Prudent Corporate Advisory Services Limited (PRUDENT) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Prudent Corporate Advisory Services Q2 FY '26 Earnings Conference Call hosted by Equirus Securities. [Operator Instructions] Please note that this conference is being recorded. This conference call may contain forward-looking statements about the company, which based on beliefs, opinions and expectations of the company as on date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. I now hand the conference over to Mr. Lalit Deo from Equirus Securities. Thank you, and over to you, sir.

Yes. Thank you, Anjuti. Good morning, everyone, and thanks for joining the call. To give a brief update on the 2Q FY '26 results and address investor questions, we have with us from the management of Prudent Corporate Advisory Services Limited, Mr. Sanjay Shah, Chairman and Managing Director; Mr. Shirish Patel, CEO and Whole-Time Director; Mr. Chirag Shah, Non-Executive Director; Mr. Chirag Kothari, CFO; and Mr. Parth Parekh, Head, Investor Relations. We would request the management to start with the opening comments, post which we can open the floor for Q&A. Thank you, and over to you, sir.

Thank you, dear. Thank you. Good morning, everyone. I extend a warm welcome to all of you joining us on Prudent's second quarter earnings call. Thank you for taking the time to be with us. I hope you would have the investor presentation handy with you, which has been uploaded on the exchange yesterday. So, please, when I'll start talking about and we will give you the commentary, I'll refer to the various slides. So let us begin with the Slide 45. So this slide shows how our AUM has moved during the last quarter. So if you look at on this slide, on the left-hand side, it's a comparison of daily average AUM for first half of FY '26 with our current AUM. During the first half, we earned revenue on a daily average AUM of about INR 115,600 crores, while our current AUM stands at about INR 127,000 crores when I'm talking to you. So that's an increase of about 11%, which gives us a strong momentum as we enter the second half of the current financial year. On the right-hand side, we have quarterly average AUM trend. The average AUM for the quarter we close to INR 119,000 crores. This number excludes the Indus AUM, which was integrated in last week of September. We will start earning on that from October onwards. Our quarterly average AUM grew by 17% year-on-year and 8% quarter-on-quarter, reflecting steady business momentum. Now turn to Slide 46. This slide shows the momentum in our equity AUM on a both year-on-year and quarter-on-quarter basis. Starting with the year with a year-on-year view on the left, our equity AUM grew by 13.2% during Q2 FY '26. It moved from about INR 103,950 crores in September '24 to around INR 117,650 crores in September '25. That's an increase of nearly INR 13,700 crores. This growth was driven primarily by strong net sales. Despite a negative mark-to-market impact, our retail investors continued their systemic investments with consistency. This highlights the resilience and confidence of Indian retail households. Another encouraging aspect we would like to highlight is our mark-to-market impact was negative by 1.4% compared to 6.2% decline in NIFTY 500 in the last 12 months. This reflects benefit of rupee cost averaging during the volatile but range-bound market as well as an important role played by our distributor partners in fund selections and asset allocations. Coming to quarter-on-quarter view on the right-hand side, equity AUM grew by 3.3% during the quarter. This was driven by strong net sales of INR 3,600 crores and the addition of Indus AUM worth INR 2,050 crores. The key highlight here is that this was one of the strongest net equity sales quarter in the prudent history. So now please turn to Slide 47. So this slide highlights our SIP performance. As of September 2025, our monthly SIP book stood at INR 1,085 crores. We have added about INR 210 crores over last 12 months. This highlights the resilience and continued growth of our SIP franchise. Our market share has improved by 10 basis points from 3.4% in September '24 to 3.5% in September '25. We aim to reach around INR 1,200 crores in monthly SIP flow by March 2026. Now let us move to an important slide, which is Slide #49 of consolidated financials. So this Slide 49 outlines our consolidated financials. On the mutual fund side, our quarterly average AUM grew by 8% sequentially, while mutual fund revenue increased by 9%, it's driven by stable yield and the benefit of an additional one day in this quarter. So