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Tuesday, 10 May 2022
CM RATING43/100
 

Prudent Corporate Advisory Services

Mutual fund distributor

AUM and profitability shows strong growth with scalable and asset light business model, depends excessively on mutual distribution for revenues

Prudent Corporate Advisory Services incorporated in 2003 is an independent retail wealth management services group and is amongst the top mutual fund distributors in terms of average assets under management (AAUM) and commission received. The company offer a technology enabled, comprehensive investment and financial services platform with end-to-end solutions critical for financial products distribution and presence across both online and offline channels.

It has grown faster among top 10 mutual fund distributors in terms of commission and AAUM with a CAGR of 34.4% and 32.5%, respectively, for the five-year period ending FY2021, becoming an important interface between asset management companies (AMCs) and mutual fund distributors or independent financial advisors (MFDs) and retail investors who avail services from such MFDs over the last two decades. The company is an independent platform with no single AMC contributing more than 15% of AUM end December 2021.

The assets under management from the mutual fund distribution business (AUM) stood at Rs 48411.47 crore with 92.14% of AUM being equity oriented, which has at a CAGR of 32.83% from Rs 16667.75 crore end March 2018. Equity oriented AUM has increased at even higher CAGR of 36.49% from Rs 13865.79 crore to Rs 44605.91 crore, represented 2.39% of total equity AUM of mutual fund industry.

Among national distributors, market share on commission received basis has increased from around 4% in FY2015 to around 12% in FY2021.

The company is associated as distributors with 42 AMCs. The company provided wealth management services to 13,51,274 unique retail investors through network of 23,262 MFDs, representing 18.46% of the industry, on its business-to-business-to-consumer (B2B2C) platform. The presence of the company is spread across branches in 110 locations in 20 states end December 2021.

Branches in 50 locations are in beyond the top 30 cities (B-30) markets and 60 are locations in the top 30 cities (T-30) markets. About 27.83% of registered MFDs and 20.56% of retail investors are based out of B-30 markets. Owing to large network of MFDs, the company facilitates AMCs access to smaller cities, especially in the B-30 markets. The company has a qualified pool of 1,067 employees.

AUM from the B-30 markets has grown at a CAGR of 36.20% to Rs 8058.62 crore representing 16.65% of total AUM end December 2021.

The recent reductions in TERs have made sourcing of new business from retail investors more challenging, and AMCs will need to focus on developing alternative sourcing strategies and improving distributor management. The pan-India presence of the company increases its value proposition for the AMCs to source business from retail investors in a cost-efficient manner.

The company is well positioned to grow AUM given its de-risked B2B2C business model and long-standing relationships with MFDs and AMCs.

The technology platforms of the company have given wider acceptability amongst MFDs in the industry.

MFD base is well-diversified, with top 50 MFDs (by AUM) contributing only 8.52% of total AUM. The retail focus has helped grow the number of systematic investment plans (SIPs) handled from 0.79 million end April 2018 to 1.53 million end December 2021 with equity AUM from SIPs rising from 29.08% of total equity AUMto42.48%. The monthly SIP flows were Rs 386.7 crore providing visibility of monthly inflows for MFDs as well as the company.

The company also distributes life and general insurance products in India through wholly owned subsidiary, Gennext. The company distributed 74037 policies, across life and non-life insurance segments in 9MFY2022, with an aggregate premium of Rs 161.20 crore and total brokerage received amounting to Rs 23.22 crore. The insurance products are distributed through a mix of online and offline channels, with each contributing 34.23% and 65.77%. Gennext recorded the highest EBITDA and PAT margin in FY2020 among insurance brokers with digital platforms and focus on point-of-sale channels.

Sanjay Shah is Chairman and Managing Director and Promoter of the company.

The company intends to continue to focus on increasing geographic reach and strengthening relationships with MFDs. It would also leverage existing MFD network to distribute products and services. The focus would continue pm innovating technology platforms to provide superior experience to MFDs and their clients. The company intends to add new offerings to existing portfolio.

The company offers digital wealth management (DWM) solutions through platforms, as follows:

Fundzbazar is an online investment platform offers variety of investment products

PrudentConnect is a virtual office for all MFDs registered with the company which provides end-to-end support for MFDs for various processes

Policyworld is an online insurance platform offers completely paperless transactions for variety of insurance solutions

WiseBasket an online facility to invest in multiple model stock portfolios;

Prubazaar provides the facility to the clients to buy/sell equities through web portal or mobile app

CreditBasket portal offering finance to customers through a wide range of retail loan products and credit card products for varying financial needs.

Prudent Corporate participated in the bidding process for the acquisition/ transfer of Karvy Stock Broking (KSBL) and acquired the entire mutual fund folios/ AUM of KSBL (KSBL MF Folios) for an amount of Rs 151 crore. Post acquisition, the company acquired 0.86 million folios comprising of 0.48 million unique investors having an AUM of Rs 8092.27 crore which is included in AUM of the company at end December 2021.

