'When RBI Increased Rates, Bond Funds Did Not Make Money': Anand Rathi's Feroze Azeez
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00:00Anand Rathi wealth, they came out with their Q2 numbers yesterday and again the numbers
00:06have been extremely stable, that kind of performance continues.
00:11So let's quickly switch over, let's bring on board the management Firoz Aziz who is
00:16the deputy CEO of Anand Rathi, talking to us about company's first quarter earnings
00:21of course and along with it Firoz you always provide us with nuggets with regard to how
00:26you are looking at themes and investing, so all of that should be a good chat.
00:30Let me first start off Firoz with your AUM, 57% growth, what in the AUM construct has
00:37grown best for you, just talk to us about what's doing well.
00:42I think like you rightly pointed out the AUM growth has been reasonably promising, 57%
00:47is good growth, having said which the more important barometer of how the business and
00:53my colleagues and all of us are doing together is the net flow that has been 5700 crores
00:59for the first six months, which is close to a thousand crores a month in six months, close
01:04to 6000 crores, I'm just rounding it off for better arithmetic or easy arithmetic that's
01:080.1.
01:090.2, 55% of our assets are in equity mutual fund, which implies that we have only collected
01:16intergenerational monies, we don't like to deal with clients who have temporary monies,
01:22so if they are intergenerational wealth, then since we are using the lowest risk equity
01:26participation security, which is mutual fund, 55% in equity mutual fund gives a fillip to
01:34the investor to at least get double digit returns to beat inflation, that's 0.2, 0.3
01:39that was 50% a year back and now it's 55%, so that implies that we have participated
01:45in the equity rally reasonably well without being circumspect of where the market is going,
01:50which is what the industry has done, right, we have tried to make sure that we look at
01:54earnings, we look at what kind of liquidity is there, what kind of broader market rallies
01:58are possible, what kind of domestic flows and that's where our bullishness on equity
02:01is not today, but has been post COVID August 2020 when we turned bullish and that's what
02:07our clients are reaping benefit of and the assets are 55% in equity mutual funds, clean
02:14equity mutual funds and then we have one fourth of it in structure products and then some
02:18portion of debt and another portion which is called others which is raw material which
02:24we bring on board to align to the three product classes which we believe in for efficiency.
02:32Right Feroz, now when I'm looking at AUM, let me try and break this up a little better,
02:38you've got 47,000 crore is what your AUM was same time last year, you're currently sitting
02:42at roughly 75,000 crore in AUM, 28,000 crore increase over the last year, talk us through
02:50fresh flows, you've spoken about last six months fresh flows roughly being 1,000 crore
02:54a month, talk to us about fresh flows versus what you've done for clients in terms of growing
02:59their money, just break that 28,000 crore for us.
03:056,000 crores is for this first half year, I think it would be 5,000, 4,500, 5,000 for
03:14the previous six months, so 47,000 to almost 58,000, 57,000, 59,000 has come because of
03:21actually extra monies collected and of course the last six months have been upbeat but I
03:27think like you saw that there's a 128% jump in our collections between the first half
03:35year of this year and the first half year of the previous year.
03:38To answer your pointed question, 47,000 to 75,000 will have 10,000, 11,000 crores of
03:43collected money and the rest of it would be marked to market which implies that almost
03:48out of 28,000 crores like you rightly did the arithmetic, close to about 40% is collected
03:54money, the rest of it is profits of our clients.
03:57So if you look at the profits being 15,000 and 16,000, that will give you a color of
04:02how satisfied clients will be because most of my competitors have told people to preserve
04:08money and have 50% of their money in debt which does not even beat inflation for a person
04:12who is rich, he does not need money for his child's education, so he can have equity proportions
04:18which are larger as long as it can withstand the low or high volatility in the interim
04:22which I think that's the purpose of my existence, to handle a person in the short term so that
04:28he can relish a double digit return in the long term.
04:32A little bit more on this Firoz, am I hearing it right, debt is not something you focused
04:36on especially over the last year or so, not added money there and despite rate cuts being
04:41on the annual, you're still not constructive?
04:46If I filter my assets, see we don't like to take assets which are short term, there are
04:51so many times when a client from his company gives us short term monies, we ask him to
04:56redeem it, we force him to take the money back because it's distracting me, this is
05:01not private wealth intergenerational.
