IIFL securities stock investment idea: 10x in 10 years

 

 

IIFL securities: 10x in 10 years

 

Article published as on Wednesday, 11^th November, 2020 at 5:30 p.m. 

Flow of the article 

 

Explaining the flow

Introduction

 

About the business

Demerger

          Brokerage business

          Land bank they have

          AAA (advisor anytime anywhere)

          Other business IIFL markets etc.

 

Financials & Ratios

 

Valuations (using DCF) and multiples like P/E and P/B.

 

Promoter and Management analysis (very important)

 

So let’s begin:

 

Introduction

 

I searched on internet regarding IIFL securities, but there aren’t many articles which can interest an investor.

 

Even the valuepickr forum has threads about the old IIFL holdings but not of the demerged entities.

 

Today I want to present fundamental analysis of listed Indian FinTech stock which has potential to become 10x in 10 years, 

Its IIFL securities.

 

About the business

     ~Demerger

 

First of all let me provide details of demerger of IIFL holdings

 

Record date for demerger 31st may 2019

 

Demerger ratio 

For every 7 shares of IIFL holdings.

Investors will get 

7 shares in IIFL finance

7 shares in IIFL securities

1 share in IIFL wealth

 

      ~Brokerage business

 

Let’s talk about the brokerage business

 

IIFL securities is a traditional brokerage house in India, it has 2, 52,498 active clients as on the date (source: chittorgarh)

 

It has more than 2500 branches as on date.

(50-60 owned and rest are of sub brokers)

 

As any other traditional brokerage house it faces competition from discount brokers.

 

Once IIFL holding promoted 5 paisa (now demerged) it has 6 lac active clients and 3rd largest discount broker after Zerodha and upstox.

 

Because of conflicting nature of both IIFL Securities and 5 paisa they demerged but the management had an idea that there is a huge market potential for discount broker and hence started the 5 paisa venture.

 

However coming back to IIIFL securities

 

The brokerage business will be the cash cow for the company, it will grow but not as fast as the discount brokers, if you look at the historical income statements of IIFL securities you’ll see cyclicality in it, as it’s the nature of the markets.

 

To counter this cyclicality they ventured into NBFC business of wealth management and disbursing loans, through IIFL wealth and IIFL finance, but they are now demerged entities, now they came up with the idea of AAA to counter cyclicality of markets. (More on that further)

 

Pros: long established brand value and reputation in the industry.

They are expensive but fully service oriented with branches, research & advisors, RM’s, this also makes them profitable.

 

Cons: they have tough competition from discount brokers,

          They are not banking related brokerage firm.

 

Coming to the

       ~land bank that IIFL security holds.

 

IIFL securities holds substantial real estate in terms of office space which it rents out to its associate companies and earns rent.

Its earning through rental income is approximately 55 crores annually

(As stated by management in recent con-call)

 

Buts its profitability is not good as major chunk goes into the finance cost.

 

They hold around 6, 34,459 square feet spread across multiple locations from Ahmedabad to Mumbai to Pune. They are carrying it at book value of roughly about 300 Crores and the market value is close to about 700 (source link : concall of Q2 FY21)

 

Also the management plans to unlock value through sale of its real estate, but they have to make debt payments against it as well.

 

However in future they could post exceptional gains when they sell some of their real estates.

 

 

Let’s see what AAA is about in short.

 

 

      ~AAA (Advisory anytime anywhere)

 

I had seen many advertisements on TV but didn’t paid much attention to it at first.

After doing a little bit of research I understood that this is the 'FinTech' start-up kind of venture.

 

After all what PayTM has is a software which makes it convenient for users to transfer cash to each other. 

 

Similarly what AAA is: a technological software which makes it extremely convenient for distributors to carry on business!

 

Its competitors are NJ India, and Funds India wealth advisor.

 

They also provide software to distributors to provide convenience in carrying out business and in turn take a share in profits earned by distributor who uses their software.

