Nuvama Wealth Management Limited (NUVAMA) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Nuvama Wealth Management Limited Q3 FY '25 Earnings Conference Call. [Operator Instructions] Please note that this call is being recorded. I now hand the conference over to Mr. Ashish Kehair, Managing Director and CEO. Thank you, and over to you, sir.

Thank you. Thank you, Sujal. Good morning, everybody. Welcome to the earnings call for quarter 3. I have with me Bharat, Group CFO; and SGA team, our Investor Relations adviser. So like every time we do, I will summarize the last quarter and maybe give some outlook or some guidance on how we are looking at the future ahead, and Bharat can then detail the results. And then we can move to the questions that you may have. Pleased to share that we've had a successful Q3 and a very good 9 months. Client assets have grown by about 36% year-on-year. Revenues until Q3 grew by about 45%, and profits for Q3 was about INR 252 crores and for 9 months, INR 731 crores, recording a growth of 76% year-on-year. I would sincerely like to thank both our customers for their trust in us and our teams for the relentless commitment. I think that's the dual force behind these outcomes, which continues to be superior to most of the market. On macros, I think it's a very interesting day to talk about it. A lot of uncertainty is now coming about, but I think things will settle in maybe next 20, 30 days. I'm fundamentally an optimist. I believe that the India long-term structural story is fully intact. These bouts of volatility will give opportunities to people to participate in the market and everything finally settles down and things come back to fundamental. Short term ups and downs are going to remain, but I don't see anything getting impacted in the long term. And I think this kind of a setup is where the diversified business model, which we are blessed to have, comes into play where you have multiple levers playing out. And if one thing sort of undergoes some moderation, the other picks up. And that we have seen play out for the last 3 years and more so in the recent quarters. We continue to remain bullish on our core Wealth and asset management and all the ancillary services around it. I think if those 2 grow, which are the still to grow given where the Indian fundamental story is, businesses like Asset Services and capital markets will also thrive. Coming to the results and more so on our strategic priorities and what we've been focusing on. I think beginning of the year itself, we had highlighted that there are 3 or 4 key levers, which we are going to drive for this year. The first being scale and growth across both our Wealth businesses, asset management businesses, Asset Services. And happy to say that we've really played that out well. We've increased the capacity and geographic expansion. In both our Wealth businesses, we've also gone offshore. And in Asset Services, we've added significant number of clients over the last year or so in order to make the business more granular. Second was capital efficiency. When we started out, we had clearly said that we want to be best-in-class ROE, and we continuously looked at opportunities to deliver this superior growth but also improve the usage of capital. And deliberately, we calibrated our loan book because we wanted to make it undergo a change such that it becomes a reasonable ROE business. We've now reached that state. I think we can now increase the loan book from here, more like what our peers are doing. Revenue quality and granularity, this was one of the key agenda points for us, where we said we will now focus on annuity and ARR assets in private and managed products and investment solutions in Wealth. And as I said, increase the number of clients significantly in our Asset Services business so that it becomes granular and extremely resilient. And last was leveraging technology across the board because if you're aiming for this kind of a growth and capacity expansion and you want to maintain your handle on efficiency and productivity, I think technology becomes a key player. On all 4 parameters, we are quite happy on how the progress has been made. And I think when we can talk about it more in detail if you have Q&A. Coming to specific businesses. Nuvama Wealth, as I said, our focus continues to be managed products and investment solutions. We've reasonably grown the flows there. The net new flows for the year -- for 9 months now is about INR 5 crores plus, which is more than what we did for the full year. It's grown by about 46% year-on-year if we compare the same period. Also, on an annualized basis, it's growing at about 35% on the opening base, which I think is reasonably robust. And within this, also the constituent of managed products is now increasing. It used to be around 45%, 50%. It's now nearing 65%, 70%. So that was one key element. Second, as I said, tech. We have significantly invested in technology and continue to do so in this business. And I've been speaking about one of the solutions, which we have launched earlier, the portfolio solution. I think that's one of the kind in its industry. We have done second pioneering development in this space. We've created a product called Nuva.AI. It's an AI-based training solution because we are hiring in such large numbers, we figured out that a classroom trading solution becomes extremely suboptimal to deliver the kind of objectives, which we want to do. So we proprietarily developed a solution to deliver training, which is one-on-one to our relationship people. And I think there's a significant amount of acceptance by the relationship people on the field. On the loan book, as I said, we deliberately calibrated it because we wanted to improve the quality of the book, which we have now done. You will see that there is a dip in the NII in this business. That is temporary. I just wanted to highlight because of 2, 3 reasons. One, I'll take this opportunity to talk about it. We've moved into what is called self-clearing in the Wealth businesses. Earlier, we used to clear. For the Wealth management clients, the clearing used to be done by the Asset Services division. But for 3 reasons: one, operating efficiency because operations of one team and the other team had to coordinate. It led to a lot of suboptimal processes. So operating efficiency, margin efficiency for clients and capital efficiency for the Wealth business. For 3 reasons, we have shifted it to Wealth. Now the clearing is done by the Wealth business itself, which -- this movement was done in this quarter. And to do this movement, we had to borrow about INR 800 crores extra for about 45 days, which was a temporary borrowing, which at the end of December was