Viewpoint

Reliance Nippon Life Asset Management Ltd

Strong player with bright long-term prospects

Sector: Banks & Finance

Reliance Nippon Life Asset Management (RNAM) is an attractive
play on the secular theme of Indian financialisation of savings (the
Company Update secular long-term migration of household savings from physical
assets and traditional bank deposits to financial instruments).
Change
Despite the recent volatility, retail inflows in asset management
View: Positive  companies have been resilient (indicated by steady SIP flows) and
increasing investor awareness. The retail segment’s contribution to
CMP: Rs. 371
total assets under management (AUM) is 26% for RNAM (as against
Upside potential: 12-15% á an industry average of 20%), which is a positive, as it is considered a
relatively sticky segment. The company also has lower concentration
á Upgrade  No change â Downgrade risk as no distributor has more than 5.5% contribution in AUM. The
top five AMCs (have ~58% AUM market share) are expected to gain
disproportionately due to their strong distribution network and brand
Company details reputation. The recent acquisition of 75% stake of RNAM by its foreign
owner removes ownership overhang. Going forward, management is
Market cap: Rs. 22,679 cr
confident of regaining lost ground (in AUM growth), which we believe,
52-week high/low: Rs. 387/120
is achievable, considering its strength in B30 centres (and ramping
up well). RNAM has stated it can increase the number of branches
NSE volume: (No of from 727 to 977 easily without needing capital at present level of
19.3 lakh
shares) capital adequacy and healthy solvency ratio. With a new brand
name and a strong and stable owner, we expect RNAM to improve its
BSE code: 540767 flows and/or curb outflows. We introduce FY2022E estimates in this
note and rollover the target multiple. We maintain our Positive view
NSE code: RNAM
and expect potential upside of 12-15%.
Sharekhan code: RNAM Our Call
Free float: (No of Valuation: RNAM is currently available at 24.2x its FY2022E EPS, which
15.3 cr we believe is reasonable. Given the steep valuation differential when
shares)
comparing on an MCap/AUM basis, RNAM is available at ~5% of AUM
compared to HDFC AMC, which is at ~21% of AUM, indicating the steep
Shareholding (%)
discount gap for RNAM. This is partly due to AUM growth slowdown
Promoters 75.0 seen in RNAM primarily due to internal challenges (exit of HNI, debt
investors, exposure to group debt etc.). We believe with resumption
FII 7.5 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
DII 3.9 the stock. The company remains committed to a strong retail business
on account of SIPs and higher B30 penetration, which we believe is a
Others 13.6
sound and sustainable strategy for the long term. Going forward, we
expect economies of scale to be an important driver for growth and
Price chart profitability. We introduce FY2022E estimates in this note and rollover
400 the target multiple. We maintain our Positive view and expect potential
350 upside of 12-15%.
300
250 Key Risks
200
Rise in distributor commissions and increased competitive intensity to
150
grab market share may impact profitability.
100
Feb-19

Sep-19
Nov-18

Nov-19
Jun-19
May-19
Dec-18

Mar-19

Oct-19
Aug-19
Jan-19

Apr-19

Jul-19

Valuation Rs cr
Particulars FY18 FY19 FY20E FY21E FY22E
Price performance
Operating Income 1,735.1 1,646.8 1,969.1 2,409.6 2,939.8
(%) 1m 3m 6m 12m Operating Profit 664.1 710.3 827.8 1,038.0 1,265.9
Net Profit 457.2 487.1 611.1 767.6 937.2
Absolute 17.6 48.0 63.3 139.5 EPS 7.5 7.9 10.0 12.5 15.3
BV 38.7 42.0 48.0 56.8 67.5
Relative to
12.5 35.8 56.5 105.1 PE 49.6 46.7 37.1 29.5 24.2
Sensex
PBV 9.6 8.8 7.7 6.5 5.5
Sharekhan Research, Bloomberg Source: Company; Sharekhan estimates

November 27, 2019 2

 Viewpoint
Operational leverage to aid future profitability
As compared to peers, RNAM’s operational expenses are a tad higher mainly as the AMC has a large
dependence on the IFA channel, which is comparatively expensive, leading to higher distribution cost.
However, growth is likely to come (and already coming strong) from Tier-4 and beyond cities, which rely on
the IFA channel, owing to lesser financial literacy. Going forward, we expect RNAM’s profitability to improve
on account of economies of scale. Moreover, we view the IFA channel as an important growth driver for the
AMC, enabling it to compete and report sustainable AUM growth.

