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Please refer to important disclosures at the end of this report
Particulars (Rs mn) FY17 FY18 FY19
Revenue from operation 10,981 16,586 15,490
Total Income 11,560 17,148 15,772
PBT 4,296 4,901 5,379
Profit After Tax 3,135 3,802 3,745
EPS (Rs) 42 48 45 Source: Information memorandum
Equity Research September 19, 2019
BSE Sensex: 36564
ICICI Securities Limited is the author and distributor of this report
Financial
IIFL Wealth Management Unrated
A Structural opportunity
Research Analysts:
Sachin Sheth [email protected] +91 22 6637 7572
Ansuman Deb [email protected] +91 22 6637 7312
Sandeep Joshi [email protected] +91 22 6637 7658
IIFL Wealth Management (IIFLWM) is one of the fastest growing financial services
and private wealth management firms in India, with AUM of ₹ 1,677bn, as on FY19-
end. India represents a huge opportunity for IIFLWM, as only 4% of HNI’s wealth
is being managed by top wealth managers. Also wealth of HNI’s is expected to
more than double by 2023. The company has witnessed robust business growth
under the vision, leadership and guidance of its Promoters and senior
management. Retaining of top talent has also led to robust business growth as it
helps in lower client attrition. The strong brand of ‘IIFL’ has also helped in
attracting customers to its products in preference over those of its competitors.
Huge market potential for wealth management: Total individual wealth in India is
currently estimated at ~US$5.6trn and is expected to double to US$10.9trn by 2023
at a CAGR of 14%. Of the total Individual wealth, ultra HNI’s and HNI’s account for
approximately US$2.2trn, which is projected to grow to US$5.06trn by 2023. It is
estimated that Financial Assets managed by Top Tier Wealth Managers is only
USD 201 billion, with other assets (USD 1.1 trillion) outside coverage which is 4%
of the ultra HNI / HNI wealth.
Alternatives to drive asset management vertical: This business vertical has
shaped up to become the highest purveyor of asset management in the alternates
space, with listed equity, early stage private equity, mid – market / SME private
equity, private debt, and global SMA practices being fully established. The focus on
alternates and portfolio management services will drive the growth of the asset
management vertical for the next few years as they open India’s access to global
institutions and UHNIs and family offices for investments for the long term.
Strong brand name: ‘IIFL’ is a well-established and reputed brand in the broking
and financial services sector throughout India. Its brand and reputation serve in
attracting customers to its products preferentially over those of its competitors.
Brand marketing exercises over the years have helped the company retain its
existing customers and gain new ones.
Retaining top talent leading to client stickiness: Wealth management being a
people’s business, requires retention of top talent. The company has offered a
significant portion (>20%) of its ownership to employees and has thus created an
entrepreneurial culture and an ownership mindset across the firm. Team leader
attrition rate was 3.2% in FY19 and has averaged at <2.5% over the last four years.
This has resulted in a low client attrition rate of <2.5% per annum.
INDIA
IIFL Wealth Management, September 19, 2019 ICICI Securities
2
TABLE OF CONTENT
Industry Section ............................................................................................................... 3
Wealth management – Growth drivers ........................................................................... 4
Asset management – Growth drivers .............................................................................. 7
Company background ................................................................................................... 10
Scheme of arrangement ................................................................................................ 11
Wealth management business ..................................................................................... 12
Asset management business ....................................................................................... 16
Company positives and risks ....................................................................................... 18
Financial performance ................................................................................................... 21
Financial summary ........................................................................................................ 22
Appendix ......................................................................................................................... 24
Index of Tables and Charts ........................................................................................... 27
IIFL Wealth Management, September 19, 2019 ICICI Securities
3
Industry Section
The global wealth management industry, estimated at US$201trn in client assets, as
at 2017 grew at ~8% per annum from 2011 through 2016, and is expected to grow at a
slightly slower pace of 7% going forward through to 2021. India is ranked 4th in the
world for the number of new wealthy individuals after the US, China and Japan, but
ahead of Germany. Asset management in India too has witnessed strong growth over
the last few years –in March 2019, Assets under Management (AUM) in India were
worth US$340bn (growth of 24% from March 2014 to March 2019). Alternative
investments in India (AIF - real estate & private equity, debt, equity) is estimated to be
around US$40bn and is poised to grow sharply as investors are increasing looking to
allocate to more sophisticated products.
India: Economic Outlook
India is poised to become a US$5trn economy in the next five years and aspires to
become a US$10trn economy in the eight years thereafter, according to the Finance
Minister Piyush Goyal, in his Budget speech, in February 2019.
An IMF report concurs, opining that India’s economy is on track towards achieving
those goals, picking up pace in 2019, benefiting from lower oil prices and a slower
pace of monetary tightening than previously expected, as inflationary pressures ease.
India should return to a healthy growth rate of 7.7% by 2020, if there are no major
headwinds in the global economy, the IMF report states. As the IMF projections in
chart 1 depict, India’s real GDP growth surpassed China’s in 2018 and is expected to
maintain a ~4% spread as against the average worldwide real annual GDP growth
through 2021.
Chart 1: Real annual GDP growth
Source: Information memorandum
Having overtaken France to become the sixth largest economy in 2018, India is
expected to displace the UK from the fifth spot in 2019. “India’s enormous population,
favourable demographics and high catch-up potential due to low initial GDP per head
will help it surpass the United Kingdom in the world's largest economy rankings in
2019”, according to PwC's Global Economy Watch.
-2
0
2
4
6
8
10
12
14
16
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020P
2021P
(%)
World India China
IIFL Wealth Management, September 19, 2019 ICICI Securities
4
Size of wealth market in India: Potential opportunity
With a growing economy, India’s wealth creation journey has accelerated over the
past few years. Total individual wealth in India is currently estimated at ~US$5.6trn
and is expected to double to US$10.9trn by 2023 at a CAGR of 14%. India’s wealthy
are expected to increase their assets sharply through growth of existing assets or sale
of business (unlocking potential through secondary sale). Of the total Individual
wealth, Ultra HNI’s and HNI’s account for ~US$2.2trn, which is projected to grow to
US$5.06trn by 2023. It is estimated that, as of FY17, there are 160,600 UHNI / HNI
households and this is projected to grow to 330,400 households by FY21. Of the
mentioned US$2.2trn, US$1.3trn is in financial assets (stocks, mutual funds, fixed
deposits, etc). It is estimated that Financial Assets managed by Top Tier Wealth
Managers is only USD 201 billion, with other assets (USD 1.1 trillion) outside coverage
which is 4% of Ultra HNI / HNI wealth. IIFL Wealth Management’s market share is
10.6%.
