Jefferies Upbeat On Indian Wealth Managers; Starts 360 One, Nuvama At Buy

Global brokerage Jefferies said Indian wealth managers (IWMs) are well-placed to ride on India's economic growth and financialization of savings, especially into the capital markets, and started coverage on 360 One Wam Ltd. and Nuvama Wealth Management Ltd. at Buy ratings.

“Leading players will benefit from strong inflows and operational efficiencies to deliver 20%-22% profit CAGR over FY24-FY27E,” Jefferies said in an investor note.

The brokerage said institutional platforms are estimated to manage around 50% of the $1 trillion-$1.2 trillion of financial assets owned by India's high net-worth individuals (HNIs), led by banks (30%-33%), IWMs (12%-14%) and global players (5%-7%). The rest is disaggregated with independent financial advisers (IFAs), distributors or self-managed, it added.

IWMs are gaining share in the ultra-HNI segment (80% of market) where global players are receding and smaller banks lack bandwidth for personalized solutions, Jefferies said.

“We believe large IWMs should deliver 22%-25% CAGR in active AUM (fee-bearing) over FY24-FY27E led by, (a) net inflows of 12%-17% from higher wallet share in existing/new wealth & network expansion in new geographies, and (b) MTM gains (we factor 8% CAGR),” equity analysts Jayant Kharote and Prakhar Sharma said.

EARNINGS PREDICTABILITY

Jefferies said while changing regulations have impacted fee rates of active AUMs by around 20 basis points (bps) over the last five years to around 45-60bps, the industry’s shift to full trail model (versus upfront commissions) has significantly improved long-term revenue visibility.

Share of annual recurring revenues (ARR) has increased to around 60%-65% of revenues (versus 40%-50% in FY20) in the ultra-HNI segment and will rise to around 70-75% by FY27E, it added.

The brokerage said even as product-level commission rates remain broadly stable, increasing share of advisory will lead to marginal compression of fees (3-5bps) over FY24-FY27E. However, operational efficiencies with rising client/relationship manager (RM) vintage will drive down cost-to-income ratios by 3%-5% and aid earnings growth of 20%-22%, it noted.

VIEWS ON 360 ONE

• Jefferies starts 360 One with Buy rating and a target price of 900 rupees per share.

• 360 One is the largest IWM with ultra-HNI focus and a leading asset manager in private markets.

• Network expansion and growing client vintage should drive around 25% CAGR in active AUM of wealth business over FY24-FY27.

• AMC is entering a private equity fundraising cycle as large maturities approach and should deliver a 20% AUM CAGR.

• Despite some pressure on fees, operational leverage will drive a consolidated cost-to-income ratio improvement of over 400bps over the next three years and deliver pretax profit CAGR of about 22%.

VIEWS ON NUVAMA

• Jefferies starts Nuvama with Buy rating and a target price of 6,000 rupees per share.

• Wealth contributes around 60% of revenues (ultra-HNI: 25% and HNI: 35%) along with investment banking (22%), custody services (18%) and a nascent AMC.

• Management is investing in wealth franchise build-out (RM network to double over FY23-FY27E) and AUM/pretax profit CAGR is likely to be 22%/20%, respectively, over FY24-FY27.

• High base of investment banking can drag consolidated earnings (17% CAGR).

• Nuvama's valuation discount is driven by a lower mix of wealth/ARR.

• The steady improvement in business mix is likely to drive re-rating for the stock over the medium-term. However, near-term upside can be limited after the recent run-up.

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