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PAT in line with estimates; EBITDA margins expand QoQ

* Anand Rathi Wealth (ARWL) reported operating revenue at INR 2.4b in 3QFY25, up 30% YoY (6% miss). The overall revenue growth was driven by a 52% YoY increase in the MF business revenue, which reached INR1.1b. For 9MFY25, the overall revenue from operations grew 33% YoY to INR7.2b.

* Opex grew 27% YoY to ~INR1.3b, but declined 6% sequentially due to 8% decline in employee costs to INR1b. As a result, the cost-to-income ratio improved 141bp YoY and 224bp QoQ, reaching 54.8% in 3QFY25 (vs 56.3% in 3QFY24 and our estimate of 56.6%).

* PAT for the quarter stood at INR773m, reflecting a 33% YoY growth (in line with our estimates). For 9MFY25, it grew 34% YoY to INR2.3b. PAT margins for 3QFY25 expanded 79bp YoY to 32.6%. (MOFSLe at 31.6%).

* We expect ARWL to report an AUM/revenue/PAT CAGR of 26%/26%/28% during FY24-27. With a robust cash generation (INR8.9b of OCF during FY24-27E), an RoE of 40%+, and a healthy balance sheet, the company’s valuation is well-priced at 42x FY26E P/E. We have cut our FY25/26/27 EPS estimates by 3%/7%/6% to factor in slower AUM growth. We maintain a NEUTRAL rating on the stock with a one-year TP of INR4,200 (premised on 40x Sep’26E P/E).

AUM growth backed by MF flows, given the guidance is maintained

* The total AUM came in at INR764b (+39% YoY) as the ticket size of clients increased, leading to robust inflows. The Private Wealth/Digital Wealth AUM grew 39%/23% YoY to INR745.7b/INR18.3b, respectively.

* The company has seen the highest-ever quarterly net inflows of INR34.5b, up 18% YoY, with equity net flows at INR27.2b, up 39% YoY, despite weak market sentiments. Management expects some equity net flows to moderate going ahead. For 9MFY25, it grew 69% YoY to INR91.5b, with equity flows growing 51% YoY to INR58.3b.

* The share of customers with AUM of INR500m+ has increased to 25% in 3QFY25 from 22% in 3QFY24. ? It aims to gain ~4% market share (currently 1.8%) in equity net flows. The share of equity in AUM grew to 55% from 52% in 3QFY24.

* Opex grew 27% YoY to ~INR1.3b but declined 6% sequentially due to an 8% decline in employee costs to INR1b. This resulted in a 140bp YoY and 225bp QoQ decline in the cost-to-income ratio to 54.8% (vs our estimate of 56.6%). Other expenses increased 21% YoY to INR294m.

* EBITDA for 3QFY25 grew 34% YoY to INR1.1b, with EBITDA margins up 140bp YoY to 45.2%. For 9MFY25, it grew 34% YoY to INR3.1b. Management guides to maintain PBT margins at 40-41%.

* The company recorded one of the lowest regret RM attrition rates in the industry at 0.14% in 3QFY25 vs 0.29% in 3QFY24. ? Of the FY25 guidance for Revenue/PAT at INR9.8b/2.95b, the company has already achieved 75%/77% of the guidance as of 9MFY25.

Highlights from the management commentary

* Client attrition was lower at 0.14% in 3QFY25/0.32% in 9MFY25. The company has added 1,785 clients over the last 12 months, bringing the total to 11,426 families.

* Management guides for structured products to be in the range of 25-35% of the overall AUM mix.

* The company plans to begin its operations in the wealth management business in the UK market, though it will take 6-9 months to establish.

Valuation and view

* ARWL is one of the few companies in the listed universe space that has consistently outperformed its stated guidance. For FY23/FY24, it beat its revenue guidance by 9%/14% and PAT guidance by 8%/10%.

* We expect ARWL to report an AUM/revenue/PAT CAGR of 26%/26%/28% during FY24-27. With a robust cash generation (INR8.9b of OCF during FY24-27E), RoE of 40%+, and a healthy balance sheet, the company’s valuation is well-priced at 42x FY26E P/E. We have cut our FY25/26/27 EPS estimates by 3%/7%/6% to factor in slower AUM growth. We maintain a NEUTRAL rating on the stock with a one-year TP of INR4,200 (premised on 40x Sep’26E P/E).

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