Anand Rathi Wealth Ltd (ANANDRATHI) Q1 FY23 Earnings Concall Transcript

Anand Rathi Wealth Limited  (NSE:ANANDRATHI) Q1 FY23 Earnings Concall dated Jul. 13, 2022

Corporate Participants:

Feroze Azeez — Deputy Chief Executive Officer

Jugal Mantri — Group Chief Financial Officer

Rajesh Bhutara — Chief Financial Officer

Analysts:

Rohan Mandora — Equirus Securities — Analyst

Umang Shah — Kotak Mutual Fund — Analyst

Arpit Shah — Stallion Asset — Analyst

Janakiraman Rengaraju — Franklin MF — Analyst

Unidentified Participant — — Analyst

Ajox Frederick — Unifi Capital — Analyst

Bhuvnesh Garg — Investec Capital — Analyst

Devesh Agarwal — IIFL Securities — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to the Anand Rathi Wealth Limited Q1 FY23 Earnings Conference Call.

This conference call may contain forward-looking statements about the Company, which are based on the 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.

[Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Feroze Azeez. Thank you, and over to you, sir.

Feroze Azeez — Deputy Chief Executive Officer

Good evening, and thank you everyone for joining the earnings conference call for the quarter ended 30th June 2022. Along with me I have Mr. Jugal Mantri, Group Financial Officer, our CFO, Mr. Rajesh Bhutara; Mr. Chethan Shenoy, Director and Head, Product and Research; Vishal Sanghavi, Head IR; and SGA team, our Investor Relations Advisors.

We are one of the leading non-bank wealth solution company in India and closely work with HNIs and ultra HNIs to meet their financial goals and objectives. We facilitate their investments and financial instruments using our well researched solutions. Our performance during the last few years has helped our satisfied clients to achieve their objectives.

AUM of our flagship business private wealth is INR32,142 crores, as on 30th June 2022. Our strong performance for Q1, FY23 was backed by addition of new clients and strong net flows. Despite challenging equity capital market scenario, our net flows for the quarter stood at INR1,355 crores, which grew by nearly 400%, as compared to the same period last year. We have 7,400 plus satisfied client families of which 58% are with us for more than three years and account for 77% of our AUM.

The share of equity mutual fund AUM to total AUM has increased from 39% to 46%. We believe this strong performance will continue in the current financial year, with a strong team of 271 relationship managers. Apart from this, the Company has two new age technology-led business verticals that is Digital Wealth and Omni Financial Advisor, OFA.

The DWM business is a fintech extension of the Company’s proposition for the mass affluent segment, with wealth solutions delivered through a combination of human interface and powered with technology. OFA business is a strategic extension for capturing the wealth management landscape to service retail clients through the mutual fund distributors by using our technology platform. We believe that the wealth management sector in India holds significant growth potential, and we remain optimistic about the business potential and will continue to drive towards our vision, while consistently focusing on uncomplicated solutions.

With this, I will now ask Mr. Jugal Mantri to take us through the financial performance. Jugal, sir, over to you.

Jugal Mantri — Group Chief Financial Officer

Thanks, Feroze. Good evening and happy Guru Purnima to all. I’m happy to share that the Company has posted a strong financial performance for the quarter ended June 2022 backed by the accelerated growth across all important business parameter.

Our revenue for the quarter ended 30th June 2022 stood at INR133.5 crores, as against INR98.4 crores in Q1, FY22, registering a growth of 35.7%. Our PBT for the quarter stood at INR52.9 crores, registering a growth of 33.6%, as compared to INR39.6 crores in Q1, FY22.

Our PAT for the current quarter — June quarter stood at healthy INR39.7 crores, registering a growth of 33.6%, as compared to INR29.7 crores in corresponding quarter of FY22. For Q1, FY23 earning per share stood at INR9.5, while annualized return on equity stood at a healthy 42.3%.

We are confident that our long-term commitment to provide our clients with the most effective wealth management solution, along with a committed team of relationship managers will enable us to see strong growth in the coming year.

With this, we will now open the floor for question-and-answers. Thank you.

Operator

Thank you. Sir shall we start with the Q&A session.

Jugal Mantri — Group Chief Financial Officer

Yes, please.

Questions and Answers:

Operator

Give me a moment. Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Rohan Mandora from Equirus Securities. Please go ahead.

Rohan Mandora — Equirus Securities — Analyst

Good afternoon, sir. Thanks for the opportunity and congratulations for good numbers. Sir, could you share what was the MLD issuances for 1Q, FY23?

Feroze Azeez — Deputy Chief Executive Officer

Jugal ji or Rajesh ji, can you take this one?

Rajesh Bhutara — Chief Financial Officer

Yeah. Sure. See in FY23 June quarter, the MLD issuances, which was there from Anand Rathi Global Finance was more or less same like in the first quarter of FY22, it was INR690 crores. And about the same amount has been issued from Anand Rathi Global Finance limited of INR703 crores in FY23 quarter one, and almost about INR390 crore plus have been issued — sourced from third-party of the similar product.

Rohan Mandora — Equirus Securities — Analyst

Sure, sir. And sir, how would the yields vary between the MLDs issued from Anand Rathi Global Finance and third-party?

Rajesh Bhutara — Chief Financial Officer

Yields on third-party products are better than what is getting issued marginally better than what is getting issued from Anand Rathi Global Finance Limited.

Rohan Mandora — Equirus Securities — Analyst

Marginally better. Okay, sir. And, sir, what would be the quantum of MLDs that would have matured for 1Q?

Jugal Mantri — Group Chief Financial Officer

The maturity value of the MLD was almost about the same, if you put together the 690 [Phonetic], 700 [Phonetic] plus 390 [Phonetic], so almost about INR1,090 crore MLDs have been matured in Q1, FY23.

Rohan Mandora — Equirus Securities — Analyst

Sure, sir. And sir, in terms of the employee expenses on a Q-on-Q basis, it has gone up from INR52 crores to around INR60 crores, so what explains this jump if you could quantify that?

