Reliance Nippon Life Asset Management Company

First Indian Asset Management Company to go public

Third largest mutual fund by AUM size with second largest retail investor portfolio

CM RATING

50/100

Reliance Nippon Life Asset Management Company, promoted by Reliance Capital in February 1995, is one of the largest asset management companies in India, managing total AUM of Rs 384062 crore end August 2017. The company was ranked the third largest asset management company, in terms of mutual fund quarterly average AUM (QAAUM) with a market share of 11.4% end June 2017. The company also ranked the second most profitable asset management company in India for FY2016. The company is involved in managing mutual funds (including exchange traded funds called ETFs), managed accounts, including portfolio management services, alternative investment funds (AIFs) and pension funds, and offshore funds and advisory mandates. Mutual fund scheme wise market share of the company stands at 9.5% in equity based schemes, 8.9% in debt-liquid, 12.6% in debt-others and 25.4% in ETFs schemes end June 2017.

The company is promoted by Reliance Capital, a diversified RBI-registered non-banking finance company with business interests including in asset management and mutual funds, life, health and general insurance, commercial and home finance, stock broking, wealth management services, distribution of financial products, asset reconstruction and proprietary investments. Reliance Capital is a part of Anil Ambani Group, which has business interests in financial services, telecommunications, power, energy, infrastructure, and defense. The co-promoter of the company, Nippon Life Insurance Company (Nippon Life) is one of the leading private life insurers in Japan with assets of approximately US$ 577 billion, as of March 2017. Nippon Life offers a wide range of financial products, including individual and group life and annuity policies.

Vijayendra Nath Kaul is the non-executive chairman of the company. Sundeep Sikka is the executive director and chief executive officer of the company.

The mutual fund business managed QAAUM of Rs 222964 crore and 7.01 million investor folios with 55 open-ended mutual fund schemes including 16 ETFs and 174 closed ended schemes end June 2017. The QAAUM of the company has increased at CAGR of healthy 22.2% from FY2013 to FY2017. The company has a pan-India network of 171 branches and approximately 58,000 distributors including banks, financial institutions, national distributors and independent financial advisors (IFAs) end June 2017.

As part of managed accounts business, the company provides portfolio management services to high net worth individuals and institutional investors including the Employees Provident Fund Organisation (EPFO) and Coal Mines Provident Fund Organisation (CMPFO). Reliance AIF Management Company (Reliance AIF), a subsidiary of the company, manages two alternative investment funds, which are privately pooled investment vehicles registered with SEBI. The company managed total AUM of Rs 150393 billion as part of managed accounts business end June 2017. Reliance Capital Pension Fund, one of the group companies that ceased to be subsidiary of the company pursuant to sale of 51% stake on 6 July 2017, received a certificate of commencement of business as a pension fund manager from the Pension Fund Regulatory and Development Authority (PFRDA) in 2009 and manages pension assets under the National Pension System (NPS).

The company manages offshore funds through subsidiaries in Singapore and Mauritius and have a representative office in Dubai, which enables to cater to investors across Asia, Middle East, UK, US, and Europe. The total AUM stood at Rs 2207 crore under offshore fund management portfolio. The company also acts as the advisor for India focused equity and fixed income funds in Japan and South Korea. Further, it managed Rs 5277 crore of international advisory mandates end June 2017.

The Offer and the Objects

The offer consists of a fresh issue of up to 2.45 equity shares (face value Rs 10 per share) of the Company totaling up to Rs 616.9 crore at the upper price band of Rs 252 per share and an offer for sale of up to 3.67 crore equity shares by Reliance Capital (1.12 crore equity shares) and Nippon Life Insurance Company (2.55 crore equity share) totaling up to Rs 925.3 crore at the upper price band. The offer shall constitute 10% of the post-offer paid-up equity share capital of the Company.

The price band is Rs 247 to Rs 252 per share. The issue is to be made through the book-building process and will open on 25 October 2017 and close on 27 October 2017.