05:03Now coming to your point of what's the opinion on debt, I personally think this opinion of
05:07rate cut is overdone because if you cut the clutter and go a little bit more deeper, today
05:13the 10-year paper of Government of India is 6.89, 3-month paper is 6.56.
05:21The difference between this is 0.33, okay, India's got never had such a flat end of the
05:27yield curve.
05:28RBI will reduce the short end of the yield curve but the long end has not gone up, so
05:32why should it come down, right?
05:34The gap between the 3-month paper and the 10-year paper for the last 10 years is 2%,
05:401.75% to be precise, so we have had the flattest yield curve, even if RBI reduces interest
05:46rates, bond funds will not make money because they didn't lose money when RBI increased
05:51interest rates and that's why I personally think this whole capital gain story in debt
05:56is not right because if you don't lose money, you don't make money in bonds and I don't
06:01think we are sitting at a 2%, if there was a 2% difference, if the short end was at 6.5
06:07and long end was at 8.5, that is normal.
06:10So then if RBI reduced rates, this 8.5 would have come to 7, 8.5 is already not the case,
06:16it's 6.89 as of today.
06:18So I personally believe that people are extrapolating a very common hypothesis that RBI will reduce
06:25rates, bond funds will make money, that's a wrong hypothesis because RBI increased interest
06:30rates, bond funds didn't lose money.
06:33Fascinating, and you've done, and I'll shift focus, as much as I'm tempted to venture in
06:39this conversation, I'll shift focus back to your numbers, you've consistently done 30%
06:44top line, bottom line, both.
06:46What gets you to do that?
06:48Is it just buoyant markets?
06:49What gets that consistency?
06:50Of course, market has been buoyant and your prayers have been there, so we have done well.
06:59But let me tell you that 20 to 25% is our guidance and we very firmly believe this is
07:06possible consistently, if not quarter on quarter, we will try quarter on quarter, but year on
07:12year 25% growth, 20 to 25% growth for the next 10 years, in my opinion, is sacrosanct.
07:18Of course, I'm telling you to my best ability of today's knowledge, I would attach a 90%
07:24plus probability to this event, knowing the business, whatever I know of, point one.
07:29Point two, if you look at this whole perception that financial services business is going
07:35to be doing well only when there's a tailwind, that's what we want to prove otherwise.
07:40And that's been our professional aspiration to create a market agnostic financial services
07:46business, which is tough to create, but we are trying to.
07:49Now let's assume, if you look at this journey of three years of being listed, we have done
07:5412 quarterly results.
07:56The first quarter from a market standpoint was minus 9.6%, which was the FY23 first quarter,
08:03which was June 22, when US interest rates went through the roof, nifty fell minus 9.6.
08:10The growth year on year for us, that quarter was 33.6.
08:14The second worst quarter was minus 4% of nifty, which it was FY23 again, but quarter four,
08:22there also we grew 26% on private wealth and 23.6% on a consolidated basis.
08:30So these are the two worst quarters of our listed existence.
08:33If you see the growth in those two quarters, that gives us more happiness than in a good
08:37quarter growing 32, 35%.
08:40So our professional aspiration is to build a market agnostic.
08:43And how is that possible?
08:44Like, which was your question, sorry for the longish kind of an answer.
08:48There are four engines of growth.
08:50One is God's gift, which is doing well for clients can increase the revenue because the
08:55growth of that 17,000 crores.
08:57If I make profits for my clients, my revenues grow.
09:00That's one leg of growth.
09:01The second is I have 30 clients per RM.
09:05So we have two, three, 74 RMs.
09:07That means I can handle 7,000 more clients without hiring a new one.
09:11That's the second leg of growth that is called capacity utilization.
09:14The third leg of growth is my existing 10,900 clients have almost a lakh crore outside.
09:20Once I do what I'm speaking, they start giving us money from outside.
09:25That's called penetration growth.
09:27That's the third cylinder of our growth.
09:29The fourth cylinder of growth is I have 400 odd people whom are apprentice who have been
09:34trained for two, three years to get promoted as new RMs.
09:37That's the fourth leg of growth.
09:39With these four mutually exclusive legs of growth, we believe and we pray to the Lord
09:44that our effort is good enough to grow at 20, 25% for long periods of time because 10,
09:4912% is implied growth in this business.
09:51Okay, a ferocious devil's advocate.
09:53Two risks that I believe could likely play out.
09:57Tell us if there are more.
09:58First is finding clients who can deploy that multi-generational kind of wealth to you.
10:03And second is people attrition.
