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Earnings Call Analysis
Q3-2024 Analysis
Anand Rathi Wealth Ltd
The company successfully infused fresh capital of INR 5,620 crores and recorded a mark-to-market (M2M) gain of INR 10,260 crores, showcasing a solid financial inflow and a robust increase in asset valuations. With a significant 73% of the investment coming from existing clients, the company demonstrates a strong trust and retention among its client base. Facing the potential challenges of market downturns, the management highlighted their preparedness, citing impressive Systematic Investment Plan (SIP) contributions of INR 1,41,000 crores in nine months. In comparison to a hypothetical scenario where SIP inflows were nil, resulting in a market negative of INR 29,000 crores, the company would stand immune, with a positive net inflow of INR 3,557 crores, thus proving its resilience.
The company maintains a cautious approach towards its digital business ventures, focusing on under-committing and over-delivering. Emphasizing a trial-and-error process over multiple years, they aim to ensure that any growth narrative is thoroughly vetted before being presented to shareholders. Reflecting on its main business, the Private Wealth division, management expressed confidence in their ability to scale up operations, correlating to the company's philosophy of improving before expanding. With a stable remuneration formula for relationship managers (RMs) over 16 years, the company cites low attrition rates, indicating strong internal stability and employee satisfaction.
The company adopts a strategic formula for comp structures that has remained unchanged for an extensive period, indicating stability in its remuneration policies. They prioritize hiring candidates from smaller wealth management firms who demonstrate long-term commitment, aligning with the firm's growth strategy of nurturing and retaining talent. This practice not only ensures the right cultural fit but potentially enhances the client experience and asset accumulation. The stable remuneration structure serves as a cornerstone to their promising low attrition rate in an industry characterized by high turnover.
The company's product strategy revolves around client necessity rather than mere diversification. It offers structured products through Anand Rathi Global Finance, which constitutes a substantial 85% of the nonprincipal protected structured product allocation in their total AUM of INR 55,057 crores. Management projects a continuation of this trend, highlighting the safety and reliability of their offerings. They adopt a clear rationale against diversifying into more product lines unless there is compelling evidence to suggest a tangible benefit to the client's risk-adjusted returns, emphasizing the application of rigorous mathematical analysis to determine product suitability.
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Ladies and gentlemen, good day, and welcome to the Anand Rathi Wealth Limited Q3 FY '24 Earnings Conference Call.
This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on the date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict.
[Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Feroze Azeez, Deputy CEO. Thank you, and over to you, sir.
Thank you so much. Good afternoon, friends, and thank you for joining the earnings conference call for the third quarter and the 9 months ended 31st December 2023. With me, we have Mr. Jugal Mantri, the Group CFO; Mr. Rajesh Bhutara, the CFO; Mr. Chethan Shenoy, Executive Director and Head of Product and Research; Mr. Vishal Sanghavi, Head, Investor Relationship; and SGA, our Investor Relations advisers.
Indian economy has shown robust growth, and our markets remain resilient despite global uncertainty. With the expanding investment opportunity and a thriving market, wealth management firms are likely to attract more clients seeking professional guidance. During the last quarter, we have added the highest number of HNI families, and our client base is now at 9,641 families, and our assets under management have grown to INR 55,057 crores, a 43% growth on a year-on-year basis.
In the first 9 months of FY '24, our consolidated revenues increased from -- by 35% year-on-year to INR 555 crores, and consolidated profit after tax grew by 34% year-on-year to INR 169 crores. The consolidated net flows grew by 41% year-on-year to INR 5,411 crores. Equity mutual fund net flow saw a remarkable 85% year-on-year increase to INR 3,854 crores despite the industry experiencing net flows of minus INR 29,000 crores in equity and growth-oriented scheme net of the SIP inflow of INR 1,41,000 crores approximately. This growth highlights our client families' trust in us and our deep understanding of our client requirement, backed by meticulous research to gain insight into the risk associated with achieving their financial growth.
Our trailing revenue for 9 months of FY '24 stood at INR 186 crores, which grew by 32% on a year-on-year basis.
The role of our team of relationship managers has been a key to our consistent growth. Relationship managers, which increased by 45 in number on a net basis over the past 12 months, bring the total number of relationship managers to 322. Importantly, the quarter also -- this quarter also we saw zero-regret attrition, showcasing the strength of our workplace culture. Our superior client retention capabilities have helped us to manage our client attrition rate below 1.1% in terms of AUM lost for the first 9 months of this financial year. We remain confident that the private wealth management space in India has massive growth potential and the HNI space still being a highly underserved market.
