IIFL group reorganises business between 5Paisa and IIFL Securities

IIFL has decided to streamline the focus and remove the business overlap amongst it’s group entities, 5Paisa Capital and IIFL Securities (IIFLS).

Pursuant to the reorganisation, Online Retail Trading (ORT) Business of IIFLS is being transferred to 5Paisa.

  • The business being transferred is where customers are digital savvy and/ or millennials. They only need a platform to trade/ invest and not any further assistance.
  • Customers needing personalised services and other products (e.g., AIF, PMS, Insurance) would continue to be serviced by IIFLS.
  • ORT business of IIFLS reported a turnover of Rs 51.75 crore in FY 22, contributing 4.5% to it’s total turnover.
    • In comparison, 5Paisa reported a turnover of Rs 298 crore during the same period. The transferred business would have increased this by 17.4%.
  • In terms of the customers, the proposed transfer is expected to add 1.5 mn customers to 5Paisa’s existing customer base of 3.2 mn customers. This is an increase of almost 47%.
  • Consideration for the transaction
    • IIFLS shareholders will get 1 equity share of Rs 10 paid-up of 5paisa for every 50 equity shares of Rs 2 paid-up of IIFLS i.e., a swap ratio of 1:50
    • It implies an increase in 5Paisa’s issued capital by 19.875%.
    • Based on 5Paisa’s current mcap, the transaction means a valuation of Rs 204 cr
      • 4x of trailing revenues
      • Rs 1,360 for every acquired customer

The broad contours of the transaction seem fine.

However, I still don’t understand the logic of keeping both these businesses separate. There is bound to be overlap. Digital savvy customers may also need personalised services. They may trade/ invest on 5Paisa (due to low brokerage) but can invest into alternative assets through IIFLS.

I guess, IIFL group is keeping the discount brokerage separate to try capitalise based on Zerodha’s speculative valuations.

In due course, I would not be surprised if both are merged together.

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