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India Infoline (IIFL)
Banks/Financial Institutions
Weak business outlook for FY2012E, SELL. We believe that subdued equity market
volumes will put significant pressure on India Infoline’s earnings over the next few
quarters. The insurance business has reported stable performance and is yet to reflect
the impact of the IRDA regulations. Growth in lending business is positive though nearterm RoEs will likely remain subdued. We revise rating to SELL from ADD with price
target of Rs70 (from Rs100).
Broking business going through difficult times
We expect India Infoline (IIFL) to report 13% yoy decline in broking commission income in
FY2012E on the back of 15% decline in broking volumes in the cash equities segment. Higher or
lower-than-expected movement in stock markets and volumes can significantly impact earnings
from this segment.
Overall volumes in cash markets have declined by 22% yoy in 1QFY11. In July 2011, the yoy
volume decline was lower at 18% on the back of 11% month-on-month (mom) growth. In
FY2011, volumes delivered consistent mom growth in August, September and October. The higher
base poses a challenge for growth in 2QFY12E and 3QFY12E though the mom traction in July was
a positive sign.
In 1QFY12, IIFL’s broking income declined by 15% yoy. While the reported market share was
stable, the company reported 14% qoq decline in volumes – in line with market trends.
Commission rates declined to 3.8 bps from 4 bps qoq thereby driving a 20% qoq decline in
broking income.
Multiple risks to business, downgrade to SELL
We find multiple challenges for IIFL’s earnings.
` Equity broking business subdued. Equity market volumes have been subdued for the last
couple of months and will likely remain weak (as discussed above).
` Overhang of regulatory impact. The impact of regulatory changes in the insurance sector is
not yet reflected in the income from insurance distribution. While the management had initially
highlighted that they expect commission rates to decline and volumes to pick up (thereby
offsetting the impact of lower commissions) in the new regulatory regime, the trend is not yet
visible. We estimate commissions (including expense compensation) at 55% of APE in 1QFY11
and are not sure if this ratio can be sustained.
` Lower RoE in NBFC business. The NBFC business is growing rapidly but continues to
operate below optimal leverage. The company reported about 6% RoE in FY2011; we
expect RoEs at 10-11% levels over the next two years.
` Wealth management - challenging to model. Wealth management business will likely
face regulatory headwinds which can impact IIFL’s scope of operations. IIFL Wealth
Management reported revenue and earnings of Rs1.2 bn and Rs250 mn (12% of
consolidated PAT) in FY2011. We find it challenging to model the revenue from this
business in the absence of data on segmental revenues for wealth management. IIFL
holds 82% in this business (and the balance is held by employees) making it more
challenging to project the impact of these numbers in our estimates.
` Revision in estimates… We are revising down our estimates to factor lower income
from broking and insurance distribution (see Exhibit 2). We are modeling cost to income
ratio of 56% from 55% in over the next two years as compared to 58% in FY2011.
Consequently, our EPS for 2012E declines to Rs4.8 and Rs6.5 for FY2012E and FY2013E,
respectively.
` ...and price target, stock to be compared with other NBFCs. Our revised price target
of Rs70 factors (1) NBFC business at 1XPBR FY2013E and (2) other businesses at 10X PER
FY2013E. On a consolidated basis, the stock will trade at 1.1X PBR FY2013E for RoE of
11-12%.
` The share of IIFL’s broking income has been declining over the quarters. In 1QFY12, the
contribution of broking and related income declined to 43% of segmental profits from
63% in 1QFY11, while the share of finance income increased to 57% from 35%. As the
NBFC business gains traction over the next few quarters, we believe that the stock will be
benchmarked with other NBFCs on a PBR basis.
Insurance business – earnings defies macro trends
IIFL reported almost stable income from insurance distribution in 1QFY12 despite the
implementation of new IRDA guidelines. Income from distribution (primarily insurance
business) was Rs418 mn – stable yoy. APE collections were Rs595 mn. Even if assume that
20% of the distribution income was on account of trail commissions, the ratio of new
business commission to APE works out to 55%. In the past, management had guided for
stable revenues from insurance distribution driven by increase in business volumes even as
commission rates decline in the new regime. A reduction in commission rates is not yet
visible and remains a key risk to income from this segment. We don’t expect volumes in this
segment to pick up sharply either and are modeling about 30% yoy decline in income from
this segment in FY2012E.
Finance business – loan growth on track
IIFL reported loan book of Rs39 bn in June 2011, up 100% yoy. Average loan book for the
quarter was up 15% qoq while net interest income increased 9% qoq. Growth in
mortgages (loans against property) is the largest contributor to growth.
Reported spreads in the NBFC business have declined to 4.5% in FY2011 from 7.5% in
FY2010. We expect NIM to remain under pressure over the next few quarters. We believe
that the recent retail NCD issue – up to Rs7.5 bn (19% of the current loan book) at coupon
of 11.9% fixed rate for three to five years, will likely put pressure on margins as the interest
rates in the system come off.
Going forward, we are modeling loan book of Rs44 bn and Rs60 bn in FY2012E and
FY2013E. The company is now focusing on gold loans (in addition to other business) and
has set up over 400 branches for the same; the business will likely support yields over the
medium term but operating cost will remain high in the initial phase.
