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Earnings Call Analysis
Q1-2025 Analysis
Nuvama Wealth Management Ltd
Nuvama Wealth Management Limited reported impressive financial results for Q1 FY '25, showcasing both resilience and growth in a competitive landscape. The company achieved revenues of INR 668 crores, a remarkable 60% increase compared to the previous year, and operating profit after tax (PAT) surged to INR 221 crores, marking a striking 133% growth. This robust performance is underpinned by strategic investments and an expanding client base that continues to strengthen Nuvama's market position.
In a noteworthy move, Nuvama announced its first dividend, amounting to INR 290 crores, which constitutes approximately 50% of last year's profit. This signals the company's commitment to returning value to shareholders while maintaining a strategy focused on growth. The management aims to sustain dividend payouts in the range of 40% to 60% of annual profits, reinforcing shareholder trust and confidence.
CEO Ashish Kehair highlighted the favorable macro environment for India's economic growth, suggesting that despite global uncertainties, India remains well-positioned for continued business development. Key factors bolstering this outlook include stable economic conditions and a boom in wealth creation. The company anticipates that these dynamics will keep driving business growth in wealth management.
Within Nuvama's wealth management segment, there has been continued strong momentum. The company secured net new money (NNM) of INR 1,400 crores, surpassing last year's Q1 average by 11%. Over the last year, Nuvama attracted approximately INR 4,700 crores in new assets, indicating a 25% year-on-year increase. The move towards a multi-product and multi-channel model is crucial to managing regulatory risks and adapting to changing customer preferences, reinforcing the importance of a diversified approach.
While Nuvama's total costs rose by 28%, the increase can be attributed to a workforce expansion of approximately 500 employees, including 350 relationship managers (RMs) over the past 12 months. The cost-to-income ratio slightly increased from 64% to 66%, primarily due to the initial productivity ramp-up of new hires. Management expects efficiency to improve as newer RMs integrate more fully into their roles, with an eventual target of reducing cost-to-income ratios below 65% in the upcoming quarters.
Looking ahead, Nuvama aims for a sustained growth trajectory. The company projects revenue growth of around 20% to 23% across its wealth management and private services. It anticipates that the average annual revenue (ARR) based on managed products would grow approximately 30%, while transactional revenues are expected to increase by 10% to 15%. Management is also optimistic about the continued addition of institutional clients, aligning with its growth strategy.
Nuvama's asset management business showed strong performance, with an overall assets under management (AUM) growth of 30% year-on-year. Fee-paying AUM increased by 44%, contributing to a more stable revenue base. The management is focused on introducing new products, which include commercial real estate funds, further diversifying the offerings to tap into various investor demographics.
In a highly competitive market, Nuvama is actively growing its market share. The company has introduced strategic initiatives aimed at bolstering its advisory capabilities and enhancing customer engagement through technology. The management remains aware of potential risks, including regulatory changes and market volatility but believes that its comprehensive approach and strong brand equity position it well to navigate these challenges.
Nuvama Wealth Management is showcasing a strong and effective strategy marked by significant financial performance, prudent cost management, and a commitment to shareholder value. The management's focus on diversifying service offerings and expanding its client base positions the firm favorably for ongoing growth. Investors can look to Nuvama as a resilient player in the wealth management sector, confident in its ability to adapt and thrive in the evolving market landscape.
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Ladies and gentlemen, good day, and welcome to the Nuvama Wealth Management Limited Q1 FY '25 Earnings Conference Call hosted by Nuvama Wealth Management. [Operator Instructions] I now hand the conference over to Mr. Ashish Kehair, MD and CEO from Nuvama Wealth Management. Thank you, and over to you, sir.
Thank you, Deepika. Good morning, everyone. I welcome you all, and thank you for joining us today to discuss the financial results for the first quarter of fiscal year '25. I have alongside with me Bharat, Group CFO, this is his first call; Manish, our Head of Investor Relations; and SGA team, our Investor Relations adviser.
I'll start with my opening remarks and then we'll hand over to Bharat to detail our financial performance, and then we can jump over to the Q&A section. For easy reference, this time, we e-mailed all our results to most of you, the presentation and the data book also. These documents are also available in the disclosures with the stock exchanges and our website under the Investor Relations tab.
Hope you got a chance to look through it over the weekend. We've added some more slides to give some more color around the business. I'll start with a bit of macro. I think 2 big events are now behind us, both elections and budgets. So the focus will be on the economic growth, global macro and the geopolitical situation. I think U.S. election being the most important. But we are confident that in any situation, India will remain relatively better positioned. Economic and business performance will continue to be better, driving the growth of wealth. So from a macro perspective, we don't see any worries about India as such.
Jumping to our results now. I'll briefly summarize the business-wise outlook and share the progress we are making against our strategic priorities in each of the businesses. Overall, I think we had a good quarter. All the businesses performed well. Most of the input metrics, which essentially we focus on are trending in the right direction. We continue to grow our sales capacity, our client relationships, client assets and our market share. We reported revenues of about INR 668 crores for the quarter, an increase of about 60% over last year same time and an operating PAT of INR 221 crores, which is an increase of about 133% over the same period.
I'm also pleased to announce, as you guys keep asking all the time, our first dividend of INR 290 crores. This is approximately around 50% of last year's profit. Now coming to Wealth Management. I think Q1 continued to see strong flows around our focus areas. Our differentiated platform is working really well. The industry continues to evolve. I think multiple forces are at play, growing wealth, emergence of new geographies, specifically beyond Tier 1, which I keep saying with both HNI and Ultra HNI, changing customer preferences and the increase in product suite and complexity with more regulatory focus and leading to technology disruptions.
In our assessment, these forces will drive consolidation and continue to do the movement from unorganized to organized. And over a period of time, I think business models will have to transform and become more platform-led with universal wallet approach of the customers rather than being monoline and offering a few products because that kind of a model is extremely exposed to regulatory risks.
As we all know, any kind of regulation change can happen in any single product line, which can disrupt your whole model. Therefore, we've chosen to build a multiproduct, multichannel, multi-customer segment model, which is working well for us. And over a period of time, the scale, the presence and the franchise we've built, I think, will help to grow this business consistently.
