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|Thursday, 2 December 2021|
Anand Rathi Wealth
Non-bank mutual fund distributor and wealth manager
Depends on revenues from mutual fund distribution and group company
Anand Rathi Wealth is one of the leading non-bank wealth solutions firms in India and has been ranked amongst one of the three largest non-bank mutual fund distributors in India by gross commission earned in last three years. The company serves a wide spectrum of clients through a mix of wealth solutions, financial product distribution and technology solutions. The services are provided primarily through flagship Private Wealth (PW) vertical. The company overall manages Rs 30209 crore in AuM end August 2021.
The Company acts as a mutual fund distributor, registered with the Association of Mutual Funds in India. It distributes mutual fund schemes managed by asset management companies and earns distribution commissions on a trail basis from asset management companies. It purchases non-convertible market linked debentures (MLDs) and offers them to its clients and earns income from these sales. Therefore, the AUM of the Company comprises mutual fund schemes and other financial products such as bonds, MLDs and other securities held by clients in their own demat accounts.
Anand Rathi is the Promoter, Chairman and Non-Executive Director of the company. Rakesh Rawal is the Executive Director and the Chief Executive Officer of the company. He has been associated with the wealth management business of Anand Rathi Group since April 2007. He focusses on the business development and client acquisition for the private wealth management business of the company
The company has achieved a dominant position in the distribution of financial products, with a focus on the growing HNI segment through an uncomplicated, holistic and standardized offering, delivered through an entrepreneurial team of private wealth professionals, known as Relationship Managers (RMs).
The company commenced activities in FY2002 as an AMFI registered mutual fund distributor and have evolved into providing, well researched solutions to its clients by facilitating investments in financial instruments through an objective driven process.
PW vertical caters to 6,564 active client families, serviced by a team of 233 RMs (including 8 RMs working on contractual basis) end August 2021. About 54.69% of clients have been associated with the company for over 3 years, representing 73.55% of total PW AuM, which shows strength in vintage of both clients and their AuM in business. The company is currently present across 11 cities in India, namely, Mumbai, Bengaluru, Delhi, Gurugram, Hyderabad, Kolkata, Chennai, Pune, Chandigarh, Jodhpur and Noida and has a representative office in Dubai.
The client families have consistently grown with new family additions of 965 in FY2019, 863 in FY2020, 988 in FY2021 and 455 for the period ended August 2021. Correspondingly, PW AuM has also grown at a CAGR of 22.47% from Rs 18037 crore end March 2019 to Rs 29472 crore end August 2021.
The company also facilitates estate planning, succession planning and create wills as part of its core objectives, without charging any cost to Clients. It has a dedicated in-house team of 4 specialists who are qualified lawyers and servicing clients across all locations to advise and create wills or designing and creation of private family trust.
The company has digitised operational process, including opening of an account, client approvals and investment transactions and on-boarding process. This has led to cost efficiencies and making execution less cumbersome, more transparent and contributed to the growth of the Company. The Client engagement and marketing efforts have also significantly converted to digital with a move to a virtual process of meeting clients during the pandemic and conducting official meetings and training with multiple stakeholders.
In addition to PW vertical, the company has two other new age technology led business verticals - Digital Wealth (DW) and Omni Financial Advisors (OFA) aimed at creating a technology platform to acquire new clients at lower cost as well as service and retain existing clients. These in-house developed technologies, including mobile application for clients and partners provides a ready platform to integrate with PW vertical in future as and when required reducing time to market for a digital solution.
DW vertical addresses the large mass affluent segment (i.e. group of individuals with financial assets between Rs 10 lakh to Rs 5 crore) of the market with a wealth solution delivered through a phygital channel i.e. a combination of human interface empowered with technology. Starting September, 2016, DW vertical has seen encouraging results in its attempt to build a Partner led distribution model. The AuM for DW vertical was Rs 738 crore with 3,491 clients and 195 client engagement partners.
OFA vertical is another strategic extension for capturing the wealth management landscape through which the company provides a technology platform for Independent Financial Advisors (IFAs) to service their clients and grow their business. Within a short period of over five years since its launch in September 2016, it has become Indias leading technology platforms for IFAs in terms of subscribers with 5,062 IFAs subscribing to IFA platform. These IFAs handle around 1.63 million clients.
The company has three subsidiaries 1. AR Digital Wealth (75.51% shareholding) is engaged in business of distribution and sale of financial products, 2. Freedom Wealth Solutions (95%) is engaged in business of providing consultancy of wealth management services, wealth, financial, retirement and investment planning, property management, will writing, property valuation and 3. Ffreedom Intermediary Infrastructure (100%) is tech platform for Mutual Fund Distributors and provides a technology platform for Independent Financial Advisors and mutual fund distributors (MFDs).
The company aims to focus on increasing RM count with a focus on higher vintage RMs, scaling business by capitalizing on current market opportunities and through geographic expansion and brand-building efforts with an increased digital focus.
The Offer and the Objects
The initial public offer (IPO) consists entirely of a offer of sale (OFS) comprising issuing 1.20 crore equity share to raise Rs 635.38 crore at lower price band of Rs 530 and Rs 659.38 crore at upper price band of Rs 550.
The issue is to be made through the book-building process and will open on 02 December 2021 and will close on 06 December 2021.
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.