The Offer and the Objects

The initial public offer (IPO) consists entirely of a offer of sale (OFS) comprising issuing 85.49 lakh equity share to raise Rs 508.04 crore at lower price band of Rs 595 and Rs 538.00 crore at upper price band of Rs 630.

The issue is to be made through the book-building process and will open on 10 May 2022 and will close on 12 May 2022.

The company expects to receive the benefits of listing of the Equity Shares, including to enhance visibility and brand image among existing and potential customers.

Wagner has offered 82.81 lakh equity shares for sale and Shirish Patel has offered 2.68 lakh equity share each for sale. The average cost of acquisition of Equity Shares for Wagner is Rs 150.94, and for Shirish Patel is Rs 0.13.

The eligible employees are provided discount of Rs 49 per share with share aggregating to Rs 6.5 crore reserved for employees.

The promoters and promoter group shareholding remains steady post issue at 56.78%.

Strengths

The company operates in an underpenetrated Indian asset management industry, that has grown at a CAGR of more than 20% driven by increasing penetration across geographies, strong growth in capital markets, higher technology progress, and regulatory efforts aimed at making mutual fund products more transparent and investor friendly.

India’s Mutual fund penetration levels at around 16% remains well below those in other developed and fast-growing peers, with a world average of 75%.

The ratio of the equity mutual fund AUM-to-GDP in India at 6% is significantly low compared to 89% in the US, 78% in Canada, 50% in the UK, and 30% in Brazil.

The share of financial assets as a proportion of net household savings is rising consistently.

The company is a growing independent retail wealth management services group in India and are amongst the top mutual fund distributors

The company grew faster among national distributor (amongst the top 10 mutual fund distributors) in terms of commission and AAUM

The company has a granular retail AUM with a mix skewed towards high-yield equity AUM. Individual investors tend to stay invested for longer periods and prefer equity-oriented schemes, providing predictable, committed AUM to mutual funds and steady, recurring inflows for distributors as well.

An increase in equity-mix and retail investor base has been driven by focus on digital offering and extensive MFD network across all the country, including B-30 markets.

About 47.09% of SIPs are perpetual, that is till 2099 or until cancelled and the rest have an average maturity of 17 years, demonstrating the relative stickiness of investment inflows through this route.

Among various asset classes, equity as an asset class has higher expense ratio and consequently higher earning for distributors.

The commission to AAUM ratio for FY2021 stood at 1.06%, while the industry average in the same period was 0.65%.

The company offers a comprehensive multi-product investment platform with end-to-end solutions critical for financial products distribution leading to increased participation and long-standing relationship with MFDs. The offerings for MFDs include various technology platforms for them as well as for their retail investors, with continuous support through 59-member in-house technology and 55 member back-office service team.

Independence, in terms of not being promoted by any existing AMC / financial institution, allows to serve the needs of the MFDs and the end customers in a more holistic and efficient manner and allows greater flexibility to choose products for distribution.

The company has a track record of innovation and use of technology to improve investor and partner experience. Over the years, the company has enhanced partner engagement and experience through digitisation of processes and augmentation of technology platforms. Technology helps reduce transaction and physical costs (paperwork, labour, etc.) allowing the distributor to focus on value additions for their clients, bring in efficiency of time and increase volumes.

The company has a pan-India diversified distribution network with ability to expand into underpenetrated B-30 markets

The company has demonstrated a consistent track record of profitable growth due to a highly scalable, asset-light and cash generative business model

The business model is scalable and asset-light. The company focused on managing costs by using a technology-led business model. As a result, cost ratio, which is defined as the ratio of total expenses to total revenue, has decreased from 86.42% in FY2019 to 79.48% in FY2021 to 76.31% for 9MFY2022.

In last couple of years, the company has created significant infrastructure in the form of digital assets, physical branch presence, a wide MFD network as well as a large SIP base, which it believes will help in generating operating leverage in business operations

Weaknesses

The company operates in a highly regulated environment. The business activities are subject to extensive supervision and regulation by the Government and various regulatory authorities, such as SEBI, IRDAI, PFRDA, AMFI, RERA, Depositories, and the Stock Exchanges. The company is subject to a variety of financial services regulation

There is an outstanding SEBI matter against Prudent Broking Services (PBSPL), which if determined in an adverse manner, may result in a loss of license of PBSPL

The company needs to innovate and further develop platform and keep pace with technological developments to remain competitive.

The business operations are highly dependent on information technology. Failure or disruption of Information Technology (IT) systems may adversely affect business.

Any reduction in commission or brokerage of other financial products could have adverse effect on business.

The financial services industry is rapidly evolving and intensely competitive.

