Prudent Corporate IPO Opens on May 10th: Should You Subscribe?

Prudent Corporate Limited IPO Details:

Prudent Corporate IPO Date: 10 May - 12 May 2022

Prudent Corporate IPO Price band: Rs 595 - Rs 630

Prudent Corporate IPO Issue Size: Rs 538 crore (Offer for Sale of 8,549,340 Equity Shares)

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

Post Issue Implied Market Cap: Rs 2,464 crore - Rs 2,609 crore

Minimum Investment: Rs 14,490

Employee Discount: Rs 59 per share

Bid lot: 23 shares, and in multiples of 23 shares

Prudent Corporate IPO: Objects of the Issue

The company will not receive any proceeds from the Offer, and all such proceeds will go to the Selling Shareholders.

Prudent Corporate IPO: About the company

• Prudent Corporate was incorporated in 2003 and provides retail wealth management services.
• The company offers services and products like Mutual Fund products, Stock Broking services, Life and General Insurance solutions, SIP with Insurance, Gold Accumulation Plan, Asset Allocation, and Trading platforms.
• Their assets under management from the mutual fund distribution business (AUM) stood at Rs 48,411.47 crore with 92.14% of their total AUM being equity-oriented as of December 31, 2021.
• They provided wealth management services to 1,351,274 unique retail investors through 23,262 MFDs on their business-to-business-to-consumer (B2B2C) platform and are spread across 110 locations in 20 States.
• Prudent Corporate also distributes Life and General Insurance Products in India and as of December 31, 2021, they distributed 74,037 policies.
• As of December 31, 2021, Prudent Corporate Advisory Services has 1,067 employees strength, 35.05 lakhs live folios and 15.25 lakhs live SIPs.

Industry overview

• Retail investor participation has increased across product segments over the last five years.
• The total number of investor accounts increased at 16.2% CAGR from FY16 to FY21 and active clients on NSE increased at 29.6% CAGR from FY16 to FY21.
• The Broking Industry has seen strong growth over the last five years aided by the robust performance of capital markets. The Active Client Base on NSE increased at 29.6% CAGR from 5.2 Million in March 2016 to ~18.9 Million in March 2021. 
• The broking industry is likely to register a 12-14% CAGR in the next five fiscals driven by rising retail penetration and high growth in the equity derivatives segment.

Prudent Corporate - Key Verticals

Below are key verticals and Prudent Corporate's services for each vertical:

Financials

• The company has reported revenue from operations of Rs 221.98 crore, Rs 234.83 crore, and Rs 286.51 crore for FY19, FY20, and FY21, respectively. The revenue growth has been 5.79% and 22% in FY20 and FY21 over the previous year.
• EBITDA for the same period was Rs 38.21 crore, Rs 46.67 crore, and Rs 61.91 crore, respectively. The EBITDA percent was 17.21%, 19.87%, and 21.61%, respectively.
• The company has reported a net profit of Rs 21.02 crore, Rs 27.85 crore, and Rs 45.30 crore for FY19, FY20, and FY21, respectively. 
• The average EPS (Basic) and RoNW for the last three financial years are 7.59% and 26.2%, respectively.
• The company's AUM has increased from Rs 16,667.75 crore as of March 31, 2018, to Rs 48,411.47 crore as of December 31, 2021, at a CAGR of 32.83%.
• The total number of policies distributed through them has increased from 53,221 in FY19 to 86,988 in FY21 at a CAGR of 27.85%. 
• Renewal of policies constituted 71.32% of the total number of policies sold in the nine months ended December 31, 2021, and allowed the company to earn a premium of Rs 91.38 crore.

Listed Peers

Prudent Corporate Advisory Services has multiple listed peers and will have to compete with some big names in the industry. Its listed peers include names like IIFL Wealth Management, ICIC Securities, CDSL Ltd, Computer Age Management, HDFC Asset Management, Nippon Life India Asset Management, UTI Asset Management. It is not an apple-to-apple comparison with all the companies.

