At record high! Nuvama Wealth jumps 24% in February; Citi sees further upside

After a 24 percent jump just in February so far, global brokerage house Citi sees the stock hitting ₹5,000 by December 2025. This comes on the back of its stellar December quarter (Q3FY24) results.

The stock also hit its record high of ₹4,468.55 in intra-deal deals today (February 19). It has now soared 111 percent from its 52-week low of ₹2,111, hit on October 5, 2023.

The brokerage has a buy call on the stock and has raised its target price to ₹5000 from ₹4,110 earlier. Nuvama is Citi's top pick besides 360 One.

"Nuvama’s stellar Q3 captures strength in operational performance and buoyant markets. Momentum in net flows led by continued client and RM additions, robust product pipeline in AMC, elevated client activity and new deal wins in asset servicing, market tailwinds in Investment Banking/Investment Advisory and Execution (IB/IE) and gradual improvement in operating efficiencies underpin strong profitability trends," said the brokerage.

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Multi-product model, resilient and sticky UHNI/HNI clientele, diversified revenues driving higher ability to absorb regulatory changes and higher bargaining power in distribution underpin constructive stance on wealth. Nuvama is placed in a sweet spot; wealth and alternate focused AMC scaling up and tailwinds benefitting capital markets, rationaled Citi.

The stock has surged 55 percent from its listing price of ₹2,699, in September 2023. Before the stellar performance in February, the stock had been flat in January, However, it rose 14.2 percent in December 2023, 7.5 percent in November 2023, and 21.3 percent in October 2023.

Earnings

In the December quarter, Nuvama Wealth Management's net profit almost doubled to ₹178 crore on the back of all-round growth in fee-based businesses from ₹90 crore in the same period last year. For the quarter under review, total income grew 45 percent to ₹842 crore from ₹582 crore in the same period last year. The company's expenses rose 21 percent to ₹328 crore from ₹270 crore a year ago.

Its Assets Under Management (AUM) stood at ₹73,855 crore as of December 2023, up ₹8,000 crore.

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Commenting on the financial performance, Ashish Kehair, MD & CEO of Nuvama Group, said, “The economic growth momentum for India has been strong in 2023, and our integrated platform captured many of the growing opportunities. In Q3, all our segments performed exceptionally well. In wealth management, our platform continues to attract talent, and we have further invested in human capital for growth. We deepened our presence in existing locations and expanded to new cities.

Heading into 2024, Nuvama believes the growth momentum will continue as India will reap the benefits of the reforms undertaken and its steady focus on business stability, job creation, industrialisation, and an expanding digital economy.

“We expect the rate of wealth creation will continue to outpace the economic growth rate, driven by financialisation and increasing penetration of organised wealth management. Our fundamentals remain robust, and our business is well positioned to continue to benefit from these tailwinds”, Kehair said.

Investment Rationale

According to the brokerage, Nuvama’s niche and dominant positioning in Ultra High Net Worth Individuals (UHNI)/ high net worth individuals (HNI), multi-product open architecture

product proposition, RM base augmentation, and geographic diversification are likely to aid medium-term flows. Flywheel effect from AMC and IB business augurs well, it added.

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The brokerage further pointed out that the profitability of the sub-scale asset management business is likely to increase as funds get deployed and new products are launched. The firm plans to raise funds from domestic investors and an off-shore family office in CY2024. The wealth businesses are likely to see gradual productivity improvement. On the flip side, moderation in markets can drive a decline in capital market margins (60-65 percent of profitability is driven by sticky asset servicing business), it noted.

Estimates

The brokerage sharply raised core PBT (profit before tax)estimates for Nuvama by 20 percent in FY2024E and 13 percent/11 percent in FY2025/26E; the impact of a high AUM base was also captured in the latter.

It also raised revenue estimates by 9 percent/4 percent/1 percent in FY2024/25/26E and taper down core cost ratio estimates by 380/335/390 bps in FY2024/25/26E. Despite the surge in overall business volumes, Nuvama continues to stringently manage its cost base. An increase in revenue growth encapsulates a higher AUM base and marginally higher yields.

The brokerage also remains conservative on IB/IE and asset servicing revenues (+9 percent/+2 percent YoY growth assumption in FY2025/26E).

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Meanwhile, it expects cost-to-income to decline 110/135 bps YoY in FY2025/26E to 57 percent by FY2026E (down 12 percent over FY2021-24E).

Bull and Bear Case Scenarios

The brokerage has a target price of ₹9,800 in the bull case scenario, indicating an upside of 134 percent, meanwhile, in the bear case scenario, the brokerage has a target of ₹2,100, implying an almost 50 percent downside.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decision.