paid back. And the cost of that borrowing has had some impact on this NII. So if you see there's a INR 10 crore gap. Out of this, INR 4 crores comes from there. And given the volatility in the quarter, there was some INR 2 crores, INR 3 crores cost on the MLD hedging side. I think these are the 2 large things. And of course, the average loan book itself was down by INR 100 crores. So I think out of the 2, 3 factors, 2 are temporary, and we will see the margins come back in Q4 for this part of the business. On Nuvama Private, again, focus remains in the annuity products, the ARR sales. And if you look at the numbers, it's about INR 8,000 crores again for 9 months, which is exceeding what we did for the last full year. This growth is about 88% year-on-year. And again, on the opening base, about 35% annualized. So robust capacity expansion here also goes on, though we prefer to not be mindless in adding RMs because of the price point. And I think the volatility in the market now will be of some help because people will understand that the -- at every price point, it doesn't make sense because it takes enormously long for the relationship person to break even and puts a lot of pressure on the individual himself and also on the system. But we've added now -- for the last 1 year, we've added about 11% in terms of capacity. We've -- now are fully functional on the offshore side. Our first location, DIFC is live. Business has started. Revenues have come -- started coming in. Clients have started joining in. So I think that's a reasonable progress. Maybe in another 6, 9 months, we'll breakeven there. Self-clearing, I've already spoken. On asset management, again, net flows remained strong. We had about INR 1,200 crores of net flows in this quarter. We closed our -- we did our first close of our commercial real estate fund at about INR 1,700 crores. Once we make 1 or 2 deployments, we will start raising funds again. We target to achieve about INR 3,000 crores in that fund. On the private equity front, we returned some money. We did some sales of Ola Electric. And also, we distributed capital back, which is why there's a reduction of about INR 200 crores in the AUM there. But we have launched our fourth series of the private equity fund, which should do the first close in about 2 quarters. So again, fee-paying AUM will get back -- added back. Public markets, we have grown 3x in the last 12 months from INR 1,600 crores to about INR 5,000 crores. Some of our funds have become largest in the category in their segments and are always in the top 2, 3 in terms of performance. We now have products across the risk spectrum. Starting from a capital protected product, an absolute return product, long short, Flexi Cap, mid and small cap. So across the risk spectrum, and we've also added gift as a location for getting offshore money, and we are expanding on the external distribution side. About 20%, 25% of the funds that we raised in our public markets come from external distributors. We are adding more external distribution and hope to see that expand further. You would have seen one of the announcements made that we are making an application for license -- mutual fund license from SEBI. This is for the special investment fund. This is a new category, which has been rolled out by SEBI, which is the SIF, which is a INR 10 lakh minimum ticket size. And that will allow some of our strategies, which we now deploy on the AIS side, like long short and absolute return. As of now, SEBI's intention is to allow these strategies on SIF. And if this fund has the taxation structure, which is similar to MF, and not like AIF, which means taxation only on redemption, then I think this vehicle will become extremely efficient for clients. Hence, we want to apply and be one of the first ones to launch this under the structure. Coming to Asset Services. Basic feedback from most of you, we have now segregated Asset Services from core capital markets. And over the last 1 year, many of you have individually come and told me that you need to segregate that out if you have done. And I think, fundamentally, we also agree that the nature of the business is closer to Wealth and asset management. In my view, everything is correlated to the market from the capital markets. It's just a degree of correlation changes and Asset Services is, I would say, closer. And hence, we thought we'll segregate it out. And the reasons are basically the growth of that business is more linked to the growth of Wealth and asset management business in the industry. The revenue stream is more recurring, less transactional. Assets are more sticky, less volatile to move. I think these are the fundamental reasons why we moved. On how we did in that business, assets under custody and clearing have grown by about 57%. For the full year now, we are at INR 1.3 lakh crores. And as I said earlier on, that we have significant number of clients. On the domestic side, now our market share happens to be 22% of all incremental AIF and PMS registration. We are able to on-board them. And internationally, obviously, in the client segment of our choice, we have a dominant position. Coming to the core capital markets now, institutional equities and investment banking. I think equities saw a bit of a tepid quarter with this Q3 because of the fall in volumes by about 10% in the market. And I think we've seen about a similar fall. Market shares have been intact. We still have a 6.2% plus market share in institutional equity, which is industry-leading. On the IP side, on the other hand, I think that this quarter was reasonably robust. Our capital market income dipped because there was a large transaction on M&A in Q1 and Q2. I think some impact came from there. But if I look at stand-alone IB BAU, I think Q3 was actually better than Q1 plus Q2. In the market, there were 57 deals that happened across IPOs and QIP and a fundraise of about INR 1.45 lakh crores. We were able to capture a market share of 18%. Out of that 18%, about 11 deals and INR 25,000 crores. So I think from -- and most of it doesn't get built in the same quarter. Yes, we have a spillover of billing of Q1 and Q2. But I think the activity of Q3 was significantly higher, which doesn't get fully built. So you will see the flow-through coming in Q4 and ahead. And even the deal pipeline remains significantly strong even now. I think there is some bit of market volatility and price correction that could lead to postponement of some issues. But once it settles down, I think people will get on with it. This is all from my side for now. I will pass it on to Bharat. He will take you through the detailed numbers across all the metrics in the businesses, and then we can move over to Q&A.

