The Indian capital market sector

The easy money-driven boom in the stock market has resulted in rapid financialization of savings as people started investing in the capital markets. They did so by abandoning, though not entirely, traditional asset classes, primarily fixed deposits, resulting in bank credit-deposit ratios reaching record levels.

Take a look at the numbers. According to Motilal Oswal Financial Services (MOFSL), in the last five years, between 2019-20 and October 2024, the number of demat accounts has grown 4.4x to 179 million, and the number of National Stock Exchange (NSE) active accounts has grown 4.9x to 49 million.

On the other hand, the number of unique mutual fund (MF) investors has grown 2.4x to 50 million, leading to systematic investment plans (SIPs) growing 3.2x to ₹25,300 crore. Moreover, the Nifty delivered over 100% returns, while Midcap 100 and Smallcap 100 yielded ~250% returns in the last five years, driving mutual fund AUM to triple to ₹6.9 trillion.

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Still, there is a long way to go, as penetration is low compared to developed economies. For instance, Demat account penetration in India is just 12% compared to 62% in the US, while MF AUM-to-GDP is just 17% relative to the global average of 65%.

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Moreover, only 3% of the population invests in mutual funds, while only 12% have a demat account. This figure is relatively low, as 30% are Unified Payments Interface (UPI) users, 52% have Permanent Account Numbers, and 78% have accounts with financial institutions.

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Needless to say, this number is expected to grow even further as India reaps the demographic dividend as more people join the workforce. MOFSL estimates that 100 million people will join the workforce, and 100 million households will enter the middle-income bracket.

Further, improved financial literacy and exposure to capital markets are expected to drive the penetration of demat accounts at a compound annual growth rate (CAGR) of 20% to 31%, with 483 million demat accounts by 2029-30. This will likely push the total MF AUM 3x to ₹154 trillion by 2029-30 from ₹53 trillion in 2023-24.

HNIs and UHNIs to gain from robust capital markets

This is expected to increase household savings, disposable income, and the demand for more personal investments. Strong capital markets have also prompted promoters to redeem part of their holdings, which is expected to boost the wealth management business.

Avendus estimates that this is expected to drive the growth of the high-net-worth individuals (HNI) and ultra-high-net-worth individuals (UHNI) segments at a 13-14% CAGR.

Further, MOFSL estimates that more HNIs and UHNIs will help the wealth management sector grow at a CAGR of 13-14% over the next four to five years, from the current $1.2 trillion to $1.8 trillion. This growth is also believed to be due to the increasing preference for professional advice.

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Now, let’s come to the stock that could potentially be one of the biggest beneficiaries of this boom.

Nuvama Wealth Management

Nuwama operates in three primary business segments: capital markets, wealth management and asset management (AMC).

Capital markets

The capital markets segment has three divisions: investment banking (IB), institutional equity (IE), and custody and clearing businesses (C&C).

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It contributes about half of the company’s revenue. The rest, 47.2%, comes from wealth management and 2.2% from AMC.

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In the IB division, Nuvama has been one of India’s most sought-after IB companies.

The C&C division serves as a Sebi-registered securities custodian, a designated depository participant (DDP), and a professional clearing member (PCM) for the derivatives market. As of Q2FY25, its assets were worth ₹1.25 trillion. Since this is a sticky business, ~90-95% of the revenue generated is recurring, ensuring a steady revenue flow.

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Financially, the C&C division’s client assets have grown at a CAGR of 50% over the last three years until 2023-24.

At the same time, the division’s revenue and operating profit before tax (PBT) have grown at a CAGR of 25% and 33%, respectively. On the other hand, the revenue and operating PBT of the IB and IE divisions grew at a CAGR of 12%.

This segment benefits from robust F&O market activity and the growth of the Indian economy. Given its dominant position, robust IPO and QIP activities are expected to drive its IB and IE business.

Wealth management

Under wealth management. It has two business divisions. Nuvama Private and Nuvama Wealth. Nuvama Private provides services to UHNIs, while Nuvama Wealth offers services to HNIs.

Nuvama Private

Nuvama Private has an AUM of ₹2.05 trillion as of Q2FY25. This division thrives on the expertise and dedication of its relationship managers (RMs), who are pivotal in driving business growth. The IB team strongly supports their efforts.

Given the market momentum, it has aggressively added RMs and aims to double the number from 127 by Q2FY25 in the next five years.