 

Let’s see what the management had projected and said regarding this venture.

 

R. Venkatraman :AAA is a tab based order entry risk management back office for independent financial advisors, including sub brokers, so this is one tool in which you can not only do stock broking, but also buy mutual funds, buy insurance, debt products and it has all encompassing comprehensive solution. ~concall 18^th, May 2020

 

 

 

On the Concall in May2020 they said they have roughly 1000 sub brokers using AAA.

 

In this article we can see that Nirmal Jain chairman of IIFL said that

 

“Currently we are targeting tier II and tier III cities, soon to make it multi-lingual with Gujarati and Hindi in the coming months. We have invested nearly Rs. 100 crore and aspire to sell 100,000 tablets in 2019 across more than 1000 IIFL centres. We are betting on Jio’s growing network across India” (source link: BFSI Economic times)

 

I am very excited because the growth potential from this venture is tremendous. 

 

This venture has the potential to add more sub brokers in turn aiding the growth of traditional brokerage business as well as growing its income from financial product distribution (FPD) as well.

 

 

 

Security broking currently contributes 67% of income.

Advisory income and distribution of financial products (FPD) contributes towards 13% of total income.

 

Other than that its real estate business contributes to its revenue

and also the investment banking business which undertakes IPO’s, FPO’s, QIP’s, rights issues, share buyback, advisory and M&A also contributes to its revenue.

 

Let move to next part that is:

Financials and Ratio’s

 

As the demerger happened around May 2019 we don’t separately have annual report for the company prior to FY2020’s

 

We will take the help of the investor presentation to check its performance.

 

Here is the picture.

 

Here all the basic metrics such as growth of net worth, earnings per share and dividend per share is given.

 

And also the return on equity (ROE) is given which shows a consistent figure of more than 20 percentage.

 

ROE reflects quality of earnings: ability of company’s business to generate super normal profits. This is the reason why most High ROE companies trade at high P/E multiples

(But our IIFL securities is trading at single digit P/E multiple)

 

Let’s move onto 

Valuations part.

 

Let’s compare the IIFL securities with Motilal Oswal and ICICI securities. (As on 6/11/20)

      ~Peer comparison

stocks	stock price	market cap	P/E ratio	P/B ratio	ROE %
ICICI securities	454.15	14632.49	19.21	10.06	52.37
Motilal Oswal	560.60	8169.59	32.77	2.79	8.51
IIFL securities	38.70	1236.89	6.40	1.52	23.73

 

 

                            

      ~valuation using  DCF (Discounted cash flow model)

As seen compared to peers it’s one of the cheapest stocks available,

Let’s do the DFC (discounted cash flow) valuations of the stock

(Now obviously you could take different rates and the fair value would be higher or lower, that’s why I have given all my figures and assumptions here)

 

In the picture you can see what assumptions we have taken, and according to this the fair value as of today comes in the range of 39.98 to 50.37 rupees, for the current year FY 21.

 

And because the discounting rate is 26%, we can calculate fair value after 10 years which comes in the range of 403.22 to 508.06 rupees.

In this manner I assume the stock to grow 10x in 10 years from the current levels.

 

Moving on to the next part

 

Promoters and management

 

I believe that however good the business and valuations look prima facie,

It’s the management which matters the most.

Unfortunately it’s not simple task to do analysis of management also this process is very time consuming,

So even my analysis could get updated with the passage of time.

 

So Moving on:

IIFL was promoted by Nirmal Jain (aged 53 as on 2020)

The promoters currently hold 29.8% shares

Fairflax currently holds 35.4% (they intend to be passive financial investor)

 

During 1999 they decided to offer equity research free of cost to public.

During 2000 IIFL launched 5 paisa per trade scheme for its online retail customers. Retail customers needed to pay just 0.05% instead of 1%-1.5% levied by other brokers. This helped IIFL gain a lot of retail customers and also started a price war in the brokerage industry.