Thank you, Ashish. Thank you so much for setting up the context. Good morning, everyone, and warm welcome to all the participants on the call. See, before we jump on to the numbers, you know that the last quarter actually see a lot of volatility as well as driven by the macro and the geopolitical events. And within India, if you look at, there are a lot of mixed expectations on the results and similarly, the implementation of key regulatory changes, more specifically, say, SEBI, F&O regulations and all. I think that all kept the market on its toes during the last quarter, and we saw a lot of volatility. And we also saw some bit of hit on our broking revenues also, which is driven by the regulatory changes. So that is also built-in into the performance. Overall, if you look at the company level performance, I think happy to share that all our businesses during the quarter has delivered a continuous performance quarter-on-quarter, whether it was a net new flows for Wealth business, private business or asset management, whether it was launching new strategies in our asset management business, adding new clients on the Asset Services side, market share on the IBI side. I think all in all, these were the business numbers, but even if you look at the qualitative parameters in terms of actually getting more people on the RM capacity increase investing actually into our enterprise tech stack, all those things were also in place. I think from a quarter perspective as a management, we believe that this has been a good quarter for us. Overall, number-wise, as Ashish also covered in the beginning, the client asset has actually grown by 36% year-on-year, and we are now at around INR 4.5 lakh crores, which is a very respectable number. Revenue continued to grow strong at 30% for the quarter at INR 723 crores, and that's, as I mentioned, was done by all the businesses. So it was not just one business, which was pulling up the numbers. Total cost is at INR 390 crores or so, which is a 19% growth, but that's mainly driven by the people which we have added in the last 12 months or so, we have added around 270-plus RMs. So I think that cost is coming in, but that's a good cost to invest. However, I would want to highlight that our OpEx on a quarter-on-quarter basis has always been like flat. We are at whatever, INR 90 crores, INR 95 crores a quarter of OpEx. But we are looking at investing into our enterprise tech upgrade. So we may see in the coming quarters, there is some increase in the OpEx. But I think that's like investing in tech is never a wrong idea, I would say. So to that extent, it's fine. Overall cost to income ratio continued to improve. We are at 54% compared to 59% last year, and the PAT has actually grown by 43% for the quarter and 76% for the full year at INR 731 crores. Last year, full year, our profit was around INR 597 crores, and we are now seeing in the first 9 months, we are at INR 731 crores. Ashish did touched upon the capital utilization. Our ROE for the quarter is 32%. I am happy to share that for 9 months also, it is at 32%. So it's not about this quarter, we saw some ROE uplift, it has been consistent at 32% for the 9 months. Moving to specifically to the businesses. Again, Wealth, our focus area within that our Wealth segment, the AUM has crossed INR 1 lakh crore with a growth of 38%. NPIs, which is our key focus area, has actually grown by 34%, and the assets under management is now around INR 29,000 crores or so. Good sustained net flows, we are at INR 5,800 crores for the 9 months. We did almost same number for last full year. So we did INR 5,800 crores now and INR 5,785 crores something like for the full year FY '24. And again, the NPIs contribution has actually gone up to 90% in the first 9 months of the financial year. So that's a good sign. Capacity, we are at around 1,257-odd RM. There is one more number, which I would like to specifically highlight for Wealth. So quarter 3 revenue has actually grown by 24% and 9 month has also grown by 24%. So it's like a very consistent performance. If you look at quarter or you look at the 9 months, a 24% consistent growth is a very reassuring number. Cost-to-income ratio at 67%, same as last year despite of adding a lot of new capacity. If we remove that capacity cost as well as their revenue, actually, the cost-to-income ratio would have improved by 300 basis points or so. So I think it's all, I would say, a good investment in the right direction. Operating PBT has actually grown by 19%. So I think Wealth ticked all parameters in terms of revenue growth, in terms of capacity addition, tech also, as Ashish covered, as well as on the PBT growth. Nuvama Private crossed INR 2.1 lakh crores and grew by 24% in terms of the client assets. ARR asset continues to grow much faster at almost 38%, 39%. The ARR net flows is actually INR 8,000 crores for the first 9 months, which is significantly higher than what we did in the full year last year. Again, we continue to add a number of families. We added around 20% families, when it is compared to year-on-year or 150-odd families in the quarter. So I think that's a good sign of adding new families or the new clients in the private segment that's working well. Q3 revenue was around INR 153 crores. So now if you look at Wealth has touched almost like a INR 70 crores per month run rate and private has touched a run rate of INR 50 crores. So I think that has come to a level where it's reasonably like assuring thing that at INR 70 crores or INR 50 crores, say, give and take INR 120 crores, INR 130 crores a month number coming from Wealth business is a good way to look at it. Overall, you will see that the revenue growth for this quarter over previous year was a little lower. Nothing unusual, what happened till last year same quarter. Our sales, the gross sales was more heavy towards the AIF 2, where you have a little bit more upfront of 1/3 commission. But now in this quarter, we have more of sale of AIF 3, which is more trail-based. So if you ask me, it is basically the revenue and the profit cash flow timing issue, nothing structurally has changed. For private, we should rather see quarter-on-quarter. So quarter 2 versus quarter 3, the growth is around 6%. So we have actually implemented that change in the system, and that's why the quarter-to-quarter growth is more relevant versus compared to Y-o-Y growth. Otherwise, I think this business is shaping up pretty well, and we are all in the right place. Asset Management, Ashish covered a lot of things about it in terms of AUM is touching around INR 11,300 crores. INR 1,200 crores of net flows. We also to share that in the public market, we picked up actually INR 725 crores, and commercial real estate, INR 675 crores. But we have actually first time distributed from our first crossover 3 funds around INR 225 crores, which has been distributed. Launched our Flexi Cap and did our first close of the CRE fund. Otherwise, things are in the phase and SEBI and MF application, anyways, Ashish's covered in a lot more in detail why this is relevant for our business. Asset services, I would request people to look at our investor deck, we have actually added a new disclosure or new insights about the business, why this is more recurring in nature and relatively less correlated to the capital market movements. I think it's a pretty reasonable articulation of how the business is actually working and what are the various levers in the business. I would request the team to look at it. Capital Market, again, we discussed it's been steady for us. And I don't know whether Ashish covered or not. But our market share in terms of our equity IPO has actually moved double. So if you look at time database from current -- from calendar year '23 from a 9%, it has moved to actually 18% in calendar year FY '24. And I'm happy to share that we have secured #1 rank in terms of our public debt issue. I think as an end up to my commentary, I would say that quarter 3 has been pretty happy for us. And now open for Q&A.