as you remember, because of one day, our revenue has gone up by roughly about INR 3 crores, and that is the reason the revenue increased by 9%, while the average AUM grew by 8%. The heartening aspect is that despite a range-bound market, our quarterly average AUM grew by 19.8% on a half yearly basis. During the same period, mutual fund revenue increased by 18.4%. Marginal difference between AUM and revenue growth on a half yearly basis is primarily due to impact of that book repricing, which has started happening from August of last year onwards. Now I'll try and touch base the important aspect of insurance front. So, on the insurance front, our revenue grew by 11.5% sequentially, driven by strong traction in fresh premiums. Retail health face premium rose 33% year-on-year with the book now at INR 162.5 crores. You may notice a sequential dip in the insurance yields. However, as highlighted by us in our March quarter call, we at Prudent recognized the insurance revenue only upon confirmation from the insurers. Consequently, around INR 3.5 crore revenue of earlier period was recognized by us in Q1 of FY '26, leading to a temporary base effect. Adjusting for this, yield remains stable sequentially and the current quarter's yield provides a more representative view of future trends without expected impact due to GST-related changes. So now let me touch upon the impact of GST in the insurance segment. To be very honest, clarity is still not fully emerging. A lot of discussions are happening with the insurance companies. So I'll just share what the situation was during the month of October. November is not over yet and the discussions are still ongoing. If you split the insurance business into life and health, GST impact has been quite different in both segments. In life insurance, out of, let us say, INR 100 of premium, which we collect, almost INR 30 of the business got impacted by GST. That means roughly 30% of my life business saw an 18% cut in revenue because of GST, which has been transferred to us. On the other hand, in health insurance situation is exactly reversed. For every INR 100 of premium, which we have collected, INR 70 got impacted by GST, while remaining INR 30 was not affected. But again, this was the position in the month of October. Final picture, the actual revenue impact and how arrangement will finally settle, we will be able to tell you only at the end of this quarter, which is after October, November, December is over. However, I thought I'll try and address it is an important part, which is I think the -- what is happening on the GST front. Now let me touch base another important point, which is regarding the revenue from nonfinancial product, and that also grew sequentially. However, on a year-on-year basis, decline was primarily due to the absence of liquid loan income in the current fiscal. In the previous fiscal, we earned INR 6.9 crores from liquid loan, out of which INR 6.2 crores was recognized in the first half itself. Consequently, this base effect will now taper off in the second half, and we expect a healthy year-on-year growth trend to resume on this line item. Now I think let me try and address the commission and fee expenditure also. So on -- coming to commission and fee expenses, we have seen an increase of 10% compared to 8.9% growth in the revenue, primarily due to an additional trail commission provision. This provision is made based on the net sales achieved by partners during the fiscal year. This scheme was introduced by us in August, September last year. And as a result, provisioning in the first half of FY '25 was lower by INR 4.1 crores with the majority of INR 19.1 crores was the -- while the majority of INR 19.1 crores, which was the full year provision was booked in the second half. Now for the current fiscal, we expect a similar total provision with INR 3 crore booked in Q1 and INR 5.2 crores booked in Q2. The incremental INR 2 crore provision in this quarter has temporarily lifted the commission growth relative to the revenue. That said, we expect lower commission provisioning in second half compared to last year as provisioning is now more evenly phased throughout the year. Now coming to other income, which is the treasury income. While our operational profit grew by 7.3% sequentially, it did not fully reflect in overall profit growth due to lower treasury income. Mark-to-market losses on equity portfolio and lower yield on bank term deposits during the quarter led to partial reversal of earlier gains, creating a temporary drag on the overall treasury income. So during the quarter, there are two factors which