Value a listed AMC with Rs 1.2 lakh crore of AUM, a 0.52% revenue yield falling 3 basis points a year, 12% AUM growth and costs growing 8%. Build three years of profit, state every assumption, and show which one drives the P/E you would pay.

Operating profit rises only from Rs 324 crore to about Rs 347 crore in three years, even as AUM grows 40%. The falling yield absorbs most of the AUM growth and costs absorb the rest. On a 20 times exit and a 12% return that is worth about 15.2 times today's earnings. The yield trend moves that answer about as much as AUM growth does, so it is the assumption to defend first.

Think of a toll road whose traffic rises every year while the authority keeps cutting the toll. Revenue depends on cars times the toll, and if the toll falls fast enough, more traffic barely helps. An AMC's revenue is AUM times the revenue yieldFee revenue as a share of average AUM, after commissions paid to distributors. It falls when the mix shifts to cheaper funds or when fee caps tighten on larger schemes., so AUM growth and yield change matter in equal measure. Costs are largely fixed in the short run: salaries, technology, branches and marketing. That makes profit sensitive to anything that moves revenue.

Treat each year's AUM as the average for the year, a simplification worth stating. Year one: AUM Rs 134,400 crore at a 0.49% yield is revenue of Rs 658.6 crore; costs are Rs 324 crore; operating profit is Rs 334.6 crore. By year three AUM is 40% higher but revenue only 16% higher, and operating profit has crept from Rs 324 crore to Rs 347 crore. The model is simple on purpose. An interviewer cares that every line has a stated assumption more than that the model is detailed.

Work backwards from the exit. Year-three profit after tax of Rs 260.3 crore at 20 times is a value of Rs 5,205 crore in three years. Discount it at 12% for three years and it is worth Rs 3,705 crore today. Divided by today's profit of Rs 243 crore, that is about 15.2 times earnings, the most you would pay if every assumption holds. Dividends would add to the return, so a fuller model adds them; the comparison between assumptions does not change.

Flex each assumption by a reasonable amount, one at a time. AUM growth of 9% or 15% moves year-three profit between Rs 290 and Rs 407 crore. A yield decline of 4 or 2 basis points a year moves it between Rs 296 and Rs 398 crore. One basis point a year on the yield is worth about as much as three percentage points of AUM growth, so the fee trend deserves as much attention as the flows. Cost growth matters least, between Rs 326 and Rs 368 crore. If the yield held flat at 0.52%, year-three profit would be Rs 499 crore, which shows how much the decline costs.

Close with the view and its weak point. At about 15.2 times earnings Arthavistar is fairly priced on these assumptions, and the case for paying more rests on the yield falling slower than 3 basis points a year. The evidence to look for is the mix: the share of equity AUM, which earns the most, and whether direct plans and passive funds are taking flows. Say the limit too: market falls hit AUM and profit together, and a three-year model with steady 12% growth hides that cycle entirely.