[Operator Instructions] The first question is from the line of Prayesh Jain from Motilal Oswal Financial Services.

Great set of numbers. A few questions. Firstly, on Wealth. Could you give me some understanding on the breakdown of your managed products category and what is the kind of share of insurance or some other products, the breakdown will really help us understand as to how things are moving. And the yield pressure in the Wealth segment is primarily just because of NII going down, right? Nothing else to be kind of looked back there. So that's on Wealth. On private, again, the -- again, we did the breakup -- breakdown of AUM with respect to especially the ARR AUM that is where -- from which segment does it come through? That will help us understand better. And again, the yields have been declining consistently. It's not that just the recent quarter or anything else, but how should we look at it from a structural standpoint, whether the yields have to be assumed at the current levels or it can see further more decline. Bharat did allude to it, but your view going ahead is something that we'll look here. And also, there is some weak net new money in this business, right? And last question would be on Asset Services. What is the kind of split between domestic and international year? And is there any concentration risk in the international piece? Those would be my questions.

So I'll start with your first one, Wealth managed products. Basically, out of the net new money that is coming in now, Prayesh, about 65%, 70% essentially pertains to PMS, AIF and MF. Balance, yes. So in terms of the MPIS flow, MPIS totaled about 65%. And out of the total MPIS AUM, I think now about 60%, 65%, 70% is now managed products. And when I -- when we say managed products, we don't include insurance in it. Insurance falls in the bucket of investment solutions. So fixed income, MLD unlisted and insurance, that is the other bucket. So 65% to 70% now flows is now sitting in managed products. And within that, given the segment, I think the yields would be more on a trail basis between 1% plus because all PMS AIF CAT III would be at that range itself. On the yields falling from, whatever, 85 to 83, I think there's nothing structural. There is just one element, which we want to keep saying on the Wealth business is that there is a component of broking assets, where MTM and the revenue doesn't actually move in tandem. If you see last 18 months fresh, INR 35,000 crores of broking assets have become INR 70,000. So literally doubled. But revenue of broking doesn't move like that. And in this quarter, specifically, MTM is 7% positive, but revenue is down on broking because of whatever has happened in the market through to label, F&O, consolidation, all reasons put together. 7% positive MTM and minus 20% and yield impact is just 2 bps in a quarter where your NII has been because of the self-clearing and all. So if you remove the impact, our actual yield this quarter is 90 bps. So there is nothing structurally wrong. So Q4, you will see things coming back. Private ARR breakup. Again, out of the ARR flows, actually, everything is managed products only. And around INR 42,000 crores is our ARR AUM. Out of that INR 12,000, INR 13,000 advisory and rest happens to be about INR 2,000 crores of loan and rest is managed products. And yield there. Yes, this quarter, we saw about 700 basis points -- sorry, 7 bps of fall. 7 bps of fall, out of that, again, 4 bps comes from self-clearing, so that will reverse; about 1 to 2 bps from MLD. So I think that will also change. The other -- the third bucket, which is the proportion of CAT III AIF is going up, that is structural in nature. So if you ask me, I think 80 to 85 basis points should be the sustainable yield. And I think Q4, we should come back to that level. Asset Services, domestic international breakup remains the same. Like I said last quarter, 25-75. And internationally, there's always this concentration. But the good point is that the top 5, 7, 10 clients. See, it's not a business where you have thousands of clients, right? There are only limited set of clients, let's say, 100, 200 internationally. And the top 10 keeps changing. So that is the good part which you always want to see, that you are not necessarily dependent on just 1 or 2, it keeps changing depending on how they're deploying their strategies, how they are bringing in capital into the country. So that's where we are in terms of Asset Services.

Just one question there on net flows on the private side. There are some...

Net flow on the private side, sorry, I missed that. Transactional, there is a negative. There is 1 transactional client, which basically booked out, but hardly any impact on revenue. But on the ARR side, if you see the flows are consistent, and this was a one-off transactional outflow, which happened for 1 client because I think they are relocating and they're taking everything to the Middle East.

The next question is from the line of Lalit Deo from Equirus Securities.

Congratulations on a good set of numbers. Firstly, so in the clearing business, we saw some yield pickup in this quarter. Now that would be majorly on account of that movement of self-clearing, but I wanted to understand more on that and like how that yields have increased? Secondly, sir like you mentioned that we are moving -- we are building a presence in our Dubai and Singapore. So just wanted to know like how many RMs over there we have recruited and what is the growth plan for the next 2 to 3 years?

Okay. So self-clearing, basically, as I said earlier, the clearing of Wealth business used to happen through our Asset Services division. Now we have moved to those assets, which were sitting, have been transferred back to Wealth. So you will see that assets under clearing, there is a dip, right? About INR 10,000 crore assets moved. Now the earnings, which the Asset Services division used to make on these clients, was lower than what they do from their other clients. Because these were largely where clients have only minor clearing services and all were there. Hence, on the remaining book, the yield has gone up. It's just mathematical. It's not that there is something different that has happened there. And on our offshore plants, DISC, as I said, is now fully live, functional, business happening every month, revenue coming in. At an RM cost level, we have broken even. Of course, infrastructure costs and all, another 5, 6 months, we should now break even. And then we have about 3 RMs there. We may go to 5, 6 over the next 12 months, depending on how it shapes up. Singapore, we are just in the process of thinking through on how we want to do. I think we'll first want to focus Dubai and take it to the next level and then maybe add Singapore because the competitive intensity in Singapore is significantly higher, and the cost of people and the time taken to breakeven is longer. So we may want to prioritize Dubai more than Singapore at this point in time.

Sure, sir. Sir, just 2 things. So like as you said that there has been some yield pickup. So like going ahead, should we see that yields in the clearing business to be in that range of in excess of 150 basis points? Or should that should revert back to 130, 140 basis points of yield?

No, it should remain at this level. It should -- it will not revert back unless there is a structural change in the interest rates and all, which takes about 12 to 18 months to take impact.

Sure, sir. And sir, just one question on the transactional income in this particular quarter. So like we have seen some good pickup over there in the Nuvama Private business. So like what led to that?