Jugal Mantri — Group Chief Financial Officer

Increasing employee cost you’re asking.

Rohan Mandora — Equirus Securities — Analyst

Yeah, sir. Employee expenses.

Jugal Mantri — Group Chief Financial Officer

So is this like — there are multiple factors. One thing is that there is a — see majority of the RMs, their expenditures or the provisioning is linked to the revenue. And if you look at the revenue, it is in terms of percentage, there are hardly any change. If you look at it by given last year employee benefit expenses was about 45% and it is in the same range even in this financial year. So at the absolute number, you might say that number looks higher. But if you’ll compare it with the revenue number in terms of percentage, it is more or less same.

Rohan Mandora — Equirus Securities — Analyst

Sure, sir.

Jugal Mantri — Group Chief Financial Officer

And besides that definitely there is a addition of the account managers and the employees, the team have been growing, but those will have the marginal impact largely it is linked to the revenue.

Rohan Mandora — Equirus Securities — Analyst

Sure. And is the annual hike factored in this or will it be in the subsequent quarters, annual increment [Indecipherable] increment.

Jugal Mantri — Group Chief Financial Officer

[Speech Overlap] of course, it will come in the Q2. But in our case, the impact of the annual increment is very, very marginal reason being that majority of the employee benefits are driven by the variables, so that — the impact on the fixed cost is very marginal.

Rohan Mandora — Equirus Securities — Analyst

Sure, sir. And the fixed cost for 1Q has increased by almost 17% year-on-year. So should we consider this a normal run rate for the full year in terms of fixed cost increases?

Jugal Mantri — Group Chief Financial Officer

Yes, yes, definitely Rohan, reason being — see the fixed cost, we have moved from COVID era to the normal area. Okay.

Rohan Mandora — Equirus Securities — Analyst

Right.

Jugal Mantri — Group Chief Financial Officer

So definitely the cost, which we are — the saving, which we are achieving because of the virtual environments now since offices are running and administrative expenses, business promotional expenses and all have come on track. So in fact, this was the normal operating first quarter post COVID era. So like this largely on account of this, but it will — going forward, it will remain in — at the same line.

Rohan Mandora — Equirus Securities — Analyst

Sure, sir. Thanks a lot.

Jugal Mantri — Group Chief Financial Officer

Okay. Welcome.

Operator

Thank you. The next question is from the line of Umang Shah from Kotak Mutual Fund. Please go ahead.

Umang Shah — Kotak Mutual Fund — Analyst

Yeah. Thanks for taking my question, and congratulations to the team for a very strong first quarter. Sir my first question is on clearly the new client acquisition, as well as the net flow attrition [Phonetic] during the quarter has been fairly impressive, if we were to look at it in the context of a very volatile market environment. So if you could just help us, one is clearly what will be our strategy going forward as well, and let’s say if markets were to stabilize and improve from here on, should we expect a similar trajectory or a better trajectory from what we have reported in the first quarter.

Feroze Azeez — Deputy Chief Executive Officer

Yes. Umang, thanks for your question. Firstly, the net flows have been better, and they’ve been like you said, very healthy is because what happens is in good times, of course, the wealth management outfit does well, in bad times or volatile times like we’ve all seen for the quarter ending June, what happens is there is emphasis placed on consolidation. When a person sees good performance relative to other outfits, then they start consolidating their monies and give me a larger wallet share. That’s one reason.

Second is clients start giving you more references when they see relative better performance. During good times everybody looks identical, rate [Phonetic] becomes an abstract word. So in bad times, it’s very easy to distinguish between good advisors and bad advisors, good distributors and bad distributors. So that’s one very important reason.

And then what happens is once you get a listing, there is extent of transparency goes up and that improves confidence, so that acted as a catalyst or has begun to act as a catalyst. So we believe that this trajectory will improve, and if market stabilize, you will get a further lift in the rate at which net flows and clients will be added [Phonetic] in the future.

Umang Shah — Kotak Mutual Fund — Analyst

Perfect. Perfect. This is good. Also, is this also the reason, I mean, we are also seeing increased — improving kind of vintage both in clients, as well as the assets that we manage, which means that it’s fair to assume that the assets and clients become much more stickier for us?

Feroze Azeez — Deputy Chief Executive Officer

See clients — client attrition is very minimal for us. And what happens is dealing with this segment of HNIs you’re not doing absolute pure play retail in the private wealth business, you basically will influence client behavior during bad times already because if you speak to a person for two, three, four years and you season him and prepare him for bad times like we saw in the last quarter, when bad times happen, they are wanting to invest more. That’s why you would see net flows and equity especially have been beautiful.

So coming [Technical Issues] point now, whether the clients net flows are going to remain as robust? The answer is yes. And what we see is, when clients have all been seasoned, and in HNI, you’re interacting with a smaller universe, so you’d be able to influence their behavior with vintage. So to answer your pointed question on vintage, the client vintage is increasing, as time progresses, as you see 58% of our clients have been with us for three years. It also implies that 42% have been added in the last three years alone. So we think as time progresses, vintage will happen. What I see as an opportunity is the other 42% also giving us large wallet share, as time progresses.

Umang Shah — Kotak Mutual Fund — Analyst

Sure. Sure. That’s helpful. My second question is for Jugal ji, picking up from the previous question. So given that the large part of our employee cost or a large part of opex actually becomes more revenue linked or performance-driven, is it fair to assume that as the overall AUM start expanding our — the operating leverage starts playing out and EBITDA margins either sustain or start improving from where we are currently?

Jugal Mantri — Group Chief Financial Officer

Yeah. Umang, I think you are playing by role because the way you’ve highlighted all the positive side of our business that is the great thing since all the financial veteran they understand what we have been doing and whether we — you are bang on the way we have performed in terms of AUM, as well as vintage, as well as the new funds mobilization.

