2 weeks Ago
There are investors who want to bet on asset management companies (AMCs) that benefit from the growing culture of equity mutual fund (MF) investments in India. However, it is difficult to pick the winners among the AMCs. The other option for investors is to consider proxy plays such as Ltd (ARW).
ARW is the only pure-play listed wealth management company in India, with half of its assets under management (AUM) in equity . Recall that 360 One WAM Ltd also diversified into equity broking recently by acquiring B&K Securities. ARW managed to grow its revenue by 30% year-on-year (y-o-y) to 939 crore during FY25 and net profit by 33% to 301 crore.
The management has guided for the net profit growth rate to come down to 25% for FY26. While a higher base could be a reason for the slower earnings growth guidance, slightly sluggish quarter-on-quarter performance in the March quarter (Q4FY25) may also have driven the decision. Amid weak equity markets, ARW’s Q4 equity AUM fell by nearly 3% sequentially to 40,865 crore.
While Nifty peaked in September at 26,277 (intraday high), there is some lag effect of the falling stock prices on AUM. Consequently, trail revenue (commission calculated as a percentage of daily mark-to-market AUM of a mutual fund distributor) fell about 6% q-o-q to 103 crore. Note that this was the first decline in trail revenue in at least eight quarters.
Net profit saw a dip of about 5% q-o-q to 74 crore in Q4, explaining the Street’s muted reaction to ARW’s results even though y-o-y growth is healthy. Healthy RMs to client ratio In the earnings call, ARW’s management shared that a relationship manager (RM) can effectively handle a maximum of 50 clients. Currently, the average number of clients per RM is 31.
So, there is an existing unused capacity per RM. With the current base of 382 RMs, the company can add nearly 6,000 new clients without adding RMs. However, given the potential for adding more clients in the future, the company would still like to add another 50-60 RM in FY26.
Even if the number of RMs increases, much will also depend on how equity markets behave in the future. The company’s equity MF AUM showed strong growth of 35% year-on-year in FY25 to 40,865 crore. The growth rate might moderate as any fall in markets impacts mark-to-market gains in the equity portfolio, which can erode AUM growth from fresh inflows.
Moreover, it becomes challenging to convince clients to invest in equity MFs when markets are in a bearish phase. Sure, ARW’s consistent financial performance with a CAGR of 23% in revenue and 31% in net profit over the past six years to FY25 is commendable. If the company sustains a 25% growth rate in overall AUM over the next five years and reaches an exit yield of 1% by FY30 (current exit yield based on closing AUM of FY25 is 1.
2%), the AUM is expected to hit 2.4 trillion, with revenue forecast at 2,400 crore. Yield is commission earned by a financial product distributor from selling various MFs and structured products.
Assuming a 30% profit after tax margin, net profit from operations would be about 720 crore in FY30. While it is difficult to estimate other income, ARW stock’s current market capitalization is 21x of likely operating net profit for FY30. This valuation is hardly cheap, even after considering the high visibility for growth.
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