OPEX to AUM (%)

0.23%

0.18%

0.13%

0.08%

0.03%

-0.02% Q3FY19 Q4FY19 Q1FY20 Q2FY20

HDFC AMC RNAM

Source: Company, Sharekhan Research

Indian AMC business holds disproportionate market share

The Indian AMC industry is highly fragmented with ~44 players in the fray, but the market share is highly
skewed in favour of large players having disproportionate share of AUM. The top five AMCs not only hold
~58% of the market share, but have also seen a 220 BPS y-o-y rise in market share since September 2018.
We expect this trend to continue, which would entail that the top five players (who enjoy more than 58% of the
market share) in the industry are likely to gain disproportionately from growth and incremental inflows. This
is largely because the top players have a strong distribution network, brand reputation and recall as well as
operating leverage benefits.

November 27, 2019 3

 Viewpoint
About company
Reliance Nippon Asset Management (RNAM) was incorporated in 1995 as Reliance Mutual Fund. Currently,
it is India’s fifth-largest asset management company in India. As of September 2019, RNAM has a total AUM
(including foreign assets) of Rs. 4,53,500 crore, of which MF AUMs amount to Rs. 1,88,600 crore. The company
has an annualised SIP book of over Rs. 10,200 crore from 3.2 million SIP accounts. The company has strong
distribution network with its presence across 290 locations and more than 75,400 distributors. Besides mutual
funds, RNAM also runs managed accounts and international/offshore advisory services.

Investment theme
RNAM is the fifth largest mutual fund in India in terms of AUM size and has maintained its position in the top
5 consistently over the years. It has grown its MF AUM at 17% CAGR in the FY13-19 period. RNAM’s success
on building a large distribution network despite not having a bank promoter entity is notable. Its success is
also expected to be sustainable, as additionally, it has been able to garner an ~11% share in the SIP market,
increasing its share over the years. It has a strong foothold in B30 cities (~20% of AUM) which has helped the
AMC garner and improve its retail share, which in turn makes the customer segment more granular. A granular
book, we believe it more sustainable and sticky as compared to HNI and institutional flows. In FY19, multiple
downgrades on parent and exposure to stressed companies led to outflows in debt & liquid funds, impacting
AUM growth. However, going forward, we expect the buyout by the MNC owner has removed the overhang
of uncertainty of the promoter entity. Going forward, we expect RNAM to garner better flows from domestic
corporates as well as offshore flows.

Key Risks
Rise in distributor commissions and increased competitive intensity to grab market share may impact profitability.

Additional Data
Key management personnel
MR. Sundeep Sikka CEO
Mr. Prateek Jain CFO
Mr. Manish Gunwani CIO - Equity investment
Mr. Amit Tripathi CIO - Fixed Income
Mr. Milind Nesarikar Chief Risk Officer
Source: Company Website

Top 10 shareholders
Sr. No. Holder Name Holding (%)
1 Nippon Life Insurance Co 75.0
2 Reliance Capital Ltd 4.3
3 Bodies Corporate 2.54
4 Valiant Mauritius Partners FDI Limited 1.76
5 HDFC Trustee Company Limited 1.62
6 BARON Emerging Markets Fund 1.28
7 IIFL Special Opportunities Fund 1.22
8 Clearing Members 0.29
9 Non-Resident Indian (NRI) 0.14
10 Trusts 0.03
Source: BSE

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

November 27, 2019 4

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