StockAxis

Prudent Corporate Advisory Services Ltd - IPO Note

Finance - Others

Prudent Corporate Advisory Services Ltd - IPO Note

Finance - Others

Price range
Rs. 595-630
Issue Period:
May 10, 2022
May 12, 2022
Rating
Avoid
May 11, 2022

Stock Info

Sensex
54211.13
CNX Nifty
16168.00
Face value (Rs.)
5
Market lot
23
Issue size
Rs. 538 cr.
Public Issue
0.85 cr. shares
Market cap post IPO
2609 cr.
Equity Pre - IPO
4.1 cr.
Equity Post - IPO
4.1 cr.
Issue type
Offer for Sale

Shareholding (Pre IPO)

Promoters
56.79%
Public
43.21%
Source: Ace equity, StockAxis Research

Shareholding (Post IPO)

Promoters
56.79%
Public
43.21%
Source: Ace equity, StockAxis Research

Key Strengths

Operates in an underpenetrated industry that is witnessing high growth:
Mutual fund assets in India have seen robust growth driven by a growing investor base on account of 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. However, penetration levels remained well below those in other developed and fast-growing peers. The ratio of the equity mutual fund AUM-to-GDP in India at 6% is considerably low compared to 89% in the US, 78% in Canada, 50% in the UK, and 30% in Brazil.  Further, along with an increase in financial literacy, the relative outperformance of financial assets over recent years, and the government’s efforts to fight the shadow economy, will increase the share of financial assets as a proportion of net household savings over the next 5 years.

Consistent track record of profitable growth due to a highly scalable, asset-light and cash generative business model:
PCAS has a track record of strong financial performance and delivering returns to shareholders. The company has a scalable and asset-light model. They have focused on managing costs by using a technology-led business model. As a result, their cost ratio, which is defined as the ratio of total expenses to total revenue, has decreased from 86.42% in FY19 to 76.31% for the 9MFY21. In last couple of years, they have created significant infrastructure in the form of digital assets, physical branch presence, a wide mutual fund distribution (MFD) network as well as a large SIP base which help them in generating operating leverage in their business operations.

Pan-India diversified distribution network with the ability to expand into underpenetrated markets:
PCAS is one of the very few national distributors (non-bank) with a strong presence in the B-30 market catering to retail investors in more than 16,356 pin codes across India. Their AUM from the B-30 markets was Rs 2,525.03 crore representing 15.15% of their total AUM as of March 31, 2018 and has grown at a CAGR of 36.20% to Rs 8,058.62 crore representing 16.65% of their total AUM as of December 31, 2021.

To add new offerings to the existing portfolio:
With an increase in financialization of investments and a greater understanding of financial investments, there is significant potential to launch newer products and enter into newer segments. In particular, certain asset classes are underpenetrated among their customer base and they intend to leverage their analytics capabilities to recommend customized products for their investor base. Apart from products distribution, the company also wishes to strengthen its research and advisory offerings to their partners and retail customers. They intend to expand the target customer base from MFDs and underlying retail customers to the high-networth individuals and affluent segments of wealth management.

Risks

Highly regulated industry:
The sector is highly regulated and hence the company will always be subject to compliances and regulatory risk.

Highly competitive industry:
The industry in which the company is operating is highly competitive & disruptive with new players entering very frequently.

The issue is purely an OFS:
The issue is purely an OFS and company will not get any capital from this issue. All proceeds will go to such selling investors.

Company Description

Incorporated in 2003, Prudent Corporate Advisory Services Ltd (PCAS) provides retail wealth management services. The company offers Mutual Fund products, Life and General Insurance solutions, Stock Broking services, SIP with Insurance, Gold Accumulation Plan, Asset Allocation, and Trading platforms. The company also offers digital wealth management (DWM) solutions through platforms, namely, FundzBazar, PrudentConnect, Policyworld, WiseBasket and CreditBasket. PCAS is amongst the top 10 mutual fund distributors in terms of average assets under management AUM as of FY21. As of December 31, 2021, PCAS provided wealth management services to 13,51,274 unique retail investors through 23,262 channel partners on the business-to-business-to-consumer (B2B2C) network, which is spread across 110 branches in 20 Indian states. The company is also associated as a distributor with 42 AMCs.

Valuation

The company has highly scalable, asset-light and cash generative business model. The financial market in India is expected to continue growing at a healthy pace owing to key drivers, such as expected growth of the Indian economy, increasing urbanization, increasing house hold savings, rising consumerism because of higher per capita incomes, and favorable changes, thereby indicating market growth potential for established financial service providers in India.

At the upper price band of Rs 630, the IPO is valued at 57x of FY21 EPS which does not leave much upside potential. Also, the issue is purely an OFS and company will not get any capital from this issue. All proceeds will go to such selling investors. Hence, we recommend investors to ‘AVOID’ subscribing to the IPO.

Key Information

Use of Proceeds:
The total issue size is of Rs. 538 crore is fully an OFS constituting offer for sale of 0.85 crore equity shares by investors. Company will not get any capital from this issue. All proceeds will go to such selling investors.

Book running lead managers:
Axis Capital, ICICI Securities, Equirus Capital

Management:
Sanjay Shah is the Chairman and Managing Director of the company. He has been associated with the company since its incorporation and has approximately 2 decades of experience in wealth management. He is well supported by Shirish Patel, Whole-time Director and the Chief Executive Officer of the company. He has been associated with the company since December 1, 2005. He has been instrumental in business expansion and has expanded the branch network from 5 to 105 branches as on date. Company’s management team has extensive experience in the financial services sector.

Financial Statement

Profit & Loss Statement:- (Consolidated)

Yr End March (Rs Cr) FY19 FY20 FY21
Net Sales 222.00 235.00 287.00
Commission & Fees expense 125.00 120.00 153.00
Employee Cost 43.00 49.00 56.00
Other Expenses 16.00 19.00 16.00
EBITDA 38.00 47.00 62.00
EBITDA Margin 17.00% 20.00% 22.00%
Depreciation & Amortization 8.00 8.00 8.00
EBIT 30.00 39.00 54.00
Other Income 3.00 1.00 8.00
Interest & Finance Charges 4.00 3.00 2.00
Profit Before Tax - Before Exceptional 29.00 37.00 60.00
Tax Expense 8.00 9.00 15.00
Net profit for the year 21.00 28.00 45.00
Net Profit Margin 9.00% 12.00% 16.00%