Chart 2: Estimates of financial assets
Source: Information memorandum
Wealth management – Growth drivers
a. Financialization of savings
Over the years, Indian Investors have moved away from traditional investment assets
such as real estate, gold and fixed deposits towards building financial portfolios.
Firstly, the prolonged slump in real estate led to a move away from a sector that had
traditionally been the default ‘go-to’ asset class. Secondly, post demonetisation, with a
greater share of assets already formalized and ‘in the bank’, more of these assets
have been ‘put to work’ in mutual funds. Post demonetisation, Mutual Funds
Systematic Investment Plans (SIPs) have surged, peaking at Rs81bn in March 2019.
This trend towards investing in financial assets is also seen in HNI families who wish
to diversify away from business and real estate.
$2.20HNI
$0.85 New
Financial Assets
$1.10
Other Assets
89.4%
Others
$3.40 New HNI
$1.30 Financial Assets
$0.20 Assets Managed
by Top Tier Wealth managers
10.60%IIFLWM
Total Wealth ($ Tn) Total HNI Wealth ($Tn)
HNI Finacnial Assets ($Tn)
Top Tier WealthManagers ($ Tn)
IIFL Wealth Management, September 19, 2019 ICICI Securities
5
Chart 3: Indian household savings
Source: Information memorandum
b. HNI wealth expected to grow ~2.3x
India’s wealthy are expected to increase their assets sharply through growth of
existing assets or sale of business (unlocking potential through secondary sale). It is
estimated that there were there are 160,600 HNI households in FY17 which is
projected to grow to 330,400 by FY21.
Chart 4: HNI wealth in India
Source: Information memorandum
c. Underpenetrated market opportunity
Estimates suggest that 56% of HNIs live in the top four metros, followed by 26% in the
next six cities, 23% in next 20 and balance 3% in others. In terms of assets, the four
metros account for 59% of wealth and the next six cities account for 17% of wealth.
Tiers-2&3 cities have seen significant wealth creation, but are underpenetrated by
large WMs. As seen below, share of assets of IIFL is low, hence the opportunity to
expand reach and penetration across the country.
2 2 2
57 54 49
41 45 49
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY13 FY15 FY17
Saving Gold & Silver Saving - Physical Assets Gross Financial Saving
0.0
1.0
2.0
3.0
4.0
5.0
6.0
2018 2023
($ T
n)
IIFL Wealth Management, September 19, 2019 ICICI Securities
6
Chart 5: Breakdown of IIFL’s share of UHNI assets by city
Source: Information memorandum
Chart 6: Breakdown of IIFL’s share of number of UHNI by city
Source: Information memorandum
d. Consolidation of wealth management industry
Over the last few years, Indian firms have significantly gained market share as global
Wealth Management firms have scaled back. Indian banks and wealth managers now
account for 78% of assets under management as of 2018. With localised offerings and
better reach, Indian players are expected to continue increasing their market share.
99 99
99.699.8
1 1
0.40.2
98%
99%
99%
100%
100%
101%
Top 4 Cities Next 6 Cities Next 20 Cities Other Cities
Others share of UNHI IIFLWM share of UNHI
$1,293bn $405bn$108bn$379bn
98.14 98.3498.83
97.41
1.86 1.661.17
2.59
96%
96%
97%
97%
98%
98%
99%
99%
100%
100%
101%
Top 4 Cities Next 6 Cities Next 20 Cities Other Cities
Others share of UNHI IIFLWM share of UNHI
$89,936 $4,818$36,938$28,908
IIFL Wealth Management, September 19, 2019 ICICI Securities
7
Chart 7: Market share breakup
Source: Information memorandum
Asset management – Growth drivers
a. Underpenetrated market for mutual funds:
Mutual fund penetration in India is still low. As percentage of GDP, India MF AUMs
account for 29% as compared to >70% in countries like UK, Canada and US. In fact,
equity MF AUM comprises 5% of market cap.
Chart 8: AUM as a percentage of GDP
Source: Information memorandum
3038
32
40
38
22
0%
20%
40%
60%
80%
100%
2015 2018
Indian Non-Banks WMs Indian Banks WMs Foreign WMs
107
74 6759 59
34 2912
0
20
40
60
80
100
120
US
Canada
UK
Ge
rmany
Bra
zil
Jap
an
India
Bra
zil
(As a
% o
f G
DP
)
IIFL Wealth Management, September 19, 2019 ICICI Securities
8
Chart 9: Equity MF as a percentage of market cap
Source: Information memorandum
b. Increasing sophistication of investors:
I. Alternates: If we see the chart below, the global alternates market is sizeable. In
India, the size of the market is relatively small denoting an emerging opportunity for
asset managers. Alternate Investment Funds (AIFs) are gaining prominence for
domestic investors, having grown at >100% CAGR to become a Rs850bn+ market.
Share of alternates in HNI portfolios has increased from 4% in FY13 to 14% in
H1FY18. IIFL has a ~14% share in AIFs.
Chart 10: Global alternatives market is sizeable
Source; Information memorandum
41
2519 17 16
7 510
5
10
15
20
25
30
35
40
45
US
Canada
UK
Germ
any
Bra
zil
Jap
an
India
Bra
zil
(Equity M
F a
s %
of m
ark
et cap)
5,799
1,127 744
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
US UK China
IIFL Wealth Management, September 19, 2019 ICICI Securities
9
Chart 11: India: Emerging opportunity
Source: Information memorandum
Chart 12: Fund sources for alternative investments: Global institutions have major share
Source: Information memorandum
II. Discretionary PMS: Another area that has seen strong inflows is discretionary PMS
where the market is estimated to be around Rs930bn, growing at ~35% CAGR. Over
95% of PMS holders are individuals as opposed to mutual funds (share of Individuals
here is 45%).