I will now request Chethan Shenoy to take us through the digital wealth management and the OFA vertical businesses, which are our subsidiary. Chethan, over to you, sir.
Thank you, Feroze. The company's Digital Wealth is an extension of our Private Wealth offerings to mass affluent segment. This segment aims to deliver a comprehensive and scalable wealth management solution through technology, featuring real-time portfolio restructuring, access to high-quality private wealth product research, simple customer education and a 360-degree digital delivery model. The AUM in this segment increased by 47% year-on-year reaching INR 1,491 crores. Revenues from this segment grew by 79% year-on-year, reaching INR 18 crores.
Now moving to the Omni Financial Advisors, OFA business. The OFA business is a strategic extension for capturing the wealth management landscape to service-related clients through mutual fund distributors using our technology platform. This is a subscription-led business model where our proprietary technology is used to solve the common pain points of a mutual fund distributor. As of December 31, 2023, OFA has 5,932 mutual fund distributors and has assets under administration on its platform of INR 1,24,410 crores. Total revenue from this segment grew by 15% and stood at INR 5 crores.
Now I hand over the call to Mr. Jugal Mantri, Group CFO, to take you all through the financial performance of the company. Thank you, over to you, Jugal, sir.
Thank you very much, Chethan and Feroze bhai. Wish you all a very Happy Makar Sankranti.
As far as concerned with our financial synopsis, our consolidated revenue for the quarter ended December 31, 2023, stood at INR 187 crores compared to INR 140 crores in Q3 FY '23, registering a growth of 34% Y-o-Y. The revenue for 9 months of FY '24 stood at INR 555 crores compared to INR 412 crores in 9 months of FY '23, registering a 35% year-on-year growth.
Trail revenue for Q3 FY '24 stood at INR 72 crores, which grew by 43% year-on-year. And for the 9 months ended, trail revenue stood at INR 186 crores, witnessing a growth of 32% Y-o-Y.
Profit before tax for the quarter stood at INR 78 crores, registering a 34% year-on-year growth, whereas profit before tax for 9 months of FY '24 stood at INR 226 crores, registering similar growth of 34% Y-o-Y. Our profit after tax for the quarter stood at INR 58 crores, registering a 34% Y-o-Y growth compared to INR 43 crores in quarter 3 of FY '23. Profit after tax for 9 months of FY '24 registered a growth of 34% year-on-year at INR 169 crores as compared to INR 126 crores for 9 months of FY '23. The PAT margin stood at 31% in Q3 FY '24 and 30.5% in 9 months of FY '24.
Earnings per share for Q3 FY '24 stood at INR 13.9 per share, and for 9 months of financial year '23/'24, it stood at INR 40.5 per share. The return on equity on an annualized basis stood at 42% for 9 months of FY '24.
Coming to the Private Wealth verticals. For 9 months of FY '24, our flagship Private Wealth vertical revenue grew by 34% year-on-year to INR 531 crores, and profit after tax grew by 33% year-on-year to INR 166 crores.
With this, we can now open the floor for question and answer. Thank you, Mr. Davi.
[Operator Instructions] The first question is from the line of Samyak Shah from Sameeksha Capital.
So congratulations on a good set of numbers. So I just wanted to know that what will be the alpha generated by us on 9-month basis.
Sorry, I couldn't hear you. If you could just repeat the question, Mr. Shah.
Yes. Am I audible now?
Yes, a little. So -- but yes, we'll try -- I'll do an attempt to hear you better this time.
Yes. So what would be the alpha generated by us on mutual funds this time?
Okay. Alpha generated by us. As of the model portfolio, we run a 14-scheme model portfolio currently. The alpha generated as of yesterday, I can tell you. I don't know the 31st December number, but those 14 schemes are in the public domain. It is 14.23% from 1st April absolute.
Okay. And other products have increased from 12% to 15% this year. So which are the products offered in this segment? And what will be the average yield on those products?
Sorry, I couldn't get you again.
Yes. Other product -- like other product share has increased from 12% to 15%.
Correct.
So I think he is talking about the AUM, which we classify under other products.
Yes. I understood. I understood, Jugalji now.
Margin progress which has grown up.
See, when we get assets, that's our raw material for the subsequent quarters. So when you look at other products, you have -- when a client we analyze, we generally don't onboard him generally just with a check. We sometimes take his stocks in our Demat account, which will, over a period of time, get realigned. So first, we show him our strategy or show her the strategy, whoever the client is, then [ Anand ], the strategy is accepted. The person we say that there's a lot of tax implication, exit load implications to what you currently are doing. So we take that in our custody and that's work in progress.
