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Aggregate play on Indian asset management space with positive optionalities

Prudent Corporate Advisory Services Limited (Prudent) is one of the leading mutual fund distributors in terms of average assets under management (AAUM) of Rs560bn as of Mar’23 and commission received of Rs5bn as of FY23. This is achieved through 26,949 Mutual Fund Distributors (MFDs) across the country as on Mar’23 which is a source of competitive advantage. Stock based business model and growing AUM have resulted in revenue/earnings CAGR of 30%/54% between FY19- 23, strongly anchored by monthly SIP of Rs5.2bn and high equity mix of 93.5% as of FY23. As distribution business successfully migrates to digital platform, foray into non-MF financial products promises future new business streams (Insurance based revenues have already reached Rs~700mn in FY23). Risks include increasing direct mix within equity AUM and cut in yields if they are not able to pass on the same to the MFDs under them.

* Recommend BUY with target price of Rs1,048 based on 25x FY25E EPS (adjusted for goodwill amortization) of Rs42. We expect AAUM growth of 21% between FY23-25E, factoring yields dropping from 33bps in FY23 to 28bps in FY25E at a net level which results in EBITDA margin declining to 26.4% in FY25E compared to 28% in FY23. Non-MF revenue is expected to clock 11% CAGR between FY23- 25E driven by higher insurance sales as Prudent successfully uses its existing MFD base to cross sell insurance (Rs346/706mn revenue in Q4/FY23). Positive momentum in capital markets could boost the broking segment. Our 25x multiple justifies the strong earnings CAGR of 16.5% and average ROE of ~30% between FY23-25.

* Impact from dip in yields is likely to be lower for the company vs asset management companies. This is a classical attribute of being an aggregate play on the AMC industry. Based on the consultation paper released by the regulator which has suggested for a uniform TER rates for AMC, there can be a possible impact on the overall investment management incomes of the AMCs. AMCs are likely pass on the impact to intermediaries in the MF ecosystem. Prudent is relatively well placed considering it (1) is an aggregate play on the industry and as such the impact may be lower compared to large standalone AMCs and (2) can pass on the impact to MFDs as it has done historically when regulator had lowered the overall expense ratio for the entire industry applicable from Apr’19. At that time, gross margin for Prudent (i.e. gross commission from MF AUM minus the fees/commission paid to channel partners divided by gross commissions) increased from 36% in FY19 to 38% in FY20. The passing on to MFDs will also be logical considering that AMCs will also pass on the same to their direct MFDs.

* We factor 5bps net yield impact for Prudent from possible TER cut. We believe this well encapsulates the risk considering that it will imply nearly 50% absorption of a complete pass on from AMCs to intermediaries. Any higher or lower cut in yield pose a downside/upside risk.

* AUM based revenue can form a recurring core; non AUM based revenue can provide growth optionality. Prudent has total AUM of Rs560bn, of which 93.5% is equity (as of Mar’23). Revenue from MF distribution business was Rs5bn amounting to 82% of total FY23 operating revenue of Rs6bn. The remaining 18% of revenue is divided among broking (3.6%), insurance commissions (11.6%) and others. AUM CAGR for Prudent has been 35% between FY21-23 vs industry growth of 12%. Gross margin has increased from 34% in FY21 to 39% in FY23 while EBITDA margin improved from 19% in FY21 to 26% in FY23. SIP book is Rs5bn as of FY23 and provides fundamental support to this recurring income segment.

* Strong and well-diversified MFD network is a key business strength and a good growth opportunity. Prudent intends to maintain its growth momentum in financial products distribution business through existing network of ~27k MFDs (~23%* industry market share) and is continuously building on the same. MFD pool of Prudent is a critical asset in the AMC industry for increasing reach to tier2/3 locations. Nearly 70% of MFDs associated with Prudent are more than 5 years old. The company’s MFD force includes 7,750 employees who themselves or their family members are working as a point of sale insurance agent.

* Platforms aimed at improving investor and partner experience provide strong optionalities. Prudent offers digital wealth management (DWM) solutions through platforms such as FundzBazar, PrudentConnect, PolicyWorld, WiseBasket, PruBazar and CreditBasket. FundzBazar is an online investment platform. PrudentConnect is a virtual office for all MFDs registered with them and provides end-to-end support to MFDs. WiseBasket provides an online facility to invest in multiple model stock portfolios. CreditBasket is an online credit / financing facilitation portal. PruBazar is an online trading platform.

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