Anand Rathi Wealth Ltd - IPO Note

Financial Services

Anand Rathi Wealth Ltd - IPO Note

Financial Services

Price range
Rs. 530-550
Issue Period:
Dec 02, 2021
Dec 06, 2021
Rating
Subscribe
December 02, 2021

Stock Info

Sensex
58098.35
CNX Nifty
17275.55
Face value (Rs.)
5
Market lot
27
Issue size
Rs. 660 cr.
Public Issue
12,000,000 cr. shares
Market cap post IPO
2289 cr.
Equity Pre - IPO
4.161 cr.
Equity Post - IPO
4.161 cr.
Issue type
Offer For Sale

Shareholding (Pre IPO)

Promoters
74.34
Public
25.66
Source: Ace equity, StockAxis Research

Shareholding (Post IPO)

Promoters
48.82
Public
51.18
Source: Ace equity, StockAxis Research

Key Strengths & Strategies

Companies focus remains on less price sensitive HNI segment:

  • The PW (Private Wealth) vertical focuses on the HNI segment with AUM potential of Rs. 5 to 50 Cr, who are looking for quality and value addition rather than low cost. The targeted AUM potential is above Rs. 5 Cr, the company typically on-boards clients with a relationship value of minimum of Rs. 50 lacs.
  • HNI segment of clients is an attractive and underserved segment in terms of the quality of service. Creating a platform to serve this segment is time consuming and also difficult to build, however, this platform has the potential to provide a better opportunity to be the sole or a dominant wealth services provider to clients.

Presence in Non-Convertible Market Linked Debentures (MLDs):

  • Apart from distribution of mutual funds, company also sells non-convertible market linked debentures to its clients.
  • MLDs form an important part of its model portfolio acting as a hedge to market volatility providing more predictable returns based on the market performance with medium to lower return risk as compared to equity investment over the maturity period.
  • Anand Rathi selects MLDs issued by Anand Rathi Global Finance Limited (subsidiary of Anand Rathi Financial Services Limited), which fit into the companies Investment strategy and target returns.
  • A large portion of the MLDs gross mobilization comes from repeat purchasers. Over the last three years and five months ended August 31, 2021, 78% of the MLDs sales has come from repeat purchasers.

Objective-driven approach to uncomplicate and provide standardized solution to clients:

  • Company has been following process driven approach in providing wealth solutions and aims to achieve consistent client outcomes through a standardized investment strategy which augments the RM’s ability to deliver service proposition.
  • The company’s model portfolio consists of an optimal combination of mutual funds and MLDs making it simpler for clients to understand. This combination envisages liquidity along with limited risk to capital in the medium term.
  • The model portfolios are created using in-house research and analytical tools in allocating assets and selecting securities that are aligned to each client’s liquidity and risk profile.
  • The portfolio is periodically monitored and if required, strategic calls are organized with clients to modify strategy and help them reach their financial goals.

Industry

Peer comparison

Particulars (Rs. in Crores) FY21 Revenue CAGR (FY19 - FY21) AUM CAGR (FY19 - FY21) PAT (%) ROE (%)* EPS PE (x)* Revenue Yield Cost/Income
Anand Rathi Wealth Limited -3.00% 20.00% 18.65% 30.00% 10.85 18.60 0.99% 77.00%
IIFL Wealth Management -7.00% 15.00% 28.47% 22.00% 42.01 22.00 0.50% 54.00%

Risks

Dependence on securities market:

  • The company operates in the distribution of financial products. The performance of such investment products is largely dependent on the financial markets.
  • Any major discrepancies or volatility in the securities market can adversely affect the business of the company.

Higher competitive intensity:

  • In the wealth management segment, the company faces competition from several players, including established Indian and foreign banks, as well as private banks and dedicated wealth management companies.
  • The company also competes with a large number of independent financial advisors as a consequence of the fragmented wealth management market in India.
  • Further with the rise in the use of technology, competition from new entrants in the industry who may leverage technology to provide products and services better suited to the investors may adversely affect the business operations of the company.

Any regulatory changes can impact company’s Financials:

  • Company is subject to various financial services regulations by the SEBI Act.
  • SEBI prescribes the upper limits with respect to the TER (total expense ratio). From time to time these TER limits may be reviewed and revised by SEBI.
  • For example, with effect from April 1, 2019, TERs for open-ended equity oriented schemes were reduced from a range (depending on AUM) of 2.5% to 1.75% to the current range of 2.25% to 1.05%. such steps taken by SEBI might further taken in future and this can impact company’s financials.