And we're very, very happy to see that number, 13% becoming 15%. It implies that you have more money to align for the subsequent quarters. And that's where that's 13% to 15%. Other product could be a tax [ RE bonds ], could be a stock, could be a PMS, which may get on the handle for a change. So realignment happens post the custody moves to us.
Okay. And had we launched any new offering in nonprincipal protected structured products?
No. We personally believe in just doing the same thing over and over again if it works. So the structured products we currently design require 2 macroeconomic variables, which is high interest rates and reasonable WALs. And that continues. So this design has not changed for the last -- February 1, 2013, was the first issuance. So the design has remained similar because the external environment has been similar, too.
So we might be doing the -- 1,300 times the same product. So no innovation. Innovation is in the optimal extent only when the clients stop making money -- or are projected to stop making money is when the design changes.
Okay. And when seeing product-wise AUM mix, share of those products have reduced from 29% to 24%. So what is our target AUM mix?
See, that's again alignment opportunity next quarter or the subsequent quarters. When the mark-to-market gains and structured products are going to be lower than a year where markets [ we'll see ], I think, started this year on the 1st April of about 17,400 and, I think, has moved up about 18%, 16%, 17% as of December end.
So the change in proportion is because of the mark-to-market gain in one of the primary products being higher than the other, which implies that when I take a portfolio to the marketplace and realign because the strategic allocation for a client, let's say, one of my clients who I'm an RM to has 65-35, 65 equity mutual fund, 35 [indiscernible] structured products. If that was the desired allocation on 1st April and that was actually allocation on 1st of April, there is a realignment need of 5%, 6% because of the differential mark-to-market. So that proportion will be restored back to 30%. That's the thought and our strategy.
Yes. And what will be gross and net like issuance of MLDs, these nonstructured products on [ reasonable ] growth of the structured products?
Yes. So gross and net, I'll request Jugalji to give you precise numbers. Yes, but the net has gone up significantly.
Jugalji, can I request you to give those numbers, 9 months gross and net?
Yes, please. See, the gross mobilization in case of 9 months is INR 3,994 crores. And the net mobilization in non-PPSP is about INR 3,000 crores.
No, 9 -- Jugalji...
In the 9 -- first 9 months.
That's equity mutual funds, right? Nonprincipal protected structured product...
Gross mobilizations is INR 3,994 crores in the first in the 9 months.
Gross mobilization is INR 3,994 crores. And net number is INR 915 crores.
We have the next question from the line of Dhaval Parekh from IIFL.
Am I audible?
Yes, absolutely.
So sir, I had a few questions on the MLD part. So just wanted to know within the gross or the primary issuances that we do, what proportion of it could be a self-product and, I think, from the Nuvama [ health ] product?
And secondly, on the duration of the product, what is the current duration of the MLD products that we sell to the clients? And has it significantly changed post the change in the regulations last year? That will be my question.
Second question was what, sorry, Mr. Parekh?
Second question was the duration of the MLD products that we sell. Is it a 3-year product, 5-year product? And has it significantly changed post the tax regulation change last year?
No. So on the first one, what are the proportions, the proportions I can give you precise numbers. But Jugalji, I have a proportion number and then I'll give the [indiscernible].
Yes, yes. For the gross mobilization in the first 9 months, as I said, it is INR 3,994 crores. Out of this, INR 3,590 crores is issued by the group company and remaining INR 404 crores has been issued by the third party, which is Nuvama.
Yes. And the second part of the question, is there any change in August 2020? I think we went from 3 years to 5 years. That was one of our learnings from COVID. It has been largely 5 years post that.
And there has been some regulatory change on some MLD or structured product -- nonprincipal protected structured product issuances because Nuvama's sourcing could be lower in this quarter. There is some regulatory change on certain issuers. Anybody who was issued as principal-protected structure product had some changes in regulation. I'm just trying to bring it to your notice now that we're on the topic.
Since Anand Rathi Global Finance has never issued a listed product ever like we had also during the MLD tax change highlighted that we don't believe in taking market share and things which we don't believe in. So we never did -- not even one listed structured product now called MLD has ever been done. So there is no change in regulation for ARGFL, but there has been a change in regulation for anyone who have issued both of them in the past.
Okay. And sir, last one point on this. What is the yield that we make on this product, sir, currently?
The yields we make are 1.17 on all mature products approximately per annum. Yields are always per annum on average market value. If a product began at INR 100, matured at INR 180, the average capital is considered as INR 140. And the yield is 1.17 for about 1,200 products when we last computed after maturity.