10:05How large are these risks?
10:06Just give us perspective.
10:07I love devil's advocate arguments because that's where we improve from.
10:11So I'm very happy because that's where sometimes your risks occur to you.
10:15So you have a very, very valid question.
10:18One risk, of course, like you said, will I have clients expanding?
10:22In our opinion, there are about 9 lakh families who have greater than a million dollars of
10:27total investable surplus other than the home they live in.
10:31And that I think is an underestimate because India is a little unstructured market.
10:35So about a million people are there and I'm still 1% of the total audience.
10:40That's point one.
10:41So 99% of HNIs don't deal with me and they deal with somebody.
10:46So there is a lot of consolidation possible.
10:48Every one of these 10,990 clients whom I have, have at least 15 of my prospective clients
10:54on their phone book.
10:56Okay.
10:57If I have almost 1.5 lakh people, I know why are my 10,900 clients, I have to do justice
11:04to this 10,900 and do efficient finance for them to refer their friends without me asking
11:11for it.
11:12That's the pull strategy we are working on and that seems to be happening.
11:16That's why you see an exponential growth in the number of client families and quite a
11:21few of our clients today say, can you please come to present to 10 of my clients, 10 of
11:25my friends.
11:26They call them, call us on their birthdays and say, these are my friends.
11:30I want to give them a gift by giving you, giving your service to them.
11:34This was the latest.
11:35So, so that's where we are client acquisition will happen from.
11:38And if we do well, we will get clients eternally.
11:43Of course, we will have several challenges.
11:44We will navigate those challenges.
11:46We have had challenges in the past as well.
11:48So we will navigate that.
11:49The second risk we see is people's attrition.
11:53Okay.
11:54So if you see in the people's business, your plant and machinery, I am the plant and machinery.
11:58My colleagues are the plant and machinery, we are people.
12:00If you see this ideally has not happened in the financial services industry that it's
12:05been 15 months, we have not lost one RM in regret attrition.
12:10Any RM greater than 40 crores, if he leaves us or she leaves us, we call it regret attrition
12:15and it is five consecutive quarters that's zero.
12:18Okay.
12:19And this zero is a message.
12:22Most people who have joined hands with us are not monetarily motivated alone.
12:28So if there's a guy who wants 50 lakhs, if he gets a one crore offer, he still doesn't
12:32bring collide.
12:33He says, I don't, money can't buy me.
12:35That's why you see 15 months of zero attrition and we pray to the Lord that it remains that
12:39way.
12:40But we take pride in near zero or zero attrition for 15 consecutive months.
12:46So let me look at it over 10 years, Firoz, very impressive.
12:50At 25% growth from the 75,000 crore in terms of your current AUM, you will roughly be at
12:58six lakh crore or maybe six and a half lakh crore in the next eight odd years, right?
13:03Not taking the 10 year period, eight and a half odd years.
13:06And you, you're, you're yielding at 1.1 to 1.2%.
13:10Is that how one should look at it?
13:14I think you should be a research analyst more.
13:17I think that's precisely how I would, in a simplistic fashion, look at my business.
13:21Of course, there are risks which will unfold.
13:24There has to be capability in the professionals and the grit to be able to solve those with
13:30a positive bent of mind.
13:32And we've seen several of those risks coming and we've tried to navigate when the wolves
13:36are knocking on the door.
13:37Having said which, like you rightly said, 26% in 10 years means 10 times in 10 years.
13:44So 25% would mean six lakh crores and, and 1.1, 1.2, we are possessive about two numbers,
13:5340% PBT and 30% PAT.
13:59Anything more than that.
14:00We don't like economies of scale bringing us operating leverage.
14:03We like to reinvest in the business.
14:05So if I'm getting to 45% kind of a PBT, I would like to strengthen several departments
14:11which requires strengthening to be able to be poised to handle a six lakh crore AUM.
14:16So that's why you would see 145 research people in spite of selling only three kinds of products.
14:23So to answer your pointed question, you're absolutely right.
14:26AUM results in an yield of 1.1, 1.2, yield results in revenue, revenue results in 40%
14:34PBT, 40% PBT results in 30% PAT.
14:37So this is how one should look at and multiply it with whatever PEs the market is trying to give us.
14:44The market for us currently gives you a PE of around 64 times and therefore, if this
14:51growth were to continue, will look seriously impressive.
14:55Thank you so much for that conversation.
14:56Always a pleasure to chat with you.