So largely 2, 3 things. I think there is -- given that there was volatility in the secondary market, I think activity in the unlisted space picked up. We've not done credit downselling still. I mean I think that is also one thing which is happening in the market in a big way. Direct transactions in the markets are increasing as a trend is what we are seeing. And I think we just participated in a few transactions, and that led to that income. It should become par for course in my view, in the Wealth management space because more and more clients, in addition to putting money in funds, also want to do direct deals and direct transaction and unlisted as a space over the last 3, 4 years has grown significantly.

The next question is from the line of Abhijeet Sakhare from Kotak Securities.

My first question is just to get some clarity on the asset plus mix for both Wealth and Private divisions, especially pertaining to the ARR assets between how much would be equity listed, unlisted and rest of it?

So ARR assets in Private largely for us is not equity. We've just, over the last 8, 9 months, 12 months, started doing more PMS and AIF. So our impact, therefore, on the positive and negative MTM is lower than rest of the street. It's more non-correlated asset classes. So it includes real estate funds, private equity funds, infrastructure funds, credit funds, and now listed equity funds also getting added there. So that's how the split is. In terms of Wealth, I think it will be more 50-50, so 40%, 50% would be listed equities and balance would be noncorrelated asset plan.

Got it. And secondly, a bit of a qualitative question. So we have -- we operate across the spectrum, right, Asset Management, Wealth and Capital Markets. So is there a way to quantify what would be, let's say, synergy benefits? Or what would be the likely sort of franchise value in terms of having everything within the firm? And how much extra revenue does it create for the overall firm?

Interesting question at this time. So I think over a period of time, the value gets derived. The way we look at it. It's like a flywheel. The customer can enter in any part of the business. So for example, and I'll give you a theoretical construct and then tell you practically where we have and what we have achieved. So customers could enter into a fund of asset management and could be a pre-IPO fund or a private equity fund. Technically, you have a shot to becoming an investment bank for the IPO. And at the time of monetization, you can get access to the Wealth for the promoter. And then if you have an H%I in an affluent division, you can also explain the services to the senior management of that company. So that's just one construct. There are many such use cases like Asset Services and Wealth, Investment Banking and Wealth. I think around 10% to 15% of the revenue is what we think one can add by bringing out these synergies across the board, and that's a straight through path to the PBT because there's no extra cost apart from the incentive or the incentive you will provide for creating this ecosystem That is the only extra cost. But otherwise, it's a straight-through path to PBT. I think that's where we have reached right now. And the areas where we have sort of tried to focus more is between the investment bank and private division. I think that is where the highest level of synergy lied and some, let's say, in the mid-cap equity research and Wealth division and so on and so forth. But it's an ongoing process. It's easier said than done because people of different businesses take time to understand the nuance of each aspect and why they should do and why it is beneficial for them. But once you taste success, once any individual tastes success, then we've seen that it becomes widespread in that division and then it follows through from there.

The next question is from the line of Dipanjan Ghosh from Citigroup.

Just a few questions. Now we have seen 1 month into the quarter, in terms of activity levels on the Wealth side, both on incremental flow on the ARR side or on the transactional pipeline, how you see churn kind of play out, if you can give some color on that? Second would be on the transactional income that you are booking in your -- both Nuvama Private and maybe a little bit of in the Nuvama Wealth segment also. In terms of quality of the underlying structures or product that you're really down selling, if you can kind of break it up or maybe give some color so that we can get some understanding of how this should be on a more of steady-state run rate basis. And lastly, if the markets were to remain sluggish for, let's say, a prolonged period, what sort of expense levers would you really have to kind of manage your margins? Or do you expect the margins to sustain at current levels?

So the first one, I don't know whether we are allowed to answer, but I'll still do that. We are not seeing any significant negative impact either in the transactional flows or ARR -- both in both the Wealth businesses, at least in the month of Jan. I think where we are seeing impact is, of course, broking volumes, which has come off, but I think Jan, again, is coming back in that sense. But in terms of the other areas of business, right now, at least, we have not seen any negative impact flow through. In terms of transactional income, let's look at Wealth first. So basically, there are 3, 4 categories, which fall into transactional income; one -- or there, we don't call ARR transactional, but I'm saying unlisted fixed income MLDs. Largely, it will be these 3. And it will be dominated by fixed income. I think more than 80%, 90% would be fixed income. And between unlisted and fixed income and MLDs also, to some extent, I'm saying not -- unlisted is sporadic in that business. It's not like a BAU. And -- but fixed income is BAU. Like every month -- and fixed income for that client segment is a significant part of their asset allocation. And as we all know, that mutual fund fixed income does not attract flows from individual clients. The large part of mutual fund fixed income, 85%, 90% still comes from corporates and institution. So the fixed income allocation of individual sits in bank deposits, that remains for the large opportunity, and we tap it through direct fixed income. So it's fairly steady and consistent in that sense. When we come to Nuvama Private, it's a combination. Again, fixed income is a big component there followed by, I would say, a bit of MLDs, followed by a bit of direct deals, direct deals more in the unlisted space, very little maybe in the credit space. If we find a transaction in some fund, which has an overflow and passes our diligence, then we may offer it to our clients. So largely this. But between these 4 opportunities keep coming and we keep repeating that. In terms of sluggishness, I think if there's a sustained and prolonged sluggishness, there are discretionary expenses, which we have, like there are conferences, there are events, there are marketing events. I think, in general, the travel cost comes down, variable expenses, variable employee expenses. So those would be like at least 20%, 30% of the cost. And today, if I look at our variable cost and fixed cost, our available cost is actually at the same level as fixed employee cost, given how we are performing in the business on the overall level. If you are saying that everything becomes sluggish and prolonged, that level, of course, comes down. So there is a 20%, 30% play that is available. And when I analyze our cost to income today, let's say, we are sitting at 54%. And this Dipanjan, now I am taking a 3-year view. Now we are clear that in 3 years, Wealth will move from 65% to 60%. Asset management, which is now at 127%, will at least break even or become like 80%, 90%. Asset services at the same level. And I think even if capital markets deteriorates by 20% from here, given how our business is proportioned, our cost income will remain at 54%.