Among the promoters, Anand Rathi Financial Services has offered 92.85 lakh equity shares for sale, while Anand Rathi and Pradeep Gupta have offered 3.75 lakh equity share each for sale. Among promoters group, Amit Rathi and Priti Gupta have offered 3.75 lakh equity share each for sale.
The promoters and promoter group shareholding at 74.74% would decline post issue to 48.82%.
The company is focused on the underserved and less price sensitive HNI segment. PW vertical focuses on the HNI segment with AuM potential of Rs 5-50 crore, who are seeking quality and value addition rather than low cost solutions.
The HNI segment of clients is the most attractive and underserved segment in terms of the quality of service.
The number of active client families with respect to PW vertical stood at 6564 end August 2021, with 54.69% of Clients being associated for a period of over 3 years.
Uncomplicated, holistic and standardized solutions are offered to clients based on an objective-driven approach
The model portfolios are created using in-house research and analytical tools.
The company is one of the leading non-bank mutual fund distributor in India coupled with presence in Non-Convertible Market Linked Debentures. The company is the third largest mutual fund distributor on the basis of the gross commission earned by non-bank MFDs.
The company is also focusing on value added services such as estate planning, succession planning and creating wills without any cost to Clients. It safeguards and enables smooth transmission of wealth, which brings effective long-term relationship with the Clients.
The company is focused towards attracting and retaining talent through an entrepreneurial work culture.
Being the leading MFD, the company expects to benefit from underpenetrated mutual fund industry with mutual fund AUM to GDP at 16.0% in 2020, as compared to a global average of 63%. Further, India accounts for less than 2% of the global mutual fund industry, representing a significant growth opportunity.
The continuous shift in savings from physical assets to financial assets would benefit the wealth management sector. The reduction in bank deposit rates in the past year has further led to a shift in investment to mutual funds and the stock markets. The implementation of various reforms is likely to shift informal sectors into the formal economy. The share of financial assets in the total investment pool is expected to rise to 63% by FY25 from 57% in FY20.
Some of the key drivers of growth for wealth management industry are increasing population of affluent clients with rising income levels, increase in wealth allocated towards financial products, financial savings shifting to mutual funds, low penetration and strong fundamentals, increased reach of mutual funds beyond top 30 cities, retail participation increasing with rise in SIP investments.
India is expected to be the fourth largest private wealth market globally by 2028.
The continuing effect of the COVID-19 pandemic on business and operations is highly uncertain and cannot be predicted. The company has witnessed decline in revenues and profit in FY2021 primarily due to the adverse effect of the COVID-19 pandemic, extended period of business disruptions, stock market volatility and decrease in investors sentiments for new investment in the initial phase of the COVID-19 pandemic.
The revenues from distribution and sale of financial products are dependent on sustained ability to increase AuM as well as on the performance of the funds distributed.
Any changes in the total expense ratio for mutual funds due to regulatory changes may reduce distribution commission income which may have a material adverse effect on business.
Anand Rathi Commodities (ARCL), one of promoter group entity and its Directors are involved in a proceedings involved with SEBI and Economic Offence Wing of Mumbai Police. Any adverse outcome in the aforesaid proceedings would have an adverse effect on the brand and reputation of the Anand Rathi Group.
The issue is entirely an OFS and the company will not receive any proceeds from the Offer.
The distribution arrangement with AMCs can be terminated without notice.
A significant portion of revenue at 34.01% came as mutual fund distribution from asset management companies in FY2021.
The Company is dependent on Anand Rathi Global Finance (ARGFL), one of Group Companies, for the business relating to the structured products. Any change in the regulatory environment of non-banking financial services may have an adverse impact on the business. The percentage of revenue contributed by sale of structured products (market linked debentures) to the overall revenue of the Company was 59.23% in FY2021.
The company operates in a highly regulated environment.
The business is highly dependent on management team and Relationship Managers.
The business faces competition from existing and new market participants and may affect market share.
An increase in direct investment in mutual funds by existing as well as potential clients will have an adverse impact on revenue from mutual fund distribution.
Anand Rathi Wealth is the leading non-bank associated mutual fund distributor and leading wealth management company. The consolidated revenues of the company declined 20% and net profit dipped 27% in FY2021, driven by the impact of covid 19 pandemic. The company achieved nearly two third of last years revenues at Rs 166.93 crore and crossed last years net profit at Rs 51.07 crore in the five months ended August 2021.
The post issue book value (BV) of Anand Rathi Wealth is Rs 68.9. P/BV works out to 8.0 times at the upper price band of Rs 550 per share.
EPS of Anand Rathi Wealth for FY2021 works out to Rs 10.8 and offer is made at PE of 50.8 times at upper price band of Rs 550. 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 Anand Rathi Wealth works out to Rs 2289 crore at upper price band. In terms of M-cap to AUM ratio, the offer is made at 0.08 times.
IIFL Wealth Management which also includes its mutual fund business is trading at 4.6 times its book value and PE of 34.8 times FY21 EPS and 24.8 times H1FY2022 annualized EPS. In terms of M-cap to wealth management AUM ratio, IIFL Wealth Management is trading at 0.06 times.
Anand Rathi Wealth earns a significant portion of revenue at around 35% from mutual fund distribution, while the company is also highly dependent on group company Anand Rathi Global Finance for the business relating to the structured products sales contributing around 60% of revenues.