Coming to our wealth cluster, the first business, Nuvama Wealth. I'll speak about the focus areas here. We continue to add capacity and grow the relationship management pool. Last 12 months, we've added about 350 RMs and in Q1, more than 60 RMs. I also want to say that, as I mentioned last time, that as we scale in this order and magnitude, it is of utmost importance that processes are institutionalized. And not only the advisory process about which I'll talk about later on the technology stuff, which we are doing but also the entire talent management, learning and development, the sales cycle management, I think all of this has to work seamlessly to be able to get this kind of a workforce inside and make them productive in a reasonable period of time.
On asset flows, managed products and investment solutions, which is MPIS continues to remain our focus area. In Q1, we've garnered about INR 1,400 crores in net new money in MPIS. We've added this disclosure in the data book, additional disclosure. INR 1,400 crores is about 11% higher than the full FY '24 quarterly average. And over the last 12 months, we've added about INR 4,700 crores, which is on a base or 25% Y-o-Y growth on the starting base. And within NNM, I'm happy to state that NNM for managed products, the proportion of that is growing faster. That has grown about 40% year-on-year and now constitutes more than 70% of the entire NNM that is happening for the last 2 quarters.
We expect this trend to continue, but there is an implication of this because most of the managed products now are annuity based. So we are building that book and the trail build-out, as you understand, takes time. So in about 2 to 3 quarters or maybe 3 to 4 quarters, you will see that meaningful growth in the managed products income that will come by the accumulation of trail that is happening because of the addition of the book.
On revenues, in Nuvama Wealth, while the overall revenues have gone up, if you look at quarter-on-quarter, MPIS is down marginally, about 2%. And I'd like to state that is largely because of the AIF revenue recognition impact. If we normalize that, the revenue growth in MPIS itself is about 20% and quarter-on-quarter, actually, we don't see here because quarter 4 -- sorry, Y-o-Y was minus 2%, quarter-on-quarter is about 13%, and that's largely because of insurance because insurance is heavy on Q4.
We all know it happens every year. It'll happen this year also, and therefore, it gets normalized, which also actually has a leading impact on yield. So you cannot really compare the yields in Q4 and Q1 because insurance does a bump up. And in this year, Q1, we had a significantly higher mark-to-market in brokerage assets. If you look at the entire mark-to-market number of last year versus this year, in Q1, the mark-to-market is about 50% of the absolute value of last year's full number of mark-to-market.
If you normalize that, then Q1 yields actually inch up and are almost equal or higher to the Q4 yields. And cost income, Q1 is about 66%. Q4 was 68%. So there is a 200 basis points improvement there vis-a-vis last year Q1, it was 64%, but not comparable because we added about 350 RMs after that. And if you take the impact of that growth cost and the revenues produced by those RMs, it's actually 63%, so there's a 300 basis points reduction. I think we'll talk about this more during the Q&A section.
As I said, on the technology side, we are investing heavily in this business, specifically around 2 areas. In my last call, if you would recollect, I had mentioned that we've launched a portfolio advisory tool, which we internally code name as MARS, multi-asset advisory tool, which was -- which is now in production, rolled out to the entire sales force and is getting extremely good feedback because it's helping the field to engage better with the client, deliver more, I think, consistently and achieve a personalization at scale.
And second, I had mentioned that we are launching an internal platform, which is like a sales cycle, cum CRM, cum book management and activity management tool, which is called One Platform. Now it's available even on a mobile app to the entire sales force, and I think it will help them deliver their job better.
Moving on to our Ultra HNI segment, Nuvama Private. I think the segment continues to see robust demand across not only Tier 1, across Tier 2, Tier 3, economic activity, corporate profitability, everything has a positive impact. And recently, we saw the data that more than 50% of recognized start-ups in India are coming from Tier 2 and Tier 3. This will lead to an unprecedented disposition of wealth in the hands of customers there. And the need for organized wealth management is only going to go up.
I hope and wish that service providers like us are able to match up on the supply side. We continue to invest in capacity here also, about 15% to 18% have been added in the last 12 months. Our first quarter is normally slow in addition of capacity in this business because typically, the appraisal cycle ends around April, May, June, and people are reluctant to move because their whole year bonuses and all happen.
So Q2 onwards, activity will pick up, and we have a decent pipeline Q2 onwards. But I want to state one point here. Actually, something which is a little disturbing in this segment is there is some kind of a FOMO happening. A lot of organizations are jumping into this business. Many traditional players are changing nomenclature and moving into this business. And a sincere piece of advice to the world of relationship people that please do not make a movement to the highest bidder because when cycle adjusts, things do not go well and massive layoffs happen.
And we've seen that play again and again in any sector that goes overboard. And therefore, you should look at players who are serious, who have vintage, who have deep pockets, who have sustained cycles and who have a platform that can deliver value to the customer. Overall, we've added about 200 families, taking the count of families to about 3,900. So customer acquisition remains robust. And the synergy with Investment Bank is working really well. About 40% of the relevant deal clients and 80% from a value perspective, the total value of deals which Investment Bank has done has now started working with Nuvama Private and which is a reasonably good number. We'll continue to improve upon that.
Coming on to flows. ARR flows remain as a focus area for us. Q1 was highest ever in terms of flows in ARR, about INR 4,700 crores. And out of that, happy to state that more than 93% is managed products, which is a trend now we are seeing over the last 2 quarters. And if you see last 12 months, the total flows here were about INR 11,200 crores. In comparison, I think the transactional assets, we are largely seeing MTM, and I'll talk about it a bit more. But again, as I said in Nuvama wealth, the implication of building the ARR flows, especially in the area of managed products is that you will see the trail build-out happening gradually, but meaningfully.
So there will be some quarters where I mean, we may get a little impatient, but I don't think we will digress from our strategy. There is a bit of depression in the transactional income in Q1, which is why the Q1 versus Q4 revenue looks lower. But Q2 onwards, the transactional income will come back because there are opportunities in sell-downs and unlisted shares and other products which are coming back in Q2 onwards.
On the offshore build-out, last time I had mentioned that we are working in DIFC licensing and all. Happy to state that all our approvals have come, leadership is in place and about 2 to 3 relationship managers will be joining in the next 20 to 30 days, and we'll be open for business.