323
106
25 7 4 20
50
100
150
200
250
300
350
Mutual Fund PE/VC1 Real estate Private Debt Infra Hedge Funds
($ b
n)
India based20%
Others - Global18%
Global LP3%
Global Fund54%
Others - India3%
India based LP2%
IIFL Wealth Management, September 19, 2019 ICICI Securities
10
Company background
IIFL Wealth Management (IIFLWM) is one of the fastest growing financial services and
private wealth management firms in India, with an AUM of Rs1,677bn as at FY19-end.
The clientele of its wealth management business includes high net worth and ultra-
high net worth individuals, affluent families and family offices, and institutional clients.
Its asset management business serves inter alia global and domestic institutions,
channel partners including private banks, family offices, pension funds, and retail
investors.
Table 1: Company history
Year Event
2008 Incorporation as IIFL Wealth Management Limited
2009 Established global presence with offices in US, Dubai, Singapore and Mauritius
2010 Crossed the Rs15,000mn AUM threshold
2011
Acquisition of Finest Wealth Managers Private Limited (later renamed as IIFL
Distribution Services Limited) adding AUM worth Rs17,000mn
2012 Crossed the Rs250,000mn AUM threshold
2013 Acquisition of India Infoline Asset Management Company Limited and India Infoline Trustee Company Limited
2014
Launched an alternative investment fund
Acquisition of IIFL Inc., IIFL (Asia) Pte. Limited, IIFL Private Wealth Management (Dubai) Limited, IIFL Private Wealth Hong Kong Limited, IIFL Asset Management (Mauritius) Limited, and IIFL Private Wealth (Suisse) SA
2015 Investment by General Atlantic Singapore Fund Pte. Limited in the Company
2016 Acquisition of Chephis Capital Markets Limited, investment of US$9bn in the entity, later renamed as IIFL Wealth Finance Limited
2017 Launched the US$1bn fund, IIFL Special Opportunities Fund
2018
Investment by Steadview Capital Mauritius Limited, ABG Capital, LTR Focus Fund, HDFC Standard Life Insurance Company, Rimco (Mauritius) Limited Amansa Holdings Private Limited, and WF Asian Reconnaissance Fund Limited along with further investment by General Atlantic Singapore Fund Pte. Limited
2018
Acquisition of Wealth Advisors (India) Private Limited (later renamed as IIFL Wealth Advisors (India) Limited) and Altiore Advisors Private Limited (later renamed as IIFL Altiore Advisors Limited)
Source: Information memorandum
Company’s business can be divided into two verticals
Wealth management: It serve the highly specialized and sophisticated needs of high
net worth and ultrahigh net worth individuals, affluent families, family offices and
institutional clients through a comprehensive range of tailored wealth management
and lending solutions.
Asset management: It has a diversified suite of alternative investment funds, portfolio
management schemes and mutual funds that span public and private equities, fixed
income securities and real estate. Its clients include global and domestic institutions,
channel partners including private banks, family offices, pension funds, and retail
investors.
IIFL Wealth Management, September 19, 2019 ICICI Securities
11
Scheme of arrangement
This involves transfer and vesting of the Wealth Business Undertaking from IFL
into IIFLWM (“Part IV” of the Scheme);
Rationale of scheme:
Creation of a clean corporate structure with no cross holdings, thereby ensuring
transparency, accountability, highest standards of corporate governance and
compliance, enhanced operational flexibility and responsiveness to competitive or
environmental challenges;
Unlocking value for shareholders given the business has achieved scale, allowing a
focused strategy in operations which would be in the best interest of all
stakeholders;
Creation of listed entities specializing in the loans and mortgages business, wealth
management services and capital market business with ability to achieve valuation
based on respective risk-return profile and cash flows, attracting the right investors
and thus enhancing flexibility in accessing capital; and
Attracting and motivating its key people with stock options such that their rewards
are strongly correlated with IIFL Group’s philosophy of ‘owner mindset’ which is
shared ownership and shared accountability by all team members.
The appointed date for the demerger and vesting of the Wealth Business Undertaking
is 1st
April’18
IIFL Wealth Management, September 19, 2019 ICICI Securities
12
Wealth management business
The core of its business is working with UHNIs, HNIs, family offices and institutions in
helping manage and deploy their investments, as an advisor to their portfolio and as a
distributor of financial products, or as a broker facilitating purchase and sale of
securities.
It acquires and manages client relationships via the medium of relationship managers
(RMs). It has over 325 relationship managers in 25 offices in India and five offices
outside India, as on FY19. These RMs work in team structures along with dedicated
service managers, and the team as a whole draws upon the institutional resources of
the company to serve the client. It has over 100 employees involved in the
product/advisory and investment team, along with the investor counsellors and
dealers, available as resources to the RMs to meet the client requirements.
Enabling this business vertical, are (i) the trust advisory team, and (ii) the leverage
solutions team. The trust advisory team advise large client families on setting up multi
– generational and multi – location trusts to efficiently protect and pass on their wealth
legacy. The leverage solutions team provide liquidity solutions in the form of loans
against securities for temporary requirements that its clients may have for meeting
their investment objectives. The leverage solutions are offered through IIFL Wealth
Finance Limited, with a closing loan book of Rs4,798bn as at FY19.
Recently, the company has shifted its revenue earning model from a distribution-led
model to an advisory-led trail income model, which will make its earnings much more
predictable and consistent in nature. This is in line with the global movement of client
assets by large European and American firms to more advisory/ discretionary models
vis-à-vis traditional transactional and distribution led models.
Following are some important aspects in its wealth management business:
The company tracks the unit economics of the business in two forms:
Table 2: Economies of business on the basis of average AUM
Particulars FY19 %
Basis average AUM
Net Revenues on Average AUM(A) 0.76% Wealth Employee Expenses on Average AUM (B) 0.22% Admin and Other Expenses on Average AUM (C) 0.13% PBT (A-B-C) 0.41%
Source: Information memorandum
Table 3: Economies of business on the basis of average number of RM teams
Particulars FY19 - Rs mn
(Basis average no. of RM teams)
Net Revenues on Average AUM (A) 148 Wealth Employee Expenses for FY19 (B) 43 Admin and Other Expenses for FY19 (C) 26 PBT (A-B-C) 79
Source: Information memorandum
IIFL Wealth Management, September 19, 2019 ICICI Securities
13
Pillars of the company’s wealth management business
People: Wealth management is a people-centric business with high engagement
levels. A quality team comprised of experienced professionals across verticals
such as relationship management, products, operations etc. is essential to ensure
high levels of service to clients.
