Tough times for industry but long-term story alive: IIFL

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Reporting a 2.4% slip in the consolidated income in the first quarter of FY12, financial service provider India Infoline (IIFL) says the brokerage industry is facing harsh times, however, believes the long term potential of the business is still going strong.

In an exclusive interview to CNBC-TV18, managing director R Venkatraman  says that although there will be short-term pressures, the Indian story is intact. "The last two quarters have been challenging for the broking industry due to the fall in equities volume in the exchanges," he explains.  However, he further says, "the company will continue to invest because we believe in the long-term growth story," adding that the company will refrain from dramatic measures like large scale retrenchment.

Below is an edited transcript of R Venkatraman's interview with CNBC-TV18's Latha Venkatesh and Soniya Shenoy. Also watch the accompanying video.

Q: Brokerages have seen pressure on margins because of lower brokerage yields. What has IIFL done this quarter, in terms of margins and how do the next couple of quarters look? Do you anticipate more pain from here?

A: The first quarter results broadly reflect the trend in the brokerage industry. At income level, we have seen 17.5% increase in the top line which had a 3.56 billion income for the quarter and at the EBITDA level, it was virtually flat. If you compare on quarter on quarter basis which is at about 1.39 billion and on PBT level, we have seen 35% decline and if you see our brokerage number there has been a growth in the top-line in terms of traded volumes.

For the June quarter, we had an average daily turnover of about 5,234 crore that is up 20% on year on year basis. However, there is a decline on quarter on quarter basis due to the pressure on the yield. Two years ago, in FY10, F&O constituted about 76% of the overall exchange volumes and now we have almost at 91%. Hence, this change in business mix is affecting adversely the yields because yield in F&O business is lower compared to the cash business. Therefore, there is a headwind in the equities business. 

Q: How do things pan out from hereon? Are you all going to tackle this as many brokerages have done with more job cuts?

A: The last two quarters have been challenging for the broking industry because of the fall in equities volume in the exchanges. There is intense competition and there has been unrelenting pressure because of increase in employee cost. We will not do something as dramatic, as large scale retrenchment.

These are difficult times, but we believe in the long term potential of the business. We will continue to scale up infrastructure as well as invest in people because when the market cycle turns, it is very difficult to scale up. Retail percentage of equities holding in a country is very low, in spite of continuous interest rate hikes it looks unabated, the GDP continues to grow, the Indian story is intact, and hence, there will only be short-term pressures. I don't know whether this quarter or next quarter or maybe two quarters away, we will see a bottoming out but the pain is there. As a firm, we will continue to invest because we believe in the long-term story.

Q: Should we assume that there will be some trimming?

A: In an industry like ours, people are continuously evaluated on regulated basis.

Q: Will there be any re-jig in terms in your financing and investment businesses?

A: The financing business has done well and it has scaled up in the last two-three quarters. The book has grown and the mortgages business has also increased its share. On the NBFC front, the equity side of the margin funding and loan against share, all of them have linked to the state of the capital market. Once, the market revises, it is one arm that can scale up fast.

Q: What about the insurance side of the business?

A: The new regulations came into effect sometime last year and the industry is going through readjustment. Pension as a product category itself has been severely affected and ULIP sales have also been affected. However, these are temporal adjustments so now we have a product that is good for the customer, hence, sooner or later there is a real demand for life insurance as a product and things should improve.

Q: Your margins this time around have been around 38-39% or so because of the way the environment has been. Do you think you could significantly slip below these levels or do you think you could maintain it in this range?

A: There will be some amount of pressure and it's extremely difficult for me to make a comment.

Q: You are opening 750 crore NCD issue. What is the purpose of this? Is it purely money raising exercise or do you think investor appetite is going towards debt?

A: The issue is opening on August 4. We are looking for financing because the entire NBFC business is a leverage play. Hence, as of now we have seen the success of our peers and we want to have alternate sources of financing available. Therefore, it is a good way to diversify the funding sources.

Q: What is the extent of bad debt on that book?

A: Our NPA is about 0.4% to be precise.

Q: Is gold mortgaging becoming a big think now and is IIFL looking to diversify into that segment?

A: We have set up our gold branches in the six months or so. Appetite for gold loans is quite good in the country and we will look to scale this book up also.