggregate turnover volume (cash and derivatives segments) of the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) in first half of fiscal 2023 (1.1% in fiscal 2022 and 2021). It has a strong institutional equity franchisee, and is a leading domestic investment banker, participating in several marquee initial public offerings (IPOs) and qualified institutional placements. In fiscal 2022, there was traction in the investment banking business, driven by higher capital market activity and the company also has a pipeline of deals for this fiscal. Revenue from this segment increased to Rs 150 crore in fiscal 2022 from Rs 74 crore in fiscal 2021. During the first half of fiscal 2023 this segment reported a revenue of Rs 55 crore.

 

The company also distributes third-party financial products such as insurance, mutual funds, bonds, alternative investment funds, portfolio management services, and deposits through its website, mobile app and branch network. Distribution assets under management (AUM) was around Rs 18,700 crore as on September 30, 2022, and income from distribution was Rs 95 crore for the first half of this fiscal (Rs 212 crore in fiscal 2022).

 

Risk management and monitoring systems are adequate to mitigate risks arising from uncertainties inherent in the retail broking business.

 

Adequate capitalisation

Consolidated networth was Rs 1,284 crore as on September 30, 2022, from Rs 1,182 crore, as on March 31, 2022 (Rs 968 crore as on March 31, 2021). In the past, a large portion of the borrowing was made by the wholly owned subsidiary, IIFL Facilities Services, which is secured by the subsidiary's various real estate assets. The group has plans to dispose off non-core real estate assets and deleverage the subsidiary. However, borrowings at the broking entity is expected to increase. The broking business borrows largely to meet margin requirements at the exchanges and finance a margin-trading facility book, which stood at Rs 549 crore as on September 30, 2022 (Rs 472 crore in March 2022 and Rs 96 crore in March 2021). Consequently, overall gearing increased to 0.6 time (0.5 time as on March 31, 2022 and 0.3 time as on March 31, 2021). The margin-trading facility book is expected to grow further in fiscal 2023. While gearing is expected to increase from current levels, capitalisation will remain adequate over the medium term.

 

Weakness:

Exposure to uncertainties inherent in the capital market businesses

The company's main businesses remain exposed to economic, political, and social factors that drive investor sentiment. Brokerage revenue is dependent on the level of trading activity in capital markets. Specifically, since March 2020, the stock markets have seen high retail participation and daily trading volume. A significant proportion of client additions in the industry are in the age bracket of 25-30 years without relevant trading experience. The upward movement of the key benchmark indices has attracted retail investors to market trading. While this has benefited the broking players, including IIFL Securities, sustainability of the market's momentum needs to be seen. However, the impact on earnings is partially offset by the high share of business coming through franchisees, resulting in a more variable cost structure than that of peers.

Liquidity: Adequate

IIFL Securities, at a consolidated level, has adequate liquidity, supported by the agency nature of its business. As on November 30, 2022, consolidated liquidity stood at Rs 293 crore in the form of cash and equivalent (Rs 15 crore), liquid investments (Rs 84 crore), and unutilized bank lines (Rs 194 crore). Debt obligation is expected to be Rs 9.8 crore (including interest) during the period December'22 to March'23, which will be funded at a consolidated level.

Rating Sensitivity factors

Downward factors

• Impact on business profile as indicated by drop in market share impacting broking income
• Weakening of the earnings profile or sustained increase in cost-to-income ratio to over 80%

About IIFL Securities

IIFL Securities, the erstwhile flagship company of the India Infoline group, was set up as Probity Research and Services in October 1995. The name was changed to India Infoline Ltd in March 2000 and to IIFL Securities in May 2018. The company is a member of the BSE and the NSE. IIFL Commodities Ltd (formerly India Infoline Commodities Ltd; a 100% subsidiary of IIFL Securities) sold a major part of its business in a slump sale to IIFL Securities, effective July 1, 2018.

 

As on September 30, 2022, the promoters owned 31% stake in IIFL Securities. Fairfax group owned 37% and the remaining 32% was held by public.

 

On a consolidated basis, IIFL Securities reported total income and profit after tax (PAT) of Rs 1,316 crore and Rs 306 crore, respectively, in fiscal 2022, against Rs 868 crore and Rs 220 crore, respectively, in fiscal 2021. For the first half of fiscal 2023, the total income and PAT were Rs 618 crore and Rs 99 crore, respectively, against Rs 586 crore and Rs 141 crore, respectively, for the corresponding period of the previous fiscal.

 

On a standalone basis, IIFL Securities reported total income and PAT of Rs 1,151 crore and Rs 284 crore, respectively, in fiscal 2022, against Rs 760 crore and Rs 173 crore, respectively, in fiscal 2021. For the first half of fiscal 2023, total income and PAT were Rs 568 crore and Rs 96 crore, respectively, against Rs 492 crore and Rs 106 crore, respectively, for the corresponding period of the previous fiscal.

Key Financial Indicators

   IIFL Securities - Consolidated (CRISIL Ratings-adjusted numbers)

As on / for the period ended March 31	Unit	2022	2021
Total assets	Rs crore	6041	3544
Total income	Rs crore	1316	868
Profit after tax	Rs crore	306	220
Return on equity	%	28.5	23.9
Gearing	Times	0.5	0.3

 

   IIFL Securities - Standalone (CRISIL Ratings-adjusted numbers)

As on/for the period ended March 31	Unit	2022	2021
Total assets	Rs crore	5539	3119
Total income	Rs crore	1151	760
Profit after tax	Rs crore	284	173
Return on equity	%	33.3	23.4
Gearing	Times	0.4	0.1

 

Any other information: Not applicable