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Jul 411 min read

Wealth Management: Proxy to Affluent India



India is becoming rich, and out of all income classes, its the HNIs(High net worth Individuals) and UHNIs(Ultra high net worth individuals) which are growing their wealth at the fastest rate. So how do we take this opportunity into account? Wealth Management! This blog will aim to explain wealth management as an industry, the structural tailwinds behind it and analyse the listed businesses in this space.


What is wealth management?

We all have heard of asset management companies, so how does wealth management differ from it?

Wealth management is highly customised and is catered towards HNIs and UHNIs. The end goal in AMC is almost always wealth creation, but that might not be the case here. It can be aimed towards wealth preservation, tax efficiencies and, of course, wealth creation. Each family is allotted an RM or a relationship manager who represents the wealth management company, helps understand the family's objective, and allocates capital or assets accordingly. It helps create personalised relations and hence leads to sticky customers. Wealth management companies offer PMS, Advisors, distributors, brokers, AIF and MF products.

AMCs are not as customisable as wealth management and are focused on maximising portfolio value. Services include PMS, MF, and AIF.



Whats driving the growth?

1.Growing TAM

The HNIS and UHNIs are set to have the highest wealth creation in the next few years. A report my Mckinsey global wealth pool analysis predicts that the growth will be around 13-14% CAGR. Moreover, the 200K househoulds in 2022 which are clubbed in UHNI/HNI segment are set to grow to 300K in FY27E. That is a significant jump! With such a fast rate of increasing income, these families will require someone to manage their assets and help plan their future appropriately. Moreover, data shows that the incremental growth is higher outside of the top 8 cities which is another advantage as the wealth poolis spreading out of the metro cities and expanding into Tier 2 cities.


2. Increasing Corporatisation of the stock markets

Have you guys noticed that the promoter selling has been extremely high in FY23 and FY24? Well, it's because India has had an abnormally high promotor holding compared to the rest of the world. Hence, with time, we can expect this holding to reduce as these promoters sell their stake and let fund houses and other entities buy them. A good idea would be to look at how the newly listed tech startups such as Zomato, PB fintech etc have their shareholding structured. Well, the cash that these promoters get post selling has to go somewhere right? A lot of these assets are being catered to by the wealth management companies we will talk about. Businesses like Nuvama help them sell their block of shares and extend their relationship by converting these assets as their AUM. The increasing liquidity will help wealth management companies outpace the growth of HNI/UHNI growth segments.

3. Investment asset classes are growing

AIFs have grown by a CAGR of 57%, Mfs have consistently grown at a CAGR of 16%, and PMS have grown at a CAGR of 35%! The growth rates are enormous. Do you know why? A large value migration is taking place. India has a strong savings rate, and the growth of investment classes is set to outpace the savings rate. This means that people will look at avenues to increase wealth and wealth management offers just that. Although this value migration is not just limited to Wealth management businesses, there will potentially be a bigger impact on mutual funds as well. Look at the AUM/premium to GDP, and we will soon realise there is a significant runaway ahead.



credits: Nuvama wealth management

4. Regulation changes for the better

Previously, the industry operated at upfront commisions which would lead to lumpy commisons and difficulty to predict stability. Post multiple regulations by SEBI, all major products have been moved to trail basis which first, helps in predictability of earnings and second, align the interests of wealth managements and clients which helps with the sustainability of the industry. Although there has been margin pressure of 20-30bps, it has largely done the businesses good.


Before we go business specific and metrics , I want you all to understand the risks first!


Risks

1.Highly Cyclical

Wealth management is considered the least cyclical of all in the capital markets. However, they still do have elements of cyclicality. Let's use a bit of first principles thinking; they are tied to the incremental wealth creation in India. Where is most of this wealth tied up? Stock markets and Real estate! Both have been doing really well, and I have even talked about the real estate cycle continuing in the coming years(I could be wrong). However, we can not be certain, and hence, drops in prices or extended corrections can have an impact on this industry. Another thing to understand is that the industry is also highly tied to liquidity. If liquidity dries up, there aren't liquid assets for clients to give to wealth management, and there aren't(relatively) good enough sources to invest money in for these WMs.




2. Regulations

Any capital market company you talk about, this is always a risk to worry about. SEBI has been aggresive with issuing regulatory changes in the past, we can not be certain of when will the next one be and what would its nature be like. Previously, there were margin pressure and hence one should be wary of the nature of regulatory changes.