Setting up new branches and relocating certain existing branches: The company proposes to utilize Rs 38.31 crore out of the net proceeds towards setting up new branches and relocating certain existing branches. About Rs 23.72 crore will be utilized for setting up of 150 new branches and Rs 14.59 crore for relocating 54 branches.

Upgrading the IT system: The company intends to continue upgrading and strengthening information technology infrastructure and capabilities to help scale up operations and propose to utilize Rs 40.65 crore from the net proceeds towards for the same. It would upgrade existing apps and corporate website by adding more features to enable easier and faster customer transactions and also make it device agnostic. The company would utilize Rs 10.05 crore for digital initiatives, Rs 10.05 crore for the transformation, Rs 5.10 crore for automating the campaign management initiatives, Rs 8.18 crore for core applications and Rs 7.26 crore for upgrading IT infrastructure.

Advertising, marketing and brand building activities: Penetration of mutual funds is low in India with the share of mutual funds in net financial savings of Indian household was just 2.94% in the FY2016. Therefore, it is imperative for the company to advertise schemes/products/funds to gain market share. The company intends to deploy Rs 72.09 crore towards marketing and brand building exercise.

Lending to Subsidiary (Reliance AIF) for investment as continuing interest in the new AIF schemes managed by Reliance AIF: The company intends to utilize Rs 125 crore to invest in Subsidiary, Reliance AIF by way of debt. The company has entered into an inter-corporate deposit facility agreement dated 6 October 2017 with Reliance AIF for an amount of Rs 125 crore to be disbursed in one or more tranches as decided by the company. Reliance AIF shall pay interest on the principal amount outstanding from time to time, as well as on other monies that may accrue under the terms of the AIF Loan Agreement, at a fixed rate of 12% per annum on a quarterly basis.

Investing towards continuing interest in new mutual fund schemes: The company intends to utilize Rs 100 crore towards MF Continuing Interest at or above the minimum level prescribed by SEBI MF Regulations. The actual deployment of proceeds may vary between open and close ended scheme depending on market conditions, type of schemes and new schemes launches subject to SEBI approval.

Funding inorganic growth and other strategic initiatives: The mutual fund industry has seen several acquisitions in the last five years where players have bought out the entire stake in other AMCs. The industry with a QAAUM of Rs 19.52 billion end June 2017 is still scattered amongst 41 players. The industry is concentrated with the top 10 players accounting for 80% of the industry in terms of AUMs and further consolidation is expected in the industry (Source: ICRA Report). The company therefore continues to selectively evaluate targets or partners for inorganic growth and investments in order to consolidate market position. In 2015, the company acquired, from Goldman Sachs Asset Management (India), the asset management rights, obligations, liabilities, responsibilities and duties of 12 schemes launched by the Goldman Sachs Mutual Fund, thereby acquiring an AUM of Rs 7132 crore at an approximate consideration of Rs 243 crore. The company intends to utilize Rs 165 crore towards potential inorganic growth and strategic initiatives such as acquisition of AUM under mutual fund schemes, AIF schemes and portfolio management schemes by way of one or more transactions.

Strengths

The company is the third largest asset management company in India, in terms of mutual fund QAAUM, end June 2017. The large size provides benefit such as economies of scale, particularly in the areas of fund management, marketing and distribution. The company has strong relationships with distributors and investors, consisting of individual (retail and HNIs) and institutional investors. The company has a diversified investor base with 7.01 million investor folios, which comprised 6.72 million retail folios end June 2017. The monthly average AUM (MAAUM) of retail investors managed was the second largest with a total market share of 13.6% among asset management companies in India. About 77 of the S&P BSE 100 companies, which include top 100 companies by market capitalization, had invested with the company, while they also managed assets for other small, medium and large corporates in India.

