Rating Rationale
June 05, 2020 | Mumbai
IIFL Wealth Management Limited
Rating Reaffirmed  
 
Rating Action
Rs.2500 Crore Commercial Paper Programme(IPO Financing) CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its rating on the commercial paper programme(IPO financing) of IIFL Wealth Management Limited (IIFL Wealth Management; part of IIFL Wealth) at 'CRISIL A1+'.
 
The ratings factor in IIFL Wealth's strong market position in the wealth management business, experience and stability of the management and comfortable capitalisation. These strengths are partially offset by a limited track record and low diversity in lending operations in the wealth management business and regulatory risks in the wealth management business.

Analytical Approach

For arriving at the rating, CRISIL has consolidated the business and financial risk profiles of IIFL Wealth Management and its subsidiaries, including IIFL Wealth Finance Ltd (IIFL Wealth Finance) and other subsidiaries. This is because all these entities, collectively referred to as IIFL Wealth, have significant operational, financial, and managerial integration and operate under a common brand. CRISIL has also factored in the business synergies that IIFL Wealth has with IIFL Finance and IIFL Securities, given their common promoters and shared brand name.

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 wealth management business
IIFL Wealth is among the largest wealth advisors in India, with assets under management (AUM; excluding custody assets) of Rs 1.51 lakh crore as on December 31, 2019 (Rs 1.37 lakh crore as on March 31, 2019). It provides a full suite of services to clients, including distribution, advisory, asset management, broking, and lending. IIFL Wealth is also among the largest managers of AIFs in India, with AUM of Rs 19213 crore as on December 31, 2019 (Rs 15661 crore as on March 31, 2019). Its wholly owned non-banking financial company (NBFC), IIFL Wealth Finance, had AUM of Rs 4027 crore as on December 31, 2019 (Rs 4798 crore as on March 31, 2019), mainly consisting of loans against securities. IIFL Wealth has 64 teams with more than 288 relationship managers (RMs) across 29 offices as on December 31, 2019. CRISIL believes that IIFL Wealth will maintain its leading position in the wealth management business over the near to medium term.
 
* Experienced and stable management
IIFL Wealth, with a track record of over a decade in the wealth business, has a stable and experienced management. The management's experience and understanding of the wealth business has enabled the company to be among the most innovative in the wealth segment, resulting in its leading position in the market. The management's founders ' Mr Karan Bhagat (Managing Director) and Mr Yatin Shah (Executive Director) have been instrumental in setting up the businesses and have also been given the status of promoters post the demerger of IIFL Group entities.
 
The assessment of IIFL Wealth's credit risk profile continues to factor in its strong management capabilities and stability.
 
* Comfortable capitalisation; supported by presence of marquee institutional investors
IIFL Wealth has comfortable capitalisation levels, as reflected in net worth of Rs 3062 crore and low gearing of 2.4 times as on December 31, 2019 (Rs 2910 crore and 2.1 times as on March 31, 2019). The company is mainly present in fee based businesses wherein the capital requirement is relatively lower; capital is primarily required for the NBFC, sponsor commitment in AIFs manufactured by IIFL Wealth and for inorganic expansion. The company has also demonstrated its ability to raise funds from external investors in the past, including Rs 750 crore raised in fiscal 2019 from marquee investors including from existing investor General Atlantic.
 
On a standalone basis, IIFL Wealth Finance had a net worth of Rs 1901 crore and a gearing of 3.2 times as on March 31, 2019. The company has received regular capital infusions from the parent with Rs 962 crore infused in fiscal 2016 and Rs 500 crore infused in fiscal 2019.
 
Weakness
* Limited track record and low diversity of lending operations
IIFL Wealth Finance, which started operations in fiscal 2016, is mainly present in a single line of business-loans against security-largely to support the wealth management business. The business, in general, is linked to developments in capital markets and domestic and global economic events. Consequently, given the macro environment, the loan book witnessed a decline to Rs 4027 crore as on December 31, 2019 from Rs 4798 crore as on March 31, 2019.  Ability to successfully scale-up business amid economic cycles while managing asset quality and profitability will remain a monitorable.
 
* Regulatory risks in wealth management business
Unlike risks in lending business that can be credit related and hence subsequently impact capitalisation, wealth management is largely a fee based business and the impact on the capital is low, however the business remains exposed to significant regulatory risks.
 
The wealth and asset management business operates in a highly regulated environment with unanticipated regulatory changes having the potential to adversely impact the business model. In the past few years due to regulatory changes (banning of upfront commissions, reduction in MF total expense ratios leading to a consequent reduction in commissions, etc.), companies have been forced to re-orient their business model to adapt to the changing environment. This has impacted the profitability of these companies, including IIFL Wealth. IIFL Wealth has been proactive in addressing these changes with the transition to the advisory platform and income recognition across products on a trail basis- this would impact the earnings profile in the near term; however, it should lead to greater stability going forward.
 
Any other regulatory changes that can impact the business remain a key monitorable.
Liquidity Strong

Liquidity for all the subsidiaries of IIFL Wealth Management is managed at a consolidated level. Asset Liability Maturity profile of IIFL Wealth shows that it has positive cumulative mismatches in all buckets up to one year as on December 31, 2019, for the wealth finance NBFC.

As on April 30, 2020, IIFL Wealth (consolidated) had liquid investments (excluding government securities for collateralised borrowing and lending obligations (CBLO)) and unutilised bank lines of Rs 1826 crore, against total debt (excluding CBLO) of Rs 288 crore maturing till July 31, 2020. Furthermore, IIFL Wealth continues to tap debt capital markets for fresh issuances.