And similarly when you’re talking about the point about the variability linked to the vintage, you’re absolutely right. And in fact, you can see, when we buy — I recall having discussed with you about the operating leverage before IPO time, at that time the operating margin, which we had those were like about say 38% of the margins, which we had and now it has already moved beyond 41%.

So that is the beauty of the whole structure that when vintage starts playing, definitely your operating cost will not grow in that tandem, and that is why the margins, the EBITDA margin or the PAT margins are swing year-on-year growth, even though it will be marginal because there is a limit to which we can reach because of the taxes and other impacts. But definitely bit by bit, we are adding to what we have — what we were doing in the past.

Umang Shah — Kotak Mutual Fund — Analyst

Understood. Great. Thanks. And just last question from my end is on yield. So clearly this quarter, we have been able to kind of optimize our yields probably because of a larger component of MLD issuances in the net flows. Now, I understand that probably there could be some quarterly volatility, but assuming on a four to six quarter basis, what should we assume as base yields for the business, I mean, would we see a higher volatility or we believe that yield should kind of move in a narrow band going forward.

Jugal Mantri — Group Chief Financial Officer

No. Actually see that the — in case, if you will talk about the yield, the volatility impact the AUM frankly speaking. But actually the yield, there is not a substantial change because the yields will remain constant and it is linked to the asset bucket.

So like if I I’m having the assets in equity mutual fund, the commission, which is being paid by the mutual funds that remains the same. So ultimately, the point which I’m making is that the volatility, largely impact AUM, but the yield more or less, it remains the same, and it changes with the change in AUM or the traction in the AUM. So if I have the increase, I’m adding to the AUMs by way of increase in market capitalization or growth in equity mutual fund, as well as new mobilization, the revenue amount will keep on growing. And in terms of yield, I don’t see much change going forward. It will remain almost around same levels.

Umang Shah — Kotak Mutual Fund — Analyst

All right. Perfect. Thank you. Thank you so much for patiently answering my questions, and good luck for future quarters. Thanks.

Jugal Mantri — Group Chief Financial Officer

Okay. Thanks. Thanks a lot, Umang.

Operator

Thank you. [Operator Instructions] The next question is from the line of Arpit Shah from Stallion Asset. Please go ahead.

Arpit Shah — Stallion Asset — Analyst

Yeah. Hi, congratulation on good set of numbers. I have a few questions, it’s very basic question for my side. Can you just help me with the market size of the — market size of MLDs in India and who will be the top issuers of this product in India?

Feroze Azeez — Deputy Chief Executive Officer

Sorry, I couldn’t hear your question. If you could be a little louder, it would be helpful, Mr Shah.

Arpit Shah — Stallion Asset — Analyst

Yeah. Can you help me with the market size of MLDs in India, and who would be the top issuers of this product in India?

Feroze Azeez — Deputy Chief Executive Officer

So MLD market size in India is now reasonably large, but MLDs are broken into two, one, our pure bonds, which look like MLD. That’s a very large market and that’s not — that’s the listed market. Basically you are having MLDs from a listed debenture more or less, not too much market play. And then you have the pure play MLDs, which actually give you the market play.

I would say — I would not precisely know the market size currently, but I can tell you, who are the top issuers. The top issuers, of course, is ARGFL, Edelweiss, now the PAG entity. You also have Centrum, you have IIFL Wealth, and you have from the MNC [Phonetic] side, cities issuer. There are several issuers, seven, eight of them, but I have named the top one. If you look at the MLD business, pure play MLD, I would say INR1,500 crores of net mobilization every month could be the size of the pure play MLD business.

Arpit Shah — Stallion Asset — Analyst

Got it. So let’s say on these products our take rates, if I must say this is [Phonetic] — which is probably around 2% or 3%, which is probably the highest for any other wealth products. So how do you make so much money on MLD?

Feroze Azeez — Deputy Chief Executive Officer

So if your question is how do we — was your question — sorry, if you can go again because you’re cutting off. I’m so sorry to ask you to repeat it again.

Arpit Shah — Stallion Asset — Analyst

Yeah. How do we make 2% or 3% on these products because broadly if I see equity mutual funds, our take rates will be probably around 1% or so for the industry. But in — in this…

Operator

I’m sorry to interrupt Mr. Arpit Shah, your voice is fumbling, and we are not able to understand what you’re speaking. I would request you to use your handset. Could you please do that.

Arpit Shah — Stallion Asset — Analyst

Hello, am I audible now?

Operator

Yes, you’re quite audible now.

Feroze Azeez — Deputy Chief Executive Officer

Yeah, yeah, now it is quite audible.

Arpit Shah — Stallion Asset — Analyst

Okay. Okay. So just wanted to understand why our take rates in MLDs are around 3% because if I see other wealth products, they will be around 1% or so maybe lower than 1%. So how do we make money on MLD product that is what I wanted to ask?

Jugal Mantri — Group Chief Financial Officer

Arpit, if you will look at any debt [Phonetic] product, which is getting sold, okay by any wealth distributor or any financial intermediaries, you will find that the commission, if somebody is selling, say NCD given or any debt products typically the brokerages, which are being paid are in the range of 1.5% to 2.5% okay. So in fact, the commission structure, which is there on the MLD, that is in line with what is being offered on the similar product in the market.

Arpit Shah — Stallion Asset — Analyst

Got it. Got it.

Rajesh Bhutara — Chief Financial Officer

Maybe add something here, Feroze.

Feroze Azeez — Deputy Chief Executive Officer

Yeah, yeah. Please.

Rajesh Bhutara — Chief Financial Officer

Okay. Super. See you can look at commissions in two ways. MLD yields, if you calculate per annum, you will not get to 2.5%. See what happens in MLDs is you recognize it initially as trading income. There are — like for example, ARGFL has had 985 MLDs maturing. If you compare it with what would you have actually earned per annum yield on market value, which is what you get paid on equity mutual funds, it will not be 2.5%, 3%.