Got it. Got it. Just one follow-up, if I may. In terms of the RMs that you have added or the productivity pick up that should play out over near to medium term. Now obviously, on a low base, you're currently operating at a close to opening AUM, which is significantly strong, like north of 30%, as you mentioned. How do you see that really changing as the business scales up and also, the productivity levels pick up? I mean, how these 2 things really work in parallel?

I think -- I don't think this to slow down significantly unless we meaningfully reduce capacity addition because right now, if you see in both the businesses, the productivity of new people has just started to play out. It's not even play out. Like in the Wealth business, if I look at our RM cohorts, more than 40%, 45% is less than 1 year, right? Now 45% of people less than 1 year are doing, let's say, less around 1x or less than 1x. When they move, and I'm saying there will be attrition. So even if 50% of that moves to more than 3-year bucket, that's like a 4x jump. So in both the businesses that is yet to play out, which is why we keep saying that there will be a cost to income advantage when this capacity starts adding over the next 3 to 4 years. And maybe, yes -- and in 2, 3 years down the line on an opening AUM, we may not get 30%, 35% of incremental flows. But between mark-to-market and flows, I don't think that to come down below 25% on an overall basis.

Got it. So if I understand correctly, you're saying that the AUM growth even 2, 3 years out should be 25%, assuming mark-to-market is more steady and normalized?

Correct.

The next question is from the line of Mohit Mangal from Centrum Broking Limited.

So first is in terms of the RM attrition. So I mean, in the last call, you said that you have RMs in the big league, which actually produces maximum revenue for us. So just wanted to know that in quarter 2, we lost around 2 RMs. So how has been the movement in that category in Q3?

I think Q3 was actually 0 loss.

Yes. Secondly...

And when the volatility increases in the market, the RM attrition also keeps coming down.

Understood. Second is in terms of the cost-to-income ratio, right. I mean, you just said that the wealth will come down from 65% to 60%. And we have also seen that the competition is ready to pay more. So are you a little confident that we will be able to retain those RMs with the lower cost or in the sense, the same cost? Just wanted to understand that.

So again, let's segregate both the businesses. And also, you have to understand that when you say pay more, it always means fixed costs, right? And what people actually make is a combination of fixed plus variable, and variable is largely a function of how much monetization opportunity a platform can provide. And all platforms in Wealth Management are not equal because of the number of product, access to opportunities, access to in-house products, access to investment banking deals, institutional equity block deals, everybody doesn't have all this. So the ability of the RM to make money on this platform for their clients is significantly higher, which basically ensures that they end up making a higher variable. And once you have spent some amount of vintage on a platform, to go out and to recreate it, it takes time. And also you will see that movement of people, when it happens from one place to the other, actually performing people move less. It's underperforming who move more. And performing people sometimes move for change in role, change in position or some significant opportunities. It's not that they keep jumping. So large part of the attrition noise is actually not in the performing bucket in the Wealth Management industry. And we also face that challenge. When we go out and we want to recruit, it's not easy to get performing people even from a moderately successful platform.

Understood. And any -- I mean, change in the fixed cost to variable cost component? Any change in the formula for that for RMs? Or it has remained same?

Largely same. Nothing, no change.

The next question is from the line of Vivek Ramakrishnan from DSP Mutual Fund.

Congratulations on great performance. My questions were on the loan book only. I mean you had said it was calibrated. But actually, if I see the loan book has been relatively stable, given the market conditions. So I wanted to know in terms of calibration or better quality of loan book, what have you done? Is it just more granular in nature? And how do you expect to grow this? Is it the number of clients because the market remains a volatile thing?

You have to understand our loan book. It's not necessarily margin trade financing, which is linked to the levels of market and market activity. We have loan against shares. We have ESOP financing, we have loan against AIF funds, which typically Wealth clients take for either leveraging and improving their returns in those funds, or for temporary liquidity. Margin trade financing is a small component of our book, which is more correlated to the market. What we have done is that, in some cases, like in our ESOP loans or loan against share, people used to -- I'll just take one specific example, and that will give you a sense. Like people used to borrow against their ESOP and then sit on it. And for a year, 2 years' time, we thought essentially that in a rising market, that was an okay thing to do for the client. But given where we are right now, it may not be very wise to be leveraged and hold on to your ESOP when valuations are sitting at this level. So that was one point of view, which was client related. And therefore, we said that we want them to borrow, yes, fine, exercise, but then sell and diversify. So we changed the structure of our rates. We've made it extremely competitive less than 30 days and then increased post 30 days. So that induced the behavior of people moving out and moving into other assets. So the book remains same, but more people borrowed. And your ROE also improved simultaneously in the process because you have a processing fee. On selling, you have brokerage, which if you annualize 12x, it increases. So that gave us the capacity to access more clients with less capital and overall led to an improvement of ROE in the business. Now with this in place, we can expand our book size. We can go to more corporates. We can add more clients. We can allow more people to borrow. But we don't want to -- when I said we can grow the loan book, I want to make myself clear. We don't want it to become some dominant contributor of our revenue. But like 1 year, we have kept fairly steady. We can now look at it increasing with the size of our -- scale of our business and not just remain flat.

The next question is from the line of Ashish Agarwal from Oaklanecapital.

Yes. Sir, I have a question on the ownership. So what is your view on PAG's long-term ownership in the company? Also how does PAG add value to your company? Basically, you have mentioned that it adds strategic value. So how does it add value? So yes.

What was your first question?

Sir, what is your view on the PAG's long-term ownership in the company?