Company Description

Anand Rathi Wealth Limited is one of the leading non-bank wealth solutions firms in India and has been ranked amongst the top three non-bank mutual fund distributors in India by gross commission earned over FY19-21. The company offers a wide product portfolio of wealth solutions, financial product distribution, and technology solutions to its clients. It provides services primarily through its flagship Private Wealth vertical where it manages Rs. 29,472 Cr in AUM as on Aug, 2021. Its AUM is a sum of 1) all third-party assets that generate commissions or incomes, which could be upfront and/or on a trial basis and 2) custody assets of clients having demat as well as MF accounts.

The company's PW (Private Wealth) vertical caters to 6,564 active client families, through a team of 233 RMs. In addition to the PW vertical, the company has 2 other new-age technology-led business verticals, i.e., Digital Wealth (DW) and Omni Financial Advisors (OFA).

The company has achieved a dominant position in the distribution of financial products, with a focus on the growing HNI segment. Currently, the company has a presence across 11 cities in India.

Valuation

Anand Rathi Wealth Limited is one of the leading non-bank wealth solutions firms in India. The segment which company caters to is underpenetrated in India therefore looking at the big opportunity size for the industry and also the overall outlook for the Indian equity market looks very positive for the next couple of years as company is also into wealth management business and being the top three non-bank mutual fund distributors could be a major beneficiary. Company financials remains strong and also has well-experienced management with a strong brand name and distribution network.

At the upper price band of Rs 550, the PE works out to be 50.6x to its FY21 EPS of 10.85 and 18.6x to its annualized earnings of 5MFY22. Whereas its peer IIFL wealth is trading at a PE of 22x. Also, company’s ROE has been consistently higher than peers like IIFL Wealth. Although company’s FY19-21 growth in revenue & profits has lagged, but its current year growth has been encouraging and above its peers. On the back of a positive outlook for the industry, we recommend SUBSCRIBE to the IPO.

Key Information

Use of Proceeds:
The company is doing Offer For Sale (OFS) there is no Fresh Issue and here is the gist of the offer:

  1. The OFS component will comprise the issue of 120.00 lakh shares and at the upper price band of Rs.550, OFS value works out to Rs.660 crore.
  2. Out of the OFS of 120.00 lakh shares, promoters Anand Rathi, Pradeep Gupta and Anand Rathi Financial Services Ltd will sell 3.75 lakh shares, 3.75 lakh shares and 92.85 lakh shares respectively. Balance shares will be sold by other investors.

Book running lead managers:
Anand Rathi Securities Limited, BNP Paribas Equirus, Capital Private Limited, IIFL Securities Ltd

Management:

  • Anand Rathi is the Chairman and Non-Executive Director of the company. Since completing his Chartered Accountancy over 50 years back, and prior to joining the company, he was with Aditya Birla Nuvo, and with the BSE (where he has also held the position of President) and was one of the first directors of the Central Depository Services.
  • Rakesh Rawal is an Executive Director and the Chief Executive Officer of the company. He holds a Bachelor of Technology degree in Mechanical Engineering from the Indian Institute of Technology, Kanpur, and a Master’s in Management Studies from Jamnalal Bajaj Institute of Management Studies. Prior to joining the company, he worked with Deutsche Bank and Hindustan Lever.
  • Pradeep Gupta and Amit Rathi are Non-Executive Directors. Mohan Tanksale, Ramesh Chandak, Kishan Gopal Somani, and Sudha Navandar are independent directors. Rajesh Kumar Bhutara is the Chief Financial Officer of the company. He has been associated with Anand Rathi Group since August 8, 2000. He is a member of the Institute of Chartered Accountants of India. He also holds a Bachelor's Degree in Commerce from Jiwaji University, Gwalior.

Financial Statement

Profit & Loss Statement:- (Consolidated)

Particulars (Rs. in Crores) FY19 FY20 FY21 H1FY22
Revenue from Operations 276.59 331.83 265.33 166.93
Employee Benefit Expenses 132.17 166.57 150.76 74.37
Other Expenses 46.54 58.54 44.71 18.83
Total operating expenses 178.71 225.11 195.47 93.19
EBITDA 97.88 106.72 69.86 73.73
EBITDA Margin (%) 35.39% 32.16% 26.33% 44.17%
Depreciation and Amortization 16.27 21.05 17.29 6.51
EBIT 81.61 85.67 52.57 67.22
Other Income 7.60 4.59 13.92 1.98
Finance Cost 6.11 3.30 2.91 0.86
Profit Before Exceptional Items and Tax 83.10 86.96 63.58 68.34
Share of restated profit /loss of associates /jv - - - -
Exceptional Items - - - -
Profit Before Tax 83.10 86.96 63.58 68.34
Tax Expenses 24.67 25.35 18.49 17.25
Effective Tax Rate (%) 29.68% 29.15% 29.08% 25.25%
Profit After Tax 58.43 61.61 45.10 51.09
PAT Margin (%) 21.13% 18.57% 17.00% 30.61%