So point is, if you calculate yield like a mutual fund does, it pays you a trail commission on a annualized basis on market value. At maturity, if somebody backwards calculate it, what did you make? You would make 10%, 15% more. When you actually take your total gross mobilization and the money you’ve made and divided by AUM, the yields will look sharper and larger.

So to answer your pointed question, the yield per annum if measured in the way a mutual fund pays trail commission would not be twice that of mutual fund, it will be just 15%, 20% more than mutual.

Arpit Shah — Stallion Asset — Analyst

Got it. And who would be the [Technical Issues] hello.

Rajesh Bhutara — Chief Financial Officer

You understood my point, right.

Arpit Shah — Stallion Asset — Analyst

Yes, yes. I got your point. I just want to understand, who will be the underlying borrowers of such products. What kind of businesses would be borrowing in such format like in terms of MLD.

Feroze Azeez — Deputy Chief Executive Officer

Jugal ji.

Jugal Mantri — Group Chief Financial Officer

See borrower — in the sense, these MLDs are issued by the NBFC. So NBFCs are the borrowers.

Arpit Shah — Stallion Asset — Analyst

No. Who would be the underlying borrowers of those NBFCs.

Jugal Mantri — Group Chief Financial Officer

No, no, it is not necessary. Ultimately see the money, which is being raised by the NBFC, okay, it is at the discretion of the NBFC that — how does they want to utilize this money, which is being reached. So it is not necessary, whether it is — it is not a structure, where these borrowings are being made to facilitate our back to back any — the borrowing arrangements are there. These are plainly — the MLDs are issued on the strength of the balance sheet of the issuer.

Arpit Shah — Stallion Asset — Analyst

Right. Right.

Jugal Mantri — Group Chief Financial Officer

Okay.

Arpit Shah — Stallion Asset — Analyst

Got it. And can you just split the difference between fixed and variable expenses on employees?

Jugal Mantri — Group Chief Financial Officer

It is quite simple like, anyone who is getting a fixed compensation or the fixed salary, which is coming every month that is the fixed component. The variable component that is linked to the performance of the employees. So we have got a CTC structure, where the overall compensation of every RMs is determined based on these AUM and earnings on that AUM, his CTC is being decided. And whatever fixed component is being paid to him that gets deducted and remaining amount is being paid, as a variable payment.

Arpit Shah — Stallion Asset — Analyst

So what will be the fixed amount the [Phonetic] quarter.

Jugal Mantri — Group Chief Financial Officer

Fixed amount per quarter, you’re talking about at the overall aggregate level.

Arpit Shah — Stallion Asset — Analyst

Yes, yes, yes.

Jugal Mantri — Group Chief Financial Officer

That is, say about INR12 crore per month.

Arpit Shah — Stallion Asset — Analyst

So around INR36 crores a quarter.

Jugal Mantri — Group Chief Financial Officer

INR36 crore, INR37 crore per quarter, correct.

Arpit Shah — Stallion Asset — Analyst

Okay. So we do get upfront fees on MLDs right. That is what Feroze meant?

Jugal Mantri — Group Chief Financial Officer

Yeah. Every product, which — other than mutual funds, most of the products, which are being sold by financial intermediaries, they receive upfront income.

Arpit Shah — Stallion Asset — Analyst

Got it.

Jugal Mantri — Group Chief Financial Officer

And that is the case with the MLDs.

Arpit Shah — Stallion Asset — Analyst

Okay. Thank you. Thank you so much.

Jugal Mantri — Group Chief Financial Officer

Okay, Arpit.

Operator

Thank you. The next question is from the line of Janakiraman Rengaraju from Franklin MF. Please go ahead.

Janakiraman Rengaraju — Franklin MF — Analyst

Hi Feroze, are you able to hear me?

Operator

Yes, you’re audible. Please go ahead.

Feroze Azeez — Deputy Chief Executive Officer

Yes, Janaki, sir, you are.

Janakiraman Rengaraju — Franklin MF — Analyst

Hi Feroze and team, commendable performance, congratulations.

Feroze Azeez — Deputy Chief Executive Officer

Thank you, Janaki [Phonetic].

Janakiraman Rengaraju — Franklin MF — Analyst

See one is, again going back to that interplay between the profitability and the cost structure, now you have gradually improved the profitability, so I can measure PBT as a percentage of AUM, I think this quarter you almost touched about some 65 basis points. Where is the limit to this, to what level can improving efficiency in your operations to what level can it improve this PBT metric by?

Feroze Azeez — Deputy Chief Executive Officer

Janaki, sir, according to ours, see like AUM is a photograph; revenues, margins are movies. So 30th June AUM if you calculate profitability as a percentage of the AUM captured on a specific day that will not be a right representation of what yield would you made as a profit after tax or profit before tax. What we believe is that making — first is, making an yield of 1.3% to 1.5% on AUM is something, which is sustainable for good point one. Point two, making more than 40%, 42% PBT and upwards of 31%, 32% PAT is what — these are the three numbers we look at internally.

Right now, of course, it can be dissected, as a percentage of AUM, but since AUM is just one specific day, and if the market is 5% down that day for example, it will distort that number. I don’t know whether I’m able to articulate. So these were the three numbers we’re internally focused on and swear back.

Janakiraman Rengaraju — Franklin MF — Analyst

Okay. So 1.3% to 1.5% and about 42% of revenue as PBT.

Feroze Azeez — Deputy Chief Executive Officer

Yes, sir.

Janakiraman Rengaraju — Franklin MF — Analyst

Right. Right.

Feroze Azeez — Deputy Chief Executive Officer

[Speech Overlap] when we’d like to discover further value-added services in our research and product group to spend some money to get a further lift in the revenues. So sometimes when you go to 43%, 44%, we like to see what else, value-added services can be given to clients. So we’re not very ambitious to bring PBT to 45%, 47% also because then you might be missing out on several other opportunities, which can give you growth. So we spend that little money and not try and get to 47%, 48%, so 40% to 44% is what we look at as a percentage — PBT as a percentage of revenue.