The company has a strong presence across India, have set up subsidiaries in Singapore and Mauritius and a representative office in Dubai. A pan-India network of the company comprises of 171 branches, of which 132 branches are located in B-15 locations (small towns beyond the top 15 cities), and approximately 58,000 distributors end June 2017. The branches network of the company was spread across 145 districts in India. The distributors comprise IFAs, foreign banks, Indian private and public sector banks, broking companies, national distributors and digital platforms. As a result of well diversified and geographically spread distribution network, none of distributors account for over 4% of AUM. Further, the company had the highest total mutual fund MAAUM among all asset management companies in India from beyond top 15 locations end June 2017. Also, no single investor contributes more than 3% of closing mutual fund AUM end June 2017.

The company has a well-diversified product suite across mutual funds and ETFs, managed accounts and offshore funds and advisory mandates. It managed 55 open-ended mutual fund schemes including 16 ETFs, which covered various indices across different asset classes. As part of managed accounts business, it provides portfolio management services and manages AIFs and pension funds. The company also manages offshore funds, which enables cater to investors across Asia, Middle East, UK, US, and Europe.

The penetration levels of mutual funds in the country remain very low, with a total AUM to GDP ratio of about 12%, against a global average of 55% and upwards of 100% in countries like United States of America and Australia. As per the ICRA report, the Indian mutual fund industry is expected to grow at a CAGR of 20% between the financial years 2018 and 2022, with the average AUM expected to grow to Rs 45 trillion by March 2022. Growth rates are expected to be higher over the financial years 2018 and 2019 due to buoyant capital markets coupled with an increase in retail participation, after which the growth rate is expected to taper given the gradual increase in scale. A favorable demographic profile with a young working population, rising income levels and the currently low penetration of mutual funds are expected to support the growth. Improving macroeconomic conditions and positive capital market indicators provide a conducive environment for the mutual fund industry. Individual investors are expected to remain a key driver for growth in mutual fund assets.

With a large part of the retail portfolio invested in equity schemes, the growth in the retail segment would also help drive the equity AUM growth. The equity AUM is expected to grow at a CAGR of 25%, outperforming the overall industry AUM growth. The share of equity and related schemes in the total AUM is expected to increase to approximately 39% as of March 2022 as against 32% as of March 2017 (based on QAAUM) and 35% as of June 2017 (based on MAAUM). The debt AUM (liquid and other debt funds), is expected to grow at a CAGR of 17%, and the share of debt (inclusive of liquid schemes) is expected to moderate to 58% as of March 2022 as against 65% as of March 2017 (based on QAAUM) and 62% as of June 2017 (based on MAAUM).

Weaknesses

Revenue and profit are largely dependent on the growth, value and composition of AUM of the schemes managed, which may decline. The significant majority of revenue comes from management fees amounting to 91.1% of total revenue in FY2017. Management fees are usually calculated and charged to clients as a percentage of the AUM of the schemes. Any decrease in such AUM will cause a decline in management fees and therefore total and net revenue. The AUM may decline or fluctuate for various reasons, many of which are outside control, such as declines in the Indian equity markets, changes in interest rates and defaults, withdrawals or Fund Exits etc.

Underperformance of any investment products could lead to a loss of investors and reduction in AUM and adversely affect revenue and reputation.

The company proposes to utilize the net proceeds (Rs 165 crore) to undertake acquisitions, which may turn out to be costly or may not yield expected benefits.

Valuation

Consolidated sales of the company has increased at CAGR of 21% from Rs 608.74 crore in FY2013 to Rs 1307.50 crore in FY207. The company has posted healthy 19% CAGR growth in profit before tax to Rs 581.31 crore in from FY2017 from FY2013. PAT has increased at CAGR of 15% to Rs 402.76 crore in FY2017 from FY2013.

The company has consistently delivered RoE of above 20% for last three years to FY2017.

Post-issue valuation is Rs 15422 crore at the upper price band of Rs 252 per share and Rs 15116 crore at the lower price band of Rs 247 per share.

EPS for FY2017 works out to Rs 6.58 on post-IPO equity basis. The scrip is offered at P/E multiple of 38.3 times FY2017 EPS at the upper price band.

The post-issue book value (BV) is Rs 37. The scrip is offered at a P/BV multiple of 6.8 times at the upper price band of Rs 252 per share. There is no comparable peer listed in India.