The next question is from the line of Bhavin Pande from Athena Investment Fund.
Congratulations on great set of numbers. First question would be on the increase in AUM we have seen. Some could be attributed to MTM gains. And whatever inflows we had, could we get a breakup of how much is from the increased wallet share and how much is from new customer additions?
Sure, sir. I will have to ask Jugalji for that number, which is there in front of me and [indiscernible] to my notice. Jugalji, do you want to take that, if you have that handy?
Yes, yes, it is available. The new money which has come to us is about INR 5,620 crores, and M2M gain is about INR 10,260 crores. And there is an AUM attritional adjustment that is about INR 260 crores.
And the proportion between existing and new clients is about 70% to -- 70% from existing clients, to be precise, 73% and the residual from new clients.
Okay, okay. And Feroze, when we look at equity markets, especially in the Indian market, we have seen sort of a dream rally. And we can see that SIP numbers and everything has gone up in general. But when we look at the scenario where we could see a down cycle, so how do we make ourselves immune to a situation like that?
So we are already immune. Let me tell you there's some -- there's one which is a perception, the other is the reality. Perception is that a lot of money has come into mutual funds, which is correct. But if you look at the 9-month number, if you look at this number, this was mind-boggling to me, so I thought I'm trying to bring in attention, INR 1,41,000 crores has come in the form of SIPs in the first 9 months. Still, the net addition in terms of flows is about INR 1,12,000 crores, which implies if you remove -- if SIPs were 0, the amount which is there would have been INR 29,000 crores negative.
In the same period of 9 months, the corresponding net of SIP numbers for Anand Rathi stands at INR 3,557 crores. In a period of 9 months, when if you -- if SIPs were to be 0 hypothetically, you would have had a minus INR 29,000 crores outflow. In that period, Anand Rathi Wealth Limited has a INR 3,557 crores of inflow. So like in the past couple of calls, I would have said that our dream is to be a 3%, 4% market share in equity mutual funds. This is a green shoot of the same. Last year, full year, if SIPs were not there, the total net flow of equity mutual funds would have been minus INR 9,000 crores.
In the same period, if I remember the number, for Anand Rathi Wealth, net of SIP, the number was close to INR 2,500 crores positive. You've gained market share on 3 counts. One is better funds chosen. You get better mark-to-market. Second is you get better market share in net flows. Then your market share on AUM goes up. So when we have a dream of 3% to 4%, we are backing that with effort and energy to make sure that, that dream has a larger chance of getting fulfilled.
So to come back to your question, are we agnostic to the direction of how the market is behaving in terms of their affinity to buy mutual funds, I would like to believe, yes, because our SIP total inflow has just been INR 2,250 crores. We are also now focusing on SIP. It would be -- in the next year or 2, you'll be very pleased with us as a shareholder of what kind of SIP numbers we will mobilize from the HNI family.
Wonderful, wonderful, Feroze. Seems pretty much clear. And just one last thing before signing off, do you see a sort of a reversal in the trend in the debt MF space and we are anticipating a string of rate cuts in the year ahead?
I don't see that because if you look at the cumulative rate cuts expected in the country, in the world, our estimate is about 155 rate cuts by central banks are going to happen in the world. But India is not going to see huge mark-to-market gains on the debt side because we didn't see mark-to-market losses. If you look at our 10-year G-SEC is at 7%. In June 2022 when the rate cut cycle happened, we were somewhere thereabout, about 50, 60 bps more is what we have seen. So we've not seen the long end of the yield curve in India move up dramatically.
So if that's the case, the repo rate changes have not transpired into the long end of the yield curve, so expecting to make mark-to-market gains when the short end of the yield gets lower may not be real because in India, we've always operated an upward sloping yield curve. But the short end of the yield curve has now gone up. So we have a flattish kind of a yield curve. Hence, I don't expect huge mark-to-market gains on the debt side even if interest rates on the lower end, repos and [ debt-wise repos ] are the best. We didn't lose money, so you are not entitled to make as much is the key.
Congratulations again.
Thank you so much for your wishes.
The next question is from the line of Gaurav Nigam from Tunga Investments.
Sir, I have one question on the OFA business. I have not followed up, I think you may have mentioned this earlier, but can you help explain what is the business model of this OFA business and how it is different from the other national MF distributors?
Sure. Sure, Gaurav bhai. Let me try and attempt doing that. OFA business, which is an abbreviation to Omni Financial Advisors, is a SaaS platform. It is a reporting platform which are subscription -- on a subscription model basis, we provide to IFAs, close to about 5,600 IFAs, okay, give or take. And the assets which use the platform for reporting is close to about INR 1,20,000 crores of assets gets reported. They're not in our broker code or based in another sub-broker model. Unlike other B2B businesses where there is sub-broker models also being utilized, this is just a pure SaaS platform for a fee.