Jugal Mantri — Group Chief Financial Officer

Right. I think I’ll just add to what Feroze bhai has said Mr. Janakiraman is that the one simple point, which he has made if you compare the AUMs on point to point basis definitely there is a variation because if you see from 31st March to 30th June, the NIFTY was down by say about 9.5%, and mid cap and small cap, they were down by 10% to 13%. So wherever the clients, who have invested in different asset classes either being managed by you or anywhere else, their AUM numbers are down, but we have been getting trails on day-to-day basis.

Okay. So when AUM on an — on a — any particular point, if it is lower that can have a variation if you compare on point-to-point basis. But ultimately all three objectives, as highlighted by Feroze bhai, that those are the key parameters. And whatever trailer, which you’ve seen in the quarter that is the — actually in, some, in substance that is the picture, and these broad numbers even whether you compare it today or after one year, based on the operational efficiency, it might be — we can better it by another say 2% to 5% or it can come down by 2% to 5% whatever operating leverage, which we had, that would be the end result. But directionally, we will be moving in the similar way.

Janakiraman Rengaraju — Franklin MF — Analyst

Got it. And Feroze, when I look at the growth in AUM, how to look at that number. So you have the increase in the per ticket — per client the AM side, as well as the total client count both of them contribute, so how do you see that mix working?

Feroze Azeez — Deputy Chief Executive Officer

It’s very simple. I’ll just tell you how we internally look at the growth engines for AUM. So the four growth engines for AUM are as follows, and all of them seem to be very consistent. One is the embedded growth of the portfolios since the asset mix of how we have deployed our AUM is poised for an expected return of 12% to 14%. We expect at least a 10% growth in AUM by the virtue of the growth in portfolios. That’s first leg, which is the embedded growth, which this business has unlike several other businesses. That’s one.

The second engine of growth is the capacity utilization of our RMs. Our RMs today manage 28, 29 clients per head. But in our belief before COVID itself, the capacity of an RM to efficiently manage and keep his clients and family satisfied is 50. That means as a unit, I can double or close to increase our clients strength by 80% without using a new RM machinery. So that’s capacity utilization vertical of AUM growth.

The third is existing clients, like the — there are 42% of the clients of the 7,400, who have come within three years. So they start believing us more, as you start establishing credibility to what you’ve said, and they start giving you a large wallet share. That’s the third source of AUM growth.

The last source of AUM growth is my 300 account managers, who are currently being trained to become RMs and that’s the fourth leg of growth. So with this three — four legs of growth, the first one, which is the most certain one, which is the 10%, 12%, plus the other three gives us a 25% AUM growth believe over years to come not just one or two years guidance. I would say that I personally very strongly believe 20%, 25% AUM growth is with all these four cylinders of the engine is what has happened in the past and we’ve — and I would say, that’s how we look at AUM growth on a yearly basis, 20%, 25% AUM growth in a bad quarter, a market [Indecipherable] like for example, the last one.

We added INR1,355 crores, but our AUM didn’t go up because market took away some. So next quarter, we’ve got is kind [Phonetic], for example, if this INR1,300 crores, we again add INR1,500 crores, for example, and then the market gives back the INR1,300 crores, INR1,400 crores, then you have INR2,800 crore of AUM growth. So I’m not making a guidance, I’m just giving you an illustrative way of how we look at it.

Janakiraman Rengaraju — Franklin MF — Analyst

Understood. And these are — but early days for Anand Rathi Wealth as a listed entity, but have you taken any decision in terms of distribution, so this is a asset-light business, so the free cash that you generate, how do you plan to deploy that?

Feroze Azeez — Deputy Chief Executive Officer

Jugal ji, if we have a dividend policy or…

Jugal Mantri — Group Chief Financial Officer

Yeah, yeah. See there are two things, one thing is that we do have very clearly spelled out dividend distribution policy, where the guidance is about 30% to 40% of the cash accrued will be distributed. And rest of the things, as you have rightly said that these are the early days for us, and this the first time, any of the group company has been capitalized. So there are lot of opportunities in the market, and as and when those opportunities will come up. So better to say it on certain case, on the balance sheet and a scout [Phonetic] for other opportunities, which may come up in future.

Janakiraman Rengaraju — Franklin MF — Analyst

Got it. Got it. Thanks, Feroze. Thanks for the update [Phonetic]. All the best.

Feroze Azeez — Deputy Chief Executive Officer

Okay. Thank you. Thank you very much, Janakiraman [Phonetic].

Operator

Thank you. [Operator Instructions] The next question is from the line of Rohan Mandora from Equirus Securities. Please go ahead.

Rohan Mandora — Equirus Securities — Analyst

Yeah. Sir thanks for the opportunity again. Sir, this was a follow-up to an earlier question on operating efficiency income from the employee, opex, employee expenses to total revenues, where do we see that in the next two years’ time because the — for the RM employee expenses that thing would probably move in line with the growth in revenues, but how should we look at the non-RM employee expenses growth trajectory. That was one.

And second, the slide on guidance you have not given this quarter. So does the previous guidance hold or is there a change in the guidance specific to the FY23?

Feroze Azeez — Deputy Chief Executive Officer

Rohan, so very important, so I’ll take the first question first, in terms of like variable cost, you rightly identified. In case of fixed cost, that is where you get the operating leverage advantage, the reason being that the cost of the product team, operations teams and other support and services functions that remains constant even, and it is not directly in commensurate with the growth in your business. And we’re capacitized to even like as of now, if the AUM suppose from 32,000 [Phonetic], it ramps up by 50% or 100%, the incremental fixed cost increase may — will be marginally up. It will not grow with the growth in the revenue as well as in AUM. So that is the scenario with the fixed cost. Okay.

And the second point, which you…

Rohan Mandora — Equirus Securities — Analyst

Guidance.