3. Competition

If the industry is growing, that also means that it's more likely to attract competition. UHNIs are sticky and likely to stay with the same wealth management; their persistence ratio is in the high 90s. However, HNIs have a persistency ratio in the high 80s(still good, though), making them more likely to switch to competitors. Banks such as HDFC and ICICI are expanding into these segments to capture the growth, and so are the global banks. The local banks have an edge because their overall ecosystem and reach will be great. Global banks have an edge in their brand name. The existing wealth management businesses will rely on their current presence, brand names, relations and historical performance to attract new clients. Moreover, growing competition can turn pricing irrational, bringing the rates down.



Business model

Provided above is the multiple avenues through which the wealth management businesses make money. Lets understand them

  1. ARR: This is the most important part of the model. The name probably gives it away. Its the part of revenue which is consistent, stikcy and is predictable. Hence, having a high share of this portion is generally considered good.

  2. Advisory and distribution: Distriubtion is focused on execution and sales. They help faciliate the assets of their clients with certain MFs,PMS etc. Advisory is more of an active role, where wealth managers and relationship managers provide the customer with portfolio management, advisory services by helping them with their portfolio and end goals. The Bps that is given is the % these businesses take from the AUM.

  3. Credit business: This is never the main part of the business. It is an extension so that businesses can extend their reltaions with the client and become a one stop shop. Clients can use their assets which are under the AUM of the wealth management businesses and take a loan. This way, they get quick access to cash and Wealth management companies have a 100% collateral.

  4. Broking: This is quite simple. If you were to punch an order in different asset classes such as equity and bonds, they take a % cut from the total order.


Key Metrics to track

  1. AUM growth: The business's income is tied to its AUM or assets under management. Hence, it becomes key to understand where the trajecotry is going. Since its a very important metric, all listed businesses will go in great depths about it.

  2. ARR revenue: ARR(Annually recurring revenue) as discusssed above is very important. More the share of ARR, the better. Higher ARR ensures sticky revenue and high retention rates of clients. Moreover, the margin pressure that we talked about earlier is expected to reduce in the coming times and hence this source of revenue becomes better. However, the biggest reason why it matters to me is its the least cyclical revenue element of all!

  3. Cost to income ratio: We measure the business's cost effectiveness by its cost to income ratio. How much of % goes in cost when earning 100 rupee of revenue. Goes without saying the lower the better. One very important thing to understnad is that a reduced cost to income(CIR) is the product of operating leverage and the problem is that wealth management is not so good at operating leverage. Do you wanna know why? Relationship managers are one of the most scarce and important individuals in this industry and they do not come cheap. Since a RM can only handle xyz amount of clients, wealth management businesses have to constantly hire and train new RMs which makes operating leverage difficult. So how do they accomplish that? AMC. Businesses like 360 ONE WAM and Nuvama are agressively expanding into AMC as the costs are neglible here compared to WM and hence allow operating leverage. Hence, tracking AMC growth too becomes a key metric.

  4. RM count: Increasing RM count means increasing capex and that signals growth opportunites ahead. Look for businesses which are talking about increasing RM counts and track them aggressively.


Business Analysis

We will be analysing Nuvama Wealth management and 360 ONE WAM as these are the ideal plays to HNIs and UHNI wealth increasing.


Nuvama wealth management

Nuvama wealth management was a part of Edelweiss before it was acquired by PAG. Currently, Nuvama operates in 3 business segments

1. Wealth Management: There are two business divisions here: Nuvama Private caters to UHNIs while Nuvama Wealth serves HNIs. The ARR business here accounts for 60% of their revenue!

2. Clearing and custody services: Although this is a part of capital markets, I would like to distinguish as it is really unique. A clearinghouse is concerned with the process of securities transactions. It is a back-end activity that supports the transfer of securities from a broker to a dealer, and vice versa. A custodian, on the other hand, is a firm that physically holds an investor's assets for the sake of security. Nuvama is one of three non banking firms to have this license and is a play on the increasing HFT/quant firms in India (does Jane street give you trauma too?) its a very sticky business and the growth rates can be 25%+ but regulations can become a problem here. This accounts for 15% of revenue

3. Capital markets: Nuvama has an established and strong IB team but it is also the most cyclical element in their business and accounts for 22% of their revenue. Moreover, the opex costs are high and hence the chances of operating deleverage increase when the times are bad.


Operational numbers

  • AUM: 346,000 crores( 247,000 is in Wealth management)

  • ARR revenue %=57-60%

  • Cost to income ratio: 62%


Why I like the business?