Further, although it has a presence in tier 2 and tier 3 cities, it plans to expand its geographical reach to newer locations. The company believes that these locations will drive business growth going forward.

It is also expanding into Singapore and Dubai to cater to the overseas needs of Indian families, the Indian needs of overseas customers, and the overseas needs of overseas customers.

Financially, the division AUM has grown at a massive 20% CAGR over the last three years until 2023-24. At the same time, its revenue and operating PBT have grown at 35% and 79% CAGR, respectively. This increase in profit was driven by a reduction in the cost-to-income ratio, which fell by 21% during the period.

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Nuvama Wealth

Nuvama Wealth has an AUM of ₹1 trillion (as of Q2FY25).

The division targets the HNI segment, which comprises clients with investable surpluses of ₹5-25 crore. This segment is one of the fastest-growing within the wealth management industry.

This division has an aggressive expansion plan to grow over the next three years. It plans to expand its RMs at ~25% CAGR and improve their productivity. Moreover, it plans to penetrate more cities with low wealth management penetration.

Financially, the division AUM has grown at a massive 33% CAGR over the last three years until 2023-24.

At the same time, its revenue has grown at a 35% CAGR, and operating PBT has grown at a 106% CAGR. This increase in profit was driven by a reduction in the cost-to-income ratio, which fell by 25% during the period.

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Going forward, Nuvama Private and Nuvama Wealth are expected to experience strong AUM growth. This will help them further reduce their cost-to-income ratio and improve their profitability.

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This growth is expected to be driven by the growing number of middle-class, HNI and UHNI investors. In addition, expansion in tier-1 and tier-2 cities with RM is expected to drive the business further.

Asset management company (AMC)

The AMC segment, launched in 2021, has an AUM of ₹10,280 crore. It offers alternative investment funds and portfolio management services, including pre-IPO. In partnership with Cushman, it also recently launched a new real estate strategy.

Nuvama AMC revenue grew 34% over the previous year to ₹32 crore in H1FY25, driven by a robust 67% growth in AUM.

However, the segment is currently operating at a loss due to the lower income share in the AMC business and a cost-to-income ratio exceeding 109%.

This is normal for a newly established company, but it is expected to become profitable by 2025-26 and break even in 2024-25. Further, the segment will likely snowball due to new product launches and strong capital market activity.

Consolidated financials and valuations

In H1FY25, Nuvama’s consolidated revenue grew 55% over the previous year to ₹1,407 crore, while its profit rose 100% to ₹479 crore.

This was led by a robust AUM growth of 51.5%, which (as of Q2FY25) reached ₹4.4 trillion, and a decline in the cost-to-income ratio by 11%.

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What about valuations?

Nuvama trades at a price-to-equity (P/E) ratio of 30, close to its average price-to-earnings (PE) ratio of 29x. However, it trades at a discount of 37%, compared to 360 One’s PE of 47.3.

Motilal Oswal has two estimates for Nuvama, calling it a preferred pick.

In the bull case, it expects its revenue to grow at a CAGR of 28% over FY24-FY27E, driving PAT at a CAGR of 36% during the period. In this scenario, the price per share is estimated at ₹11,719 based on a PE ratio of 30, about 67% higher than the current market price (CMP).

In the bear case, revenue and PAT are estimated to grow by 20% and 22%, respectively, during the same period. In this scenario, the price per share is estimated at ₹5,810 at a PE of 20, ~17% lower than its CMP.

The company is well positioned in this fast-growing industry, expected to be driven by the growing middle class, rising per capita income, demographic dividend, and vibrant capital markets.

However, note that this is a cyclical business. Any slowdown in fundraising deals and capital market activities will also impact its AUM and profitability. There is also the threat of high competition and any regulation changes related to expense ratios.

Now, having said this, there’s another company in the wealth management space that deserves your attention. In fact, it is also one of Motilal Oswal’s preferred picks in this sector.

In an upcoming edition of the Profit Pulse, we will share all about it. So watch this space!

Note: Throughout this article, we have relied on data from www.screener.in and Tijorifinance. Only in cases where the data was not available have we used an alternative but widely used and accepted source of information.  

The purpose of this article is only to share interesting charts, data points, and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educative purposes only. 

Madhvendra has been a passionate follower of the equity market for over seven years. He is a seasoned financial content writer. He loves reading and sharing his honest opinion about publicly listed Indian companies and macroeconomics.

Disclosure: The writer does hold the stocks discussed in this article.