Anand Rathi IPO: A detailed review

Anand Rathi Wealth Limited (ARWL) IPO opens for subscription on 2nd December. The company is looking to raise up to Rs 660 crore through the public issue. Here are the details:

About the Anand Rathi Wealth IPO

Anand Rathi Wealth Limited IPO Date: 2 December - 6 December 2021

Anand Rathi Wealth Limited IPO Price band: Rs 530 - Rs 550 

Issue Size: Rs 660 crore (Offer for sale of up to 12,000,00 Equity shares)

Post Issue Market Cap: Rs 2,206 crore – Rs 2,289 crore

Reservation: QIB 50%, Retail - 35%, NII 15%

Employee Reservation: Rs 25

Minimum Investment:  Rs 14,850

Bid lot: 27 shares, and in multiples of 27 shares

Objectives of the issue

The net proceeds from the IPO will be utilized for the following purposes :

• to achieve the benefits of listing the equity shares on the stock exchanges

About Anand Rathi Wealth

• ARWL was incorporated in 1995. Today it is one of the leading non-bank wealth solution forms in India.
• It is ranked amongst the top 3 non-bank mutual fund distributors in India for the last three financial years.
• It acts as a mutual fund distributor, registered with the Association of Mutual Funds in India. It earns distribution commission by selling the mutual funds schemes managed by different asset management companies.
• Their Clients or active client families include client families/groups with at least Rs 50 lakh in cumulative AUM.
• The company has achieved a dominant position in the distribution of financial products. It focuses on the growing HNI segment.
• The company is based in 11 cities in India - Mumbai, Bengaluru, Delhi, Gurugram, Hyderabad, Kolkata, Chennai, Pune, Chandigarh, Jodhpur, and Noida and they have a representative office in Dubai.

Anand Rathi Wealth’s Business

The company operates in three different verticals as below:

Private Wealth Vertical - Under this vertical, they distribute mutual fund schemes managed by leading AMCs in India. They also sell non-convertible market-linked debentures (MLDs) to their clients. MLDs form an integral part of their model portfolios. It enables more predictable and stable returns, with lower risk compared to equity investment over a medium to long term period. As part of managing wealth for their clients, under this vertical, they also do estate planning, succession planning, and creating wills as part of their core objectives.

Digital Wealth Vertical - It is a fin-tech extension of the company’s proposition. The idea is to address the large mass affluent segment of the market with a wealth solution delivered through a ‘phygital channel’ - a combination of human distributors empowered with technology. 

The segment was launched in 2016, and it has seen encouraging results in its attempt to build a Partner-led distribution model through which a packaged investment solution is delivered. Partners here are IFAs and AMFI registered Mutual Fund Distributors. Partners can grow their business by taking the Anand Rathi brand, product research, selection, and investment insights to their clients through an innovative easy-to-use technology interface.

Omni Financial Advisors (OFA) Vertical - With OFA, the company provides a technology platform for Independent Financial Advisors (IFAs) to service their clients and grow their business. It launched in 2016, and since then it has become India’s leading tech platform for IFAs. As of August 31, 2021, it has around 1.63 million Platform Clients.

Anand Rathi Wealth’s Financials

• ARWL's revenue from operations for FY19, FY20, and FY21 is Rs 276.59 crore, Rs 331.83 crore, and Rs 265.33 crore, respectively. The revenue dropped in FY21 because of Covid.
• The EBITDA for the same period has been Rs 106.25 crore, Rs 111.07 crore, and Rs 83.76 crore, respectively.
• The net profit reported by the company for FY19, FY20, and FY21 is Rs 58.43 crore, Rs 61.61 crore, and Rs 45.10 crore.
• It has posted an average EPS of Rs 12.81 and an average RoNW of 28.33% for the last three financial years.
• Its PW AUM has also grown at a CAGR of 22.47% from Rs 18,037 crore (FY19) to Rs 29,472 crore (FY21).
• The AUM for their Digital Wealth vertical was Rs 738 crore with 3,491 clients and 195 client engagement partners as of 31st August 2021.

Anand Rathi Wealth’s Listed Peers

Though many wealth management companies are doing well in India, when it comes to public companies, there is not much competition for ARWL. It will compete with IIFL Wealth Management Ltd. 