has impacted profitability, lower other income and the recognition of an additional trail commission provision. This both put together is amounting to INR 4.3 crores. If we adjust this, then our profit growth has been broadly in line with our revenue growth. Now let me try and touch base the very important point, which is the recent announcement about the SEBI, which is a draft consultation paper. So touching upon the SEBI's recent consultation paper on mutual fund, particularly the proposal impacting the total expense ratio. The first point is about the revised expense ratio, which will now be exclusive of all statutory levies, including GST. Earlier, only AMC's management fee attracted GST over and above year. Everything else was considered inclusive of GST. So if let us assume that I was earning 1% from AMC, that 1% was including GST, meaning my actual income was 85 basis points and 15 basis points went to GST. Under new structure, my rate will be 85 basis points, exclusive of GST. So I'll invoice GST on top of that and still effectively, I earn 1%. So it's a revenue neutral for those who are registered under the GST, but a big advantage is that it removes the earlier anomaly where a GST registered distributor on less than an unregistered one. This creates a level playing field and help us attract smaller players to join the prudent platform. So even though it's neutral in revenue terms, it's statistically a huge benefit for us. Second point is the removal of 5 basis points of exit load, benefit of which has been there since 2012 for all open-ended schemes. SEBI has compensated slightly by increasing TER in first two slabs up to INR 750 crores by about 5 basis points. But overall, the industry impact will still be a reduction of about 4 to 4.5 basis points on the TER because of this 5 basis points, which has been removed. Third point is on the brokerage cost. SEBI has proposed reduction on brokerage on cash transactions to 2 basis points and 1 on the derivative side. Currently, we are of the view that AMC is paying roughly about 5 to 6 basis points. So this could mean an overall impact of 2 to 2.5 basis points, assuming onetime portfolio turnover ratio for the entire industry. So putting all this together, the exit lower charge and broker reduction, total impact on the TER side should be in the range of 6 to 7 basis points. This impact we assume that this impact would be shared by everybody in the value chain, be it the institutional brokers or RTAs or AMCs or even to the distributors also. And since it affects everyone and whenever we always say that whenever the impact is transferred to the distributors, I'm sure it will be transferred to everybody. And in that situation, we'll also be in a position to share this with our distributors. But just a quick reminder, this is just a draft paper. SEBI has invited feedback till 17th of November, and there is a good chance that some relaxation may come either on the exit load side or on the brokerage. But whatever happens, I think it will probably try -- it will dilute the impact only. That's why I thought I'll try and touch this point to highlight what is changing, where the impact lies and how it could actually turn out to be positive for us. Now let me also talk about the ESOP plan, which has been announced by us very recently. So we have granted 130,945 options to 388 employees. On the day of announcement, option value per share was approximately INR 542 as per CA certificate, which will be amortized over a period of next 12 months, equally each quarter. So we expect a total P&L hit of about INR 7.10 crores, which will be booked under the share-based premium -- share-based payment expenditure under employee benefit expenses. Finally, to conclude, we have successfully completed the merger of Indus acquisition. It's a very highly cash accretive addition to our platform, powered by 15 experienced relation managers under a seasoned business hit. It is expected to deliver annualized mutual fund commission of about INR 22 crores to INR 23 crores and a cash profit before tax of approximately INR 15 crores. We continue to see a growing interest from distributors seeking alignment with scaled and technology-driven platform to ensure business and service continuity for their clients, a space where Prudent is well positioned and open to explore strategic opportunities. Our treasury corpus currently stand at INR 480 crores provides a robust war chest to pursue select organic and select inorganic opportunities and that are strategically relevant and value creative to us. With that, I would now like to open the floor for Q&A.