Okay. So see, PAG essentially is a fund, right? And it's like Blackstone, Advent. So they have -- and this is largely an alternative investment fund and private equity happens to be one of their key areas, and India now happens to be one of their key sort of investment thesis. And we are a reasonably successful company in their portfolio. The fund life is up 2030. But any private equity fund always enters into an asset with a view to exit at a point in time. So it's never like permanent. So they will explore opportunities in their normal course of business. We wouldn't know more than that. In terms of strategic value, see, I've always maintained that when a private equity actually enters into an asset, it's clearly entering to create value in different components of the business and take the multiple, higher; valuation, higher. So in a sense, it's completely aligned with all the shareholders. And the way they add value is they will find pockets where -- are there businesses where your operating efficiency is low, your capital efficiency is low? Or are you not looking at some strategic target market, which you should be looking at? How do you bring synergies between various components? So it's more strategic and a business owner kind of a mindset. They have extreme amount of learnings because they've invested. And I would say any large private equity invests in so many businesses across so many markets that they are able to see some mistakes, which typically managements make who are in their business and they're able to point it out and help you clear that and help you grow faster than the others. I think that's one. And also the focus on governance and relationship with stakeholders, like lenders, rating agencies and all, I think those are the things which bring an immense amount of help in having a large [indiscernible] back in private equity as your promoter.

Okay. Just one more question is that what is the time frame that you look to break even the asset management business?

As I said, if we don't load in our company, we'd load allocated costs equally to all businesses. If we remove that, they are breaking even, even now. But with that allocated cost loading, I think by the time we crossed about INR 20,000 crores, so maybe another 12 to 15 months.

The next question is from the line of Sanketh Godha from Avendus Spark.

Sir, we see that you added almost 600 families in 9 months in ultra H&I space. And if I do 9 months net flows figure, it is INR 7,300-odd crores. Sir, just wanted to understand, this INR 7,300 crores is largely driven by mining the old 3,600 families? Or the 600 actually have added much to numbers or not? And if they have not, then how do you expect it to play out in subsequent quarters or years, in that sense? And I think it's a similar trend I see in the Wealth business, that families additions are there. Just wanted to understand the waterfall, whether it is more driven by families addition or client addition? Or is it mining of the existing customer? If you can give a waterfall in that thing, it will be helpful to understand how it works.

Typically, Sanketh, it's a combination of both. And in the Wealth business, for example, we've added about 15,000 families in the quarter and maybe 75,000 in the year. But out of that, only 10%, 15%, 20% will be relevant. And the contribution into net new money, 30%, 40%, 50% will come from, let's say, the new family and balance comes from the old, and even from new. Actually, we'll also share this data, I think going forward, we'll look at how we can share. The new family typically, when they come in anywhere, whether it is Wealth or Private, it doesn't happen that you get 100% of their investable flows in one go. In some cases, it may be a possibility, but more often than not, it starts with a product and then it keeps adding, keeps adding, keeps adding. So it is not fair to assume that if you add 600, their entire investable surplus will come to you. I would say maybe 20% would come now and then it keeps adding over the following years. So depending on year-to-year, the mix will keep changing. I think 30%, 40%, is safe to assume, would come from new clients and balance from mining of old clients.

Got it. Perfect. And second question, sir, is to understand both in Wealth and Private, how much of our revenue concentration or AUM concentration is linked to MLDs? And if there is any specific -- I mean, basically, just wanted to understand MLD's concentration into the entire revenue pie of ours. If you can give that breakup in both...

Less than 1%, I mean hardly anything. I mean our MLD sales total would not be more than INR 50 crores, INR 60 crores a month. I mean we -- because we don't actively encourage MLDs on our own book, we are actually bringing that book down because we don't want to have the hedging risk. And second, we don't pay significantly on that as a commission because we want to keep cost of borrowing down. So not more than INR 50 crores, INR 60 crores, and even if you take 2%, 3%, hardly 1%, 2% of our revenue would come from MLD.

When you say 1 percentage, is it MLD of your own [indiscernible] or is it...

Before the tax change. Sanketh, before the tax change, it used to be reasonable. But our own MLDs, I mean, it's not a significant revenue provider to us.

Got it. Got it. And sir, the reason I asked this question is that in one of the questions, you said that in MPIS net flows, 65%, 70% is [indiscernible] and mutual fund and rest 30%, 35% is insurance fixed income and MLD. So is it fair to assume it is normal...

So that MLD would be, let's say, of other issuers who still are issuing some, but that also will not be big. Like in our fixed income, more than 90%, 95% so we include MLD in fixed income only. More than 90%, 95% is vanilla fixed income. MLD. MLD, now I think across the market, except maybe 1 player, everybody else, MLD has come down significantly, only 2 players. I think one, we all know and the second one is an unlisted wealth management player. Otherwise, across the board, MLD has come down significantly post the tax change.

The next question is from the line of Nishant Shah from Millennium Capital.

I just have one clear question to ask. You mentioned in your opening remarks that there may be some postponement of flow activity or deal activity. And earlier in the call, you also talked about like how January has been relatively steady. Do you mind just reclarifying this part again, like do we see some postponement of flows given capital market activity slowing down? So not a lot of promoters unlocking value, not a lot of ESOPs getting any cash. So does that kind of like reduce flow activity until the markets kind of like settle down a bit? Or how should we kind of think about flows going forward? Medium term, I take your point, like it's probably relevant, but like more in the 6 months' timeframe.

So as of now, actually, Nishant, we are not seeing. We were discussing amongst ourselves that logically, this could happen because prices have come off very sharply. So maybe people who wanted to do QIP or IP or may want to wait but the filings are still going on at the same pace. I mean, our teams are saying that, that has not come down. People are saying that, okay, valuations were significantly higher than what we had thought earlier. Now it looks more reasonable. We want to go ahead because our plans have not changed. Maybe some private equity funds who want to exit through IPO, they may want to delay, because for them, it's not necessarily related to plans around their business. It's more maximizing the IRR. And if that they can delay by 1 month or 2 months, it may be okay, but that also they're not stopping the filing. But on the promoter side and ESOP and cashment and all, we are not seeing any change as of now. It's just -- I am just saying that if it becomes prolonged, that is one area that can get impacted. But if you're asking me on actual activity side, are we seeing that change? As of now, no.