Coming to asset management. Our AUM is now around INR 7,700 crores. We've added about INR 700 crores last quarter between new money and MTM. And overall, I think the target or the aspiration this year is to add about INR 3,500 crores to INR 4,000 crores across the multiple strategies which we have. And because we've added new products like commercial real estate, we've added one more fund in our private equity space, which is Crossover 4, both for domestic and international investors. And we've added an absolute return fund, which I'll talk about more. So I think we now have the product palette fully available and the sales engine is also firing.
In the private markets, the approach has been right now for the last 12 months on deployment. Now deployment momentum has picked up. So we will continue that and add to the new strategy, which we have rolled out. Public markets, we have our 2 flagship products, Edge, which is our long-shot fund. Now that's the largest in this category and in top 2 performance figures always. So we have reasonable amount of demand now coming in from external distributors.
And Nuvama Absolute Return Fund is a fund which basically is a fixed income alternative. It targets pretax, pre-fees return of about 15% with no negative quarter. So essentially, after the debt mutual funds have gone to marginal slab-based taxation, I think there's a huge gap in that space, and this product fills that space. So we are extremely bullish on both these products. In the first quarter, we saw sales of about INR 500 crores in this category.
And over the last 12 months, we've moved from INR 1,000 crores to INR 3,000 crores almost in terms of AUM here. Commercial real estate, our newest product is now picking up. I think in the next 2 quarters, we'll be able to do our first close and also start the deployment. Capital markets, the uptrend actually continues. Extremely robust performance in Q1. Asset services, we are seeing growth across client segments, both in the international clients and the domestic clients.
Domestic clients typically comprise of PMSs and AIF, where we do their fund accounting, client onboarding and custody services. So it's somewhat like what RTAs do in a similar setup, which we offer to the domestic PMSs and AIF. We've added about 30 new accounts. We have a lead market share in the domestic market in that space. And in the international side, we've added about 5 new accounts, bulge bracket on the clearing side. And both put together, the assets have grown about 3x in the last 12 months. So we've added about INR 37,000 crores of assets in these 2 spaces.
And both institutional equities and investment banking, which is our core capital markets are doing well. Institutional equities, there has been a volume pickup in Q1 on the cash side, whereas the derivative side, the volumes in the markets have been a bit muted compared to Q4, but we've seen a reasonable increase in our market share, both in cash and in derivatives segment, which has led to the increase in revenues.
And Investment Bank, I think the deal activity continues in terms of QIPs, blocks, IPOs. And we've also been able to do a marquee transaction, one of the largest in the ophthalmic devices space, where we sold a company called Appasamy to Warburg Pincus, one of the largest deals in that space. So those all happened in Q1 for us. There were a few regulatory changes, I think, which happened and one of them is around the rebates, which market intermediaries will now not be able to earn, I think, from 1st of October onwards.
For us, I would like to state that the impact is negligible. I mean, less than 0.2%, 0.3% of our revenues. So there will be negligible impact. And the other question that keeps coming to us is, will the asset services revenues get impacted if there's a decline in yield. In FY '25, we don't see any impact at all. The way we have structured and hedged our book and the deposit structure is in a manner that at least for the next 18 months, we don't see an impact in the fall of yield.
And at the pace at which assets are getting added, I think even in future, if there is a yield reduction, it will be more than compensated with the addition of assets. I think with that, my opening remarks, I'd like to sum up that overall, a good quarter. Hope to see the trend continue in the coming quarters. And we'll hand over to Bharat to take you through the quarter performance and analysis.
Thank you, Ashish, and good morning, and a warm welcome to all the participants. And Ashish, first of all, I think you covered most of the points. So I'll try and brief and maybe a few things which has not been covered. I'll try and cover that. So again, good morning to all. So as Ashish covered a lot of things in terms of the macroeconomic, also the sector or the economy has been very positive in terms of the real GDP growth or there has not been much of, say, any regulatory, larger financial system issues or there has been an improving profitability by the corporates. So I think all those are in the right direction for the industry which we operate in.
Having said that, like any other industry, which is involving people money, whether it is banks, NBFCs, wealth management companies, mutual funds and all, they are always under the extra vigilant in terms of the regulatory environment, and that is true for us also. So what we have seen, there has been 2 key changes, which has actually happened. One is on the AIF revenue recognition, which happened last year, say, sometime May '23, but that has a base effect in this for us and more specifically for our private business where we've been a large player on the AIF side. The second is, as Ashish touched upon, the insurance sector is also undergoing a change wherein there has been a change in the surrender values, which will get effective from 1st of October 2024, which in a way means, again, there will be an impact in terms of upfront commission versus the trail commissions.
What I'm trying to say here is that both these impacts has a base effect for FY '24 and '25. So maybe the quarter-on-quarter performance is not exactly comparable. So if you look at quarter 1 last year versus quarter 1 of this year, even if we -- I'll cover the numbers at the Nuvama private level also, but there has been an impact on the AIF income, which will reflect in the overall wealth income growth.
If you look at the other things which Ashish covered or maybe the budget part, the budget has been very -- I think the focus has been more on the simplification on the whole of the capital gain structure, whether it was making the slab flat versus 10% versus 12.5% or even the holding periods changing from a multiple different periods to flat 12 and 24 months.
All this has been implemented now effective July -- effective this month. The other thing which we are happy to announce is that we have declared the dividend, which is INR 81.50 per share, which is roughly INR 290 crores or in other words, which is roughly 50% of our last year operating PAT. So that is where we have declared our first dividend after the listing part. And our endeavor will be to declare a dividend to the range of 40% to 60% of our annual consolidated profit.
So that's where we are heading. Obviously, the focus will be on the capital management in terms of where we are deploying our capital. So the capital deployment will continue in terms of addition of capabilities; building our tech platform, which will lead to better, say, customer experience as well as the engagement with our own relationship manager, which in turn comes back as more like a retention for our relationship managers. So I think all this is where we will continue to deploy our capital.
Having said that, Ashish covered most of the numbers, but I'll go on a business by business and at total levels. So if you look at our overall asset base, that has moved around 50%. I'm comparing all the numbers on a Y-o-Y basis. There has been a 50% growth on the client assets at around INR 3,89,000 crores. Within that, if you look at Nuvama Wealth, our mid-market segment, that is up by 45% and touching around at INR 88,000 crores. This has been a good quarter for us in terms of our new money, which within the MPIS space, which has been very strong at around INR 1,400 crores, which has been like the total NNM contribution, 75% has been in the MPIS segment. So that has been very reassuring.