Feroze Azeez — Deputy Chief Executive Officer

With regard to the guidance, we thought that if somebody will look at the guidance number we have already achieved the 27% in Q1 of FY23. And normally like the first two quarters are the lean period for the BFSI sector, so we thought that since we are already on the track with the guidance and have been slightly overachieved that, so we thought there is no need to reiterate what we have given in the guidance. It is up to you people to make a sense that how we are going to fare with regard to the guidance, which have been given.

Rohan Mandora — Equirus Securities — Analyst

Got you. Thanks a lot.

Operator

Thank you.

Rohan Mandora — Equirus Securities — Analyst

Thank you.

Feroze Azeez — Deputy Chief Executive Officer

Thank you.

Operator

[Operator Instructions] The next question is from the line of [Indecipherable]. Please go ahead.

Unidentified Participant — — Analyst

Hello, am I audible?

Operator

Yes, you are right. Please go ahead.

Unidentified Participant — — Analyst

Yeah. Congrats on a good set of numbers, sir. I have one question on OFA platform value. So in Q1 — so in this quarter’s presentation, you have shown that you have increased the overall clients to 18 lakhs [Phonetic], but the platform value is shown INR79,511 [Phonetic] crores. So if I compare it to the Q3, FY22 presentation, you’ve shown it 17 lakh [Phonetic] with INR84,596 [Phonetic] crores. So just wanted to check, how we can read this, this — is this the right number or is this a typo or something like that?

Jugal Mantri — Group Chief Financial Officer

No. Mr. Nityanand [Phonetic] if you will see, it’s a number, which has been given for that OFA is that we have got 5,368 [Phonetic] MFDs, which are mutual fund distributor. And the asset on the platform is 79,500 crores [Phonetic] at the end of 30th June 2022. If you compare it with the 30th June 2021 at that point of time, we had 5,058 MFDs with an AUA of 58,586 [Phonetic] crore.

Unidentified Participant — — Analyst

Okay. I was comparing with Q3, FY22 in the presentation, the figure, which was shown was 84,596 crores [Phonetic].

Jugal Mantri — Group Chief Financial Officer

I don’t have that presentation.

Unidentified Participant — — Analyst

Okay. Okay.

Jugal Mantri — Group Chief Financial Officer

I don’t have that presentation right now. But I’m giving you Y-o-Y number that — what was the number at the end of 30th June 2021, and what is the number at 30th June 2022.

Unidentified Participant — — Analyst

Okay. Got it. The second question…

Jugal Mantri — Group Chief Financial Officer

One point.

Unidentified Participant — — Analyst

Yeah.

Jugal Mantri — Group Chief Financial Officer

Yeah. It could also be mark to market [Speech Overlap] 1,500 and stuff like that. This was at 15,800, and generally, retail is it [Phonetic] more equity than debt.

Unidentified Participant — — Analyst

Okay.

Jugal Mantri — Group Chief Financial Officer

Are you okay?

Unidentified Participant — — Analyst

Yeah, yeah.

Jugal Mantri — Group Chief Financial Officer

Mark to market.

Unidentified Participant — — Analyst

Got it.

Jugal Mantri — Group Chief Financial Officer

So it impacts AUM.

Unidentified Participant — — Analyst

Got it. And the second question is related to the Digital Wealth AUM. So we can see that it has degrown slightly for this quarter. So what is the outlook for this? And if you can share what would be the percentage of the Digital Wealth overall in terms of business for next three years, five years. What is the overall bifurcation we can have within the overall business.

Feroze Azeez — Deputy Chief Executive Officer

So Nithya [Phonetic], right.

Unidentified Participant — — Analyst

Yeah. Nityanand, myself [Phonetic] Nityanand.

Feroze Azeez — Deputy Chief Executive Officer

Nithya, so basically like we’ve always stated during the IPO as well, these two businesses, which are the digital businesses we are learning and we are making sure that we adapt to the changing environment. So what we look at from a three year to five year perspective is a robust growth of 30%, 35% on a lower base like this.

But since we are in the stage, where we have come to have a digital business, which is not burning cash and that’s something, which we are reasonably clear about. I think 30%, 35% growth on a lower base of AUM is something, which is reasonable, as we learn and we adopt and develop a strategy, which will make it more monetizable.

And for the OFA business, of course, today we have used it as a SaaS platform, monetizing it. We have some ideas of monetizing it very effectively. But I would not like to comment and create an expectation on businesses, which we are wanting to build over the future. That’s why guiding — giving a guidance of three years to five years on a business, where you’re trying to develop something to be making sure that you capture the adjacent segments, it’s something we should look at it on a yearly basis.

Unidentified Participant — — Analyst

Okay. Got it. And the last question was on the guidance, the last participant has also asked. So I mean, are we — I mean, so we are on the path to achieve the guidance, which we have shared last year right for FY23. So are we going to up the guidance overall or what is the overall say on that?

Feroze Azeez — Deputy Chief Executive Officer

Nithya like Jugal ji said that if now you have to extrapolate in a quarter like how it has been April to June. If we have done 26%, 27% whatever that second digit decimal penetration into the guidance, and generally we do 22%, 23% in the first quarter. It’s for you to extrapolate, and this was not periods, where it was as easy as breeze right, April to June quarter. So it’s for you to extrapolate and see it. Well — but we feel very, very confident about the guidance.

Unidentified Participant — — Analyst

Okay. Yeah. Thank you. Thanks a lot.

Operator

Thank you. The next question is from the line of Ajox Frederick from Unifi Capital. Please go ahead.

Ajox Frederick — Unifi Capital — Analyst

Thank you for the opportunity, sir. Sir, my question is again on the OFA. What quantum of revenues coming from that particular business?

Feroze Azeez — Deputy Chief Executive Officer

Jugal sir, you may want to tackle that.

Jugal Mantri — Group Chief Financial Officer

Yeah. See as of now since in case of OFA, as it is being said that this is a IT platform, and where we are charging fixed fee from these MFDs. So monthly income is in the range of about INR40 lakh to INR50 lakh fees, which we are collecting from these MFDs.