• Among the listed peers, in terms of total income (FY21), ICIC Securities tops the list while Prudent Corporate is at the bottom of the list.
• HDFC Asset Management has the highest EPS of 62.28 among the listed peers and Prudent Corporate is at the bottom with an EPS of 10.96. The average industry EPS is around 35.
• IIFL Wealth, ICICI Securities, CDSL, CAMS, HDFC AMC, Nippon Life AMC, and UTI AMC are currently trading at a P/E of 36.70, 11.95, 48.27, 40.54, 29.99, 25.73, and 23.60. The asking PE for Prudent Corporate is 33.94.
• Prudent Corporate is second on the list when it comes to RoNW with 28.73%, only behind CAMS with RonW of 39.80%.

USPs

Operate in an underpenetrated industry: The retail wealth management sector in India has significant growth potential. The strong macroeconomic backdrop, coupled with India’s rising affluence, digitization, and awareness will continue to propel the financialization of savings. It will lead to the growth of the wealth management sector in India.

Growing independent financial products distribution platforms: They are an independent retail wealth management services group in India and are amongst the top mutual fund distributors in terms of AAUM (CRISIL). The company's AAUM has grown at a CAGR of 32.5% to Rs 24,910 crore in the five years ending Fiscal 2021.

Have a granular retail AUM: They focus on retail investors and a systematic investment plan (SIP) has helped them in having a stable flow of investments from retail investors through SIPs accounts.

Use of technology: Their technology solutions help partners to increase focus on their core competence of managing clients without a need to make significant investments in operational infrastructure. The company has enhanced partner engagement and experience through the digitization of processes and the augmentation of technology platforms. 

Growth Potential

Increasing geographic reach: The company intends to grow its geographic reach by both expanding its distribution network and deepening its existing presence. They plan to increase their footprint across India by focusing on a growing presence in B-30 cities and rural markets. 

Leverage existing MFD network to distribute products and services: They plan to maintain the growth momentum in the financial products distribution business through the existing network of 23262 MFDs and 499 relationship managers and acquire a new client base.

Add new offerings to the existing portfolio: They plan to expand the target customer base from MFDs and underlying retail customers to the high-net-worth individuals and affluent segments of wealth management. Also, the company wants to leverage its current brand and network to cater to newer categories.

Innovate technology platforms: Company's majority of customers invest and interact through digital platforms. The company is getting access to an increasing amount of data. It will continue to invest in analytics capabilities to ensure that they can gain actionable insights from such data.

Risks

Strict regulation: The company operates in a highly regulated environment, which is subject to change, and existing and new laws, regulations, and government policies affect the sector. Any unfavourable changes to the laws and regulations applicable to them could lead to additional liabilities.

Business operations dependency on IT: THey have implemented various IT solutions to cover key areas of its operations and accounting, and business operations are highly dependent on the same. However, systems are potentially vulnerable to damage or interruption from a variety of sources, which could result in a material adverse effect on the company's operations.

Commission-based business: Company's revenue from the insurance business is derived from commissions earned through the distribution of insurance products. The rates of commission are governed by IRDAI. Any adverse change in rates of the commission could result in reduced revenue from the distribution of insurance products.

Prudent Corporate Advisory Services IPO: Review

• Healthy rise revenues: Revenue increased at 20% per year between FY19 and FY21, on the back of higher demand for financial services products.
• Robust rise in Profit: Prudent Corporate has seen a healthy 47% rise in profit between FY19 to FY21, backed by growth in total investor base. 
• Healthy margins: Profit margins have increased to 16% in FY21 from just 9.5% in FY19,  on the back of its asset light and cash generative business model. In the Apr-Dec 21 period, PAT margins have increased to 17.94%.
• Reasonable valuations: At the higher end of the price band, Prudent Corporate Advisory Services Ltd is priced at 34 times FY22 annualised EPS. This is cheaper compared to IIFL Wealth (37 times), CAMS (41 times), but higher compared to HDFC AMC (30 times), UTI AMC (24 times). Prudent Corporate Advisory has one of the highest Return on Net Worth (29%) numbers in the industry.  
• Final recommendation: Given factors such as strong profitability, healthy return ratios, robust margins, asset-light business model, strong runway for growth and reasonable valuations, analysts remain “Positive” on the long-term prospects of this issue. As it is a complete OFS, the company will not be getting any proceeds from the IPO. Important metrics such as new entrants, client retention ratio, new branches opened will have to be closely monitored.