Markets
Anand Rathi Wealth shines, but investors already sitting on a bonanza
Summary
- As the stock price multiples reflect, the market may have already anticipated much of the company's growth trajectory
Shares of Anand Rathi Wealth Ltd jumped 4% on Monday, a day when the Nifty 50 index fell over 1%. This surge follows the company's solid March quarter (Q4FY24) results, complemented by the announcement of a share buyback.
While the scope of the buyback is limited, accounting for less than 1% of the total equity, the shares are being bought back at nearly a 10% premium over their market price prior to the announcement. This premium might seem modest, but it is important to note that the company’s stock has surged nearly fivefold over the past year.
In Q4FY24, ARW's operating revenue climbed 34% to ₹197 crore, driven by a 65% increase in trail revenue (commission calculated as a percentage of daily mark-to-market assets under management (AUM) of a mutual fund distributor) to ₹80 crore. Profit after tax for the quarter was up 33% at ₹57 crore.
The company has set itself apart in the industry by adopting a disciplined approach and providing standardized solutions. It maintains a balanced exposure to equity, debt, and structured products, adjusting holdings to avoid overexposure from market gains. It does not offer direct equity or PMS (portfolio management services). Unlike many of its peers, ARW also does not engage in asset management, lending, stock broking, or investment banking.
This focused approach has enabled ARW achieve one of the highest returns on equity in the sector—40% in FY24. The company’s AUM also grew robustly by 52% year-on-year in FY24 to ₹59,351 crore. However, it is critical to note that almost two-thirds of this increase in AUM was due to the mark-to-market growth in stock prices with new money contributing one third of the incremental growth.
So, investors should not make the mistake of extrapolating the 50% growth rate in AUM for future years. Realistically, growth from new money is projected to be 10-15%, with total growth including mark-to-market gains, of about 10%, expected to be around 25%.
If ARW manages to sustain a 25% growth rate in its AUM over the next five years, reaching an exit yield of 1.3% by FY29, the AUM is expected to hit approximately ₹1.8 trillion, with revenue forecast at ₹2,400 crore. Assuming a 30% profit after tax margin, net profit would be about ₹720 crore.
ARW’s current market capitalization of ₹16,000 crore discounts the estimated PAT for FY29 at 22x or in other words, it is the P/E for FY29. If there are no upside surprises in the future, the stock price appears to have factored in most of the future growth.