The reason why this business exists and in a wealth management firm is because there are multiple revenues of monetizing this huge consolidation of IFAs on the reporting platform given the fact that the advisory capability under the auspices of Chethan Shenoy have 122 research people, which an IFA may not be able to procure himself because of the cost constraints.
So to answer your pointed question, it's a SaaS-platform, where a subscription fee is paid on an annual basis and, 5,600 of them use it for their clients to report close -- upwards of INR 1,00,000 crores of assets which are not in our distribution whatsoever.
Understood, sir.
You understand, Mr. Nigam?
Yes, yes, yes. Sir, just a follow-up on this, if, let's say, those IFAs end up scaling up, let's say, INR 120,000 crores become like INR 240,000 crores, does -- is there a possibility of our fee going up? Is it like in any way related to the AUM growth?
Not currently, not currently because you are wanting to build scale and then try and monetize.
Understood. Understood. But going forward, what are the avenues for monetization, sir, if you can help explain it? Just for the sake of...
Gaurav, our principle always has been to under-commit, over-deliver. So I don't even want to tell you stuff which is on paper. We generally test. Now if you remember, we are one of the few IPO period participants who would have vocally told that, please, value our profit-making digital businesses at 0. We said that because we like to under-commit and over-deliver.
So there are several methods of monetizing it. Are we being confident that we have cracked the code? The answer is no. So I would not create hope unless I am very sure that it is doable because, of course, I can rattle out those 4, 5 methods of monetizing, which are there in my mind. But I think it would be unfair for me to create expectations and trial and error because we try to like -- I would have also, on the Private Wealth business, said, we spent 10, 15 years -- Rakesh -- Sir Rawal, who is in our professional group, joined on 1st April 2007. After 15 years, we said that we know exactly how to scale this business. Now -- we have done our mistakes on smaller basis. Now you will see us grow at a larger pace.
So in the primary business, if there was 8, 10 years of trial and error and trying to be very confident, we love the statement which has been made to [ ANC ], become better before we become bigger. So we always want to be better. And then, I think, on the Private Wealth stage, we have got to that stage where we can say now we're trying to become bigger. We have not got anywhere close to on those digital businesses to make that statement.
Understood, sir. So we'll track it and wait to hear from you more on this.
No problem, Gaurav bhai. I almost didn't give you an answer because I just don't want to, in the public domain, give answers today.
[Operator Instructions] The next question is from the line of Rohan Mandora from Equirus.
Congrats for a good set of numbers. Sir, I missed the numbers on net ML issuance. Was it INR 915 crores for 9 months? I just want to reconfirm.
Yes, it was INR 915 crores.
And sir, what was the secondary issuances for the quarter, for 3Q?
Jugalji, can you look at that number?
Yes, INR 427 crores.
INR 427 crores, okay. And sir, in one of the earlier participants' question, you indicated there's some regulatory change because of which the other sourcing partner may have a slower contribution incrementally. So what is that regulatory change? Is it something other than the budget announcement? Just wanted to understand that.
Yes, there was -- you can read up on the circular. It says that basically, there is a regulatory change which came as lately as a few months back to 3 months back. Any company which has issued a listed structured product, that's whom that regulation is applicable. So I think I can send you that regulation. Rohan, of course, you understand our business, one of the best. So I'm sure you've tracked us much before. And I have, I think, Vishalji and our SGA team will send you that circular. So Chethan, if you could get the sense, please?
Sure, sir. And sir, just one more thing was that for FY '25, what would be the total MLDs that will mature?
FY '25, we will have about, if I'm not wrong, don't go precise numbers, I think we will have INR 800 crores, INR 900 crores of full maturity. We will have a reasonable portion which has got into the long-term category. About INR 4,000 crores, INR 5,000 crores would have brought into the long-term category from a taxation standpoint and about INR 800 crores, INR 900 crores of maturing.
If your question is stemming from your worry whether we will have enough net sale in structured product, if you want to understand that bit in conjunction of our asset proportions when there is going to be realignment opportunity, we'll be able to project the kind of revenue I'll be able to do in FY '25.
So basically, we have a very simple business model. Rohan, of course, you understand this. Whatever assets we get, like if there is INR 2,900 crores which came new to Anand Rathi Wealth in the quarter, we are going to earn 1.25% yield at least per annum. That's our business model. If there is a client who gives me short-term money, I don't even take it. If there's a client who wants 20% IRR, we don't -- we filter our clients and assets at the gate of entry.
