Citi initiates coverage on Nuvama Wealth with ‘buy’, prefers it over 360 One Wealth – here’s why
Global brokerage house Citi has initiated coverage on AMC Nuvama Wealth Management with a ‘Buy’ rating and a target price of ₹4,110, representing approximately a 27% potential upside. Nuvama's strength lies in its multi-product and open-architecture distribution model in the wealth sector.
Global brokerage house Citi has initiated coverage on Nuvama Wealth Management with a ‘Buy’ rating and a target price of ₹4,110, representing approximately a 27 percent potential upside.
Nuvama's strength lies in its multi-product and open-architecture distribution model in the wealth sector. The company has a diverse customer focus, catering to Ultra High Net Worth Individuals (UHNI) through Nuvama Private and High Net Worth Individuals (HNI) and affluent clients through Nuvama Wealth. The company's extensive presence positions it well to capitalise on the increasing formalisation of managed wealth in India, said the brokerage.
Listed in September this year, the stock has risen over 20 percent since then. It has given positive returns in all 3 months, rising over 21 percent in October, 7.5 percent in November, and over 3 percent in December so far.
The stock hit its record high of ₹3,549.95 earlier this month on Dec 4. It has now advanced over 68 percent from its 52-week low of ₹2,111, hit on October 5.
In 2020, investment firm PAG picked up a stake in the wealth management business of Edelweiss Financial Services and announced the demerger and subsequent listing of its wealth management business, Edelweiss Securities. PAG owns a controlling stake of 56 percent in Nuvama Wealth.
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Citi informed that the company's valuation is based on a 22x multiple of the estimated earnings per share (EPS) for September 2025. It expects the firm to achieve an 18 percent EPS compound annual growth rate (CAGR) from fiscal year 2024 to 2026, with a significant 60 percent year-over-year growth anticipated in fiscal year 2024.
The capital markets business acts as a flywheel, providing synergies with the wealth segment despite potential earnings volatility risks. As an Alternative Investment Fund (AIF)-focused AMC, Nuvama is expanding with a robust product pipeline and numerous distributor tie-ups, it noted. Lagged impact of leverage benefits post expansionary initiatives and momentum in flows will support core earnings, noted the brokerage.
However, changes in AIF commission may have a dragging effect on earnings. Downside risks include rising competitive pressure in mid-market wealth and potential earnings volatility in capital markets, added Citi.
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Investment rationale
Diversified wealth play: Nuvama stands out as a diversified wealth player with a multi-product, multi-customer cohort strategy, leveraging its open-architecture-based distribution model in wealth management. Positioned strategically, the company is poised to benefit from the increasing formalization of managed wealth in India. Nuvama's focus on different customer segments, including Nuvama Private for Ultra High Net Worth Individuals (UHNI) and Nuvama Wealth for High Net Worth Individuals (HNI) and affluent clients, contributes to its sweet spot in the market, explained the brokerage.
The capital markets segment, encompassing custody and clearing as well as Investment Banking/Investment Advisory and Execution (IB/IE) activities (constituting around 20% of revenues), serves as a crucial flywheel for customer acquisition and retention. Nuvama's large scale, incumbency advantage, and established presence in a high-profile customer base provide a solid foundation for success.
Expansion: In expansionary mode, Nuvama is actively augmenting its human capital and expanding its geographic footprint in the HNI/affluent segment. Simultaneously, efforts to penetrate capital market customers in the UHNI segment are expected to sustain momentum in fund flows and new customer acquisitions. Revenue is forecasted to grow at an impressive 18 percent CAGR year-over-year from FY2023 to FY2026, with wealth revenue projected to achieve a 23 percent CAGR from FY2024 to FY2026, predicted Citi.
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Cost ratios: While cost ratios are anticipated to improve gradually, lagged productivity benefits in wealth management and improving operational metrics in the AMC sector will contribute to this trend. However, there is a need for careful monitoring due to rising competitive pressure in the HNI segment, which may impact talent retention and business expansion costs, it noted.
Premium to AMCs; discount to 360 One
Valuation-wise, Nuvama commands a premium compared to traditional AMCs due to its large scale and diversified multi-product distribution, fostering customer stickiness, pointed out Citi. Although there is a marginal discount compared to 360 One, this is mitigated by Nuvama's higher growth trajectory and operating efficiency levers, which counteract potential earnings volatility arising from Investment Banking/Investment Advisory and Execution (IB/IE) activities, it stated.
Nuvama vs 360 One
While Citi prefers wealth managers over asset managers, its preference amongst wealth managers remains contingent on:
(1) investment horizon (360 One will likely face marginal near-term pressure on cost ratios owing to the roll-out of the mid-market strategy while Nuvama will likely benefit from improving cost efficiencies).
(2) risk appetite (20 percent of Nuvama’s revenues are linked to investment banking/institutional equities and thereby subject to vagaries in equity markets).
(3) competitive pressure/growth (Nuvama Wealth will likely report higher AUM growth compared to Nuvama Private/360 One even as competitive pressure in the HNI/affluent segment is likely to be higher than the UHNI segment).
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Bull and bear scenario
The brokerage has a target price of ₹6,995 in the bull case scenario, indicating an upside of 123 percent, meanwhile, in the bear case scenario, the brokerage has a target of ₹1,755, implying a 44 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.
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