If you look at Nuvama Private, our asset base is now at INR 1,86,000 crores, a growth of around 31% year-on-year. Again, if you look at the total asset base has grown by 31%, but our ARR assets has grown much faster at 48% with the AUM of ARR at around INR 39,000 crores at the end of the quarter 1. Asset Management, again, it is in a strong growth of 30% Y-o-Y.
We covered a lot of things in terms of the new offerings and the new product which we have launched over the last 3 to 6 months. And similarly, if you look at the capital market side, the custody and the clearing businesses saw a very strong growth of 115%. Again, we discussed in the previous section with Ashish in terms of where the money is coming from, whether it was on the international clients or on the domestic side. If you see the overall revenue part, the revenue has grown by a healthy 60% at INR 668 crores. All the businesses has done well. Within that, if you look at Nuvama Wealth, that has gone up by 23% year-on-year.
And Nuvama Private has grown 11%, but that's mainly, as I mentioned, because of the AIF impact. Our internal estimate around is INR 20 crores worth of AIF revenue impact in the quarter 1 last year on a like-to-like basis. If you neutralize that, the growth would have been in the range of 30% to 33%. So I think it is again on a base effect basis is where it is reflecting at an 11%. Otherwise, this has been a strong growth for the Nuvama Private also.
The AR revenue continues to grow at a much stronger pace and now it's contributing 63% of the total wealth revenue, which is where our stated approach is that our focus will be more on the ARR side of the business. In terms of asset management, excluding the carry, the revenue has grown by 23%. And within that, if you look at that, the 44% of our AUM is now fee paying. There is a growth of 44% in the fee-paying AUM, which is much faster than the overall growth of the asset management revenue.
And capital market, it's a very strong growth of 153%, taking it to INR 331 crores. We continue to benefit from the synergies, as Ashish also mentioned about a deal which has been within the system, which leads to first an IB deal, then it comes back to a wealth management business opportunity. That all is playing well for us, and we hope to see such more things.
On the cost side, the cost has actually gone up by 28%. But if you look at what we have done is that there has been an addition of around 350-odd people over the 12 months period. In the -- that is only on the RM side. But if you look at the total employee side, the increase in the number of employees is around 500 over the last 12 months, that is one is playing in. The annual increment is playing in. And secondly, the variable cost, which is linked to our business. So when we are growing at a 60%, the variable expenses, which is linked to the incentives are also being provisioned accordingly. That is what is leading to a 28% growth.
If you look at the data book, the Nuvama wealth cost-to-income ratio has marginally gone up from 64% to 66%. But that, as I mentioned, it is because of the 350-plus RMs, which we have added and the throughput of such people, it typically takes 12 to, say, 24 months to reach to the desired level, and hence, it is impacting it. But if you exclude the growth capital or the growth investment which we have made, the C/I ratio has actually come down from 64% to maybe 63%, 62% kind of a number. So that's all is playing in.
Similarly, on the Nuvama private side, there is a marginal increase in the cost to income from 68% to 69%. Again, if we remove the AIF impact and the growth capital impact, it could have been easily 65%, 64% number. So that's where we are heading. Lastly, I think my general submission here is that on a quarter-on-quarter basis, our INR 2 crores to INR 4 crores or a INR 5 crore cost impact or maybe a timing of a INR 10 crores to INR 15 crore impact on the revenue side can actually move the cost-to-income ratio by 1% here and there. So it always becomes a little tricky to manage it at the last decimal.
So maybe on a steady-state basis is where we are heading that the cost-to-income ratio, if we exclude the growth cost, it should touch around 60%, 61% over the next maybe 24 to 36 months is where we are heading. Lastly, as we mentioned, the profitability has been very strong at INR 221 crores, which is a 133% growth. And even on a sequential basis, it's a growth of 22%.
That's all from my side, and happy to take any questions and the moderator can take over.
The first question is from the line of Jayant Kharote from Jefferies.
Congratulations, sir, on a good set of numbers. First question is rightly what Ashish pointed out in the beginning of the call, we are seeing a high level of churn, so to say, not just at RM, but even at senior management level in this wide space. So first of all, where have we been in this? Have we made any acquisitions or let's say acquihire this quarter? And then a follow-up to that is, if we do see RMs moving across, typically, what part of the AUM are you able to retain? And then what are the moats that you are building to be able to retain the AUM?
Thank you, Jayant. So acquihires, actually, we are working on. Acquihires may not be one of the best approaches because when you do that kind of a hiring, 30%, 40% of the team which you get may not be what you want. So our approach is twofold always that you look for individual RMs and if there are teams in which a higher proportion of people are some -- are of the type which you want, then you go ahead. We've not lost too many people, but like any industry which is growing, I mean, this is a pain which you will have to live with, right, specifically in people-oriented industry.
If either the industry is not growing, then it's a different kind of a pain. And if you are seeing a reasonable amount of growth and optimism about future, this is one of the factors which you'll have to live with and you have to manage time and again. At least at the leadership level, we've not seen any churn. But many new players, I think, are coming into the space across the spectrum. I think in retail, in affluent, in HNI, Ultra-HNI and many players are also changing their strategy to move into this space.
So I actually see that it will lead to an overall talent expansion because whichever way you slice or dice it, I don't think if people keep recruiting from one another, there is going to be a winning approach because ultimately, the talent pool is limited. So people will have to dip into talent pools, which are sitting inside banks, build infrastructure around training and other stuff in order to add to the talent pool for the industry to grow meaningfully.
In terms of asset movement, I have always maintained this that it's not really easy for clients to close accounts and shift everything. And specifically in cases where if somebody is making a movement a multiple number of times in their careers, it's practically impossible for clients to shift everything. Yes, incremental business will get split between the 2 firms. But I think more than 60%, 70% of the AUM is retained with the existing firm. But typically in ultra-high net worth because the number of relationship points, the number of hooks which you have with the clients, the number of touch points which you have with the clients goes significantly beyond just one touch point. So business typically gets split. It's not that 100% movement happens of assets. Neither do we get it nor we lose.
And just to add to this, sir, do you expect the cost to income in this segment to be slightly elevated until this competitive intensity sort of recede let's say, for the next 6 to 12 months?
