360 ONE WAM (CMP: Rs 1,163; Mcap: Rs 42,261 crore; Rating: Overweight), earlier known as IIFL Wealth, reported its highest-ever quarterly profit of Rs 243 crore in Q1FY25, a growth of 34 percent year on year (YoY), even after providing for an exceptional expense of Rs 88 crore during the quarter. The profit before this exception item and tax soared 93 percent YoY amid the strong growth in assets and healthy net inflows. Thanks to the booming capital markets, there was a significant rise in transactional income, which turned out to be a key driver of profit.

The equity stock market is at an all-time high and the primary market is buzzing with a record number of new issues (IPO). Equity mutual funds are seeing robust inflows and bond prices could potentially rally given the expectations of interest rate cuts in the US and at home. Moreover, budget tax proposals are favourable for certain asset classes (unlisted bonds, REIT, INVIT, etc.) which should boost flows into these categories. All these factors bode well for the wealth management business.

360 ONE wealth is best positioned to benefit from the structural growth in wealth business. Its core segment consisting of UHNI (ultra-high net worth individuals with assets above Rs 25 crore) is expected to see the highest growth among the different sub-segments based on the income/wealth level, mainly because of the K-shaped economic recovery after the pandemic. Moreover, the company is entering into the mid-market segment of HNI clients (wealth between Rs 5-25 crore) and has also forayed into global markets — both segments are expected go live this fiscal. The acquisition of ET Money, which is a wealth advisory focused fintech, will give it a presence in the retail/mass market.

Strong growth in assets and healthy net inflows

As the leading wealth management firms, 360 ONE’s assets under advisory, management, and distribution (including custody assets) stood at Rs 521,208 crore, as of June, a growth of 36 percent YoY. The growth in AUM (asset under management) was led by healthy inflows of Rs 5,500 crore and boosted by positive mark-to-market (MTM) as capital markets have been buoyant.

Wealth business leads

The wealth business is the largest vertical amounting to more than 80 percent of total assets. While the transactional and broking based assets saw robust growth in Q1 FY25, the management’s focus has been on growing assets that earn recurring revenue in the wealth business. The annual recurring revenue earning assets grew 34 YoY to Rs221,287 crore crore as at end June ’24. Consequently, annual recurring revenue (ARR) contributed around 63 percent of the overall revenue in Q1 FY25. This has reduced the earnings volatility and is likely to hold the company in a relatively good stead even in a tumultuous market environment.

Under wealth management, the assets under the fee-based advisory platform — 360 ONE PLUS — stood at over Rs 50,000 crore and will likely be a key strength over the next few years.

Niche in the asset management business

In the asset management business, 360 ONE’s total AUM stood at Rs 79,652 crore, as of June end. The company is among the largest in the alternative space, focusing on private equity, structured credit, and real estate. Mutual funds form a very small proportion of its total AUM.

Improvement in return ratios

Despite total expenses rising by 26 percent YoY, the cost-to-income ratio (C/I ratio)improved sharply to 38 percent in Q1 FY25, mainly due to robust growth in revenue. The management sees the C/I ratio around 46-48 percent in the near term, assuming normal activity levels in capital markets. The C/I ratio is expected to taper down to 44-45 percent over the next couple of years as revenues start coming from the strategic investment areas.

The management sees net inflows in the range of Rs 25,000-35,000 crore in FY25. While the management’s guidance is encouraging, investors should note that 360 ONE’s revenue is exposed to fluctuations in the capital markets and any regulatory changes.

View and valuation

The market opportunity in the wealth business is huge and likely to grow in sync with India’s economic growth and rising income/wealth levels in the economy, which will keep360 ONE’s business on a sustained growth path.

In terms of valuation, the stock is trading at 38 times FY25 estimated earnings, which is rich but justified considering strong business fundamentals and good visibility of earnings growth.

Earnings are likely to be healthy in the near to medium term which will drive the stock upside.

Long-term investors should buy the stock.