• IIFL is a larger company compared to ARWL in terms of revenue. Its revenue is close to six times (that of ARWL) at Rs 1,659 crore for FY21.
• The EPS for IIFL Wealth Management is 42.24, much higher than ARWL's EPS of 10.98.
• The RoNW for ARWL is higher at 18.68% compared to IIFL's RoNW of 13.06%.

Anand Rathi Wealth’s USP

Focus on underserved HNI segment - ARWL focuses on the HNI segment with an AUM potential of Rs 5 crore to Rs 50 crore. They have an uncomplicated, standardized, and well-researched approach to onboard clients, and the client relationship value increases over a period of time. HNIs are the most attractive and underserved segment in terms of the quality of service. Their client belongs to the HNI segment that is less price-sensitive for the value of the service they offer.

Presence in Convertible Market Linked Debentures - Other than mutual fund distribution, they also sell MLDs. It gives an option to their clients to get more predictable returns based on the market performance movement with medium to lower return risk as compared to equity investment over the maturity period.

Value-added services - Other than wealth management ( paid service), the company also does estate planning, succession planning, and creating wills as part of its core objectives without any cost. It has a two-fold process for estate planning:

• advising and creating of wills
• designing and creation of the private family trust.

Anand Rathi Wealth's Growth Potential 

Increasing RM count - RMs are the building block for their business. They plan to have RMs with high experience as they have seen - the greater the years of experience of RM, the more productive they are, and they bring in high yield AUM. RMs with more than three years of experience generate 87.02% of the AUM. Hence, the company plans to improve the RMs strength and have RMs with higher experience in the team.

Geographic expansion - Currently, 8% of India's population represents 45% of the total wealth, and of the above, only 20% take advice from wealth managers. The current economic condition will drive the growth of the young HNI population in India. The company intends to tap into an underpenetrated market with huge upside growth potential for wealth managers. They will continue the hub-and-spoke model to leverage common infrastructure and increase operational efficiency and aim for their geographic expansion to include tier 1, tier 2, and tier 3 cities across the country.

Brand building through digital focus - The company will focus on increasing brand awareness through various brand-building efforts and promotional initiatives. Their brand enhancement will also include multi-channel initiatives like electronic media, Social media, articles in magazines and newspapers, etc.

Anand Rathi Wealth's Risks

Fails to increase AUM or change in TER - The company earns from the sales of financial products. They may not be able to attract clients if the performance of the funds they have selected is not at par, and hence AUM will reduce with time. Also, if asset management companies reduce the total expense ratio due to regulatory changes, then they may reduce ARWL's distribution commission income. Under all such scenarios, the financials of ARWL will be impacted.

Non-compliance with regulatory guidelines - The company is subject to regular scrutiny and supervision by various regulators, statutory bodies, and self-regulatory organizations such as SEBI and AMFI. Any non-compliance with regulatory guidelines and directions in the future may result in regulatory actions. There could be the issuance of administrative/warnings/deficiency letters, fines, or sanctions imposed by these regulators and, in certain circumstances, could lead to revocation of certain licenses. Under such conditions, the company's reputation and financial condition will be impacted.

Competition from existing and new players - The company faces competition from the wealth management arms of several market participants, including established Indian, foreign banks and private banks, and dedicated wealth management companies. Also, with the rise in the use of technology, ARWL may face competition from new entrants in the industry who may leverage technology to provide products and services similar to them or which clients prefer over services provided by ARWL. If such a situation arises, the revenue and profits of the company will go down.

Anand Rathi Wealth IPO: INDmoney Analysis

Anand Rathi Wealth has reported a decline in its revenues as well as net profit, impacted by Covid-19. Revenue from operations dropped 20% on-year to Rs 265.33 crore, while the net profit fell 26% YoY to Rs 45.10 crore. However, the company’s financial performance has shown an improvement in the first five months of FY22. 

At the higher end of the price band, Anand Rathi Wealth is priced at a PE ratio of ~50.7 times FY21 earnings per share. FY22 earnings, then the issue appears to be reasonably priced at a PE ratio of 18.70 times. However, the company has seen very good earnings growth in the first few months of FY22, and sustainability of such earnings would remain a key factor. Listed peer IIFL Wealth is trading at (PE ratio of 36 times). Anand Rathi has reported better return ratios as compared to IIFL Wealth.  

Given the company’s strong product portfolio, robust financial profile, healthy margins, good return ratios and reasonable valuations, we remain “positive” on the prospects of this issue.