Platform: A comprehensive platform with a wide product and research capability
enables them to provide cost – efficient access to the best in – class fund
managers and jointly create innovative and often exclusive product ideas in
partnership with leading AMCs.
Process: A strong emphasis on building processes helps them to create
standardized solutions and streamlined working mechanisms.
Proposition: Its ability to engage with clients through multiple modes of
engagement basis their requirements and suitability. Across engagement models,
the company strive for transparency, alignment of interest and robust process and
risk management controls to provide its clients the best possible experience.
Diversifying revenue and AUM mix to mitigate risk from capital
markets
Capital markets are a major sentiment indicator and can influence client behavior.
However, the impact of cyclical markets on a wealth management business can be
mitigated by diversifying revenue and AUM mix across asset classes and increasing
fee and annuity incomes. As seen in the trailing five-year revenue snapshot below, the
wealth business is relatively buffered from the volatility of capital markets, and closer
in correlation to the underlying economic output of the nation. The share of annuity
income has been growing year-on-year as the business becomes less impacted by
capital market volatility.
Chart 13: Annuity vs Distribution / Transactional income (Rs mn)
Source: Information memorandum
8301530
3170 381050902890
3560
4690
66205580
0
2,000
4,000
6,000
8,000
10,000
12,000
FY15 FY16 FY17 FY18 FY19
(Rs m
n)
Annuity Fee & Commission Distribution / Transactional income
IIFL Wealth Management, September 19, 2019 ICICI Securities
14
Chart 14: Asset allocation excluding custody assets
Source: Information memorandum
Impact of technology on the business in the medium and long terms
The wealth management business, especially for UHNI / HNI segment remains a
highly customized and high touch business requiring significant investment in
relationship building and garnering client’s trust before actual AUM inflow.
In the present context the company see technology as being a core enabler to its
business in medium to long term and will help in automation of operational processes,
transaction execution, generating on-demand investment analytics, better risk
management and reporting
IIFLWM offers unique credit solution to its customers
IIFLWM via its in-house NBFC acts as an enabler to its wealth management by
providing short term loan solutions to its clients. While its clients generally invest for
the long – term, they often also need short term liquidity for meeting requirements
such as business acquisition, business needs, taking positions in equity trading,
investing in public offerings, and for exercising stock options. Clients utilize this facility
as a temporary bridge for their immediate liquidity requirements.
IIFLWM has a unique credit solutions model:
Almost the entire loan book is collateralized against client investments with them;
Its loan book is usually 3% - 4% of its AUM;
No sales / distribution cost as all loans are sourced by its RMs
Unique liability model where almost the entire liabilities are long term in nature and
raised in the form of structured notes from its clients;
The book has had zero credit losses from inception; and
Enables high degree of customization, quick turn-around and cost flexibility which
improves client stickiness
3649 45
53 48
5646 50
44 49
5 5 5 3 3
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY15 FY16 FY17 FY18 FY19
Debt Equity Real Estate
IIFL Wealth Management, September 19, 2019 ICICI Securities
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IIFLWM offers unique credit solution to its customers
Treasury Advisory – The company offer treasury advisory services for institutions
and businesses, helping clients manage their short-term liquid investments on a fee
basis.
Non-discretionary portfolio management services (“NDPMS”) – The company
advise and execute (on a best effort and pricing basis) through customized NDPMS
services available for its ultra HNI clients. This business is branded as ‘IIFL One’ for
marketing purposes. The client is involved in entire decision-making process and has
to provide their consent for all trades executed on behalf of them. It earns
management fees from the client based on the AUM and performance of the relevant
client portfolios.
Discretionary portfolio management service (“DPMS”) – The Company advises
and executes (on a best effort and pricing basis) through customized DPMS service
available for its ultra HNI clients. This business is branded as ‘IIFL All In’ for marketing
purposes. The client leaves the decision making for security selection and all trades
are executed on behalf of the client by the Company as their investment manager, and
it earns management fees from the client based on AUM and performance of the client
portfolios.
Financial product distribution – The Company act as a distributor of various
products (mutual funds, alternate investment funds, structured products, portfolio
management schemes, etc.) wherein it provide the products to the clients and earn
distribution commission from the product provider/vendor. As a distributor, it also act
as a broker dealer for the client, helping in purchasing and selling shares, stocks,
bonds and other financial instruments.
IIFL Wealth Management, September 19, 2019 ICICI Securities
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Asset management business
This business vertical has shaped up to become the highest purveyor of asset
management in the alternates space, with listed equity, early stage private equity, mid
– market / SME private equity, private debt, and global SMA practices being fully
established. The focus on alternates and portfolio management services will drive the
growth of the asset management vertical for the next few years, as the company open
India’s access to global institutions and UHNIs, and family offices for investments for
the long term. The company has recruited robust and well – known teams in all the
above areas, under the experienced eye of the CIO and Joint CEO, Anup
Maheshwari. Client engagement in this vertical will be through channel partners and
private banks and institutions in India, and global institutions and family offices outside
India.
Table 4: Economies of business on the basis of average AUM
Particulars FY19
Recurring management fees % (Net of Direct distribution costs) on average AUM during the year [A] 0.69% Other income/carry income (% of average AUM) [B] 0.17% Employee costs (% of Average AUM) [C] 0.40% Other allocated costs (% of Average AUM) [D] 0.19% PBT [A+B-C-D] (% of Average AUM) 0.27%
Source: Information memorandum
Following are some important aspects in its asset management business:
Pillars of the asset management business
Attracting and retaining the right talent for each alternate strategy: Since the
core of the asset management business is alternates (i.e. private equity, venture
capital, structured corporate credit, real estate, each requiring highly specialized
due diligence and deal execution skills), attracting and retaining the right talent for
each alternate strategy is the key. Entrepreneurial culture promoting and
rewarding innovation and ownership, financial incentives and opportunity for
growth are key drivers in this space.
