Anand Rathi Wealth coming with an IPO to raise upto Rs 660 crore

Anand Rathi Wealth

• Anand Rathi Wealth is coming out with a 100% book building; initial public offering (IPO) of 1,20,00,000 shares of Rs 5 each in a price band Rs 530-550 per equity share.
  
• Not more than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors.
  
• The issue will open for subscription on December 2, 2021 and will close on December 6, 2021.
  
• The shares will be listed on BSE as well as NSE.
  
• The face value of the share is Rs 5 and is priced 106 times of its face value on the lower side and 110 times on the higher side.
  
• Book running lead manager to the issue are Equirus Capital, BNP Paribas, IIFL Securities and Anand Rathi Advisors.
  
• Compliance Officer for the issue is Ashish Chauhan.
  

Profile of the company

The company is one of the leading non-bank wealth solutions firms in India and has been ranked amongst one of the three largest non-bank mutual fund distributors in India by gross commission earned in Fiscal 2019, 2020 and 2021. The company serves a wide spectrum of clients through a mix of wealth solutions, financial product distribution and technology solutions. It provides services primarily through its flagship Private Wealth (PW) vertical where it manages Rs 294.72 billion in AuM as on August 31, 2021.

The Company: (a) acts as a mutual fund distributor, registered with the Association of Mutual Funds in India. It distributes mutual fund schemes managed by asset management companies and earns distribution commissions on a trail basis from asset management companies; (b) purchases non-convertible market linked debentures (MLDs) and offers them to its clients and earns income from these sales. Therefore, the AUM of the Company comprises mutual fund schemes and other financial products such as bonds, MLDs and other securities held by clients in their own demat accounts. Further, the company does not include demat holdings of the clients in the AUM unless the client has also used the distribution service of ARWL or have bought MLDs through ARWL. As per the industry practice, all such assets kept in the demat account of the clients belong to the respective clients and indicate the value of their assets. Such assets are shown as the AUM of the Company. All decisions regarding purchase and sale of mutual funds and other securities are taken by the clients. The Company is not engaged in any portfolio management of its clients.

Proceed is being used for:

• Achieving the benefits of listing the equity shares on the stock exchanges.
  

Industry overview

The Indian Wealth Management market is on a sustained path of growth, given India’s long-term economic prospects, positive demographics, rising income levels and current low penetration. While the percentage of wealthy individuals in India is very small compared with developed markets, very high potential of growth in wealth is estimated in future. India has the key ingredients of a high-growth wealth management market, namely driven by a very large and young mass affluent segment; an increase in the wealth of global Indians; the Indian government’s push to control illegal channel of funds and push for tighter regulations of the capital markets. The demographic difference presents an opportunity to create new products to address the needs of a young population and leverage new technologies, such as social and software-based investing applications as a key differentiator. Indian wealth management industry is largely focused mainly on the urban segment, leaving untapped majority of Indian population. One of the key factors for Advisors is to develop trust with the potential investors where advisors constantly need to build its brand, focus on overcoming trust barriers, invest in technology and focus on transparency and compliance.

The Indian mutual fund industry has a long history of over 50 years, starting with the formation of UTI, a joint initiative of the Government of India (GOI) and the RBI in 1963. It was regulated and controlled by the RBI until 1978, after which the Industrial Development Bank of India (IDBI) took over. UTI launched its first scheme, Unit Scheme 1964, in 1964 and its AUM reached Rs 67 billion by 1988. The year 1987 witnessed the entry of other public sector banks to set up mutual fund business in the country. Since 2003, the mutual fund industry has witnessed a healthy growth, supported by various regulatory measures as well as investor education initiatives, where AUM of the Indian MF Industry has grown from Rs 3.26 trillion as on March 31, 2007 to Rs 36.73 trillion as on September 30, 2021, more than 11.27 times in a span of about 14.5 years. 