  • Aggressive growth ahead: Nuvama is aiming to increase the RMs from 1200 to 2000 in 3 years and double in 5 years.. Moreover, as the productivity of the existing RMs increase; we can expect the revenue growth to outpace the RM growth.

  • Increasing ARR mix: The capital markets and custodian services will be outpaced by the Wealth management growth and hence the annually Recurring revenue is to increase. This allows opportunity of potential Rerating.

  • Operating leverage: Nuvama has a very nascent AMC(7000 crores). In 5 years, they aim to scale it 5-8x. As this happens, operating leverge should play a siginifcant role and ARR shuld contribute to 75-80% of their total revenue. Moreover, the cost to income should fall and the guidance has to been to reduce it to 60% in the next 3 years. We can expect earnings to outpace revenue.

  • One stop solution: Despite IB being a laggard, Nuvama has been able to convert their clients into clients for wealth management. Moreover, these clients are likely to take a loan from Nuvama itself using collaterals for the short term. Nuvama is creating a whole platform that integrates all its services togetehr which leads to higher stickiness and higher realisation per customer(think Apple Inc.)


Valuations: In my personal opinion, valuations look be in the middle of fair to favourable. It is avaialble at 1-1.2x PEG or so and with the structural changes in the revenue mix, the business remains open to rerating. However, at this moment it should not command the valuations of 360 WAM as the revenue mix is better.


Risks of both the businesses will be discussed together.


360 ONE WAM

360 ONE WAM was established in 2008 and was previously a part of IIFL securities. It is also the biggest non banking wealth management business It primarily caters to UHNIs and is expanding into HNIs. It primarily operates in Wealth management and Asset management.


Operational numbers

  • AUM: 466,909 crores( 227,879 crores in ARR)

  • ARR revenue %= 72%

  • Cost to income= 44.4%


Why I like the business?

  • Very sticky clients: Most of their revenue comes from UHNIs. UHNIs and the wealth managers/relationship managers have very persistency ratio. Meaning, the ones that come mostly stay. The management said that the ratio is in the high 90s, which is as good as it gets. this makes the business very stable as it does not need to fear the increasing competition.

  • ARR revenues outpacing growth: the firm recieved non fee AUM in FY24 which should convert to its ARR going forward. Moreover, increasing emphasis on cost optimisation and HNIs will most likely lead to disproportionate growth of revenue vs AUM.

  • Structural business with minimal downside: The business is targeting growth of 18-22% and is not as exposed to the rest in terms of cyclicality and competetion. If the theme of HNI and UHNI wealth increasing persists, 360 ONE WAM is at the ideal position to take the most advantage Valuations: Although this is a bit subjective and should be looked individually, my personal opinion is that its a bit expensive to build a position now after the recent run up. As a GARP framework investor, I would not be comfortable paying a 2x PEG

Risks

  • Cyclicality: This is a bigger risk for Nuvama ecause IB occupies a significant chunk of their revenue, there can be a drop in revenue if the cycle turns. The ARR currently is at 60% which is good but not as good as to protect it from aggresive cyclicality. One must be careful how well they mitigate this risk by increasing their ARR mix. For 360, they have a higher ARR mix and the non ARR mis is mainly transactional income which is not as cyclical as IB. Hence, 360 would not see a significant impact as much as Nuvama would.

  • Regulations: As we mentioned above, the risks of regulation is always present. Both businesses are equally susceptible to this risk and can lead to severe operating deleverage.

  • Competetion: UHNIs are least likely to change and hence, 360 has a strong MOAT of switching costs. 360 gets most of its revenue from UHNIs and hence it is not to be affected as much as Nuvama. HNIs are a rising segment and a lot of banks and international houses are eyeing this segment. Nuvama has a higher proportion of revenue from HNIs vs UHNIs and hence will have to fight for its existing customer.


I hope this blog covered the industry in detail so that all of you ar ready to take advantage of this long term theme. If you have any doubts, please feel free to contact me on my twitter handle(link in about). Until then, have a great day!


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Citations

4 comentarios

Pavan Chennam
Pavan Chennam
05 jul

another great indepth analysis, i look forward to your articles with great enthusiasm, thank you


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Anshul Thakkar
Anshul Thakkar
05 jul
Contestando a

thank you so much! I will keep working hard to provide good research!

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Mohan Konde
Mohan Konde
05 jul

You provided crisp analysis of the industry, moniterable metrics, valuations, risks. Very well written. Expect similar analysis for other few industries.

Thanks and regards,


Mohan Konde

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Anshul Thakkar
Anshul Thakkar
05 jul
Contestando a

thank you so much! Such comments motivate me to keep doing better!

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