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This Rs 4.5 lakh crore asset manager is losing market share, but stock is up 100%

Analysts now expect returns from the stock to moderate after a steep rally.

, ETMarkets.com|
Updated: Dec 03, 2019, 07.39 PM IST
Mumbai brokerage Sharekhan project 12-15 per cent further upside for the stock.
NEW DELHI: This Rs 4.5 lakh crore asset manager has lost market share across segments in recent months, and has seen revenue fall sequentially for six straight quarters till September, 2019.

But the stock has rallied 126 per cent year-to-date.

Analysts now expect returns from the stock to moderate after a steep rally, even as valuations, on the face of it, appear to be at a steep discount to the closest listed peer.

The stock is Nippon India Mutual Fund (erstwhile Reliance Nippon Life AMC or RNAM).

But peer comparison makes the stock look cheap. Nippon India Mutual Fund commands a market capitalisation of Rs 22,000 crore, which is 5 per cent of the total asset under management (AUM) of Rs 4,53,517 crore that the AMC had as of September 30.

Rival firm HDFC AMC commands a market capitalisation of Rs 76,000 crore, which is 21 per cent of the assets it manages.

One major recent trigger for the Nippon India Mutual Fund stock was a change guard at the company after Japanese partner Nippon Life acquired a controlling stake of 75 per cent in the asset manager from erstwhile promoter Reliance Capital, thereby removing an overhang over promoter’s financial muscle.

Mumbai brokerage Sharekhan project 12-15 per cent further upside for the stock. It said the big discount vis-à-vis HDFC AMC partly reflects the slowdown in AUM growth, which it feels could be the result of internal challenges such as exits of HNI and debt investors and exposure to the erstwhile promoter group’s debt.

The operating revenue trajectory is losing steam. For Nippon India Mutual Fund, core revenues fell 8 per cent sequentially in September quarter against HDFC AMC’s 1.3 per cent decline. Growth in equity AUM, which accounts for 75 per cent of profit before tax (PBT), fell 2.5 per cent YoY for the quarter against an 8 per cent rise for the listed peer.

Nippon India is already busy fixing things. “With the resumption of growth and strengthening of the balance sheet, there is headroom for bridging this valuation gap, which can be a trigger for re-rating of the stock,” Sharekhan said.

Nomura India data suggests the AMC lost some 460 basis points market share in the debt segment to 7.7 per cent in September on a YoY basis and 100 basis points market share in the equity segment to 8.1 per cent in last 12 months due to the promoter transition.

Liquidi fund

In its heydays in 2007, the AMC – then known as Reliance Capital Asset Management – was India’s top private sector asset manager. By 2011, it lost the top spot to HDFC Mutual Fund. Since March 2018, its share of the mutual funds market slipped to single digits.

Financial trouble at the overleveraged Reliance Group affected its business till the Nippon Life takeover.

Also, the industry itself has been facing some trust deficit following a credit crisis in debt market and the distress that some fund houses faced because of their exposure to weak non-banking finance companies (NBFC), leading to investors’ aversion towards debt funds.

The Nippon management believes given the promoter firm’s global relationships and repute among institutions, it would be able to regain lost market share.

But there is no timeline.

“While Reliance Capital’ exit augurs well for the AMC in the long run, much of the positives appear priced in with moderation in performance in a challenging macroeconomic environment. Structurally, the AMC business in India remains a long-term growth story due to low penetration, which will be beneficial for Nippon India MF. Axis Capital is factoring in a 12 per cent mutual fund AUM growth and lower tax rate for the industry over FY19-FY22.

The brokerage’s price target of Rs 360 on the Nippon Indian stock has already been breached. On Tuesday, the stock traded at Rs 359 on BSE.

JM Financial said valuations of AMC stocks, be it Nippon India or HDFC AMC, imply aggressive AUM growth estimates over the next 10 years. These estimates imply a 20 per cent earnings CAGR for Nippon India and 27 per cent for HDFC AMC.

“It is pertinent to note that HDFCAMC and /Nippon India delivered 19 per cent and 11 per cent growth (CAGR), respectively, over FY09-19. As a result, we see low margin of safety, considering the fact that AUM and earnings for this business remain cyclical,” it said.

The brokerage has a ‘hold’ rating on Nippon India with a price target of Rs 340, valuing it 34 times FY21 EPS. This suggests a possible downside for the stock.
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