Key highlights of the 1QFY12 results
` PAT was down 37% yoy to Rs272 mn, 9% below estimates
` Income was up 17% yoy, 4% above estimates largely on the back of growth in interest
income
` Net interest income was up 17% yoy
` Operating expenses ratio was stable at 61% qoq, down from 64% in 1QFY11
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Infoline (IIFL)
Banks/Financial Institutions
Weak business outlook for FY2012E, SELL. We believe that subdued equity market
volumes will put significant pressure on India Infoline’s earnings over the next few
quarters. The insurance business has reported stable performance and is yet to reflect
the impact of the IRDA regulations. Growth in lending business is positive though nearterm RoEs will likely remain subdued. We revise rating to SELL from ADD with price
target of Rs70 (from Rs100).
Broking business going through difficult times
We expect India Infoline (IIFL) to report 13% yoy decline in broking commission income in
FY2012E on the back of 15% decline in broking volumes in the cash equities segment. Higher or
lower-than-expected movement in stock markets and volumes can significantly impact earnings
from this segment.
Overall volumes in cash markets have declined by 22% yoy in 1QFY11. In July 2011, the yoy
volume decline was lower at 18% on the back of 11% month-on-month (mom) growth. In
FY2011, volumes delivered consistent mom growth in August, September and October. The higher
base poses a challenge for growth in 2QFY12E and 3QFY12E though the mom traction in July was
a positive sign.
In 1QFY12, IIFL’s broking income declined by 15% yoy. While the reported market share was
stable, the company reported 14% qoq decline in volumes – in line with market trends.
Commission rates declined to 3.8 bps from 4 bps qoq thereby driving a 20% qoq decline in
broking income.
Multiple risks to business, downgrade to SELL
We find multiple challenges for IIFL’s earnings.
` Equity broking business subdued. Equity market volumes have been subdued for the last
couple of months and will likely remain weak (as discussed above).
` Overhang of regulatory impact. The impact of regulatory changes in the insurance sector is
not yet reflected in the income from insurance distribution. While the management had initially
highlighted that they expect commission rates to decline and volumes to pick up (thereby
offsetting the impact of lower commissions) in the new regulatory regime, the trend is not yet
visible. We estimate commissions (including expense compensation) at 55% of APE in 1QFY11
and are not sure if this ratio can be sustained.
` Lower RoE in NBFC business. The NBFC business is growing rapidly but continues to
operate below optimal leverage. The company reported about 6% RoE in FY2011; we
expect RoEs at 10-11% levels over the next two years.
` Wealth management - challenging to model. Wealth management business will likely
face regulatory headwinds which can impact IIFL’s scope of operations. IIFL Wealth
Management reported revenue and earnings of Rs1.2 bn and Rs250 mn (12% of
consolidated PAT) in FY2011. We find it challenging to model the revenue from this
business in the absence of data on segmental revenues for wealth management. IIFL
holds 82% in this business (and the balance is held by employees) making it more
challenging to project the impact of these numbers in our estimates.
` Revision in estimates… We are revising down our estimates to factor lower income
from broking and insurance distribution (see Exhibit 2). We are modeling cost to income
ratio of 56% from 55% in over the next two years as compared to 58% in FY2011.
Consequently, our EPS for 2012E declines to Rs4.8 and Rs6.5 for FY2012E and FY2013E,
respectively.
` ...and price target, stock to be compared with other NBFCs. Our revised price target
of Rs70 factors (1) NBFC business at 1XPBR FY2013E and (2) other businesses at 10X PER
FY2013E. On a consolidated basis, the stock will trade at 1.1X PBR FY2013E for RoE of
11-12%.
` The share of IIFL’s broking income has been declining over the quarters. In 1QFY12, the
contribution of broking and related income declined to 43% of segmental profits from
63% in 1QFY11, while the share of finance income increased to 57% from 35%. As the
NBFC business gains traction over the next few quarters, we believe that the stock will be
benchmarked with other NBFCs on a PBR basis.
Insurance business – earnings defies macro trends
IIFL reported almost stable income from insurance distribution in 1QFY12 despite the
implementation of new IRDA guidelines. Income from distribution (primarily insurance
business) was Rs418 mn – stable yoy. APE collections were Rs595 mn. Even if assume that
20% of the distribution income was on account of trail commissions, the ratio of new
business commission to APE works out to 55%. In the past, management had guided for
stable revenues from insurance distribution driven by increase in business volumes even as
commission rates decline in the new regime. A reduction in commission rates is not yet
visible and remains a key risk to income from this segment. We don’t expect volumes in this
segment to pick up sharply either and are modeling about 30% yoy decline in income from
this segment in FY2012E.
Finance business – loan growth on track
IIFL reported loan book of Rs39 bn in June 2011, up 100% yoy. Average loan book for the
quarter was up 15% qoq while net interest income increased 9% qoq. Growth in
mortgages (loans against property) is the largest contributor to growth.
Reported spreads in the NBFC business have declined to 4.5% in FY2011 from 7.5% in
FY2010. We expect NIM to remain under pressure over the next few quarters. We believe
that the recent retail NCD issue – up to Rs7.5 bn (19% of the current loan book) at coupon
of 11.9% fixed rate for three to five years, will likely put pressure on margins as the interest
rates in the system come off.
Going forward, we are modeling loan book of Rs44 bn and Rs60 bn in FY2012E and
FY2013E. The company is now focusing on gold loans (in addition to other business) and
has set up over 400 branches for the same; the business will likely support yields over the
medium term but operating cost will remain high in the initial phase.
Key highlights of the 1QFY12 results
` PAT was down 37% yoy to Rs272 mn, 9% below estimates
` Income was up 17% yoy, 4% above estimates largely on the back of growth in interest
income
` Net interest income was up 17% yoy
` Operating expenses ratio was stable at 61% qoq, down from 64% in 1QFY11
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