Anand Rathi IPO: Here Is All You Need To Know

The initial public offering (IPO) of financial services company Anand Rathi Wealth Limited opened today (2 December). The company saw a good investor interest with the retail portion being filled up on day one itself, and more than 50 per cent of the IPO being subscribed to on the day.

The company will be offloading 84 lakh shares in the IPO out of the original 1.2 crore shares. Previously, the company had sold shares to anchor investors. The entire IPO is an offer for sale where existing shareholders would be offloading their stake to investors.

The Business

Anand Rathi caters to high net-worth individual (HNI) clients and offers various wealth solutions, financial product distributions, and technology solutions. It is among the top three non-bank mutual fund distributors in the company.

HNI clients are the ones with a net-worth between Rs 5 crore and Rs 50 crore. The company manages Rs 26,058 crore in assets under management (AUM) for its clients through its flagship “Private Wealth” arm. The company’s AUM has grown at a compounded annual growth rate of 20 per cent per annum since financial year 2019.

Of the company’s 6,109 active client families, 52 per cent have been with the company for over three years, who represent around 72 per cent of the company’s assets under management. The client families include families with at least Rs 50 lakh of wealth cumulatively. The addition of clients has been healthy with upwards of 900 clients being added each year over the last three years.

The company’s remaining verticals include Digital Wealth and Omni Financial Advisors. While the private wealth segment caters to high net-worth individuals, the Digital Wealth segment caters to affluent mass-market individuals. The segment serves as a fin-tech extension of the company’s products.

Given the lower cost of set-up, and fast scaling up, most financial companies have created a fin-tech arm. The segment has around Rs 612 crore in assets with 3,000 clients. The business is endorsed by the brand’s partners such as financial advisors who use Anand Rathi’s technology, products etc.

Omni Financial Advisors is a platform for various Independent Financial Advisors (IFAs) to service their clients, and bring onboard new clients. According to the prospectus, the business is the leading technology platform for IFAs with 5,000 subscribers.

The largest revenue source is the sale of financial products, followed by income from mutual fund distribution.

Unlike other distributors that focus on the mass-market segment, Anand Rathi is looking to differentiate itself by focusing solely on the HNI segment. The HNI segment is not very price sensitive, and has financial requirements beyond basic wealth planning (value added services), allowing companies like Anand Rathi to differentiate themselves. As the number of high-net worth individuals rises in India, firms such as Anand Rathi would see their number of clients go up as well.

Financials And Valuation

Revenues for financial year 2021 (FY21) heave decreased to Rs 265 crore from Rs 331 crore in FY20. The company has attributed this decline to the pandemic as clients could not meet their relationship managers during the period. According to the company, it conducts most business face-to-face with clients. However, revenues had grown from Rs 276 crore in FY19 to Rs 331 crore in FY20.

The company’s costs are largely fixed in nature giving the company some operational leverage. Hence, a rise or fall in revenues could lead to a disproportionate rise or fall in profits respectively.

The company has seen cash outflow during its FY21 operations. However, it generated positive cash flow in FY20 and FY19. Further, the company does not require large investments in capital expenditure. Hence, it has generated some free cash flows in FY19 and FY20.

The IPO is valued at almost 51 times the earning for FY21 and at 9.4 times price to book value.

Key Risks

Regulatory Changes: The financial ecosystem is heavily regulated by several regulators and non-compliance with rules could create problems for the company. In the past, the Securities and Exchange Board of India has brought in several regulations that changed the Total Expense Ratio (TER) that mutual funds are allowed to charge investors. Any adverse changes in such key areas could potentially lower revenues and/or profits in the future.

Competition: The financial space has seen increasing competition in recent years as a large number of entities enter the space. Given the merits of having HNI clients, several companies could target this space as well. Banks are competitors to the business as well, as they vie to cross-sell various services to customers. Fin-tech giants are also competitors in the mass-market space where these companies offer credit, insurance, financial services, wealth management and other services at extremely low prices.

Legal Issues: According to the company prospectus, the company, its promoter group entity and some other entities are involved in a few legal tussles. For instance, Anand Rathi Commodities Limited is involved in a case with SEBI and Economic Offences Wing due to the National Spot Exchange Limited issue. Anand Rathi Digital Wealth Private Limited is in a legal tussle with minority shareholders. Hence, any adverse ruling against the company could badly affect it.