Prudent Corporate Advisory Services coming up with IPO to raise around Rs 539 crore

Prudent Corporate Advisory Services

• Prudent Corporate Advisory Services is coming out with a 100% book building; initial public offering (IPO) of 8,549,340 shares of Rs 5 each in a price band Rs 595-630 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 May 10, 2022 and will close on May 12, 2022.
  
• The shares will be listed on BSE as well as NSE.
  
• The face value of the share is Rs 5 and is priced 119 times of its face value on the lower side and 126 times on the higher side.
  
• Book running lead managers to the issue are ICICI Securities, Axis Capital and Equirus Capital. 
  
• Compliance Officer for the issue is Dhavalkumar Ghetia.

Profile of the company

The company is an independent retail wealth management services group in India and is amongst the top mutual fund distributors in terms of average assets under management (AAUM) and commission received. It offer a technology enabled, comprehensive investment and financial services platform with end-to-end solutions critical for financial products distribution and presence across both online and offline channels. It grew faster among national distributors (amongst the top 10 mutual fund distributors) in terms of commission and AAUM with a CAGR of 34.4% and 32.5% respectively for the five year period ending Fiscal 2021.

Incorporated in 2003, the company provided wealth management services to 13,51,274 unique retail investors through 23,262 Mutual Fund Distributors (MFDs) on its business-to-business-to-consumer (B2B2C) platform and are spread across branches in 110 locations in 20 states in India, as on December 31, 2021. Of its branches, 50 are locations in beyond the top 30 cities (B30) markets and 60 are locations in the top 30 cities (T-30) markets. Further, 27.83% of its registered MFDs and 20.56% of retail investors are based out of B-30 markets, as on December 31, 2021. Owing to its large network of MFDs, it facilitate AMCs access to smaller cities, especially in the B-30 markets. As of December 31, 2021, it is associated as distributors with 42 AMCs. Its AUM from the B-30 markets was Rs 25,250.34 million, representing 15.15% of its total AUM as of March 31, 2018 and has grown at a CAGR of 36.20% to Rs 80,586.23 million representing 16.65% of its total AUM as of December 31, 2021. The company’s retail focus has helped grow the number of systematic investment plans (SIPs) handled by it from 0.79 million as of April 1, 2018 to 1.53 million as of December 31, 2021.

Correspondingly, equity AUM from SIPs increased from Rs 40,384.66 million (representing 29.08% of its total equity AUM) as of March 31, 2018 to Rs 189,499.09 million (representing 42.48% of its total equity AUM) as of December 31, 2021. Its monthly SIP flows as of December 31, 2021 were Rs 3866.96 million providing visibility of monthly inflows for its MFDs as well as the company. With the company’s focus on providing technologically driven solutions, it offer digital wealth management (DWM) solutions through its platforms, namely, FundzBazar, PrudentConnect, Policyworld, WiseBasket, Prubazar and CreditBasket.

Proceed is being used for:

• Carrying out the offer for sale.
  
• Achieving the benefits of listing the equity shares on the Stock Exchanges.

Industry overview

The Indian mutual fund industry has a history of over 50 years, starting with the passing of an Act for the formation of the Unit Trust of India (UTI), a joint initiative of the Government of India and the RBI in 1963. The Act came into force on February 1, 1964, with the formation of UTI. It was regulated and controlled by the RBI until 1978, and thereafter by the Industrial Development Bank of India. UTI launched its first scheme, Unit Scheme 1964, in 1964 and its AUM reached Rs 67 billion by 1988. The aggregate AUM of the Indian mutual fund industry has grown at a healthy pace of 18% CAGR, against the backdrop of an expanding domestic economy, robust inflows, and rising investor participation, particularly from individual investors. In this phase, equity AUM posted 24% CAGR whereas non-equity AUM grew at 14% CAGR. The mutual fund industry’s quarterly average AUM (QAAUM) grew at 19% on-year in fiscal 2021 mainly on account of sharp run up in the underlying value of equities and consistent inflows into debt funds, post the first half of the year, wherein debt mutual funds were buffeted by Franklin Templeton Mutual Fund’s decision in April 2020 to shut down six of its debt mutual fund schemes, citing lack of liquidity in the bond market. The decision had a contagion impact on debt mutual funds, with large scale redemptions in the immediate aftermath. 

