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MOSL: IIFL WEALTH MANAGEMENT (INITIATING COVERAGE) (Buy)-Building unique business model-Migration to a complete advisory model could be a game-changer

IIFL Wealth Management (initiating coverage): Building unique business model; Migration to a complete advisory model could be a game-changer

(IIFLWAM IN, Mkt Cap USD1.6b, CMP INR1290, TP INR1525, 18% Upside, Buy)

 

• India is fast marking its place in the league of wealthy population with a CAGR of 17% in the number of ultra-high net worth individuals (UHNI) to 161k. However, only 9% of their combined wealth of INR153t (1% of global wealth) is managed by wealth managers (versus 20% for China and 50%+ developed countries). The rapidly growing pie and the low penetration thus point toward huge potential in India's wealth management industry.
• IIFL Wealth (IIFLWAM) - the third largest wealth manager in India - has ~10% market share (AUM CAGR of ~25% to INR1.6t over FY15-20E) in the wealth management industry. Over the years, it has built a robust business model, backed by strong relationships, low attrition levels for both employees/clients, ability to structure products and provide unique solutions.
• From a transaction-oriented revenue model (based on flows), IIFLWAM is focusing on raising the share of stable and granular revenue by aggressively expanding the advisory platform, and scaling up the AMC/lending businesses (credit solutions provided to own clients). The new business model intends to drive earnings through AUM rather than gross flows in the business.
• In the AMC business, IIFLWAM intends to focus more on alternate funds. It has introduced several unique alternate funds and has become the largest AIF player (13% market share) in India with an AUM of INR192b.
• IIFLWAM is well positioned to deliver 20%/30% revenue/PAT CAGR over FY20-23 and improve RoE from 9% to 19% by FY23. Annual free cash flows are very strong, which will drive a healthy dividend payout ratio of 80%+. We value IIFLWAM at 28x FY22E EPS of INR54/share and derive a target price of INR1,525/share (+18%). On an implied basis, it would trade at 4.1x PBV FY22E.