Pros and strengths

Focus on underserved and less price sensitive HNI segment: The company’s PW vertical focuses on the HNI segment with AuM potential of Rs 50 - Rs 500 million, who are seeking quality and value addition rather than low cost solutions. While the targeted AuM potential is above Rs 50 million, it typically on-board clients with a relationship value of a minimum of Rs 5 million. Through its uncomplicated, standardized and well researched approach, the client relationship value increases over a period of time. Creating a platform to serve this segment is often time consuming and difficult to build, however, this platform has the potential to provide it a better opportunity to be the sole or a dominant wealth services provider to clients. Based on its experience, its clients belonging to the HNI segment are less price sensitive for the value of the service it offer. The number of active client families with respect to its PW vertical stood at 6,564 as on August 31, 2021, wherein 54.69% of its Clients have been associated with it for a period of over three Financial Years.

Uncomplicated, holistic and standardized solutions offered: The company follows a 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 its service proposition. Its model portfolio consists of an optimal combination of mutual funds and MLDs making it relatively simpler for clients to understand. This combination envisages liquidity along with limited risk to capital to its clients in the medium term. Its solutions, coupled with a motivated team of trained RMs help it in attracting and retaining clients. The company’s model portfolios are created using its 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.

Focused towards attracting and retaining talent through an entrepreneurial work culture: The company hires account managers, who are business management graduates / CAs by qualification. These AMs assist RMs in servicing clients. It provides intensive training and guidance, to develop the skills of AMs which helps in their smooth transition to the role of an RM. The company constantly strives towards enhancing its work environment and its work culture, which is of utmost importance and have contributed towards it being able to retain its current RMs as well as attract new talent. It is led by a professional management team with extensive experience in the wealth management business. It has built several people practices that provides a competitive advantage in its business. All employees in the role of business heads, including unit heads and team leaders, actively also work as RMs and manage client relationships. As a result, its entire management, product and advisory teams bring a deep and hands-on understanding of the market that enables it to be extremely agile as a business, identify and take advantage of strategic opportunities quickly and proactively respond to the changing competitive and regulatory landscape in India.

Strategic approach to marketing initiatives: While references given by existing clients is the most popular mechanisms to on-board new families, another mechanism that has been successful for it is the focused group discussions. In this event, groups of RMs invite prospective clients, and a speaker does the rendition of its proposition. These sessions were conducted physically during Fiscal 2018 and 2019. In addition, some of the focused group discussions were covered by leading business news channels. Such events were conducted across all major locations in India. It also sponsors various programs in India, including elite clubs like golf events, pre and post budget discussions and commercial policy discussions. It also leverage the research, intellectual and informative referencing material developed in-house on macro-economic trends for lead generation. Several of its leadership team participates in various electronic media discussions around wealth solutions and offerings, which effectively helps in generating new Clients.

Risks and concerns

Operate in a highly regulated environment: The company is subject to a variety of financial services regulation in the jurisdictions where it operate, including, the SEBI Act, the SEBI (Intermediaries) Regulations, 2008, the SEBI (Investment Advisers) Regulations, 2013 or directions issued by AMFI. The laws and regulations governing advisory and distribution services relating to financial products have become increasingly complex and cover a wide variety of issues, including registration, disclosures, conflicts and insider trading. Significant regulatory changes in its industry are likely to continue on a scale that exceeds the historical pace of regulatory change, which is likely to subject industry participants to additional and generally more stringent regulations. The requirements imposed by company’s regulators are designed to ensure the integrity of the financial markets and to protect investors and other third parties who deal with it, and are not typically designed to protect its shareholders. Consequently, these regulations often serve to limit its activities and/or increase its costs, including through investor protection and market conduct requirements. It may also be adversely affected by changes in the interpretation or enforcement of existing laws and rules by various governmental authorities and self-regulatory organizations.