Systematic investment plans (SIPs) have helped further increase retail investor participation in the mutual fund space. Several benefits accrue from SIPs, such as avoidance of behavioural weakness during uncertain periods, aggregation of a high number of small amounts, and certain tax incentives. These have not only made SIPs an attractive investment option, but have also helped grow and diversify net inflow across the industry. With contribution levels set low enough to make inflows less susceptible to cycles, SIPs have also helped reduce volatility with respect to aggregate inflows. Indeed, monthly inflows into mutual funds through the SIP route have steadily increased, from Rs 33 billion in June 2016 to Rs 104 billion in September 2021. This surge is the result of increasing popularity of SIPs as an investment option and lower minimum investment required to invest in SIPs, thereby increasing accessibility of mutual fund investments to lower income households. The mutual fund industry collected Rs 0.96 trillion through SIPs during fiscal 2021 as compared with Rs 1.0 trillion during the fiscal 2020. From April 2021 to September 2021 the cumulative SIP contribution is Rs 0.56 trillion. Popularity of equity funds, rising participation of investors, recent investor education initiatives, and apparent benefits of SIPs to households that traditionally did not invest in mutual funds indicate that growth in inflows from SIPs will accelerate over the foreseeable future. This would make SIPs an increasingly important component in overall AUM growth. The SIP monthly contribution in December 2021 was Rs 113.05 billion.

Pros and strengths

Growing independent financial products distribution platforms: The company is an independent retail wealth management services group in India and is amongst the top mutual fund distributors in terms of in terms of AAUM. Commissions from the distribution of mutual funds has been the top contributing business vertical for it. Its AAUM has grown at a CAGR of 32.5% to Rs 249,100 million in the five year period ending Fiscal 2021 while in the same period mutual funds distributors’ AAUM grew at an approximate CAGR of around 12% and touched Rs 10.19 trillion in Fiscal 2021. The company had 12% market share within the national distributor segment on AAUM basis as of Fiscal 2021. It grew faster among national distributor (amongst the top 10 mutual fund distributors) in terms of commission and AAUM with a CAGR of 34.4% and 32.5% respectively for the five year period ending Fiscal 2021.
 
Granular retail AUM with mix skewed towards high-yield equity AUM: As of December 31, 2021, the company had an AUM of Rs 484,114.74 million and were among the top mutual fund distributors on AAUM basis. Of this its equity AUM stood at Rs 446,059.12 million as of December 31, 2021. Individual investors tend to stay invested for longer periods and prefer equity-oriented schemes, providing predictable, committed AUM to mutual funds and steady, recurring inflows for distributors as well. In equity AUM, the share of individual AUM in the under > 24-month bucket witnessed a sharp increase of 8% percentage points from March 2016 to September 2021. As of December 31, 2021, it provides wealth management services to 13,51,274 unique retail investors, through 23,262 MFDs.

Long-standing relationship with MFDs: The company offers a comprehensive multi-product investment platform with end-to-end solutions critical for financial products distribution. Its offerings for MFDs include various technology platforms for them as well as for their retail investors, with continuous support through its 59 member in-house technology and 55 member back-office service team. Its MFDs as well the clients are habituated with the various offerings of its platform in term of execution of transactions, ease of administration and regulatory compliance. Availability of multiple products also reduces the efforts of the MFDs and clients to maintain relationship with multiple service providers. Further, the requirement of individual client consent to change the broker code creates administrative hassles for MFDs to transfer the AUM from its platform, which in turn builds long-standing relationship with MFDs.

