IIFL Capital Services Ltd Q2 FY2026 Concall Summary

Key Takeaways

• Regulatory shock drives revenue down: Consolidated revenue fell 4% QoQ and 8% YoY, with Retail Equities plunging 24% YoY as new F&O norms took hold.
• Wealth build-out is burning cash now: First-half losses in the wealth business already match last year's full-year loss of ₹20-25 crore, as competitive RM hiring forces a pivot to upgrading internal talent.
• Investment book takes a hit: A ₹44 crore negative MTM on BSE and NSE shares, including risk taken on NSE shares bought for down selling, dragged the quarter.
• H2 optimism rests on macro, not micro: Management expects a better second half, citing policy stability, lower GST, and benign liquidity, but offers no clarity on F&O regulation or cost targets.
• What to watch next quarter: Whether the wealth business loss rate moderates, any resolution on F&O regulatory signals, and the pace of RM upgrades from the existing 450-strong broking pool.

Revenue Headwinds

• F&O regulation is the dominant drag: New regulatory norms on F&O trading drove the 24% YoY collapse in Retail Equities, the single largest revenue line. Management has no clarity on what happens next, calling it "crystal ball gazing" and noting conflicting signals from regulators.
• Institutional income softened sequentially: Down 9% QoQ on lower transaction income, though still up 5% YoY. Management declined to break out the domestic mutual fund revenue share within this segment.
• FPD income lumpy but growing annually: Down 10% QoQ because the prior quarter benefited from upfront NCD issuance income; up 22% YoY on increased distribution focus.
• Fees and commission expense tracked revenue down: Down 12% QoQ and 17% YoY, providing no margin relief because the top line fell faster.
• Market share held steady: Non-proprietary market share increased in both F&O and cash, even as overall average daily turnover declined 21% YoY.

Venkataraman: "Exactly. You rightly pointed out it is a crystal ball gazing. So, as of now, there is no clarity about what will happen. Although, like you said, we are getting different signals from the regulators and the powers to be."

Wealth Business: Investment Phase

• Losses have doubled in pace: The wealth business lost ₹20-25 crore in H1 FY26 alone, matching the full-year FY25 loss. The burn rate reflects continued investment in people and platform while revenue is still scaling.
• RM hiring pressure forced a strategy shift: Competitive intensity in recruiting relationship managers has become so severe that management now deems it imprudent to acquire RMs "at any cost." The new plan is to upgrade, train, and empower the existing 450 broking RMs, a slower but more cost-efficient path.
• AUM composition is annuity-heavy: Of the ₹44,000 crore AUM, roughly 60% is ARR (recurring) and 40% is non-ARR, with the income split broadly matching that mix. Management declined to split how much of the incremental AUM came from the newly hired team versus existing RMs.
• Platform tech is 80% ready: Back-end work including wealth spectrum software, reporting tools, and training upgrades is largely done. The hardest part, getting external manager access, remains ahead.
• External manager network under construction: The company is building both a mutual fund distributor network and a sub-broker network, with revenue sharing that management describes as significant and market-aligned but declines to quantify.

Venkataraman: "See, we hope that over the next maybe two years to three years, this business will become profitable. As of now, we have to continue to invest and build this up."

Investment Book & MTM

• ₹44 crore negative MTM hit the P&L: The loss stems from price reductions on both BSE shares (materialized in the prior quarter) and NSE shares, where the company took risk by buying shares for down selling.
• NSE shares still held: The company continues to hold NSE shares it originally purchased for down selling, leaving ongoing MTM exposure.

Costs & Margins

• Employee cost fell QoQ on lower variable pay: The decline was mechanical, driven by a smaller provision for variable pay this quarter, not structural cost action.
• Cost-to-income ratio under pressure: Continued wealth business investment is weighing on the ratio. Management expects some second-half benefit from higher exchange volumes but offered no specific cost guidance or targets for FY26.
• No cost targets given: When asked directly how to model employee and other opex for FY26, management gave a general answer about H2 benefits and ongoing investment without committing to numbers.

Balance Sheet & Capital

• Margin funding book has headroom: Another ₹1,000 crore can be added very easily, with capacity governed by 50% of net worth plus 50% from specific borrowing.
• Cross-sell assets growing: Growth is being driven by the existing 450 broking RMs slowly upgrading and shifting focus toward cross-sell, consistent with the wealth strategy.

Regulatory & Competitive Landscape

• SEBI brokerage cap consultation is live: The consultation paper proposing caps has not yet become law, but media reports suggest the 2-basis-point floor might see some increase. Management is watching but has no inside line.
• India penetration story intact: Despite quarterly volatility and regulatory uncertainty, management argues India remains an under-penetrated market and urges investors not to judge on a quarter-on-quarter basis.
• Investment banking pipeline is optimistic but unquantified: Management is "quite optimistic" about the deal pipeline with various deals in various stages, but cannot give an exact number on closures.

Venkataraman: "So, basically, as a part of our prudent strategy, we decided that it is better to upgrade our existing RMs train them and empower them instead of going out and acquiring RMs at any cost."

Guidance & Commitments

Key Metrics