In my view, no. Actually, the more impact of cost to income is happening today because of the changeover, which is happening from, let's say, the revenue recognition of AIF because you were -- for us, for example, we were in the process of booking 60% in year 1, which in CAT 2 has, let's say, fallen to maybe 30% or 25%. Many players in the market were booking 100%. And that changeover is, to my mind, 12 to maybe 24 to 36-month process where it remains elevated. But even this year, in our view, by the time we end the year, we should come back to 65% or below because if you see even in Q1, the impact to cost income has happened not because of your regular revenues or ARR revenues but because of transactional revenues.
And transactional opportunities actually keep coming differently from quarter to quarter. And we are now seeing opportunities which are emerging in Q2, you will see it should come back. And the cost movement, actually, people don't -- in a way, people are overpaying, but ultimately, the relationship manager cost as a proportion to overall cost of the business is maybe 50%, 55%. So if you have an established infrastructure, if you have -- if you're a player which is of scale and your other costs are under control and if you're not mindlessly adding RMs at any cost, then the cost income should be under control.
That's very helpful. The one last question, if I could squeeze in is on the yield. We have seen -- and I'm not referring to the Y-o-Y numbers at all. If I look at this quarter in isolation, I see the yields are down to 90 bps on the ARR earning assets in the private piece. And if I strip off the interest earning piece, it probably is around 55-odd bps. This has been slightly lower than what we've been doing in the past 2 quarters. So can we assume this to be the new normal?
No, no, no. I meant to cover this in my opening remarks, I missed it. In this quarter, we've actually had a big win in our ARR assets. If you see our net new money in ARR is about INR 4,700 crores. Out of that, about INR 2,000 crores have come early. It came in the month of April, May, but the deployment has not happened. It's come from 2 large families. Right now, that money is sitting in liquid fund and arbitrage fund. It's come in our Infinity portfolio, which is our in-house nondiscretionary and discretionary multi-asset portfolio. Once the deployment happens and we start earning the contracted rate, the yields will come up. The impact of that single inflow is about 5 basis points.
The next question is from the line of Prayesh Jain, Motilal Oswal.
Congrats on a great set of numbers. I wanted some more understanding on the capital markets business. If you could split up your cost to income between the 2 segments, which is asset services and IE and IB. And also extending that point, if the regulations or what the media has been talking about with respect to F&O activities, is that there will be a meaningful impact on the volumes in the asset services business?
So overall cost-to-income, Prayesh, if you see in capital markets is about 42%. The Asset services in that sense is a more, I would say, is a lighter cost-to-income business. So that would hover around maybe 30-odd percent, 30%, 33% and the other part automatically goes to about maybe 50%, 55%. On the F&O side, actually, we are also waiting like everybody to see what's going to happen. There are a number of changes which are being proposed, which will lead to -- which is basically targeted to reduce the retail participation in the F&O market, which I think will have a larger impact on maybe people who have broking business around retail.
What that has as a second order impact on the institutional side will have to be seen, depending on what is the order of magnitude fall. If I'm saying if there is a, let's say, magnitude of 20%, 25%, then maybe there could be a 5%, 8% impact on the float of asset services business of the institutional clients. We do not have a large F&O float of retail clients. As you know, our overall broking product within wealth management is relatively small. And within that derivatives is even smaller. We've never participated in that part of the business. So that we are isolated. But if there is any second order impact on the institutional volumes, on the derivatives side, that we'll have to wait and see. Very difficult to say right now.
Is it fair to say, Ashish, that the capital market or the asset services business is more closer to being an annuity?
So if you look at degrees of separation, Prayesh, like if I were to see, and I keep saying this, the closest to, let's say, the volume volatility of capital markets is, I think, broking. And the most distant is wealth management and somewhere in between is, let's say, asset services because it ultimately serves 2 communities. One is international clients, which basically trade in the domestic markets and second is the domestic PMSs and AIFs.
Domestic PMSs and AIFs, I think it's fairly, fairly, fairly insulated because there, our income is completely not linked to volume ups and downs. It's typically a service-oriented business. International, yes, if, let's say, there is a massive volume reduction and if they bring their volumes down, there could be some impact. But if you ask me, it's more or less the current nature of income which we have is more than 60%, 65% is annuity. So ideally, I don't think it should be valued in a similar manner as, let's say, core capital markets because core capital markets is a different nature versus asset services, if that's what your question is.
That's really helpful. Just on the asset management side, the yields have dropped sequentially. Why would that happen?
See, there are 2, 3 things, Prayesh, in that. One, there is a product level yield, right? The product level yield is more or less consistent, if you look at private markets and if you look at public markets. Now in the last 12 months, what has happened is that which I have been saying that we've not added assets in our private markets because our focus was on deployment. And once -- and that's how private markets work, right?
You first raise a fund, you deploy at least 70%, 75%, 80%, and then you raise the next fund. Whereas public markets are continuous vehicle. There is no end date unless you're doing a closed-ended fund, which we don't have. And in the last 12 months, the proportion of public markets have gone up. So it's just a multiplication. Now if we -- if, let's say, we add another INR 2,000 crores of private assets, again, the yields will inch up. But I have always maintained that in the long run, let's say, you look at a INR 20,000 crore AUM when we reach in the next 2 years, 3 years, on a blended basis, the gross yield should be anywhere between 75 -- 70 to 80 basis points is where we should land and settle given how we see the composition of assets will move.
Perfect. Last question, what is our RM count plans for both wealth and private segment for this year and possibly if you can throw some light for the next couple of 2 to 3 years?
So we've said that we want to -- like 2 years out, we had said 20% every year. So we were able to achieve that last year. We added about 15% to 18% in private and I think more than 25%. This year also, the idea is same. So you can anchor the figure at 20%. In some cases, we may be 15%, in some, we may be 25%. That's the range we want to operate at. It's not -- that's the target now if -- depending on how the markets and the environment is, we may calibrate it, dial up or dial down, but that's the way we are looking at it right now.
The next question is from the line of Lalit Deo from Equirus Securities.