Constant product innovation: Tapping niches and developing newer sub-asset-
classes, the biggest example of the same being the pre-IPO fund, which garnered
over a billion dollars in commitment. The fund filled a large gap in the market as a
large segment of HNI investors wanted to invest in unlisted equity but were wary of
risks in early stage PE/VC investing, as there was no institutional fund product
offering late stage / pre -IPO investments.
Building a wide diversified investor base: HNIs, endowments, family offices,
pension funds and a distributor base encompassing leading banks, brokers and
IFAs.
Dependence on the wealth business for distribution
The business has provided and continues to provide the impetus for many new
product launch and ongoing subscriptions. This has helped the AMC business achieve
critical mass in the differentiated product offerings launched. There is a natural
synergy given increasing share of Alternates in HNI Portfolios (increased from 4% in
FY13 to 14% in H1FY18
IIFL Wealth Management, September 19, 2019 ICICI Securities
17
Over the last two years, the AMC business has consciously started to reduce its
dependence on the wealth business and has empaneled itself across most leading
banks and distributors. It has also expanded its reach to target large global institutions,
family offices and pension funds for advisory services.
Asset management product offerings
The company has built a strong franchise over the last three years. Its offerings are as
follows:
Listed equity: Focus on thematic managed account strategies (discretionary PMS)
and focused equity funds;
Private equity: Multiple funds straddling early stage investing right up to late stage/
Pre-IPO;
Structured collateralized real estate debt: It has raised and returned several funds
with a strong track record; and
Structured corporate credit: Looking to gain market-share from NBFCs and credit
mutual funds.
IIFL Wealth Management, September 19, 2019 ICICI Securities
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Company positives and risks
Positives
Strong and well-established ‘IIFL’ brand
IIFLWM believe that the ‘IIFL’ brand is a well-established and reputed brand in the
broking and financial services sector throughout India. They believe that their
customers associate the brand with high quality services, competitiveness as well as
its corporate values of integrity, trust and honesty. It believes that its brand marketing
exercises over the years have helped them retain its existing customers and gain new
ones.
Extensive technology and innovation platform and infrastructure
The company has invested extensively in its core transaction and execution systems
to ensure the timely execution and accurate reporting and accounting of its clients’
investments. They have recently launched mobile applications that enable them to
present complex data in a simple manner to clients and relationship managers, thus
keeping them well informed and satisfied. Digital and analytics continue to be the key
focus areas to bring in agility, availability and relevance.
Open architecture product model
The company follow an open architecture model in both wealth and asset
management verticals, whereby it offers both proprietary and third-party products to its
clients. This open architecture model provides them with the opportunity to present a
diverse product mix to its clients, depending on their needs and preferences.
Employee ownership
Its employees own a significant portion (>20% ) of the issued and paid up equity share
capital of the Company, making the interests of the Company and the employees
perfectly aligned with the long-term vision for its business. Over a period of time, this
has helped them to keep employee attrition to below 3-4%, and close to zero amongst
the senior relationship managers. Consequently, they have the lowest client attrition
rates in the industry.
Experienced promoters with strong management team
IIFLWM have seen robust business growth under the vision, leadership and guidance
of its Promoters. The company believes that its Promoters have played a key role in
the development of the business and have benefited from their industry knowledge
and expertise, vision and leadership. In addition to the Promoters, its senior
management team includes qualified, experienced and skilled professionals who have
experience across various sectors.
IIFL Wealth Management, September 19, 2019 ICICI Securities
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Risk factors
The company is subject to extensive statutory and regulatory requirements and
supervision, which have a material influence on, and consequences for, its
business operations. Further, its revenue model is undergoing a change, which
may affect its revenues and profitability.
Its business activities are subject to extensive supervision and regulation by the
Government and various regulatory authorities, including the SEBI, and the RBI, with
whom they are registered as an intermediary. A substantial portion of its revenue
comes in the form of commission and trail income from the distribution of asset
management products, such as mutual funds, alternative investment funds, and
portfolio management services to high net worth individuals. These commissions are
in the nature of recurring periodic payments made to them by asset management
companies, which are linked to the contribution made by them to their respective
assets under management (“AUM”) from the distribution of their financial products.
However, in the past, the company had been adversely affected and been required to
make changes to its business model and policies due to regulatory changes.
The company faces significant competition in its businesses, which may limit its
growth and prospects.
IIFLWM faces competition from the wealth management arms of several market
participants, including wealth management arms of broking houses, established Indian
and foreign commercial banks, as well as private banks and dedicated wealth
management companies. It also competes with a large number of independent
financial advisors as a consequence of the fragmented wealth management market in
India. Competition from existing and new market participants offering investment
products could act as an impediment to attracting and retaining clients and their funds,
thereby impacting market share or putting downward pressure on its fees.
Relies heavily on its existing brands and, specifically, the IIFL brand name, the
dilution of which could adversely affect the business.
The company’s brand and reputation serve in attracting customers to its products in
preference over those of its competitors. However, the brand ‘IIFL’ is not owned by
them. It uses the trade name ‘IIFL’ as well as the ‘IIFL’ logo (the ‘Marks’), which will be
registered in the name of IIFL Securities Limited, pursuant to the scheme. The
company has been granted a right to use the Marks and the right to register
trademarks, associated marks, images, and domain names, comprising of the Marks
in perpetuity in respect of the business and services carried out by them and its
Subsidiaries. Further, the said authorization requires that company and its
Subsidiaries do not use the Marks in any manner that could impair, dilute or tend to
impair or adversely affect their distinctive character or could deceive or cause
confusion either in the trade or to the public or adversely affect the validity of such
marks same in any other way.
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The growth of its revenues from sale of financial products is dependent on its
sustained ability to increase its AUM and AUA as well as on the performance of
the funds that it distributes.
The company has experienced significant growth over the past several years, with its
total revenues increasing from Rs11.5bn in FY17 to Rs15.7bn in FY19. Additionally, in
FY18, IT acquired the wealth management business of Wealth Advisors (India) Private
Limited, adding AUMs of Rs107bn. However, investment returns from products sold by
them depend on market and economic conditions, which are dynamic in nature and
may change rapidly from time to time. This may result in an adverse impact on the
investment performance for its clients, which may, in turn, impact its ability to retain
clients or attract new clients.