So if you want, if we got to almost INR 950 crores of net mobilization in the last quarter, INR 950 crores, average INR 933 crores, you should try and see on a monthly basis if I collect this amount, which is my run rate now for this quarter and see what will be my AUM, what will be the AUM on account of client portfolios growth, okay? Our clients' portfolios' growth over the last 8, 10 years on an overall basis has been 12% to 14% return. Clients have made 12% to 14% return. That's one assumption. Next 10 years, will they make 12% return with our strategy? In our belief, with the kind of environment India is in, they will make 12%. So that's the automatic growth.
The second variable is, how much money new will I bring on a monthly basis? Third variable is, what is the yield I will make? The fourth variable is on the revenue, how much PAT do I make? If you project this for the next 5 years, that's the business model I look for as a professional. And that will give you a sense of where this business is headed.
Structured product sourcing is an outcome of alignment. Now if our structured product proportions have come down, given 1st April, if I go to a client and say, now I'm -- time for me to realign, I will have to sell some mutual funds and bring it back to 30% if that is the agreed allocation. If it is 35%, I will bring to 35%. So the kind of money alignment, which is needed in client portfolios, is enormous.
So to answer your pointed question, not too much maturity next year, point one, INR 800 crores to INR 900 crores of market value. The long-term category 4-year plus, 4.5 year plus, which are almost close to maturity which can be sold in secondary to people, is about INR 4,000 crores, INR 5,000 crores plus the alignment opportunity you can compute from mutual funds to structured because you have to realign like asset allocation gets realigned. If equity does very well, people reallocate between equity and debt, right, realignment. Similarly, we realign between equity mutual funds and structured products.
So that change -- the reduction in the structured product AUM as a mark-to-market AUM value will help you ascertain what kind of alignment opportunities our business has in FY '25. And that's my [indiscernible].
Sure, sir, sure. And sir, in terms of the payouts to RMs, is there a difference in the proportion that is paid out for revenues from MLDs and from mutual funds? I'm asking this because the employee expenses have declined Q-on-Q, whereas the revenues were broadly flattish. So I just want to understand that, please.
No. We have the -- now that you've brought me to this topic Rohan bhai, which people don't get enough -- because you have to read between the lines. Why is our attrition 0? That's a shocking number for a financial services firm because everybody would want to hire. Yes, we want to hire your people, but people don't leave. Our formula has been constant. Our remuneration formula, which is on the basis of total comp fixed plus variable of 2 people generating the same revenue will always be equal.
In spite of somebody negotiating a better fixed, he will get a lesser variable. If somebody is not a negotiator of a best fixed [indiscernible], he will get a larger variable. So the total comp concept was introduced in June 2007. And even their Excel sheet password has not changed. There is very few in this country or the world as wealth management outputs who can say this, that we have not changed the bonus of the remuneration formula for the RM [ security ] for 16 big years.
I don't -- I've worked for some -- a couple of them in the past. I have spoken to at least hundreds of them. Everybody is mesmerized that how can you have a bonus formula, which is constant. Now coming to your pointed question, sir, saying that there -- is there a differential payout, the answer is no. Why is there a difference in employee cost? There could be bonus provisions, which are...
Feroze bhai, if you recall, see, in Q2 FY '24, we had an unfortunate incident where we lost [ Mr. Rurik Rascupal ], and there were onetime payment -- ex gratia payment because of his sudden death. And that is why that additional cost of about INR 2 crores is there in Q2 FY '23. And that is why the personnel cost is slightly higher in Q2 compared to Q3. That is the reason, Rohan. There is an attrition over there in Q2 FY '24. And otherwise, there is no reason for this manpower cost to be lower in Q3 in FY '24.
Sure, sir. And just lastly, what would be the mix of -- so in the new sourcing that we are doing between RMs and AMs, where are we typically recruiting them from currently in the last 1, 2 quarters? Just trying to understand the landscape.
Sure. I'll tell you our strategy. Our strategy has been hire best people from smaller brands, okay? We tested this hypothesis. I have, of course, done about 400, 500 interviews between '15 and '17, 2015 and '17. And I tested several hypotheses of what has got the best odds of success. We realized that best people from a smaller brand will hit the road -- hit the ground running.