Congratulations on a good set of numbers. I have 2 questions actually. So firstly, on the assets of MPIS in Nuvama Wealth and the ARR assets, so could you give us more details about the nature of like the assets, whether how much is debt and equity? Because the reason I'm asking this question is because if we look at the flow side, then if we calculate the MTM gains on these 2 books, that is hardly in the range of about 2% to 3% on a sequential basis.
Correct. You're right. So I got your question. So if you look at right now, the proportion would be more towards yield-oriented assets. But if you look at it 12 months from now, the way the net flows are happening now, we will have more -- so higher proportion of equity managed products are now coming in the net flows of both MPIS and ARR. Current AUM may not be, let's say, reflective of where we will be 12 months from now.
But as of now, like how much would it be? Can you give us a rough sense like how -- and how it has improved over the last 2 years?
Not last few years, maybe last 12 months is the right approach. Before that, our focus was reasonably high towards fixed income and yield-oriented assets. Even within managed products, we had a lot of non-correlated stuff like credit funds, infrastructure funds, distressed asset funds, which were less MTM products because our approach was to attack the fixed income portfolios of clients because everybody was doing equity. Now it's become more balanced and incremental flows are now coming towards equity assets. So currently, maybe 10%, 15% would be equity assets but 12 months from now, maybe that number could become 30%, 35%.
Sure, sir. And sir, second question was on the cost side in the capital market business. So as you have alluded that in that asset services, it is roughly in the range of about 30% to 33%, whereas in the IE and IB business, it is in the range of about 50% to 55%. So will this be like going ahead, as I understand that from like in the next -- in the second half of the fiscal year, then it should increase because of the variable payouts and all those things. So the current level...
What we have done, Lalit, is that we have, in the first quarter itself, upfronted the variable payout. Given the fact that capital markets had a very strong quarter, if you look at the total cost and if you see between Q4 and Q1 FY '25, there is almost a INR 24 crore cost jump, which is largely towards 2 elements. One would be the hikes because there is no manpower addition which is happening here. So one would be the hikes would be, let's say, order of magnitude, 6%, 7%, but rest would all be attributable to variable cost.
So the segment between the 30% to 35% and 50% to 55% will remain over the next 12 months?
Our approach of variable, we try to -- I mean, we are always -- not always correct, is to basically keep accruing the variable cost in line with the revenues in any quarter. We've not been perfectly, as I said, right at it. But to the extent possible, we try to align it so that there is no quarterly catch-up that happens. Although I must admit in the last 2 years, in our wealth management businesses, we had to do a catch-up in quarter 4, but not in the capital markets business.
[Operator Instructions] The next question is from the line of Bhavin Pande from Athena Investment.
Congratulations on wonderful set of numbers. I just had one question regarding capital markets business. So we could see some increase in market share. So could you just shed some light on dynamics of the capital market space and how one sort of stands to lose or gain market share?
So there are 3 lines of businesses which we report within our Capital Markets segment. One is institutional equities, second is investment banking; and third is asset services. So I'll start with the asset services business first. That basically serves 2 sets of clients. One is international investors, which is FPI, in which typically we serve systematic quant funds and hedge funds. And on the domestic side, long-only PMS and AIF. So essentially, the function of market share is out of the new clients which come into the fold in both the categories, how many new accounts are you able to get as far as your competition is concerned.
In institutional equities, similar. We serve FPIS, domestic MFs and insurance companies. And that is typically voting led. So as your voting on the research side goes up, your market share will typically go up. And Investment Bank, we are in ECM, M&A, PE and debt capital markets. So across that, depending on the league tables and how much we are able to win is how our market share moves. So I think overall, more than market share, on the capital market side, what we keep worrying about is how the activity will move up or down, but at least post elections and post budget for the next 12 months, it doesn't seem unless there is an external shock which comes and hits, we don't foresee a tapering.
Yes, quarter-on-quarter, the numbers could move up and down, but overall activity in the market should be at a similar level, except what Prayesh was mentioning in his question earlier as to if something draconian happens on the F&O side and that has a second order impact on the overall market and performance, then I think the entire sector, whether it is us, asset management, broking, everybody will get impacted.
Okay. And Mr. Kehair, just expanding on the anticipated rate cut. Do we think if there's a rate cut, maybe, let's say, in a couple of quarters, the private and the start-up space could revive. So that could lead to more growth? Or do you think the sort of action in investment banking activity that happened in this quarter is sort of -- is a manifestation of the anticipation of a rate cut, if we would put it in better way?
So rate cut for us actually is reasonably neutral. It doesn't impact us too much because some businesses benefit, some businesses lose. Overall market, how it will react. Now rate cuts typically happen when economy is not doing well, but markets have become counter to that. So if you see when talks of rate cut happens in U.S., broader market starts doing well because your asset valuations, your discounting rates, everything starts coming down. So your current valuation starts looking cheaper than what it could be in future. So it's extremely counterintuitive. If rate cuts will happen, I think it will lead to a positive into the market.
The next question is from the line of Sanidhya, Unicorn Assets.
Congratulations on a great set. My first question is on the -- I just wanted to understand on the yield and net new money in the MPIS and other segments. So how should we see that like year-on-year, quarter-on-quarter, gradual basis? Because there is some like not -- like the yield on assets versus the -- I mean, the revenue versus the assets, there is a difference in proportion of the growth, particularly in the wealth and the private segment. So if you can just elaborate on that.
So the retention on average assets in Nuvama Wealth ranges between 90 basis points to 1% depending on the quarter and the kind of MTM the assets have seen. And Q4 will normally be higher because insurance comes in. Typically, the way you have to look at Nuvama Wealth is MPIS growth is around 30%, 35% of the initial base. And that's how we have seen it over the last 2 years. And if you basically look at the fact that, that contributes anywhere between 40% to 50% of the revenues, so that will provide you anywhere between 12% to 15% of revenue growth.
And your other assets, which is your broking and loan assets typically could grow anywhere between 10% to 15% in a year, and that has a 50% contribution. So that will give you another 7%, 7.5%. So 20% to 23% revenue growth is what you should be able to see. And if you are able to keep costs below 20%, then the profit growth will be higher. That's how it works in Nuvama Wealth. And in Nuvama Private, typically, the ARR growth, we've seen exceptional growth over the last 2 years, but I'm saying even if you take, again, 30% growth there and 10%, 15% in transactional assets, that should also yield to about 20% growth in the overall revenue. That's how we look at it in terms of breakup and composition.