Dependence on services of its relationship managers and its inability to recruit
and retain them may adversely affect its business and results of operations.
The industry in which the company operates is people-centric. The success and
growth of the business is dependent substantially on the continued service and
performance of its relationship managers, since they are responsible for managing
existing client relationships and for establishing new client relationships. Its AUM and
revenues depend substantially on the relationship managers’ ability to position and
market its offerings and services in the sales process. However, mis-selling and
misrepresentation to the clients by the relationship managers may lead to litigation as
well as loss of reputation with clients and potential clients.
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Financial performance
Table 5: Key performance indicators of IIFLWM (consolidated)
Particulars FY17 FY18 FY19
Revenue from operations 10,981 16,586 15,490 Growth
51 (7)
Profit before tax 4,296 4,901 5,379 Profit After Tax 3,135 3,802 3,745 Total Comprehensive Income (net of Tax) 3,093 3,808 3,844 Growth
23 1
Source: Information memorandum
Over the past two years, IIFLWM revenue has grown at a CAGR of 19% to Rs.15.5bn
while its profit has grown at a CAGR of 9% to Rs.3.7bn. However, revenue and PAT
for FY19 declined by 7% and 1% respectively.
Changes in the revenue recognition process
Upfront to trail commissions – Mutual Funds: IIFLWM had already moved to a
trail model for all distribution commissions from mutual funds in 2017. The only
exception to this was commissions on closed – ended funds such as FMP's on
which upfront commissions were still being received till September 2018. Pursuant
to a SEBI mandate on upfront commissions earned by advisors on mutual funds in
October 2017, all payouts have now moved to a trail model.
Upfront to trail commissions – Managed Accounts: The company has decided
to also move income recognition for commissions earned on managed accounts to
a trail model with effect from April 1, 2019. While there is no regulatory
requirement to do this, and there is no impact on the total income that will be
earned over the life of the product distributed, they believe this change will be
beneficial to the business in the longer term. The key mitigating factor for any
reduction in revenue recognition in the short term is to move assets onto the IIFL –
ONE proposition, therefore increasing the fee incomes in FY20 and beyond.
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Financial summary
Table 6: Consolidated Profit and Loss statement
(Rs mn, year ending Mar 31)
Particulars FY17 FY18 FY19
Revenue from operation 10,981 16,586 15,490 Interest income 3,283 6,591 6,538 Dividend & distribution income 289 486 294 Fees and commission income 6,349 8,832 8,081 Net gain on fair value 973 677 573 Sale of product 87 - 4 Other income 579 563 282 Total income 11,560 17,148 15,772 Expenses
Finance cost 2,484 5,588 4,271 Fees and commission expenses 501 669 662 Net loss on derecognition of financial instruments under mortised cost category - - - Impairment of financial instrument 162 126 (76) Purchases of stock in trade 87 - 206 Changes in inventories of stock in trade - - (198) Employee benefit expenses 2,675 3,896 3,312 Depreciation, amortization and impairment 95 136 215 Other expenses 1,259 1,833 2,001 Total expenses 7,264 12,247 10,393 Tax Expenses 1,161 1,099 1,634 Profit after tax 3,135 3,802 3,745
EPS Basic 42 48 45
Diluted 42 47 43
Source: Information memorandum
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Table 7: Consolidated Balance sheet
(Rs mn, year ending Mar 31)
FY17 FY18 FY19
Assets Financial Assets
Cash & Cash equivalent 9,629 5,263 1,646 Bank balance & other than above 3,189 2,189 1,128 Derivative financial instrument 11 50 961 Receivable 5,483 5,059 7,205 Loans 36,520 70,561 49,665 Investment 20,069 11,112 30,526 Other financial assets 373 423 524 Non-Financial Assets
Inventories - - 198 Current tax assets 93 126 265 Deferred tax assets 206 170 174 Property, plant & equipment 214 267 616 Capital work in progress 36 217 1,734 Goodwill on acquisition - - 1,879 Other intangible assets 41 39 871 Other non-financial assets 101 190 410 Total Assets 75,964 95,666 97,802
Liability & Equity
Financial liabilities Derivatives financial instruments 254 814 2,516
Payables 3,263 4,672 1,361 Debt securities 17,839 18,562 39,783 Borrowing 33,987 45,483 15,661 Subordinate liabilities 4,435 5,618 5,701 Other Financial liabilities 543 1,442 2,760
Non-Financial liabilities Current tax liabilities 176 37 292
Provisions 92 117 86 Deferred tax liabilities - - 278 Other non-financial liabilities 177 291 260
Equity Equity share capital 156 160 169
Incremental equity share pending issuance 1 1 1 Other equity 15,042 18,468 28,934
Total Liabilities 75,964 95,666 97,802
Source: Information memorandum
IIFL Wealth Management, September 19, 2019 ICICI Securities
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Appendix
Key management personnel
Particulars Description
Ashutosh Naik
Ashutosh Naik is the Company Secretary and Compliance Officer of the company. He joined the company with effect from December 1, 2011. He holds a bachelor’s degree in commerce and law from the University of Mumbai and is an associate member of the ICSI. He has 19 years of experience in the fields of compliance, law, and secretarial work. He has previously worked as the company secretary at PNB Asset Management Company Limited. His gross
remuneration for FY19 was Rs13.70mn. He is a permanent employee of the company.
Mihir Nanavati
Mihir Nanavati is the CFO of the company. He joined the company with effect from December 5, 2016. He holds a bachelor’s degree in commerce from the University of Mumbai and a master’s degree in financial management from the University of Mumbai. He is a qualified chartered accountant. He has 25 years of experience in the field of finance. He has previously worked with the Avendus group in his capacity as group chief financial officer. His gross
remuneration for FY19 was Rs19.50mn. He is a permanent employee of the company.