Understood. And second question was on just your clearing -- F&O clearing business. There's been a slew of kind of like regulatory changes, but not a lot of like real impact on the premiums traded. So how is that business kind of shaping up? You mentioned -- last time we have spoken, you had mentioned that you have a long pipeline of new clients, hedge funds that you want to add as well. So any outlook that you can give for, say, the coming year for that part of the business?

Outlook, actually, we don't give. But all I can say is that from active -- 2 things, right? One, of course, the premium levels are back. And I think January, I was reading one of the reports of one of the analysts in the call only that both for BSE, NSE, even the premium turnover is back. But for us, actually, the premium value matters, and that is reasonably in time and new client addition this -- and I'm not talking small clients. These are large, $1 billion clients. They have not stopped activity, either taking offices on lease, racks on lease, hiring of people. So I can only say that the momentum or the activity, we have not seen a slowdown. And when we spoke to them, again, they said that look even after all this, India remains, within Asia, the next largest profit pool is 20% of India in the derivatives market. So it is a long time away that we will go away from here. Addition is only happening. And many participants globally have still not come. They are still looking [indiscernible] in India. So I am not actually sensing a slowdown in activity there.

The next question is from the line of Vivek Gautam from GS Investments.

Just wanted to know about the -- your statement, you said that the coming quarters will be better. What could be the reasons for that? And how is the opportunity size looking for market in terms of the volatility, which is now [indiscernible] Indian market?

I think coming quarter, I said will be better in 2 things. One was the yields in the private should come back to the 80, 85 bps thing and NII income in the Wealth Management business because both of which underwent a depression due to the same reasons which were temporary in nature. So that will reverse. In terms of overall activity, I think institutional equity volumes is the only place where we are seeing some impact. Other than that, largely things remain to be in place. I don't think we have an impact on the business. But yes, we have to be watchful of the global situation. I mean there is a significant change in leadership in the U.S. [indiscernible] is coming out with tariffs and other things, which have a bearing on their inflation, which means it has a bearing on their interest rate, which means it has a bearing on their currency, which basically has a bearing on everybody in the world. And how that plays out, how each country reacts and what it does to the emerging markets, I think there are too many factors to be considered to be able to give a calculated call on how it will go. All I can say is that activity levels of clients have not gone down. And we are not seeing that this negative chatter or sentiment playing in large parts of the business, except broking volumes where there has been an impact, but I think that will get covered up with the positive activity in other areas.

And how much of the broking contributes to our business? Because I believe most of your offline brokerage is now shifted.

See, total, if I look at our overall revenue, our institutional equity revenue would be in the range of 12%, 13%. And within Wealth Management, if I look at broking, it's less than now maybe again 12%, 13%. So -- and if you see a 10%, 10% fall in both, you are actually seeing a 2%, 3% change in revenue.

The next question is from the line of Anirudh Agarwal from Valuequest Investment Advisors.

Question was on the lending business. So if you could just talk about how much capital you've allocated to the lending side? And what are the current ROEs that you're making? So you spoke about improving the ROE profile of this business. So where is it now? And what is the target ROE that you would be comfortable with in the lending side?

So the way we look at lending is not actually a business, it's a product, actually nothing, neither broking nor lending. Everything is a product because your end client is same. And overall book size is about INR 5,000 crores, and it's split across largely 3 products; ESOP financing, loan against securities. I'm saying securities, not shares because it includes everything. And third is your MTF. MTF out of this overall INR 5,000 crores would be more or less around 20%, which is people buy and invest, 80% is around above two. And ideally, the way we look at this is that this is not the only product a client should be consuming for us because if this becomes the only product that the client will consume, then at an ROE level, you will always be inferior because you are lending to the super prime client at the finest possible rate against the best available collateral, and there has been no credit event for the last 10 years. So you cannot hope to make a large ROE unless you leverage 7x, 6x, which we don't do. We run an overall book at a 2.5x leverage. So therefore, your ROE actually comes from doing other activities and other products with the client, which will be, let's say, some buying, selling, broking, some wealth management. So if you put everything together, the wealth management whole cluster ROE is now upwards of 22%. We were sitting at 16%, 17% a year back. We are now upwards of 20%, 22%. And I think that 25% is a level where we can then say, it's good enough from there, you can keep on expanding the uses of capital and keep the ROE impact and drive more growth. So that's how we look.

Great. Second question was on the MPIS piece in the Wealth business. So the incremental growth that we've seen in this quarter, is that also largely on account of increasing PMS, AIS, MS? Or there has been some activity on fixed income MLDs or insurance in this quarter?

So insurance is not significantly high in this quarter as compared to previous quarters, but fixed income is high. And so it's a combination of all. So your MS, PMS, AIS, that trail keeps adding and of course, fixed income was high. Only out of those 3, this kind of an impact cannot come in the quarter. So it has to be both. I think Q4, we will have insurance play coming in because largely, Q4 traditionally has been big on insurance for everybody.

Okay. And there is any indication of the surrender value regulations change on the insurance front? Any change in commissions, et cetera, on that front?

Not for us, clearly, because our persistency ratios were best in class in the industry. We are actually saying that we want to have a positive impact of this change because we are one of the few which -- where the insurance company doesn't have to worry because of the surrender charge change.

Ladies and gentlemen, due to time constraint, we will take that as the last question. I would now like to hand the conference over to the management for closing comments.

Thank you. Thank you once again for sparing your time. I think we've had a decent quarter. Now we'll focus on Q4 and see you again after 3 months. Thank you for coming, again.

On behalf of Nuvama Wealth Management Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.