 

We’re talking about the year 2000. It was his vision at that time and those disruptive tactics have worked well for IIFL group.

(Source link : for 1999 and 2000 year disruptions)

Years later his original concept of discount broking got converted into 5 paisa company and are at no. 7 with 6,31,514 clients.

 

Later as the company grew they ventured out of only brokerage business and started wealth management as well as disbursement of loans such as housing, car loans, gold loans, they also became distributor of financial products and started their own Mutual fund AMC.

 

      ~Fairflax 

promoted by an Indian Prem wasta, who resides in Canada is known as Warren Buffet of Canada, he says that he invests in well managed companies with integrity and always takes a long term view of his investments.

Fairflax owns investment all over the world in India it also owns majority of Indian company Thomas cooks, It Also has major investment in Catholic Syrian Bank (CSB) and ICICI lombard as well.

Fairflax become the client of IIFL, later an investor holding 9% stake in 2011 and later they went on to acquire more stake through open offer, raising their stake to 35% in 2017.

Being a financial investor larger than promoters gives investor a confidence that yes they have interest in wellbeing of the company and will monitor the working and operations of the company closely.

 

Originally in 2005 they came up with an IPO giving shares @ 74 rupees

They did a split (5:1) in 2008 now let’s take the price of IIFL holdings in 2019 as 450 rupees.

This means the shares have multiplied your wealth by 30 times in 14 years that comes to around 27.62% CAGR returns.

(That’s not even counting dividends)

 

From the above study it’s clear that management has right intention and right vision to move ahead, there is big shareholder named Fairflax to scrutinize everything and make sure that the level of corporate governance remains high.

 

It’s certain that I don’t need to worry about the intention of the management now even if company fails then it shall be business failure,

And as we have studied they have their new FinTech product ‘AAA’ ready, also the management is innovative and disruptive which will certainly ensure survival of business.

Nirmal Jain has worked well and certainly created wealth for shareholders, but the real question is:

      ~Will this innovation and growth sustain? 

after all he is growing old. (His age 53 years)

Well at least for the next 10 years he would be capable to actively handle and contribute towards the company so let’s not worry for the next 10 years

 

      ~One more study I would like to present:

 

On 13^th march 2018 IIFL holdings made a high of 874 Rupees

And if we compare same demerged shares their value is (as on 6/11/20)

 

IIFL sec (38.60 Rs)

+ IIFL finance (84.75 Rs)

+ IIFL wealth (908.75 *(1/7) Rs = 129.82 Rs)

=253.17 rupees

This comes to around 253.17 Rs which is 71.03 % discount from its peak, while the business & profits have only grown since March 2018.

This according to me is value investing in real terms.

 

Conclusion:

 

From what we have studied I conclude that

 

1)     We don’t need to worry about the intention and integrity of management, they seem to have good track record and background.

 

2)   The company is innovating constantly, which is essential for survival, also the venturing into FinTech space through ‘AAA’ seems promising, so business prospects looks bright.

 

3)   Very good financial performance and ratios, as mentioned constant high ROE which was above 20% and a good Dividend pay-out ratio.

 

4)   It is such a brand and well known B2C business which every reader must have at least heard off, thus establishing brand value and reputation of this company.

 

You will find many such fantastic companies but the main point to focus is valuation.

 

All other such quality companies will be trading at high valuations BUT IIFL securities is trading at a P/E multiple of just around 7.

 

With a combination of

Good management+ bright business prospects+ cheap valuations

One should definitely not ignore investment opportunity in IIFL securities.

I would repeat this thing again

In IIFL security multibagger gains could be generated, it has potential to become 10x in 10 years.

 

Scrip code:                            542773                                 market cap:         1236.89 crores

Stock price                            38.70                                     eps:                         6.05 rupees

 

(Disclaimer: I hold small quantity, and would like to read your views, questions on this research so comment down below, what do you think?)

 

 

 

 

 

 

 

 

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