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

Sir, firstly, a broader question, rightly towards the end of your opening comments, you mentioned about distributor addition and you've added almost about 1,000 distributors in this quarter. Now how is the landscape changing on the ground for addition of distributors? Because what we are hearing is there is a high competitive intensity to acquire distributors from many players. And there they are sharing a much higher number in the first year from a commission perspective. We are hearing numbers as high as 80%, 90% in the first year as well. So is that the landscape changing materially? And how do you see this going ahead?

Shirish?

So, definitely, I think as we discussed earlier, I think there are a few more platforms have entered in the industry, and there could be the competition to the distributor entitlement. But on a positive side, I would say that more and more people working to get more distributors to the mutual fund industry, that is a positive thing. But on existing mutual fund distributors, the competition will increase. That is also we have to accept. Two things I would say here. One, more and more people will communicate the advantage of platform. Earlier only two major players on the platform side were communicating the advantage of working with platforms versus AMC. Now at least six, seven people will communicate the advantage. So more and more people MFDs go towards the platform. So that is a positive platform will compete. So I don't think that there is a big major impact on our recruitment side. To give you the number, I think last entire year, we recruited almost 4,800-plus new MFDs or ARN holders in our city and which was one of the highest in our history. So that says that in spite of increased competition, the number of ARN holders getting registered with Prudent and working with Prudent has not come down. Even if I talk about this financial year, YTD, we already have recruited close to 3,100. So proportionately, we are much ahead of what we did last year also. So in spite of increasing the competition, more and more people are joining prudent platform. Of course, I think competition will make the case of working with platform stronger and stronger. So, yes, I think we are watching them. But as of now, I think we are not seeing any impact.

And my main question around that was the sharing of commissions with the distributors, whether you would also have to kind of look towards what the new players are kind of giving the sharing commissions with the distributors? And would that mean some pressure on your profitability going ahead?

So, if you see, they are there in the market for almost more than 1.5 years. Since beginning, their commercial sharing is higher than what we offer. Last 1.5 years, we have not changed our strategy to increase our yield. Of course, I think that might be the pressure on a few smaller distributors getting attracted with the higher commission. But as of now, we -- because of the competition, we have not seen any impact on our yield currently. So that is it. As of now, we are not thinking of changing our strategy.

And is it fair to assume that your sharing, which was slightly elevated and you explained that there was some impact in this quarter, it will normalize to something like 60%, 60.5% -- 60% to 60.5% from Q3 onwards.

As Sanjay sir was communicating -- yes, Sanjay? [Foreign Language]

No, I think sharing you are talking about 60%, 60.5% is not the truth. I think we are sharing roughly about -- our weighted average sharing is in the range of 67% to 68% in the indirect channel. And there is a directional also. So probably if you look at -- you just look at the mutual fund piece only, I'm talking about because we do not provide the segment revenue. The mutual fund side, our sharing is in the range of 65% to 67%. And that probably -- and then if you go to a probably higher band, I think that is significantly higher. So probably Shirish sir says that we have not changed the strategy. However, I can also tell you that on the top end, I don't think there is -- we are very, very competitive. Only problem might happen at the initial level of the entry-level players. Otherwise, our sharing ratio probably we'll try to maintain the same, which is currently there.

Got that. The second question is on the insurance side. You rightly mentioned that the health insurance business is impacted more. But the communication from health insurance company has been that the growth in the business, particularly in the month of October, whatever growth they have seen will be more than enough to offset the impact of the commissions for the distributors. Is that a trend that you've also seen in the month of October where the growth has been much stronger than what you would have seen in the first six months? So any color that would help us understand how the Q3 kind of will pan out for us?

So, definitely, one thing which for that because of health insurance becoming cheaper, the more and more people will try to go for the health insurance, really try to increase the coverage that also will help to get the higher premium. If you look at my October number, definitely, if I look at my premium growth over August and September, we can see the growth over August and September. But it's too early to communicate that the month of October the growth in the premium just because of reduction in the GST or the duct going out. Maybe that will be the pent-up demand because many of the investors, many of the policyholder, many of the distributors would not have participated in the health insurance in the month of September waiting for the GST cut. So it's too early to communicate that the growth in the month of October is mainly and mainly because of GST cut only. I think probably I think three, four months down the line, we'll be able to communicate that is there a genuine growth. But yes, October, we have seen the growth.

