Anand Rathi Wealth: Q2-25 Earnings Call Highlights
Strong performance, driven by robust AUM growth, client acquisition, & effective RM retention strategies. Focus on risk-adjusted returns, & commitment to client needs positions them for success
rathi.com | NSE: ANANDRATHI
1. Key Takeaways
1.1 TLDR
Strong financial performance, driven by robust AUM growth, consistent client acquisition, and effective RM retention strategies.
Unique approach to portfolio management, focus on risk-adjusted returns, and commitment to client needs positions them well for continued success.
Strong Financial Performance: Consolidated total revenue grew by 35% YoY to INR 495 crores in H1 FY25, with profit after tax (PAT) also increasing by 35% to INR 150 crores.
Revised Guidance: Revenue guidance revised upwards to INR 980 crores (from INR 910 crores) and PAT guidance to INR 295 crores (from INR 280 crores).
Robust AUM Growth: Total AUM surged by 57% YoY, reaching INR 75,084 crores, exceeding the initial full-year target of INR 72,000 crores. New guidance set at INR 80,000 crores.
Impressive Net Inflows: Total net flows demonstrated remarkable growth of 128% YoY, amounting to INR 5,700 crores for the six-month period. Equity mutual fund net inflows also grew by 64% YoY, reaching INR 3,116 crores.
High Return on Equity: Annualized ROE stood at a healthy 44.4% for H1 FY25.
Continued Client Acquisition: Added 1,066 new client families in H1 FY25, bringing the total to 10,977. Client attrition rate remained low at 0.28% for the first six months.
Relationship Manager (RM) Stability: Zero regret RM attrition for the fifth consecutive quarter (15 months), indicating strong retention of experienced RMs.
Digital Wealth Business Expansion: AUM in the digital wealth (B2B2C) business increased by 32% YoY to INR 1,826 crores, with the client base expanding by 22% to 5,454.
OFA Platform Growth: The Omni Financial Advisor (OFA) SaaS platform now boasts 6,188 subscribers and platform assets of INR 1.55 lakh crores.
1.2 Key Themes
Consistent and Market-Agnostic Growth: ARWL has consistently achieved impressive profit growth over the last 10 quarters, with an average YoY growth of 33.9% and a median growth of 34.2%. This consistency, even during periods of market decline (e.g., Q1 FY23 when NIFTY fell by 9.6% and ARWL profit still grew by 33.6% YoY), underscores the resilience and market-agnostic nature of the business model.
"Our performance has been consistent and also market agnostic is the belief we have." - Feroze Azeez, Deputy CEO
Focus on Equity Mutual Funds and Structured Products: ARWL distinguishes itself by focusing exclusively on equity mutual funds and structured products for long-only positions, eschewing PMS, direct equity, and AIF long-only products. This focused approach provides them with greater bargaining power with AMCs, ensuring steady yields despite potential industry-wide pressure on distributor payouts.
"So our bargaining power is significantly more because we have only one platform. And I think that's the reason why you would not see a dip, and that's why you see a 70% increase in trail in-spite of this pressure, which does not impact us as much or not at all." - Feroze Azeez, Deputy CEO
Bottom-Up Portfolio Management Approach: ARWL emphasizes a bottom-up approach to portfolio management, tailoring allocations to each client's specific needs and risk profile. This approach may lead to variations in net flows for specific product categories (like equity mutual funds) on a sequential basis, as the focus is on maintaining the overall agreed asset allocation for individual clients.
"So it might mean that I might sell some mutual funds and buy structured products or vice versa depending on the mark-to-market is what I was trying to help you understand, and you should look at the overall asset perspective because it is bottom-up rather than top-down." - Feroze Azeez, Deputy CEO
Effective RM Retention Strategies: ARWL's success in achieving zero regret RM attrition highlights their effective people management strategies. They prioritize RM stability by providing a consistent remuneration formula, avoiding industry practices that contribute to RM turnover, and fostering a positive work environment.
"And we just have identified those 5 things, which industry does wrongly. And that we don't do. That's about it. We don't do anything extra. We don't do contest. We don't give RMs more than what is said. We don't give them less than what is said. We give them exactly the same formula from 2007...which has not happened in the industry. So that's one of the key reasons stability of remuneration is one of the 5 - 6 reasons." - Feroze Azeez, Deputy CEO
Strong Alpha Generation: ARWL's model portfolio has consistently generated impressive alpha over the NIFTY benchmark, with 16.88% outperformance last year and 7.34% outperformance year-to-date in FY25. Their strategy of strategically allocating to small-cap schemes has been a key contributor to this alpha generation.
"Coming to Nifty last year, I think 16.88% like I said, with the Alpha on Nifty of our model portfolio. We went Smallcap heavy....So we were zero Smallcap for 4 years with whatever God’s grace and some degree of mathematics." - Feroze Azeez, Deputy CEO
Addressing Client Needs: ARWL recognizes that their target client segment (INR 5 crores to INR 50 crores investable surplus) often lacks clarity in their financial objectives and portfolio management. Their "uncomplicated" approach aims to provide clients with a clear understanding of their risk-reward profile, simplified portfolio structures, and essential services like will planning.