Okay. And what is the others in the client asset composition?
In which segment?
In the Nuvama Wealth.
That could be maybe unlisted shares that would be client margin at exchanges. So multiple items could be sitting there.
Okay. So okay, fine. So it's like the majority portion, like almost the 60% proportion of that?
Yes.
Okay. Secondly, on the AMC front, so, I think we are not stating the actual loss in the presentation or anywhere else. So it would be great if it could be presented in the presentation itself because it doesn't make sense to not write it just because we are in loss.
I didn't understand the question.
In the AMC section...
We show the operating loss there in the data book.
Okay. Maybe I missed it, but it would be great if you can just...
There is the Excel data book in which -- so in our disclosures, which we give, there is obviously the quarterly presentation. But if you want more details, we also upload an Excel data book, and that's there on our website also. And in the Excel data book, we have detailed numbers in terms of revenue, cost and other metrices and parameters across all of these businesses given detail in Excel. So you'll be able to see it.
Sure. I will surely go through that. If -- I was just saying if it could be presented in the presentation itself, that would be great?
Sure, sure. We will add that. No problem.
And lastly, lastly, we heard some news or maybe rumors that Indian promoters are trying to exit from Nuvama. Any confirmation on that side?
Not that we know of because they hold about 56%.
No, the Indian promoters?
That's not a rumor. I mean there is no Indian promoter now. Edelweiss is now a passive shareholder. They hold 14%. As part of demerger, they had 14%, and they are not a promoter anymore. They may look to monetize a part of it, maybe half or 1/3 of it. They are under lock-in till 12 months from listing. So last week of September, the lock-in will go. Post that, they may want to sell because they want to monetize some and take the cash within the company, Edelweiss Group.
Great. And on the dividend front, the policy continues, like we have -- last quarter, I think or before that we were discussing that we are yet to set up a proper framework for this.
So like Bharat pointed out, the endeavor will be to do 40% to 60% of annual profits.
Okay. And since now buyback is also would be taxable and other things, so are we looking for any other like bonuses or any corporate actions, anything like that?
Right now, not under discussion because bonus, unfortunately, if we do now, the taxation structure for people will get impacted. So we are not thinking of bonus or anything. Maybe at some point in time, if the Board decides and discusses to do a split, they may do. But right now, nothing under discussion. Dividend is something which has been discussed in detail, and that's why we started it.
The next question is from the line of Rahul Agarwal from Himalaya Investment Advisors.
Congratulations on a very good set of numbers. My question, sir, is more on the Asset Services business. You report clearing assets and custody assets there separately and you calculate the yield on clearing assets. So can you just explain this a bit? What is -- are these 2 different models of revenue? And what will be the kind of yield that you expect on each of these 2 segments? And what portion of this revenue comes from domestic clients versus international clients?
So custody and clearing are 2 different activities. Custody is what, let's say, any institutional investor can give their assets to a custodian for safekeeping and different kinds of services are provided where you do custody fund accounting. Clearing is when a client trades in derivatives and their trades have to be cleared, then you use a professional clearing member and you have to post your margin to the exchange through the professional clearing member and the clearing member earns on that margin and also on the services that are provided. So these are 2 different lines of businesses.
Assets under custody actually sit in a company which is different and assets under clearing sit in a company which is different. In combination, this is asset services business. The company in which assets under custody sit, we hold 49%. So we do a profit pickup. We don't show the revenue here. That revenue is lower. These are typically services-related revenue. It will be maybe order of magnitude, INR 30 crores, INR 40 crores, INR 50 crores a year. So you can do the calculation in terms of bps on assets on custody. In clearing, it's about 1.4% on assets under clearing, and that's what we show here.
Understand. So bulk of the -- I mean, all of the reported revenue comes from the asset under...
Reported revenue here, what you're seeing is all coming from clearing. Assets under custody and the profit from will be shown as a profit pickup in the main P&L. We can't show the revenue of that because it's an associate, not a subsidiary.
Understood. And that is about INR 30 crores to INR 50 crores per year?
It keeps ranging, yes, maybe maximum INR 60 crores, INR 70 crores every year and keeps rising with the increase in assets under custody.
And that's the revenue number INR 60 crores, INR 70 crores.
Yes, That's the revenue. Correct.
Understand. And on the assets and the clearing, since it's largely linked to what you mentioned, how do you -- what portion of it do you consider as annuity versus exposed to capital market volatility? And what are the underlying growth drivers for that business? Or is it very hard to forecast and it just linked to the capital markets?
So in a way, it's linked to capital markets, but it's not difficult to forecast. If you ask me to say, on a 3- to 4-year basis because institutional interest in India is on the uptrend. So we are seeing newer clients from newer countries coming in, register and start participating. So there is an increase in activity. So if you look at the last 10 years or last 5 years, the number of institutions that have come in, the number of -- so our revenues will not move up or down with the daily volume which they do and all that stuff.
It's more to how much exposure they want to take to India through derivatives. So that on a secular basis, if you are asking me, we are seeing a positive trend. The impact on that business can happen if, let's say, over a 12-month period, there is a reduced -- completely reduced activity in the Indian derivatives market or there is a sharp fall in yields, in interest rates that also the impact starts hitting you after 12 to 18 months because the way you structured the collateral, there is 0 impact for the first 18 months. So I think those are the things that can impact that business. If you ask me from a split perspective between annuity, non-annuity, I think 50%, 60%, you can categorize as a base level annuity that should continue to stay.
Understand. Understand. And one last question. In the wealth business, you report a brokerage revenue as well. Is this linked to products like, say, marketing debentures or any other placement of products? Or is this linked to the brokerage revenue that a typical broker would see from the equity cash or derivative segment?
The second category.
The next question is from the line of Sanketh Godha from Avendus Spark.
In the wealth business, what I see is that your AUM in net interest income has declined either year-on-year or sequentially. But if I look at the revenue, there has been meaningfully a strong growth either on year-on-year or sequentially. So sir, just wanted to understand that this net interest income growth is largely driven by our rate -- interest rate increase on the margin trade funding or loan against shares.
So what led to that growth is one -- first question I have. And in wealth, maybe if you can broadly indicate out of the total revenue of INR 76 crores what you made in MPIS, how much could be potentially annuity in nature, which is recurring going ahead also for the subsequent quarters? That's the first question which I have on wealth. The next question I have on the flows, which I'll ask after you answer this.