The commission and fee income from distribution of mutual fund products contributed 84.49% of total revenue from operations in 9MFY2022. Top five AMCs accounting for 50.77%of total revenue, with the single largest AMC contributing 11.43%. Distribution arrangements with AMCs may be terminated without cause. Additionally, if the AMCs reduce the total expense ratio due to regulatory changes, they may reduce distribution commission income, which would impact revenues.

Direct investments in mutual funds by existing as well as potential clients will have an adverse impact on revenue from mutual fund distribution.

Contingent liabilities as a percentage of networth were 11.77% in 9MFY2022.

The company may be unable to detect and deter misconduct of employees or other third-party service providers

Security breaches of clients confidential information stored may harm reputation and expose to liability.

Valuation

Prudent Corporate Advisory Services is wealth management services group and is amongst the top mutual fund distributors. It has grown faster among top 10 mutual fund distributors in terms of commission and AAUM. The company has shown strong growth in AUM and consistently improved market share over last few years. The company has also showed strong growth in revenues and profitability with strong return ratios.

The post issue book value (BV) of Prudent Corporate Advisory Services is Rs 51.9. P/BV works out to 12.1 times at the upper price band of Rs 630 per share.

EPS of Prudent Corporate Advisory Services annualized for 9MFY2022 works out to Rs 18.6 and offer is made at PE of 33.9 times at upper price band of Rs 630. EPS for five months ended August 2021 works out to Rs 29.5 annualized and PE is 18.7 times.

The post issue m-cap for Prudent Corporate Advisory Services works out to Rs 2609 crore at upper price band. In terms of M-cap to AUM ratio, the offer is made at 0.05 times.

IIFL Wealth Management which also includes its mutual fund business is trading at 5.0 times its book value and PE of 27.3 times 9MFY22 annualized EPS. In terms of M-cap to wealth management AUM ratio, IIFL Wealth Management is trading at 0.06 times.

The recently listed Anand Rathi Wealth a leading non-bank mutual fund distributor and wealth manager is trading at 8.4 times its book value and PE of 21.3 times 9MFY22 annualized EPS. In terms of M-cap to wealth management AUM ratio, Anand Rathi Wealth is trading at 0.08 times.

Among the AMCs, Nippon Life India AMC is trading at 5.2 times its book value end December 2021, while Aditya Birla Sun Life AMC is trading at 6.7 times. HDFC AMC at 8.1 times and UTI AMC at 2.9 times. In terms of PE multiple, Nippon Life India AMC is trading at 24.1 times annualized 9MFY2022 EPS, Aditya Birla Sun Life AMC is trading at 21.0 times. HDFC AMC at 29.8 times and UTI AMC at 15.4 times.

In terms of ROE, Prudent Corporate Advisory Services has delivered ROEs of 35.8% annualized for 9MFY2022, while ROE of Anand Rathi Wealth was at 39.3% and IIFL Wealth Management at 18.3% annualized for 9MFY2022. Among AMC, ROE of Aditya Birla Sun Life AMC was at 32.0%, HDFC AMC at 27.3%, Nippon Life India AMC at 21.8% and UTI AMC at 18.7% annualized for 9MFY2022.

Prudent Corporate Advisory Services: Issue highlights

For Offer for Sale Offer size (in Rs crore)

- On lower price band

508.04

- On upper price band

538.00

Offer size (in no of shares)

8549340

Price band (Rs)*

595-630

Minimum Bid Lot (in no. of shares )

23

Post issue capital (Rs crore)

- On lower price band

20.70

- On upper price band

20.70

Post-issue promoter & Group shareholding (%)

56.8

Issue open date

10-05-2022

Issue closed date

12-05-2022

Listing

BSE, NSE

Rating

43/100

Prudent Corporate Advisory Services: Financials

1903 (12)

2003 (12)

2103 (12)

2112 (9)

Sales

221.98

234.83

286.51

321.22

OPM %

17.2

19.9

21.6

25.4

OP

38.20

46.67

61.91

81.50

Other Income

3.07

1.39

8.39

6.78

PBDIT

41.28

48.06

70.30

88.27

Interest

3.09

2.68

1.66

1.89

PBDT

38.19

45.38

68.64

86.38

Depreciation

7.62

7.95

8.12

8.69

PBT

30.57

37.43

60.52

77.69

EO

-1.92

0.00

0.00

0.00

PBT after EO

28.65

37.43

60.52

77.69

Tax

7.63

9.58

15.23

20.06

PAT

21.02

27.85

45.30

57.63

Minority interest

0.00

0.00

0.00

0.00

PAT

21.02

27.85

45.30

57.63

EPS (Rs)*

5.4

6.7

10.9

18.6

*EPS annualised is on post issue equity capital of Rs 20.703 crore of face value of Rs 5 each, EPS is excluding EO and relevant tax. Figures in Rs crore
Source: Prudent Corporate Advisory Services Issue Prospectus