So you will see a large portion of our team was hired from a smaller wealth management outfit in those periods because when a client moves from a sticky bank platform, if the technology is the hook in the previous adviser, then we don't hire. So where do you hire from? Stand-alone wealth management outfits, anybody who has spent more than 5 years, 6 years, 10 years who has proved credibility that he doesn't move on a drop of a hat are the only people we hire. So we don't hire anybody who has not spent more than 4 years in the previous organization. That's an embargo in our company.
And the longer the period, longer the propensity for him to bring in clients and if he is from not a very big brand, it becomes easier for him to get assets. Otherwise, we have these internal people whom we are training. 340 people being trained internally is a lot. So every time you see the sharpest ones who have shown capability of intellect, intent, value system and communication, irrespective of language, gets promoted on a periodic basis.
So just like a college has a fewer seats right? And IIM today does not hire 10,000 people to educate. So we have -- we try and make sure that we promote as many as we can teach to be able to take the legacy forward without diluting our brand in the marketplace. That's the principle.
Sorry, your question was very pointed, where you hire from, but I think it's more important for a prospective shareholder or a shareholder to understand principles because that's where the business [ extends ] life, not in the numbers.
The next question is from the line of Prayesh Jain from Motilal Oswal.
Sir, just one bit longer-term question as to how do you see your mix between MLDs and mutual funds evolving, say, in the next 3 years' time frame. What is the kind of diversification that you would like to bring apart from these 2 products as well? If you could throw some light on this.
So diversification is not going to be the cause of any product being approved. That's why you don't have -- there are 21 product lines in wealth management: unlisted stocks, PMSs, VIX, perpetual bonds, the insurance, so on and so forth. The reason why we do too is not that the service providers or product providers in the category don't want to tie up with ARWL, right? Anybody would want to tie up with us, right, PMS and AIF.
Because my client doesn't need it currently, we like to operate as an uncomplicated fashion of LCM. If I can get to my return objective of 12% to 14% without having the 10th product, I have just noticed another portfolio, which I analyzed of triple-digit crores of a person for 10 years has brought -- bought 84 unique products across 14 different product lines, and the IRR for the last 10 years is 10.68%, and the beta is 1.1. So if I can achieve a better beta and a better return with fewer products, so to answer your pointed question, because the business needs diversification will never be the cause of the third product.
My client needs the third product, then the outcome is going to be diversification from your perspective. We do products in a very controlled environment, a laboratory environment, right? That's why there are 2 products, not that tomorrow I can't. So if there is evidence that this is going to help me better my risk-adjusted return, that product will come. The third will come. The fourth will come. Even the 10th will come. But we have done enough research to figure out that I don't need any more at the moment.
So some day after 2 years, I might go hammer and tongs on the fourth product more than equity mutual funds maybe as long as mathematically, it's right. And how do we test mathematics? We use Monte Carlo simulation. We use Markowitz. We do all the statistics which is there in those big fat finance books and apply them to manage these thousands of crores.
Sir, but in the sense that you know your customers, how many of your customers would be kind of subscribing to the other 20 -- other 19 products that you spoke of 21 products, so other 19 line of items? They will be subscribing elsewhere with other kind of wealth managers. And are we kind of missing out on that AUM?
I would love to miss out on the AUM. That's been the strategy, okay? When you do what is right to the client, the client -- you just have to show him the logic of why you're not doing something. For everything I don't do, I have a strong logic, nonrefutable logic, in my opinion, mathematically. On perception, of course, it's a refutable level. So clients appreciate the fact that you're telling him why you don't do something, okay? That way, he is buying real estate. I can become a builder, right?
So what we do is -- then I show him that I have analyzed close to 2,400 properties. The IRR of these properties is 8.82% after 11.42 years of holding period. If you got, let's say, these families, which was 700 families, would be richer by INR 2,000 crores. Now tell me, sir, why should I tie up with a builder to provide you an under-construction apartment with this data, right? So what I'm saying is 2 people come on the same page if there is evidence, mathematical evidence of doing something or not doing something, okay?
So like the Anand Rathi Global Finance structured product model portfolio, which started on 1st of February, if somebody would have invested in that, his money would have been INR 5.5 crores in 10.66 years. But if he invested in NIFTY, it would have been INR 3.3 crores, which is hard fact. So mathematics helps decision-making. And that's why you see so much consolidation, right? Why is there 15% in other products? Because there's logic presented to them, and somebody has to be my client to understand the exact nature because over the lack of time, I'm not able to articulate what depth of mathematics.
No, no. I appreciate that. And just on these MLDs, probably you would have answered this, but just from a clarity perspective, how much of the AUM that you have today is -- does Anand Rathi manufacture MLDs or it's completely outsourced?