Pan-India diversified distribution network: The company is one of the very few national distributors (non-bank) with presence in the B-30 market catering to retail investors in more than 16,356 pin codes across India. As per AMFI, the share of AUM contributed by B-30 markets to the mutual fund industry increased to 16.45% in September 2021 from 15.53% in March 2014, illustrating the increasing importance of higher-growth B-30 cities. SEBI has also permitted AMCs to charge additional expenses of up to 0.3% on daily net assets of the scheme for B-30 markets to increase MF penetration. The additional TER benefits distributors like company who have built a presence in B-30 markets by getting higher commissions on B-30 AUM. Its mix of physical and digital model allows it to selectively target markets for expansion, especially in Tier 2 or Tier 3 cities, which are comparatively underpenetrated, thereby representing significant growth potential.

Risks and concerns

Operate in highly regulated environment: Significant regulatory changes in company’s industry are likely to continue, 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 may not always coincide with the interests of its shareholders. Consequently, these regulations may serve to limit its activities and/or increase its costs including through investor protection, compliance management 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 organisations. There can be no assurance that the Government of India will not implement new regulations and policies which may require it to obtain approvals and licenses from the Government of India and other regulatory bodies or impose onerous requirements and conditions on its operations.

Business operations highly dependent on information technology: The company has implemented various IT solutions to cover key areas of its operations and accounting, and its business operations are highly dependent on the same. These systems are potentially vulnerable to damage or interruption from a variety of sources, which could result in a material adverse effect on its operations. An IT malfunction could disrupt its business or lead to disclosure of sensitive company information. Its ability to maintain its business operations depends on the proper and efficient operation and functioning of various IT systems, which are susceptible to malfunctions and interruptions (including those due to equipment damage, power outages, computer viruses and a range of other hardware, software and network problems). Its platforms use technology to interact with clients via online/mobile based services delivered by its relationship managers and MFDs. A significant or large-scale malfunction or interruption of one or more of its IT systems could adversely affect its ability to keep its operations running efficiently.

Competition: The company faces competition from various companies in the financial services industry, including other mutual fund distributors and wealth management companies, who cater to the need of MFDs. It also face competition from the wealth management arms of several market participants, including established Indian and foreign banks, private banks and dedicated wealth management companies. It also compete with a large number of MFDs as a consequence of the fragmented wealth management market in India. Large and integrated banks also compete with it, who have a 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.

Highly dependent on management team: The company’s business, performance and the implementation of its strategy are dependent upon its management team and key managerial personnel. It cannot assure that members of its management team 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. If one or more members of its management team, including its KMPs are unable or unwilling to continue in their present positions, such persons would be difficult to replace and there could be a material adverse effect on its business, prospects and results of operations.

Outlook

Prudent Corporate Advisory Services 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 offers digital wealth management (DWM) solutions through platforms, namely, FundzBazar, PrudentConnect, Policyworld, WiseBasket and CreditBasket. It provides investment and financial services platforms for the distribution of financial products through online and offline channels. It is amongst the top 10 mutual fund distributors in terms of average assets under management AUM as of FY21. It also distribute life and general insurance products in India through its wholly owned subsidiary, Gennext. On the concern side, 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. Besides, the company is required to comply with applicable anti-money laundering laws and regulations. These laws and regulations require financial institutions to establish sound internal control policies and procedures with respect to anti-money laundering monitoring and reporting activities. 

The issue has been offered in a price band of Rs 595-630 per equity share. The aggregate size of the offer is around Rs 508.69 crore to Rs 538.61 crore based on lower and upper price band respectively. On the performance front, the company’s overall revenue from operations increased to Rs 2,865.07 million for Fiscal 2021 from Rs 2,348.33 million for Fiscal 2020, representing an increase of 22.00%. The company’s profit for the year increased by Rs 174.44 million or 62.63% to Rs 452.97 million for Fiscal 2021 from Rs 278.53 million for Fiscal 2020.  Meanwhile, the company intends to grow its geographic reach by both expanding distribution network and deepening its existing presence. It intends to maintain the growth momentum in its financial products distribution business through its existing network of 23262 MFDs and 499 relationship managers and acquire new client base. This network presents it with significant potential to cross-sell other financial products including insurance. It also aim to increase the use of technology in other parts of its business to optimize its operations, reduce costs and errors in the areas of sales, customer relationship, information security and risk management.