Gokul Ponnuraj of Bavaria Industries Group presented his in-depth investment thesis on IIFL Wealth & Asset Management (India: IIFLWAM) at Best Ideas 2021.

Thesis summary:

IIFL Wealth & Asset Management is India’s leading wealth management firm for ultra high net worth individuals (>25 Cr) and the top alternative asset management firm. Gokul believes that IIFLW is a direct play on the growth of entrepreneurship and wealth creation in India.

The firm has been able to garner 50+% market share in mandates (typically two to three firms) to manage promoters’ wealth post a business exit or liquidity event, such as a private equity sale, IPO, M&A, or ESOP monetization.

Karan Bhagat and his team founded the firm after the great financial crisis in 2008. They have executed phenomenally well to build a leading franchise, and the founders are still only in their early 40s. The firm’s solid client base of 6,500 rich families (growing at 15% CAGR) should continue to provide strong growth opportunities for wealth management and lending solutions.

IIFLW’s asset retention rate of 99.5% (churn of just 0.5% per year) provides predictability of future earnings. The firm has been able to transition the business smoothly toward an annual recurring revenue model with no up-front financial distribution profits. With the launch of IIFL One, they have shifted the business model away from distribution commissions to fixed advisory charges, which aligns interests with those of clients. The blended retention yield for the business has stabilized at 50 bps and can be sustained going forward. The transition from the old to the new business model has skewed accounting earnings, but the firm has among the most transparent earnings disclosures.

IIFLW has been able to attract and retain the best talent through the right combination of culture, variable pay, and equity ownership. Gokul expects AUM to grow consistently at 15+% through a combination of net new money (7-8% of opening stock) and market movement (7-8% based on a 60/40 equity/debt portfolio). Tailwinds exist for improved profitability from better operational leverage, higher lending income, improved alternatives exposure, and carry income optionality. The wealth management business is asset-light (no capital requirements), and the firm should be able to dividend out 50% of profits while continuing to grow at a CAGR of 15-20%.

Despite being a long-term compounder with a wonderful owner-operator, the company was recently quoted at less than 20x earnings, an attractive price for long-term investors.

Disclaimer provided by Gokul: “I, personally and through our firm have investments in the stock and hence the write-up is biased. I have had a regulatory issue in the past because of my board membership at my previous employer and that has been resolved. Please consult your SEBI registered financial advisor on your investments.”

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About the instructor:

Gokulraj Ponnuraj is a value investor with a focus on small and mid-cap compounders and spin-off’s with a bias towards emerging markets. He has been investing in the Indian markets for more than ten years and in global markets for the last four years. Gokul manages the public equities portfolio at Bavaria Industries Group. The firm uses its balance sheet assets (permanent capital) to invest in opportunities with an attractive risk-reward trade off. Gokul holds a Master in Finance degree from London Business School and a CFA charterholder.

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