Highly dependent on management team and relationship managers: The company’s business and the implementation of its strategy are dependent upon its management team, who oversee its day-to-day operations, strategy and growth of its business and also on its Relationship Managers, who are integral for the company to manage existing client relationships as well as establish new client relationships. If one or more members of its management team are unable or unwilling to continue in their present positions, such persons would be difficult to replace and its business, prospects and results of operations could have a material adverse effect. Competition in the company’s industry for skilled management and efficient employees is high, and it cannot assure that members of its management team or high performing relationship managers will not leave the company and join its competitors, and that it will be able to find suitable replacements for them, in a timely manner or at all.

Require certain approvals and licenses in ordinary course of business: The company requires certain approvals, licenses, registrations and permissions for operating its business, some of which may have expired and for which it may have either made, or are in the process of making, an application for obtaining the approval for its renewal. It has filed necessary applications with various authorities such as Trademark Registry, Assistant Commissioner of Profession Tax, Employee State Insurance Corporation and Regional PF Commissioner in relation to change in name on the certificates pursuant to change in name of the Company and the same are pending for approval and the Company is yet to receive the copies of new certificate in the new name. While it has procured all material approvals for its operations, it is in the process of renewing/procuring certain approvals and licenses. If it is unable to obtain or retain any of these approvals or licenses, or renewals thereof, in a timely manner, its business may be adversely affected.

Face competition: The company faces competition from the wealth management arms of several market participants, including established Indian and foreign banks, as well as private banks and dedicated wealth management companies. It also competes with a large number of independent financial advisors as a consequence of the fragmented wealth management market in India. As a result, it may face difficulty in attracting and retaining clients and their funds. Further, its competition consists of large, integrated banks with wide geographical reach which offer a variety of financial services and enables them to leverage their existing platforms and services to cross-sell their wealth management services. Further, with the rise in the use of technology, it may face competition from new entrants in the industry who may leverage technology to provide products and services similar to it or which its clients prefer over services provided by it. This increased competition may result in its inability to grow or maintain its market share. It may also result in reduced AuM, which may adversely affect its results of operations.

Outlook

Anand Rathi Wealth 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 the country. The company offers a wide product portfolio of wealth solutions, financial product distribution, and technology solutions to its clients. The company’s process driven approach, aims to achieve consistent Client outcomes through a standardised investment strategy, augmenting its RM capability. With regards to mutual fund distribution, it has devised in-house methodologies that consider a defined set of parameters for mutual fund selection. It has built several people practices that provides a competitive advantage in its business. All employees in the role of business heads, including unit heads and team leaders, actively also work as RMs and manage client relationships. On the concern side, the company’s operations are subject to various risks inherent in the financial sector, as well as fire, theft, data crash, hacking, robbery, earthquake, flood, acts of terrorism and other force majeure events. It operates in an industry in which it use hold and trade client monies, and in which personal relationships, integrity and the confidence of its clients are of critical importance. As a result, it is subject to the risk that its employees and other third parties whom it deal with could engage in misconduct that may adversely affect its business.

The issue has been offered in a price band of Rs 530-550 per equity share. The aggregate size of the offer is around Rs 636 crore to Rs 660 crore based on lower and upper price band respectively. On performance front, the company’s overall revenue from operations decreased to Rs 265.33 crore for Fiscal 2021 from Rs 331.82 crore for Fiscal 2020, representing a decrease of 20.03%. The company’s profit for the year decreased by 26.81% to Rs 45.09 crore for Fiscal 2021 from Rs 61.61 crore for Fiscal 2020. As part of the company’s expansion plans, the company will continue the hub-and-spoke model to leverage common infrastructure and increase operational efficiency and aim for its geographic expansion to include tier 1, tier 2 and tier 3 cities across the country. It also intends to grow its branches in other key states in India. Although, it would explore the growing concept of e-office which is gaining momentum, its expansion through digital outlets across state levels will be rapid. It intends to increase its brand recognition through various brand-building efforts, communication and various promotional initiatives. Such promotion would enhance the visibility of its brand and also improve its business positioning and credibility.