Anand Rathi Global Finance is the issuer for Anand Rathi Wealth Limited because that's one NBFC which, in our opinion, is the safest NBFC in the country from an asset standpoint. They have the largest investment portfolio.
Okay. And what would be the share of this entity in your total AUM today?
So out of INR 55,057 crores total AUM, about the nonprincipal protected structured product has got total allocation of around INR 13,300 crores. And out of that, around 80%, 85% is with Anand Rathi Global Finance, and the rest is with the third parties.
And that's what you mentioned, that incrementally, it will be more Anand Rathi rather the third party.
We already see around 80%, 85% is with Anand Rathi. It will continue in the same ratio.
People will also around with the regulation, right? All the other issuers are not going to stop issuance. That's why I said for this quarter. And what you may see as risk is what I see as good night's sleep. I'm telling you this.
The next question is from the line of Abhijeet Sakhare from Kotak Securities.
First question is on mutual fund sales. So any broad industry-level observations that you can share in terms of how do you see commission payouts been trending for the past, let's say, 6 to 12 months in terms of it's a large, mid-, smaller AMCs, NFOs versus older funds? Any broad sense that you can share will be very helpful.
Yes, sir. Sure. For whatever it's worth, I'll give you my opinion. I think commissions on the regular side don't have too much scope for compression. That's why the circular which -- [ circular-made ] discussion paper which was issued by SEBI, was held back more or less. So from a commission standpoint, of course, NFOs have taken a hit. Anand Rathi Private Wealth Limited never did one NFO. B30 commissions might get restricted. Again, we don't have any stake there. Smaller schemes get larger commissions.
I think economies of scale, the regulator rightly wants that to be passed on to the consumer economies of scale. I think our average model portfolio scheme size is upwards of 5-digit crores. So we have not used that lever. So these are the 3, 4, which you rightly pointed out, could have some compression. As a business, we have had a sense of that because I have not done any of those so far. So commissions might have a headroom of 10, 12 depression at best. Definitely, if I'm not wrong, the model portfolio schemes give us post GST about 1.09.
I think for Anand Rathi Wealth, the compression is going to be lower because used any of those levers, so if you're not earn from it, you don't lose it. But from an industry standpoint, a INR 0.10, INR 0.12 compression at best. Currently, if I'm not wrong, the model portfolio schemes give us post GST about 1.09. I think for Anand Rathi Wealth, the compression is going to be lower because we have not used any of those levers. So if you've not earned from it, you don't lose it. But from an industry standpoint, a INR 0.10, INR 0.12 compression over the next 3, 4 years is possible.
This compression is more of a pass-through, right? Like not really AMC is trying to increase their share of the overall TR. How are you seeing it?
It is basically pass-through, sir, like the GST component, for example, which AMCs were being -- we're passing on their share of fees, GST was being charged to the client. But the distributor's GST, the distributor [ obtains ]. So yes, to answer your pointed question, I would see it as a pass-through, and the illustration to exhibit that is like the GST bit.
Understood. Very clear. Second is on structuring of MLDs, just for better understanding's sake, like how does the transaction get executed? Do the investments have to sit on your balance sheet for a few days or weeks before it gets sold to the clients? Or it's like a pure agency transaction? If you could just explain.
The period would be a few days at best, 3, 4. But yes, you buy and sell them downsell.
Buy them downsell then. Okay.
It's just the average tax -- weighted average tax of the entire volume would not exceed 3 to 5 days, weighted average tax, rupee value tax.
Yes. Got it. And sorry, can I just squeeze in one more? In terms of this -- the transactions on the MLD side, there's no explicit regulation that governs it, right? Like I mean, I understand the accounting sense and how you kind of make business -- how you make revenues in the overall transaction. But there's no explicit regulations like what you have on the mutual fund side that guides these sort of transactions just from a risk point of view?
No, because this is just a bond, okay? Like a bond trader, this is a bond buy and sell. So the answer is no. But this is no different than I buying a bond on my front book and giving it away. Just that the return is variable, and a normal bond return is a constant.
We have no further questions, ladies and gentlemen. I would now like to hand the conference over to the management for closing comments. Over to you, sir.
I'd like to thank everyone for being a part of this call. We hope we have tried to answer your questions to our best ability. If you need more information, please feel free to contact Mr. Vishal Sanghavi, our Investor Relations Head; or Rajeshji, our CFO; or Strategic Growth Advisors, our Investor Relations advisers.
Have a wonderful week, and thank you so much for spending your time with us.
Thank you. On behalf of Anand Rathi Wealth Limited, that concludes this conference. Thank you all for joining us. You may now disconnect your lines.