Last question is on the employee expenses. How much of ESOP cost was there in this quarter? And how should we think about ESOP cost for FY '26 and FY '27?

So I think ESOP cost has not been part of result which has been announced. So I already said in the opening remarks that ESOP cost -- because I think ESOP valuation will be happening on every quarter. But however, the day when we announced the ESOP, I think the option premium price calculation [Foreign Language], I think the cost was roughly about INR 7.1 crores. And we are assuming that INR 7.1 crores is going to be cost for next 12 months. Starting from current quarter, we'll amortize INR 7.1 crores divided by INR 4 every quarter. And now we'll, I think, make it a trend also that every October, we'll announce the ESOP so that there should not be any -- I think the overlay of write-offs.

So INR 7.1 crores will be over a period of vesting period or it's one year cost?

So, vesting period is after 12 months. It's over next 12 months, yes.

[Operator Instructions] The next question comes from the line of Swarnabha Mukherjee from B&K Securities.

A couple of questions from my side. First of all, in terms of the flows, so our net flows improved this quarter from the previous quarter, and I think SIP run rate also is better. So, in October, what is the trend, if you could give us some color on that? And the second question is in terms of the impacts on -- from GST-related impact on the insurance side and the overall impact on the mutual fund side potential impact which might happen due to the SEBI. How much of that can we pass on to the distributor? Will it be in the same sharing ratio or you can able to pass it on fully?

Shirish?

So the first point is October month net sales is higher than what we did in the month of August and September in spite of having the festive season. We could see that the momentum of mutual fund continues, the participation in equity continues, the gross flows and the SIP flows continued. So October month in terms of net sales is far better. Coming to the GST impact due to the insurance side, first on the insurance side. mainly we will be able to pass it on in proportion to our distributor. So whatever will be the impact on -- because of the GST, whatever will be passed on to us by the manufacturer of the insurance company, we are very, very confident that we'll be able to pass it on the proportionate sharing cost to our distributor. So we don't see any challenge there in terms of margin.

Right, sir. And in terms of the potential impact of the SEBI paper, again, same question, how much will you be able to pass on in the same sharing ratio?

So, in mutual funds, assuming that the final impact comes the way the concentration paper is talking about rather we believe that we will be the beneficiary because today, almost 33, I think 1/3 of our AUM is contributed or rather I would say that the brokerage payout is contributed by those who are non-GST. So probably, I think today, they have got the tax arbitrage because of this they are not paying the GST on that. We are very, very confident that we'll be able to pass it on the hit to them in ratio of what the current sharing is. Probably it might benefit also. So, as of now, we are not saying that how much we'll be able to pass it on, but definitely, it will be higher than this year.

The next question comes from the line of Dipanjan Ghosh from Citibank.

Just a few questions from my side. First, in terms of -- going back to the previous participant's question in terms of the mutual fund business, obviously, the circular which has come out, there was a previous version of this circular somewhere around May 2023. And I would assume that at that point of time, you might have had some discussions with the manufacturers or the asset managers in terms of how the distribution of this burden will happen between various stakeholders in the ecosystem. So based on the prior discussions and maybe incremental discussions that you might have had in the last, let's say, two to three weeks, what do you think -- or what do you sense would be the sharing ratio ballpark this time around versus, let's say, September 2019, where distributors were taking majority of the burden? That's the first question. My second question is in terms of your MFD base, what would be the attrition rate, let's say, amongst your top 10% or top 20% of the MFD and maybe not for the quarter, but more from like, let's say, FY '25 versus '24 versus '23, I mean, is that -- and even 1H '26, how is that attrition trend really changing? I mean that will give us some color of the competition. And third question is on the POSP business. And given the fact that we have seen surrender charges, now we are seeing GST, multiple headwinds in terms of realizations. Just from a profitability perspective and from a more medium-term perspective, what do you think can be the growth trajectory in this business? And is there a way you can really pass on a little bit more to the underlying POSP. And the reason I ask this is because there are multiple POSP platforms in the country, which obviously pay much higher realizations or much higher pass-through rates. So those would be my three questions.

