360 One WAM Ltd and Anand Rathi Wealth Ltd were the listed pure plays in wealth management in India. However, that will no longer be the case with 360 One’s acquisition of B&K Securities and B&K Finserv.
360 One recently held an analyst call to discuss its acquisition of the B&K (Batlivala and Karani) group.
B&K Finserv is into mutual fund distribution and fits well into 360 One’s existing business. As such, its acquisition price of ₹110 crore is small. The big one to focus on is B&K Securities’ stock broking business, which will be acquired through a combination of cash and equity, split into ₹600 crore cash and 360 One’s shares worth about ₹1,174 crore.
Acquisition math
Before getting into the merits of the acquisition, it is essential to understand 360 One’s income streams. The company has two revenue streams—annual recurring revenue (ARR) and transaction-based revenue (TBR). ARR is earned from AMC, PMS and AIF for selling their products and advisory fees for managing discretionary and non-discretionary equity portfolios. TBR is earned from the broking of listed and unlisted equity and debt products and the sale of structured products, etc. As 360 One did not have its own equity broking, it was earning this revenue by partnering with the other brokers.
360 One is likely to earn ₹2,400 crore in FY25 based on Motilal Oswal Financial Services’ estimates, with 70% coming from ARR and the rest from TBR. B&K’s equity broking revenue for FY25 is likely to be about ₹200 crore. The business has been valued at ₹1,774 crore or nearly 9X of revenue.
The valuation is close to that of DAM Capital Advisors Ltd, which was listed in December and has a market capitalization of nearly ₹1,600 crore. But B&K’s advantage is that it derives almost its entire revenue from equity broking whereas nearly 70% of DAM’s revenue stream came from the lumpy stream of merchant banking or investment banking in 9MFY25.
The B&K acquisition is expected to lead to around 4% equity dilution for 360 One on the current equity base of 388 million equity shares. The fully diluted equity would expand by 10 million shares and 3.2 million share warrants to be issued to B&K promoters plus 2.8 million Esops to its leadership employees.
On the other hand, 360 One’s net profit can rise by around ₹100 crore based on Motilal’s estimates, which is roughly 10% of its FY25 estimated profit, making the transaction marginally earnings per share (EPS) accretive.
The premium question
Most wealth managers trade at a premium to brokers, who charge transactional or broking fees that are prone to fluctuations in stock market trading volume. To an extent, the lower cyclicality in revenue and sticky client relationships justify this premium.
However, 360 One’s earnings profile becomes similar to that of Nuvama Wealth, which already has equity broking. The moot question then is whether it will continue to command the same valuation premium over Nuvama. Based on Motilal’s FY25 EPS estimates for both companies, 360 One trades at a 40X price-to-earnings multiple compared to 20X for Nuvama, which translates into a 100% premium.
To be sure, not all are impressed with the B&K acquisition. “While management highlighted the deal takes it closer to the full-service model (i.e., wealth, asset management and capital markets verticals), we are not sure if this was always the end goal,” said Kotak Institutional Equities’ analysts when the deal was announced. Besides, the ongoing weakness in broader stock markets can hurt earnings.