Rating Sensitivity Factors:
Downward Factors
* Dilution in risk management practices, leading to weakening of asset quality, coupled with weakening in profitability
*Significant deterioration in AUM with high client and relationship manager attrition
* Adverse regulatory actions on the business segments of the company resulting in significant deterioration in business risk profile.

About IIFL Wealth
In fiscal 2009, the IIFL Wealth group started its wealth management services under the 'IIFL Wealth' brand and got insurance broking and venture capital licences. IIFL Wealth Management, along with its wholly owned subsidiaries, is primarily engaged in distribution, advisory, asset management, broking, and lending solutions for clients in the wealth management segment.

In January 2018, IIFL Finance Ltd (IIFL Finance; earlier IIFL Holdings Ltd) announced plans to reorganise its corporate structure, and list the three entities ' IIFL Finance (loans and mortgages business), IIFL Wealth (wealth and asset management business), and IIFL Securities (capital markets and other businesses). In May 2019, as part of this restructuring scheme, IIFL Wealth and IIFL Securities were demerged from IIFL Finance. Further, in September 2019, IIFL Wealth Management was listed on the stock exchanges.

IIFL Wealth's earnings profile is currently in the form of commission and trail income from the distribution of financial products, brokerage income, advisory income, interest income from NBFC book and management fees.The profitability was impacted in the nine months ended fiscal 2020 on account of change in revenue recognition model to trail basis across distribution, alternate investment funds and portfolio management services. Further, the profitability was impacted due to the company's plans to transition to an advisory model from the current distributor fee model, which is expected to reduce the volatility associated with distribution fees from the manufacturer.

In fiscal 2019, IIFL Wealth's profit after tax (PAT) was Rs 384 crore on total income of Rs 1,577 crore against PAT of Rs 381 crore on total income of Rs 1715 crore the previous fiscal. For the nine months ended December 31, 2019, PAT was Rs 206 crore on total income of Rs 1236 crore against PAT of Rs 301 crore on total income of Rs 1225 crore the previous fiscal.

Key Financial Indicators - IIFL Wealth Management (Consolidated)
As on/for the period ended March 31 (As per IND AS) Unit 2019 2018
Total Assets Rs Crore 9,780 9,567
Total income (net of interest expense) Rs Crore 1,150 1,156
PAT Rs Crore 384 381
Gross NPA % Nil Nil
Return on assets % 4.0 4.4
Gearing Times 2.1 3.7

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size
(Rs.Crore)		 Rating Outstanding with Outlook
NA Commercial Paper Programme (IPO financing) NA NA 7-30 days 2500 CRISIL A1+
 
Annexure - List of Entities Consolidated
Entity Consolidated Extent of Consolidation Rationale for Consolidation
IIFL Asset Management Ltd Full Subsidiary
IIFL Trustee Ltd Full Subsidiary
IIFL Investment Adviser and Trustee Services Ltd Full Subsidiary
IIFL Distribution Services Ltd Full Subsidiary
IIFL Alternate Asset Advisors Ltd Full Subsidiary
IIFL Wealth Finance Ltd Full Subsidiary
IIFL Wealth Securities IFSC Ltd Full Subsidiary
IIFL Pvt Wealth Management (Dubai) Ltd Full Subsidiary
IIFL INC Full Subsidiary
IIFL Pvt Wealth Hong Kong Ltd Full Subsidiary
IIFL Asset Management (Mauritius) Ltd Full Subsidiary
IIFL (Asia) Pvt Ltd Full Subsidiary
IIFL Capital Pvt Ltd Full Subsidiary
IIFL Securities Pvt Ltd Full Subsidiary
IIFL Capital (Canada) Ltd Full Subsidiary
IIFL Altiore Advisors Ltd Full Subsidiary
IIFL Wealth Advisors (India) Ltd Full Subsidiary
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST    --  28-02-20  Withdrawal  20-08-19  CRISIL A1+  13-08-18  CRISIL A1+  21-12-17  CRISIL A1+  -- 
        23-01-20  CRISIL A1+      11-07-18  CRISIL A1+       
                27-06-18  CRISIL A1+       
                17-05-18  CRISIL A1+       
                10-05-18  CRISIL A1+       
                16-03-18  CRISIL A1+       
                09-02-18  CRISIL A1+       
                12-01-18  CRISIL A1+       
Commercial Paper Issue  ST    --    --  20-08-19  Withdrawal  13-08-18  CRISIL A1+  21-12-17  CRISIL A1+  -- 
                11-07-18  CRISIL A1+       
                27-06-18  CRISIL A1+       
                17-05-18  CRISIL A1+       
                10-05-18  Withdrawal       
                16-03-18  CRISIL A1+       
                09-02-18  CRISIL A1+       
                12-01-18  CRISIL A1+       
Commercial Paper Programme(IPO Financing)  ST  2500.00  CRISIL A1+  28-02-20  CRISIL A1+  20-08-19  CRISIL A1+  13-08-18  CRISIL A1+    --  -- 
        23-01-20  CRISIL A1+      11-07-18  CRISIL A1+       
Short Term Debt  ST                      CRISIL A1+ 
Short Term Debt (Including Commercial Paper)  ST                  06-12-17  CRISIL A1+  -- 
                    25-10-17  CRISIL A1+   
                    04-10-17  CRISIL A1+   
                    29-09-17  CRISIL A1+   
Short Term Debt Issue  ST    --    --    --  12-01-18  Withdrawal  21-12-17  CRISIL A1+  -- 
                    06-12-17  CRISIL A1+   
                    25-10-17  CRISIL A1+   
                    04-10-17  CRISIL A1+   
All amounts are in Rs.Cr.
Links to related criteria
Rating Criteria for Finance Companies
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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