Jul 23, 2013 04:39 PM IST | Source: CNBC-TV18

Don't expect pick in cap mkt biz; positive on NBFC: IIFL

In an interview to CNBC-TV18, R Venkataraman, Managing Director, India Infoline elaborates on the reasons why the company reported a dip in PAT from the previous quarter.

R Venkataraman, managing director of IIFL expects the pressure on the broking firm's NBFC business, which has been its main growth driver, to ease in coming quarters.

The company reported a consolidated net profit fell to Rs 63.2 crore for the June quarter against Rs 81 crore in the previous quarter. The consolidated income from operations stood at Rs 673.3 crore versus Rs 732 crore in the March quarter.

Venkataraman attributes the performance to the change in the asset book composition in the company’s order book. NBFCs saw a reduction in the gold loan business, while the mortgage and home loan grew over this quarter. In the coming quarters, he is positive on the financial products, wealth management and NBFC business. However, the capital markets business will not see a significant pick up as retail activity has reduced, he adds.

Also read: How will RBI select entities for new bank licence?

Below is the edited transcript of his interview to CNBC-TV18.

Q: Can you just take us through what where the highlights of the quarter’s performance?

A: We just announced our results for the June quarter-ended our profits are up 21 percent year-on-year. We saw a 16 percent growth in our top-line. This is up on a year-on-year basis, but down on a quarter-on-quarter basis if you compare the March 31 quarter.

It is primarily because the last March quarter is typically a peak season for the financial services industry. The growth in our income as well as profits has been primarily driven by the non banking financial companies (NBFC) business.

Q: What exactly are the top-line and the bottom-line growths?

A: The income for the quarter was Rs 676 crore, which is up roughly about 16 percent on an year-on-year basis. The profit after tax (PAT) for the quarter was Rs 63 crore which is up 21 percent on a year-on-year basis.

The PAT is down roughly about 20 percent if you compare with the previous quarter.

Q: How did the margins fared?

A: Growth has been primarily driven by our NBFC business. If you look at our NBFC business the book is roughly at about Rs 9,500 crore, which is virtually flat from the quarter that ended.

But the portfolio mix has undergone a significant change because of the asset price volatility in the last quarter, which we saw in the gold loan business. Gold loan as a total percentage of the book has come down and that has been compensated by growth in our mortgages business.

We are seeing some amount of compression in the net interest margins (NIMs) primarily because of change of the asset mix.

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Q: You are right on a quarter-on-quarter basis you have seen a slump across key segments. The earnings before interest and tax (EBIT) over financing and investment income has fallen to less than Rs 60 crore versus Rs 74 crore last quarter. Going ahead, do you expect this pressure to continue? If yes, which are the key pockets where you continue to see a dwindling performance?

A: If you deep dive then we have seen the asset book witness a change. If you go back a quarter, the gold loan for the significant component of the book and if you see the overall loan book, the loan book was primarily driven by mortgages and home loans as well as gold loans.

In this quarter that we ended in June 30, the gold loan composition has come down significantly and that has resulted in fall in the NIM. Going ahead, I think the overall book will witness further growth primarily driven by the mortgages and the home loan business.

The pressure which we saw in the last quarter should ease and we should see some improvement in the days ahead.

Q: On a quarter-on-quarter basis, you have seen a slump across key segments. The earnings before interest and tax (EBIT) over financing and investment income has fallen to less than Rs 60 crore versus Rs 74 crore last quarter. Going ahead, do you expect this pressure to continue? If yes, which are the key pockets where you continue to see a dwindling performance?

A: If you deep dive then we have seen the asset book witness a change. If you go back a quarter, the gold loan was a significant component of the book. If you see the overall loan book, the loan book was primarily driven by mortgages and home loans as well as gold loans.

In this quarter that we ended in June 30, the gold loan composition has come down significantly and that has resulted in fall in the NIMs. Going ahead, the overall book will witness further growth primarily driven by the mortgages and the home loan business.

The pressure which we saw in the last quarter should ease and we should see some improvement in the days ahead.

Q: What would the ballpark growth be in the loan book going ahead? What are you targeting for FY14?

A: I can’t make any forward-looking statements as of now. But hopefully, we should see some amount of growth happening in this loan book. It should be primarily driven by mortgages and loans against property book.

Q: What about the non-performing loan (NPL) position? Any tremors over there; especially in your financing business?

A: We are happy with the asset quality as such and that is primarily a reflection of the credit underwriting processes and the checks and balance which we have. Our net non-performing asset (NPA) has gone up to 0.24 percent. We have tightened the collections mechanism and we hope that we should be able to keep our NPAs under control.

Q: When we asked you about the slowdown across all sectors you spoke only about gold. Is Gold subsumed under financing and investment income?

A: No, actually when we talk about the gold loans business, we have a gold loan book and give loans against the collateral of gold security. It is reflected in our NBFC, our loans and financing business and that is the income which we drive from interest from our loan book. So, the gold loan portfolios are subsumed under that.

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Q: For the next quarter, that is for the current quarter where do you see growth coming at all? Or will the slowdown continue in all these areas? Distribution and marketing income, capital market fees, financing, will the slowdown continue in all the three segments?

A: Let me give you a perspective of our business. If you look at component of our income – we derive income from primarily three sources which is our NBFC book, which is a single largest contributor to our income. Other components of our revenue stream is broking; which is equities, commodities and currency and the other component is finance, which is distribution of our product including wealth management. So, these are the three broad heads of our business.

Capital market business is facing challenges simply because of the change in the revenue mix of the overall market volumes. If you see cash component of the total exchange volume is slowly and steadily coming down.

Bulk of the volumes is driven by Futures and Options. It is due to higher incidence of Futures and Options the yields are under pressure and retail activity as such is slowly and steadily coming down over the last four-five quarters due to increased volatility.

The other component was commodities and currencies broking, which were showing some amount of traction. But that has been adversely affected A) Because of incident of commodities transaction tax (CTT) and B) Our currency volumes have been hit because of recent Reserve Bank of India (RBI) guidelines on open positions in the markets.

So for this quarter, I don’t see significant pick up happening in this capital markets or currency and commodities broking component of our business.

Having said that, the other two components which are basically NBFC and distribution of financial products, we are optimistic about these businesses. We will continue to grow our NBFC books, primarily driven by our mortgages and loan against property that will be the key driver of the growth of NBFC book.

And the other business is wealth management and distribution of financial products, we are optimistic about that component of our business also.

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