So on the interest income, Sanketh, simply put, there are 3, 4 factors which affect the overall interest income. One, of course, is the size of the book. Now what has happened in this quarter is that the average book was higher, but the closing book was lower. So because our book is not like a long-term loan, right? It's either ESOP funding or loan against share where people come in, go out. And typically, within ESOP also, we promote early selling because it's in the interest of the clients. We don't want them to hold their ESOPs on a levered basis on the hope of price increase because that's not in the interest of the client.
And there are 3 factors which affect our income, actually 4. One is the composition of the book. So composition keeps changing. It's between LAS, ESOP and, let's say, margin finance. And if margin finance goes up, our income will go up. Second, if your average book is higher, obviously, you will earn higher because the average book was higher.
And if your closing book is lower, that also becomes a positive impact because your expected credit loss gets reversed, and your processing fees gets upfronted because normally, when you book a loan, the processing fees is accrued. Let's say, the contracted loan period was 6 months and processing fees was, say, 50 basis points, you will accrue it over 6 months. But after 45 days, if the client sells his share and repays the loan, the residual processing fees comes in. So these 3, 4 things actually keeps the NII keep going up, down, up, down, up, down in that sense.
But is it fair to assume that -- because markets did very well in the current quarter, margin rate funding played a meaningful role?
No, no. For us, that's not a big component. I think the larger impact will come from -- so if markets do well, the positive to us is that people exercise their ESOPs more and sell them faster. So that gives you processing fees, brokerage and NII all 3 together, and that also has a positive impact.
Okay. And if you can maybe indicatively tell me the MPIS closer to annuity. How much is annuity and how much is transactional in nature?
That, I think I'll have to come back because offhand, I don't want to hazard a guess right now, but let me just look up if we have the numbers, give me 30 seconds.
Yes. If you can even give indicatively how it has trended compared to, say, last 4 quarters and in the current quarter. Just to show...
Trend-wise, I'll tell you. Trend-wise, it's on the upside because if now you look at the sales which we are doing, okay, in MPIS, more than 70% is now managed products. which means AIF, which means MF, which means PMS and insurance. Insurance is very small in terms of sales. So -- and all those 3 categories and within AIFs also, as a stated strategy now for us, Category 3 is far more important than Category 2 because Category 2 just gives you some little bit of upfront and then the trail is over the life of the period and most of the funds of CAT II are 7-, 8-, 10-year products, right, real estate fund, private equity fund. So the trail becomes meaningless.
In terms of sales, I can tell you our mutual fund, PMS, the sales numbers now on a quarterly basis, we do what we were doing in one full year. So at least in the coming year, the way we see, if we book, let's say, x of annuity in Q1, it should -- in my view, if we continue this trend, should become 3x by Q4. Currently, if I look at the overall, I think, MPIS number, I think more than 50%, 55%, 60% will be annuity, but we will have to confirm to you. This is just a rough cut calculation.
Got it. And the second question was that -- see, if I look at overall flows, the private have done very well. It's almost -- it's like INR 4,000 crore number, even if I look at active private. Just wanted to understand this trajectory, how do you see -- given this is meaningfully better compared to quarterly run rate of previous quarter -- previous year, how do you see this to play out? Is it -- I mean you yourself said that you won couple of 2 big families, which supported that number. But do you think such kind of deals will happen or this number should be toned down a bit for subsequent quarters?
See total last year, if you see, the net flows was about INR 11,000 crores over the full year in private. I think if we extrapolate INR 4,700 crores, it will go to some INR 18,000 crores. I don't think that should be the right approach. What you're saying is right, we should tone it down. Maybe order of magnitude anywhere between INR 13,000 crores to INR 15,000 crores. Essentially, 30% to 35%. Last year, we were able to do 40% of the opening book. This year, our opening book is around INR 38,000 crores and INR 38,000 crores or maybe INR 34,000 crores, so 40% of that. So anywhere between INR 13,000 crores to INR 15,000 crores is what we will aspire to achieve in the full year basis.
Got it. Perfect. And lastly, just on private again, on UHNI space, just wondering whether incremental client addition, which is happening, is it happening on advisory or still trail-based is the thing? Just wanted to understand if it is advisory, do you think the...
Like this INR 4,700 crores, which came out of that, at least 65% is between nondiscretionary and discretionary PMS. Now you call that advisory, we call that trail-based. It's all the same. Now in ARR, actually more than -- in private, at least more than 90%, 95% is managed products, in which we include advisory, discretionary, nondiscretionary, everything.
No, no. My major concern was that given incremental flows, if they come -- the way I tell is advisory. Whether you see that...
That pure advisory with some 5, 10 basis points, not of that variety, if that is what your question is.
Okay. So the yields around 90, 95 bps, what you indicated will remain in the private business. That is the point I wanted.
Yes, yes. That's what we feel.
The next question is from the line of Yash from Stallion Asset.
Congratulations for a great set of quarter. I wanted to understand that your asset services business is about 40% of your total capital markets revenue. And just sort of an internal benchmark if you have that over the next 3, 4, 5 years, you think we can -- this part of the business can sort of grow more stably and contribute to like maybe 60%, 70% of the overall capital markets revenue. How do you think -- how large can this business be?
So it is 40% of the business today. I think, yes, over a period of time, it can grow larger in terms of proportion. But even today, in terms of profitability, its contribution will be more than 55%, 60% of the capital markets business.
Right, right. So do you have sort of an internal benchmark that maybe by the next 3 years, we should have it like 60%, 70% in terms of revenue contribution or anything like that?
So, automatically, see, typically, I mean, unless both institutional equities and investment bank continue to grow the way they have grown over the last year, which we will hope. But otherwise, I think from a secular growth perspective, asset services, the probability is higher. And directionally, yes, it would become 60% of the revenues in the next 3 to 4 years.
Ladies and gentlemen, due to time constraint, that was the last question. I now hand over the conference to Mr. Ashish Kehair for closing comments.
Thank you, Deepika. Thank you, everybody. It was again a pleasure having you all here. Hope to see you again in the next quarter. Thank you.
On behalf of Nuvama Wealth Management, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.