Competition Viewed Through the Lens of Risk-Adjusted Returns: ARWL sees competition as anyone offering a superior risk-adjusted return (Sharpe ratio). Their focus is on attracting clients whose current portfolios are underperforming in terms of risk-adjusted returns, recognizing the significant market opportunity in this area.
"So to answer your question, competition will come, but there is enough and more money, which is not delivering the Sharpe ratios or even 0.5. And people don't even measure risk-adjusted return of that portfolio." - Feroze Azeez, Deputy CEO
1.4 Potential Risks:
Potential yield compression in the mutual fund distribution business, though ARWL believes this risk is manageable.
Reliance on key personnel (addressed through succession planning and low employee attrition).
Increased competition from domestic boutiques potentially putting pressure on costs in the medium term.
Anand Rathi Wealth Limited Q2 & H1 FY25 Earnings Conference Call FAQ
What were the key financial highlights for Anand Rathi Wealth Limited in Q2 & H1 FY25?
Anand Rathi Wealth Limited experienced strong financial performance in Q2 & H1 FY25, with consolidated total revenues growing by 35% year-on-year to reach INR 495 crores. Profit after tax also increased by 35% to INR 150 crores.
Key highlights include:
Mutual fund revenue surged by approximately 70% year-on-year, reaching INR 195 crores.
Total AUM expanded by about 57% year-on-year, exceeding the initial full-year guidance of INR 72,000 crores and prompting a revised projection of INR 80,000 crores.
Net flows registered a remarkable 128% year-on-year growth, hitting INR 5,700 crores for the six-month period.
Equity mutual fund net inflows grew by 64% year-on-year, reaching INR 3,116 crores.
The share of equity mutual funds within the AUM increased from 50% to 55% compared to the same period last year.
What is the company's approach to client acquisition and retention?
Anand Rathi Wealth Limited prioritizes a client-centric approach, focusing on building long-term relationships. They believe in attracting clients with a minimum investable surplus of INR 5 crores, encouraging them to start with a smaller investment of INR 1 crore to build trust and demonstrate the effectiveness of their strategies.
This approach has resulted in:
A low client attrition rate of 0.28% for the first six months of FY25.
Consistent growth in AUM from existing clients, accounting for two-thirds of the inflow.
Zero attrition among relationship managers (RMs) handling AUM exceeding INR 40 crores for the fifth consecutive quarter, a testament to the company's commitment to its employees.
How does Anand Rathi Wealth Limited generate alpha for its clients?
The company employs a disciplined investment approach focused on risk-adjusted returns, outperforming the NIFTY benchmark consistently.
Key factors contributing to their alpha generation include:
Model portfolio outperformance: The company's model portfolios have consistently outperformed the NIFTY benchmark. Last year, the outperformance was 16.88%, and for the current financial year, it stands at 7.34% as of October 11, 2024.
Strategic asset allocation: The company dynamically reallocates assets between equity mutual funds and structured products based on market conditions and client risk profiles, aiming to optimize risk-adjusted returns.
Active management: The company actively manages its portfolios, making adjustments based on market dynamics and opportunities, rather than simply tracking a benchmark.
What is the role of structured products in Anand Rathi Wealth Limited’s investment strategy?
Structured products play a crucial role in the company's portfolio construction as a strategic allocation tool, aiming to enhance risk-adjusted returns.
Key points regarding structured products include:
Allocation: Structured products typically constitute around 35% of client portfolios.
Sharpe ratio: The historical Sharpe ratio for structured products stands at 1.93, significantly higher than other investment options like mutual funds (0.78) and PMS (0.3-0.4), highlighting their effectiveness in generating risk-adjusted returns.
Tax efficiency: The company structures its products to optimize tax efficiency for clients, leveraging provisions like Section 50A and Section 70 to Section 74 to minimize tax liability.
What is the company's view on the potential impact of recent tax changes on structured product investments?
Anand Rathi Wealth Limited believes that the recent tax changes do not significantly impact their structured product business due to their inherent high Sharpe ratio and tax optimization strategies. Key points include:
Sharpe ratio advantage: The high Sharpe ratio of structured products, compared to other investment options, ensures their attractiveness remains intact even after considering tax implications.
Tax planning at the family level: The company emphasizes a holistic approach to tax planning, considering the overall tax liability at the family level and leveraging provisions like clubbing under Section 65 to minimize the impact of the tax changes.
How does Anand Rathi Wealth Limited view competition in the wealth management industry?
The company focuses on delivering superior risk-adjusted returns and client service, viewing any competitor offering better performance as a learning opportunity. They believe that the vast market offers significant potential for growth and that their focus on mathematics and client needs sets them apart.
What is Anand Rathi Wealth Limited’s outlook for the remainder of FY25?
Despite potential risks and uncertainties, the company maintains a positive outlook, expecting to continue its growth trajectory. Key indicators of their optimism include:
Revised AUM guidance: The upward revision of the AUM guidance from INR 72,000 crores to INR 80,000 crores reflects their confidence in attracting and retaining clients.
Focus on growth areas: The company is actively expanding its reach and offerings, particularly in SIP investments, to capture a larger market share.
Consistent profitability: The company's track record of consistent profitability and market-agnostic growth, even during periods of market volatility, demonstrates their resilience and ability to navigate challenging environments.
Source: Link to Earning Call Recording
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