Anshuman Maheshwary
Anshuman Maheshwary is the Chief Operating Officer of the company. He joined IIFLWM with effect from July 18, 2019. He holds a bachelor’s degree in commerce from the University of Calcutta and a master’s degree in management from the Indian Institute of Management, Bangalore. He has 18 years of experience across industries, where he has been involved with business strategy, business planning, procumbent and supply chain, large-scale organization transformation, operational / performance improvement, and commercial and strategic due diligence. He has previously worked with A.T. Kearney in his capacity as a partner. He was not paid remuneration for FY19, since he joined the company with effect from July 18, 2019. He is a permanent employee of the company.
Pankaj Fitkariwala
Pankaj Fitkariwala is the Senior Managing Partner (Administration, Brokerage and Operations) of the company. He joined the Company with effect from June 11, 2008. He holds a bachelor’s degree in commerce from the University of Mumbai. He is a member of the Institute of Chartered Accountants of India. He has 29 years of experience. He has previously worked with Barclays Bank, Plc. in his capacity as head operations, investment services. His gross
remuneration for FY19 was Rs23.99mn. He is a permanent employee of the company.
Anirban Banerjee
Anirban Banerjee is a Senior Partner (Human Resources) in the company. He joined the company with effect from June 23, 2008. He holds a bachelor’s degree in arts from the University of Delhi and a post graduate degree in human resource management from XLRI, Jamshedpur. He has 15 years of experience in the field of human resource management. He has previously worked with ITC Limited in his capacity as assistance manager. His gross
remuneration for FY19 was Rs19.46mn. He is a permanent employee of the company.
Abhishek Chandra
Abhishek Chandra is a Partner (Technology) in the company. He joined the company with effect from November 10, 2016. He holds a bachelor’s degree in engineering from the University of Mumbai and a master’s degree in financial management from the University of Mumbai. He has 18 years of experience. He has previously worked with Sanctum Wealth Management Private Limited in his capacity as director – technology and transformations. His
gross remuneration for FY19 was Rs16.83mn. He is a permanent employee of the company.
Raghuvir Mukherjee
Raghuvir Mukherjee is a Partner (Risk Management) in the company. He joined the company with effect from December 12, 2016. He holds a bachelor’s degree in commerce from the University of Calcutta. He is a member of the Institute of Chartered Accountants of India. He has 21 years of experience. He has previously worked with Reliance Nippon Life Asset Management Limited in his capacity as Chief Risk Officer. His gross remuneration for
FY19 was Rs10.73mn. He is a permanent employee of the company.
Ronak Sheth
Ronak Sheth is a Partner (Client Experience) in the company. He joined the company with effect from November 23, 2009. He holds a bachelor’s degree in commerce from the University of Calcutta and a master’s degree in business administration from XLRI, Jamshedpur. He has 21 years of experience. He has previously worked with Next Link Private Limited in his capacity as Head – Marketing and Brand Development. His gross remuneration for FY19 was
Rs9.73mn. He is a permanent employee of the company.
Japhia Walker
Japhia Walker is a Partner (Client Services) in the company. She joined the company with effect from May 26, 2008. She holds a bachelor’s degree in commerce from the University of Mumbai and a master’s degree in customer relationship management from IMSR University. She has 19 years of experience. She has previously worked with
ABN Amro Bank in her capacity as service relationship manager. Her gross remuneration for FY19 was Rs17.73mn. She is a permanent employee of the company.
IIFL Wealth Management, September 19, 2019 ICICI Securities
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Board of Directors
Particulars Description
Nirmal Jain Designation: Non-executive Director
Nirmal Jain is a Non-executive Director on the Board of the company. He holds a bachelor’s degree in commerce from the University of Mumbai and a post graduate diploma in management from the Indian Institute of Management, Ahmedabad, and is a qualified chartered accountant. He is also a qualified cost accountant and obtained the all India second rank in an examination conducted by the Institute of Cost Accountants of India in 1987. He has experience in the financial services sector and the fast-moving consumer goods sector. He founded IIFL Finance Limited in 1995 and is the current chairman of its board. Prior to this, he worked with Hindustan Unilever Limited (previously Hindustan Lever Limited), where he was responsible for, among others, export and trading in agro-commodities. He was conferred the CA Entrepreneur Leader award by the ICAI in the year 2018 in the financial services category, Entrepreneur of the Year award at the Franchise Awards, 2012. and the Pride of India Gold Medal by the NRI Institute in the year 2009.
Karan Bhagat Designation: Managing Director
Karan Bhagat is the Managing Director of the company. He holds a bachelor’s degree in commerce from St. Xavier’s College, Kolkata and a post graduate diploma in management from the Indian Institute of Management, Bangalore. He has approximately two decades of experience in the financial services sector. He is currently responsible for the strategic initiatives undertaken by the Company. He was responsible for establishing a customer-centric private wealth enterprise and was responsible for introducing new offerings such as lending and estate planning services for ultra HNIs. In addition, under his leadership, the Company also launched a fee-based advisory platform that aggregates all of its services into a single offering, called IIFL One. He has previously worked with Kotak Mahindra Wealth Management Ltd, where he served as Senior Vice President. He featured in Fortune India’s ‘40 under 40’ list in 2016 and 2017
Yatin Shah Designation: Whole-time Director
Yatin Shah is a Whole-time Director on the Board of the company. He holds a bachelor’s degree in commerce from the University of Mumbai and a master’s degree in science (finance) from Cass Business School, London. He has significant experience in the financial services sector. He has previously worked with Khandwala Securities Limited and Kotak Mahindra Bank Limited. He has previously been named the ‘Best Relationship Manager’ by Kotak Mahindra Bank and secured the ‘Best Financial Manager’ award for the best registered deal by the Asian Institute of Management, Manila.
Venkataraman Rajamani Designation: Non-executive Director
Venkataraman Rajamani is a Non-executive Director on the Board of the company. He holds a bachelor’s degree in electronics and electrical communications engineering from the Indian Institute of Technology, Kharagpur and a post graduate diploma in management from the Indian Institute of Management, Bangalore. He joined IIFL Securities Limited in 1999 and is currently a promoter and the managing director of IIFL Finance Limited. He has significant experience in the financial services sector. Prior to this, he worked with ICICI Limited, ICICI Securities Limited, and Taib Capital Corporation Limited. He has also served as the assistant vice president of GE Capital Services India Limited in their private equity division. He has been accredited as ‘Best CEO’ by BW Business world in the ‘large corporate’ category in 2018.