Ajox Frederick — Unifi Capital — Analyst

In total, right. Okay. Okay.

Jugal Mantri — Group Chief Financial Officer

INR40 lakh to INR50 lakh fees per month. Yeah.

Ajox Frederick — Unifi Capital — Analyst

Per month. Okay.

Jugal Mantri — Group Chief Financial Officer

Yeah.

Ajox Frederick — Unifi Capital — Analyst

And sir, I mean, some of our peers are using a similar model and charging the AUM right as a sub broker or whatever you may call it, and they are charging 30 bps about [Phonetic] on the AUM. So what stops us from doing that?

Rajesh Bhutara — Chief Financial Officer

Mr. Ajox, our process is that we’re — anyway we’re the largest player, and once you grow it and you penetrate the market to the fullest extreme, thereafter, only you should focus on the revenue, as Feroze bhai has said that these are the experimental businesses, where we are into it. And initial objective is to gain the market share thereafter, explore it from the revenue perspective to the fullest. So as of now, when you are building up the site capacity and penetration, the focus is on acquiring the market there, not on generating the revenue because anyway these — both these businesses are positive contributor to the Group.

Ajox Frederick — Unifi Capital — Analyst

Got it, sir. Got it. Sir, just one question on the MLD. To a new customer, how is MLD being positioned [Phonetic] as a guaranteed product or how is the sales pitch being done in a very generic manner?

Feroze Azeez — Deputy Chief Executive Officer

So to any customer for that matter we look at a portfolio with a plan A and a plan B. We create portfolios that it all emanates from client objective. If the client objective is, let’s assume 12%, we try and see what is the minimum three year standard deviation at which this can be delivered. So you — that’s a team, which actually stimulate several portfolio combinations, as percentage of these three products, equity mutual fund, debt mutual fund and MLD.

Depending on the risk return profile 12%, then we try and backward calculate what is the minimum standard deviation at which that can be achieved. And then we drop what is the most efficient portfolio, which can achieve an expected return of 12%, and then, we give a client, an alternative of having a certain percentage in MLD 10%, 20%, 30% and 35%. If the client understands and say 30% in MLD, then we tell them, the standard deviation of our portfolio with this much amount of mutual fund, this much amount of debt mutual fund, equity mutual fund and MLD this is a three year standard deviation, this is the beta, this is the maximum drawdown you can expect on a three year holding period.

And then when the client signs up for that portfolio, MLD is a resultant outcome of that decision. MLD is not standalone sold. If I went in the marketplace and if somebody said take this crore, put it in MLD that’s not the way we work. We like to design a portfolio on the risk return objective and then work backwards and whatever is the MLD proportion, which gives an efficient combination that’s how an MLD is sold, and that’s why you see such repeat buying.

I’m sure a few of you would have seen during IPO presentations close to 78% [Phonetic], 80% of repeat buyers. The reason why it is repeat buyer, it is not being sold as a standalone product. It’s a proportion in a portfolio. When there is a maturity automatically, there is a void and the void gets filled with a new fresh issuance. Does that answer, sir?

Ajox Frederick — Unifi Capital — Analyst

Okay. Yeah. That’s very helpful, sir. And sir, I’m assuming current MLDs are three year products right, whatever is being [Phonetic] designed right now?

Feroze Azeez — Deputy Chief Executive Officer

Most three year and five year.

Ajox Frederick — Unifi Capital — Analyst

Okay. And unusually [Speech Overlap] yeah, sure. Yeah. Please go ahead.

Feroze Azeez — Deputy Chief Executive Officer

Yeah. Please go ahead.

Ajox Frederick — Unifi Capital — Analyst

Please go ahead, sir.

Feroze Azeez — Deputy Chief Executive Officer

So this is both three year and five year. Okay. We issue MLDs on the basis of the probability of its success. If the markets are extremely [Phonetic] overvalued, then you would rather have a five year MLD. So to answer your pointed question, it could be three year and five year. Proportions could be two-thirds favoring five years and one-third favoring three years at the moment.

Ajox Frederick — Unifi Capital — Analyst

All right, sir. That’s very helpful, and all the best for your future. Thank you very much.

Feroze Azeez — Deputy Chief Executive Officer

Thank you, sir.

Operator

Thank you. The next question is from the line of Mr. Bhuvnesh Garg from Investec Capital. Please go ahead.

Bhuvnesh Garg — Investec Capital — Analyst

Yeah. Hi, sir, thank you for the opportunity. Sir, first question on your Digital Wealth and OFA, so just want to understand the difference between these two because I see in your presentation in Digital Wealth, you had mentioned that it’s a partner led distribution, whereas OFA also, you are having MFDs, as your partner. So just wanted to understand what’s the difference between these two — Digital Wealth and OFA. That’s my first question.

Feroze Azeez — Deputy Chief Executive Officer

Digital Wealth business is actual — is a kind of a sub-broker model, okay, to cater to firstly, the segment is different. Segment for MFDs is very retail, SIP driven and it’s a SaaS platform. OFA is a SaaS platform, software-as-a-service. Digital Wealth Management is providing the HNI proposition to a mass affluent using the help of technology powering the human. So the capacity of managing clients could be 150, 200 in the DWM.

You’re trying to make sure that the HNI proposition is delivered to a mass affluent with an internal team, on an external team of relationship manager, who can reach out to three times, four times and make it a more profitable business to go to a 1 crore client or a 50 lakh client, that’s the difference. So DWM is an interpolation of the private wealth business to the mass affluent. OFA is the SaaS platform for a fee, if [Phonetic] MFD uses our technology and white labels it and solds it to the client. Is that clear?

Bhuvnesh Garg — Investec Capital — Analyst

Okay. So in Digital Wealth, if I understood correctly, your RM is your employee right, so whereas in OFA, it’s again, it is MFD?

