In conversation with Rakesh Rawal, CEO of Anand Rathi Wealth Limited

Create a diversified portfolio that aligns with your goals and risk tolerance based on a strategy and stick to it even in times of volatility, advises Rakesh Rawal, CEO, Anand Rathi Wealth Limited

Anand Rathi's consolidated revenue for Q3FY23 witnessed a growth of 29 per cent, while consolidated net profit after tax recorded a growth of 35 per cent as compared to Q3FY22. What were the factors which led to such healthy growth?  

We have delivered strong performance across all the vectors. Our AUM grew by 20 per cent YoY to Rs 38,517 crore as of December 31, 2022. This results from solid growth in our client base and net new money (net flows) we received from our clients. Despite the market volatility, our client base increased by 19 per cent to 8,202 active client families, and net flows for the quarter (Q3FY23) grew by 74 per cent YoY to Rs 1,241 crore. 

This growth speaks of the value that we add to our clients. Despite short-term volatility, the mid and long-term outlook for the Indian equity market seems highly promising. We offer wealth solutions to our clients from a long-term perspective, which has worked well to achieve clients' objectives even during volatile market scenarios. 

For 9M FY23, your Private Wealth business revenue registered a growth of 33 per cent YoY. How do you see this business segment performing in the next 2-3 years?  

Our approach for our client is holistic, uncomplicated and standardised. We don't follow a product-selling approach but a client's goal-driven process, which aims to achieve consistent return outcomes through a standardised investment strategy. Our entrepreneurial, collaborative work culture and training mechanism are critical factors for the growth and success of our business. 

We have grown at a CAGR of around 20-25 per cent in the last few years. The four engines of growth that will lead our way forward are in place - 1) Market returns on AUM. 2) Penetration in the existing 8,000+ clients' families. There is massive scope for increasing our wallet share. 3) Addition of new clients by existing relationship managers (RMs) 4) Addition of new relationship managers who will add new clients. All in all, with these four engines, to get a 20-25% growth in business is very reasonable. 

Can you shed some light on your Omni Financial Advisors channel business for the current quarter and how you see this business segment performing in the coming quarters?  

OFA vertical is a strategic extension for capturing the wealth management landscape. It is a technology platform for mutual fund distributors (MFDs) to service their clients and grow their businesses. This is a yearly subscription-based platform sold to 5,600+ MFDs, and these MFDs serve around 18.9 lakh clients. 

It is a white-labelled product for them, and they can do additional reporting to their clients in their name. It helps MFDs to acquire more retail clients. We have seen increasing traction in this digital product and believe that this will become big business in the long term.  

What is your earnings outlook for the upcoming quarters?  

For all three quarters of this financial year, we have reported strong growth upward of 30 per cent+ YoY for total revenue. Cumulative consolidated revenue for 9MFY23 grew by 32 per cent YoY to Rs. 412 crores and PAT by 37 per cent YoY to Rs 126 crore. For the first nine months of the current financial year, net client additions increased 40 per cent to 1,120 from 801 during the same period last year.  

Net new money received from clients for 9MFY23 stood at Rs 3715 crore a growth of 94 per cent. We are confident that similar growth will also continue for the current quarter. Also, we have made an upward revision in our full-year FY23 guidance. Revised revenue guidance is Rs 525 crore, and PAT guidance of Rs 165 crore for FY23. We are conservative while giving guidance and have been able to overachieve it in actuals.  

With the current rate hikes and volatility in the market, what is your outlook on the Indian equity market in the short to medium term? 

The current macro-outlook of India looks positive, with GDP growth projected at 7 per cent for 2022-23, driven by private consumption and investment. In the first 6 months, Real GDP growth stood at 9.6 per cent. So far, high-frequency data on manufacturing, credit growth and tax collection suggest a high probability of 7 per cent Real GDP for the FY being achieved. GDP growth for 2023-24 is projected at 6.4 per cent. 

In the last 10 months, RBI has increased the repo rate by 250 bps from 4.4 per cent to 6.5 per cent. The rate hike journey, which started on May 2022, was mainly made to tackle the inflationary pressure as CPI peaked at 7.8 per cent in April 2022. In the last 2-3 months, the inflationary pressure has eased. The November and December CPI inflation came below 6 per cent. 

With around 6-7 per cent inflation, nominal GDP growth would range around 13-15 per cent for FY2022-23. If the economy grows at 13 -15 per cent, corporate sales are expected to grow by about 13 per cent. As such, there is a high probability of profitability and equity markets growing at 12-13 per cent. 

In anticipation of a future rate hike, the 10-year Government bond yield also spiked and touched a peak of 7.6 per cent in June 2022, which is currently at 7.3 per cent. 

Recent data indicates that there could be a pause in the rate hike cycle. As such, looking at the long-term spread between the repo rate and 10-year G Sec, there is a probability of bond yields softening by 10 -15 bps from the current levels. From a valuation perspective, this would be positive for the Equity market as it allows the market to get a higher PE multiple. 

Secondly, corporate profitability and valuation impact the market in the medium term. The earnings growth so far for 9MFY23 has been around 7-8 per cent. We expect the full-year growth to be at 8 per cent and the earnings to grow by about 12 per cent next year. With an earnings growth expectation of 12 per cent and a PE multiple of 19x-20x, markets are currently fairly valued. 

Therefore, if you are looking at equities from a 1-year-plus horizon, then expecting double-digit returns from Equity looks like a reasonable expectation. Having said that, short periods of correction are very normal market behaviour. A 10-15 per cent correction at any given time should be considered an opportunity to build equity exposure per an individual's desired equity allocation. 

What are the new trends you've noticed among mutual fund investors? Also, how should retail investors use mutual funds to navigate the current market volatility? 

The mutual fund industry has witnessed a rise in SIPs over the years. However, CY 2022 has seen the sharpest rise from an average of Rs 11,000 crore per month a year back to almost Rs 14,000 crore per month as of date. Equities have become the best asset class to beat inflation. 

Out of the net inflow of Rs 51,717 crore, almost 40 per cent has been allocated to small and Mid-Cap funds. Small-Cap has a relatively better growth story than other categories, which is why the small-cap category has seen the highest growth of inflows. Sector funds also account for 15 per cent of the total net inflow. Also, multi-cap as a category has seen an 8 per cent allocation. 

Out of total funds in Mutual Funds, approx. 80 per cent is under active management only 20 per cent is under passive management. Portfolio managers still have the option to generate alpha over Nifty50. 

The best way to navigate volatility is to stay invested for a long time and invest via SIPs, irrespective of market level. Another way to navigate volatility through mutual funds is to focus on diversification via asset allocations by investing in a mutual fund in equity and debt with low correlation. 

You can also diversify your portfolio across markets cap to spread out the risk and minimise the impact of volatility on your portfolio. It's also important to consider your investment goals and time horizon and to avoid making impulsive decisions based on short-term market movements. Create a diversified portfolio that aligns with your goals and risk tolerance based on a strategy and stick to it even in times of volatility.