So to give the answer of your first question, comparing 2019 and comparing now, 2019, AMCs have passed on majority of the hit. Currently, after the consultation paper, what kind of hit they will be able to pass it on, I think no AMC will currently communicate officially. But my guess is that whatever would be the impact this time to the AMC majority of the hit, AMC is being passed it on to distributor. That is what my reading after discussing with them. The reason being last two years, many of the AMCs have done the TER cut on the book when there was no regulatory changes. In spite of that, I think AMCs have cut the book commission for major of the distributor to maintain their margin. This time, it's a regulatory change. So my gut feeling or my discussion with them, this time, they will be able to pass it on, they will pass it on majority of the cut to the distributor. That is what my reading is. I don't know how finally they will act. But as of now, the reading is they pass it on the major one. The second point is the attrition of top 20% partner because new and new platforms are paying higher commission and a lot of competition has emerged in last 1.5, 2 years. I would say that the trend in case even if there is an attrition, it would be on a smaller AUM partners, not on a bigger AUM partner. The reason being the bigger AUM, the involvement of our team with the bigger AUM is much, much stronger historically also. The smaller AUM partners, their engagement, their relationship probably I think are building new or I think the relationship that might not be stronger because of the smaller scale. Second point, I would say that all these new platforms are paying the flat commission, which is on a higher side, mainly that would make a big difference to the smaller AUM. As you know that in prudent, we already have a tiered structure, smaller AUM, lower the commission, higher AUM, higher commission. So probably the commission impact or the commission difference would be seen by the smaller distributors versus this Prudent versus new platform. So the bigger AUM partners moving to join the platform, I think that trend is not there. So, attrition, I would say that there is hardly any attrition rather I would say attrition among the top 10 partners or 10% of our partners. If at all, there is some attrition, it would be on the smaller AUM partners. And again, it is not universal. It would be on a few branches where my team would have joined the competition platform because of the relationship they would have gone there. Again, that will be on a new business, part business, not the full business. So attrition-wise, we have not seen any meaningful attrition in the last one, two years. Third point you said is the impact of insurance due to GST due to the surrender charges guidelines, which impacted the revenue last year. Definitely, I think this time post GST, the impact will be much, much higher, mainly on the health insurance side because the revenue might come down by around 18% entire the GST component might be transferred to the distributor community. So impact of revenue on the health insurance side definitely will be higher. On a life insurance side, as of now, I think still insurance companies are discussing negotiating. So we are not sure that how much percentage finally would be passed on to the distribution community. As of now, the discussions are on. I would say that in the health insurance side, more than 70% of our business got impacted in the health insurance side. 30% currently under negotiation, under discussion. It is not impacted in the month of October. If I take the similar case for life insurance, 30% got impacted in the month of October, 70% still the discussions are on. So what would be the final impact? I think once we finalize our discussion with the insurance company, we'll be able to communicate. But yes, I think whatever would be the impact or pass on the impact to the distribution community, I'm sure I think they will do for the agency channel also. So when they do with the agency channel, the -- when the insurance company is passing on to all the distributors, we will be able to pass it on to our distributor also, at least in the proportion of our sharing ratio. So we don't see a bigger challenge. At least we are very, very confident that we'll be able to pass it on the hit at least equal to the sharing ratio or a little higher in insurance as well.

Got it. Sir, just one follow-up on the first part, if I understood correctly, what you said is that because mutual funds have demonstrated a capability to pass on to distributors even during absence of regulatory changes, do you think that this time around also majority of the AMCs will pass maximum portion of the impact to the distributors is your understanding or hypothesis of something. Is that the right understanding?

Yes, yes. That is what I believe.