Feroze Azeez — Deputy Chief Executive Officer

Yes. See OFA has only technology, DWM has an HNI proposition as similar as it’s possible to the mass affluent because if we send the conventional relationship manager, who can manage only 50, 60 clients to a client, who has only 50 [Phonetic] lakhs, it’s not a viable business. So for it to become a viable business technology should have — technology should be able to power an RM to manage 200 clients, then it becomes a viable business. That’s what — that’s why we call it an experiment because you learn, as you go along. A private wealth division is 20 years old, 18 years old, whatever that number is, this you’re learning.

So you will strategize and learn and have the agility in the initial part of the business. That’s why we’ve been so clear that you should not extrapolate it 5 years, 10 years, unlike most technology businesses, who extrapolate and then say, this should be the valuation and stuff. So we are trying to learn. We are very agile in these businesses.

Bhuvnesh Garg — Investec Capital — Analyst

Okay. And here the — I mean compensation for RM would be the same for your private wealth RM or…

Operator

Sorry to interrupt Mr. Garg…

Bhuvnesh Garg — Investec Capital — Analyst

Yeah.

Operator

May I request you to join the queue again, the question queue again, as there are many participants waiting for their turn.

Bhuvnesh Garg — Investec Capital — Analyst

Sure, sir, and thanks, sir.

Operator

Thank you so much. The next question is from the line of Devesh Agarwal from IIFL Securities. Please go ahead.

Devesh Agarwal — IIFL Securities — Analyst

Good evening, everyone, and thank you for the opportunity. I just wanted to know in your private wealth business, I see on a sequential basis, there has been a 60% growth in net flows. Can you share the breakup between the different products, share how the flows have been?

Feroze Azeez — Deputy Chief Executive Officer

Yeah. So I think we will be [Phonetic] tentative. Jugal ji, will have the precise numbers or [Indecipherable] tentative one.

Jugal Mantri — Group Chief Financial Officer

Yeah. We can — if you will compare it like on the mutual front, as against 15,400 [Phonetic] in 30th June 2021, it has grown to 18,600 [Phonetic]. And in case of MLD against INR9,200 [Phonetic] crores, it is [Indecipherable]. You wanted AUM mix?

Devesh Agarwal — IIFL Securities — Analyst

No, no, sir. The net flows INR1,355 [Phonetic] crore breakup.

Feroze Azeez — Deputy Chief Executive Officer

Okay. I remember that number, Jugal.

Jugal Mantri — Group Chief Financial Officer

Yeah, yeah, yeah.

Feroze Azeez — Deputy Chief Executive Officer

INR1,355 [Phonetic] crore. So INR800 crores to INR900 crores of equity mutual funds, INR100 crores [Phonetic], INR200 [Phonetic] crores of debt mutual funds, and other securities of another INR200 crores. This is the breakup.

Jugal Mantri — Group Chief Financial Officer

Correct.

Devesh Agarwal — IIFL Securities — Analyst

Okay. And when we say INR200 crore — when we say INR200 crores of MLD flows, so the earnings — the revenues that we made in the quarter if I assume a 7% yield, that would imply itself INR1,100 crore, INR1,200 crore. So how do I tie up these two numbers?

Feroze Azeez — Deputy Chief Executive Officer

So you are mixing [Speech Overlap]. The commission you make is on the gross flow, right. Like a previous call, previous participant asked the question, what is the net flow in MLDs? Net flow in MLD this quarter could be minuscule, but there is maturity and there is reinvestment. What you earn is a percentage of gross mobilization. Does it answer?

Devesh Agarwal — IIFL Securities — Analyst

Understood. Yeah. So what was the gross number for the quarter?

Jugal Mantri — Group Chief Financial Officer

The gross mobilization for MLD was [Indecipherable] INR1,100 crores.

Devesh Agarwal — IIFL Securities — Analyst

And that includes your secondary sales or secondly sales are different?

Jugal Mantri — Group Chief Financial Officer

No, no, no, no, this is primary mobilization.

Devesh Agarwal — IIFL Securities — Analyst

And how much would be secondary, sir?

Jugal Mantri — Group Chief Financial Officer

Secondary might be about say 30% of this [Phonetic].

Devesh Agarwal — IIFL Securities — Analyst

Around 40%. Okay. And third-party, the Edelweiss MLDs that you do would be one-third of your overall numbers?

Jugal Mantri — Group Chief Financial Officer

Yes.

Devesh Agarwal — IIFL Securities — Analyst

Understood.

Jugal Mantri — Group Chief Financial Officer

INR390 crore [Speech Overlap].

Devesh Agarwal — IIFL Securities — Analyst

How much?

Jugal Mantri — Group Chief Financial Officer

INR390 crore out of the INR1,100 crore.

Devesh Agarwal — IIFL Securities — Analyst

INR390 crore. Okay. And one final question, if I see the portfolio mix of the AUM product mix in last one year, the share of equity has gone up from 39% to 46%, this would have also helped you in your blended yields. So do you think that there could be some churn that you would be doing from equity to debt and that can have some impact on your yields going ahead?

Feroze Azeez — Deputy Chief Executive Officer

So to answer your pointed question, the answer is no. We have different clients with different return objectives. We generally look at allocating money into equity. And 46% is a reasonable representation of what we currently aggregate recommend to our clients.

Devesh Agarwal — IIFL Securities — Analyst

Perfect. That’s answered my question. Thank you so much.

Operator

Thank you. Due to time constraints, we’ll have to close this call, and I would request the management for the closing comments.

Feroze Azeez — Deputy Chief Executive Officer

Thank you. I take this opportunity to thank everyone for joining on the call. I hope we have been able to address most of the queries, but it appears that there was some pending queue, so we will request for all the participants, who have not been able to raise their questions or put up their questions, they please kindly get in touch with our Investor Relationship — Relations team or Strategic Growth Advisors or Investor Relationship Advisor. Thank you all.

Operator

[Operator Closing Remarks]