L&T Finance Holdings Limited on Thursday announced divestment of its mutual fund business to HSBC Asset Management (India) Private Limited for $425 million (nearly ₹3,200 crore). HSBC AMC will acquire 100 per cent equity shares of L&T Investment Management Limited, the investment manager of L&T Mutual Fund. Thus, the deal values L&T MF at 4 per cent of the latest MF assets under management (AUM) of ₹77,765 crore.

For the diminutive HSBC MF, which has been a fringe player since entering the Indian market in 2001, the L&T MF acquisition is a slingshot that makes it the 12th largest fund-house in terms of AUM from its current position of 21st player, in the 40+ AMCs jostling for space in a highly competitive funds market.

While HSBC is already an established player in the banking segment in India, the L&T MF acquisition that brings in 2.4 million folios will strengthen HSBC's asset management business in India and lead to a stronger product bouquet that can be offered to its growing non-resident Indian customer base (18 million) across the world. For L&T Finance Holdings, the divestment marks its exit from the MF business after scaling up the business ever since buying Fidelity MF's India business in 2012. Here are the four key takeaways from the deal.

Reasonable valuation

At a headline level, the ₹3,200-crore price tag is arguably the biggest seen in MF M&A deals in India. But, the HSBC-L&T deal valuation appears to be at a discount if you compare it with listed AMCs on the market capitalisation (December 23 closing) to AUM metric. HDFC trades at 11.4 per cent, Nippon at 7.5 per cent, UTI at 5.8 per cent and ABSL at 5.2 per cent. So, overall it seems to be a good buy for HSBC.

Unlike the Sundaram-Principal deal announced in January 2021, where Sundaram said that it was paying ₹338 crore (about 4.5 per cent for about ₹7,500 crore assets that Principal was bringing), HSBC MF with L&T MF has managed to get a business over 6-times its own size but hasn't paid a significant premium. While one could argue that in case of L&T MF debt AUM share is 40 per cent and in the case of Principal equity AUM formed 90 per cent, deal pricing is in favour of the buyer (HSBC) here. Large listed AMCs with a high debt AUM share such as Nippon (42 per cent), HDFC (51 per cent) or ABSL (58 per cent) do not get lower valuation multiples.

Sluggishness in income and profit for L&T Investment Management Limited, the investment manager of L&T MF, could be a reason for lower deal multiple. As per annual report data, L&T Investment Management’s gross income in FY19 was ₹629 crore but it fell to ₹382 crore in FY20 and then to ₹347 crore in FY21. Similarly, profit after tax has dropped from ₹200 crore in FY20 to ₹162 crore in FY21. Do note that on a FY21 price to sales metric, L&T MF (11 times) is not cheap.

On its part, HSBC Asset Management (India) Private Limited clocked total income of ₹97.6 crore in FY21 versus ₹96.6 crore in FY20. Profitability improved to ₹18.2 crore in FY21 vis a vis ₹8.6 crore in FY20.

Also read: HSBC arm buys L&T Investment for ₹3,187 cr

Wider products, reach

The acquisition of L&T MF's business helps HSBC go past about a dozen players and closes in on Tata MF in terms of asset size. L&T MF has a bouquet of 12 equity funds, with L&T Emerging Businesses Fund, L&T India Value Fund and L&T Midcap Fund each having ₹6,000-8,000 crore size. Four equity funds, including L&T Infrastructure and L&T Business Cycles Fund, are ranked within the top 10 in their respective categories on a one-year basis. This is interesting because in the case of HSBC MF, only HSBC Infrastructure Equity Fund has a similar top 10 rank in its category despite the fund-house having 12 equity schemes.

Following the completion of the acquisition, and subject to regulatory approvals, HSBC intends to merge the operations of L&T MF with that of its existing asset management business in India. Since L&T MF is a much larger fund-house, HSBC MF will add heft across every category. Also, HSBC MF gets a strong retail investor base since 64 per cent of L&T MF overall AUM comes from retail. L&T MF has an established and well-diversified distribution channel mix of banks, private wealth firms, national distributors and 50,000+ mutual fund distributors (MFDs) across India, a deep footprint and network that can be leveraged by HSBC MF.

HSBC is one of the leading wealth managers in Asia. Combining L&T MF with existing Indian asset management business gives it the scale, reach and capabilities to capture some of the 15-20 per cent annual asset management market growth expected in India over the next five years.

As on March 31, 2021, HSBC in India had a PMS business with ₹6,300 crore under advisory mandate. The company has also re-started PMS discretionary business from February 2021.

Unit holder implications

As per SEBI rules, an AMC can have only one scheme under each category, barring a few exceptions including, index funds/ETFs tracking different indices, sectoral/thematic funds. So, schemes in categories where both fund houses have a presence will have to be rationalised.

So, in terms of overlap, unless schemes get rejigged, L&T MF and HSBC MF may have to merge equity schemes in ELSS, flexicap, infrastructure, large & midcap, largecap, midcap categories. The situation is same in debt fund baskets of ultra short, short, overnight, liquid, low duration, dynamic bond, and corporate bond.

Essentially, a merger between two mutual fund-houses also mean a merger of similar schemes. In case of a merger, one scheme (transferor scheme) will cease to exist once the merger is over. Every investor will also get a zero load exit option when the scheme merger happens. Investors of both HSBC MF and L&T MF funds can look out for a written communication about the change.

Trend reversal ?

HSBC acquiring L&T MF business in some ways reverses the steady stream of exits by foreign fund-houses. This year already Principal AMC's exit marked another foreign fund-house throwing in the towel. Over the years, JP Morgan Asset Management (India), Deutsche Asset Management (India), Goldman Sachs, Fidelity, Morgan Stanley, ING, PineBridge, etc. have quit the Indian market.

HSBC acquiring L&T MF business is one of the rare instances of a foreign fund-house buying Indian AMC operations. In recent years, US financial major Invesco’s buyout of Religare MF in 2018 is one other instance that comes to mind.

In a market dominated by giant-sized fund houses with legacies in the banking or insurance business, foreign AMCs have found it hard to get a foothold. Most have shown an inability to grow beyond a certain size organically. HSBC MF is itself a good example; since its inception in 2001, it has hardly been able to grow at a pace that would rival other domestic bank-led AMCs such as SBI, HDFC, ICICI, Axis or Kotak Mahindra.

The only notable exception to this trend is Mirae Asset which has grown at breakneck speed in the past 6-7 years, and Franklin Templeton, which has been mired in a controversy related to the closure of six debt funds.

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