Nilesh Vikamsey Designation: Chairman and Independent Director
Nilesh Vikamsey is an Independent Director and the Chairman of the Board of the Company. He holds a bachelor’s degree in commerce from S.P. Mandali’s R.A. Podar College of Commerce and Economics. He is a qualified chartered accountant, holds a diploma in information system audit from the ICAI, is an elected member of the Central Council of the ICAI, and was, previously, the president of the ICAI. He is a senior partner at Khimji Kunverji & Co. He was also a member of the Insurance Regulatory and Development Authority of India. In addition, he is currently a member of SEBI’s Primary Market Advisory Committee and the Advisory Committee on Mutual Funds. Further, he is also a member of the subgroup formed by the audit committee of Coal India Limited and the disciplinary committee of the CDSL.
Geeta Mathur Designation: Independent Director
Geeta Mathur is an Independent Director on the Board of the Company. She holds a bachelor’s degree in Commerce from the University of Delhi and is a qualified chartered accountant. She specialises in the areas of project, corporate, and structured finance; treasury; investor relations; and strategic planning. She started her career with ICICI, where she worked for over 10 years in the field of project, corporate and structured finance as well represented ICICI on the Board of reputed companies such as Eicher Motors, Siel Limited etc. She then worked in various capacities in large organizations such as IBM and Emaar MGF across areas of Corporate Finance, Treasury, Risk Management and Investor relations.
Sandeep Naik Designation: Nominee Director
Sandeep Naik is a Nominee Director on the Board of the Company. He is currently a managing director at General Atlantic. He holds a bachelor’s degree in technology (specialising in instrumentation engineering) from the University of Mumbai, a master’s degree in science (specialising in biomedical engineering) from the Virginia Commonwealth University School of Medicine and a master’s degree in business administration (specialising in finance) from the Wharton School, the University of Pennsylvania. He was also co-founder of InfraScan Inc. He was selected as a young global leader by the World Economic Forum and has previously served on the global agenda council of the ‘new order of economic thinking’.
Shantanu Rastogi Designation: Nominee Director
Shantanu Rastogi is a Nominee Director on the Board of the company. He is currently a managing director at General Atlantic, where he is responsible for investments in the financial services, healthcare, and retail and consumer sectors in India and Asia-Pacific. He holds a bachelor’s degree and a master’s degree in engineering from the Indian Institute of Technology, Mumbai and a master’s degree in business administration from the Wharton School, the University of Pennsylvania He has approximately 14 years of experience in the fields of private equity and finance. He has previously worked as a business consultant with McKinsey & Company.
Subbaraman Narayan Designation: Independent Director
Subbaraman Narayan is an Independent Director on the Board of the company. He holds a bachelor’s degree and a master’s degree in physics from Madras University. He has 40 years of experience in the fields of economics, economic policy, and administration. He has been a senior research fellow at the Institute of South Asian Studies, National University of Singapore since 2005. He has previously held the positions of finance and economic affairs secretary; economic advisor to the Prime Minister of India; secretary in the Department of Revenue, Ministry of Finance, Government of India; secretary, Ministry of Petroleum and Natural Gas, Government of India; and secretary, Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry, Government of India.
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Key regulations governing IIFLWM
Securities and Exchange Board of India Act, 1992
Securities Contracts (Regulation) Act, 1956
Securities and Exchange Board of India (Intermediaries) Regulations, 2008
Securities and Exchange Board of India (Portfolio Managers) Regulations, 1993
Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 and
Association of Mutual Funds in India Guidelines
Securities and Exchange Board of India (Investment Advisers) Regulations, 2013
Securities and Exchange Board of India (Research Analysts) Regulations, 2014
Securities and Exchange Board of India (Alternative Investment Funds)
Regulations, 2012
Securities and Exchange Board of India (Certification of Associated Persons in the
Securities Markets) Regulations, 2007
Securities Contract (Regulation) Rules, 1957
Subsidiaries and joint ventures
IIFL Wealth Finance Limited
IIFL Distribution Services Limited
IIFL Asset Management Limited
IIFL Investment Adviser and Trustee Services Limited
IIFL Alternate Asset Advisors Limited
IIFL Trustee Limited
IIFL Wealth Securities IFSC Limited
IIFL Altiore Advisors Limited
IIFL Wealth Advisors (India) Limited
IIFL Asset Management (Mauritius) Limited
IIFL Private Wealth Management (Dubai) Limited
IIFL (Asia) Pte. Limited
IIFL Private Wealth Hong Kong Limited
IIFL Inc.
IIFL Capital (Canada) Limited
IIFL Capital Pte. Limited
IIFL Securities Pte. Limited
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Index of Tables and Charts
Tables
Table 1: Company history ................................................................................................... 10 Table 2: Economies of business on the basis of average AUM ......................................... 12 Table 3: Economies of business on the basis of average number of RM teams ............... 12 Table 4: Economies of business on the basis of average AUM ......................................... 16 Table 5: Key performance indicators of IIFLWM (consolidated) ......................................... 21 Table 6: Consolidated Profit and Loss statement ............................................................... 22 Table 7: Consolidated Balance sheet ................................................................................. 23
Charts
Chart 1: Real annual GDP growth ........................................................................................ 3 Chart 2: Estimates of financial assets ................................................................................... 4 Chart 3: Indian household savings ....................................................................................... 5 Chart 4: HNI wealth in India .................................................................................................. 5 Chart 5: Breakdown of IIFL’s share of UHNI assets by city .................................................. 6 Chart 6: Breakdown of IIFL’s share of number of UHNI by city ............................................ 6 Chart 7: Market share breakup ............................................................................................. 7 Chart 8: AUM as a percentage of GDP ................................................................................ 7 Chart 9: Equity MF as a percentage of market cap .............................................................. 8 Chart 10: Global alternatives market is sizeable .................................................................. 8 Chart 11: India: Emerging opportunity .................................................................................. 9 Chart 12: Fund sources for alternative investments: Global institutions have major share . 9 Chart 13: Annuity vs Distribution / Transactional income (Rs mn) ..................................... 13 Chart 14: Asset allocation excluding custody assets .......................................................... 14
IIFL Wealth Management, September 19, 2019 ICICI Securities
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