In an equity market that has been in a strong rallying mode over the past few years, the mutual fund space has been a huge beneficiary, thanks to increased investor interest and strong inflows. The MF industry just crossed the ₹50 lakh crore AUM mark in December 2023, five-fold rise in the last 10-odd years.
As one of India’s top-five mutual fund companies, Nippon Life India Asset Management (Nippon Life AMC) is a key player in the space with a long track record (from the time of its erstwhile avatar as Reliance AMC from the 1990s) in the industry. It managed ₹4.35 lakh crore as of September 2023.
Healthy growth in AUM, robust flows via the systematic investment plan (SIP) route, a healthy mix of asset classes spread across active and passive styles and increasing traction in its managed investment and Alternative Investment Fund (AIF) divisions are key positives for Nippon Life AMC. These apart, most of the fund house’s equity and debt schemes have done well in recent years and figure in the top quartile of returns in many categories.
The still low penetration of mutual funds in India compared to most other emerging and advanced nations, rapid digitisation resulting in ease of investments via online platforms and the rising incomes and financialisation of savings are factors that could give further thrust at the macro level for the industry.
At ₹515, the stock trades at 34 times its likely per share earnings for FY24 and about 28 times its expected EPS for FY25. This is at a discount to HDFC AMC’s estimated PE of 39 times for FY24. When the market capitalisation to AUM ratio is taken, Nippon Life AMC’s figure is at about 7.2 per cent, much lower than HDFC AMC’s 12.75 per cent. Though a certain level of discount has always existed, this wide rift is higher than usual, presenting an opportunity.
Given Nippon Life AMC’s sharp rally — the stock more than doubled in the last one year — investors with a long-term perspective can accumulate the stock on declines linked to the broader market.
The company’s operating (EBIT) margins have always been comfortable at wellin excess of 55 per cent. Net profit margin has also remained more than 50 per cent.
Between FY21 and FY23, the AMC’s operating profits rose at 20.97 per cent annually (CAGR) to ₹761 crore, while revenues rose at 12.75 per cent to ₹1,350 crore.
In the first half of FY24, Nippon Life AMC’s revenues rose by 16 per cent over the same period in FY23 to ₹751.6 crore, while net profits increased by 50 per cent to ₹479.6 crore. Since the industry is linked to the fortunes of the market, it is cyclical and there can be phases of decline. Investors need to have a longer horizon to ride out the volatility for the best returns.
Broad-based offering
The market regulator SEBI has constantly looked at bringing down costs for investors and has kept up the pressure on fund houses to reduce their expense ratios. Even so, a few select fund houses have still managed to expand their revenues and grow their assets strongly.
Nippon Life AMC manages 43 active schemes across equity, debt and hybrid categories. It also manages 41 passive schemes, including ETFs, index funds across equity, fixed income and commodities. It is the fourth largest AMC in the industry.
The AMC manages ₹350,600 crore (up 23 per cent YoY) in mutual funds as of September 2023, with a market share of 7.47 per cent. Its quarterly SIP book has risen sharply from ₹25,600 crore in September 2022 to ₹47,200 crore as of September 2023, an increase of over 84 per cent as markets were on an upswing. As much as 64 per cent of Nippon Life AMC’s systematic investment accounts tend to stay for more than five years, compared to just 26 per cent for the overall industry, indicating a resilient investment book. The longer the SIP book in quality schemes, the better it is for investors in terms of returns and for AMCs in terms of asset growth and stickiness.
In most of the active equity and hybrid categories, Nippon Life AMC manages large AUMs and its performance has also been healthy.
When the passive ETF space is taken, the company is the leader across equities, debt and commodities. It commands a 14 per cent AUM market sharein ETFs and a 67 per cent volume share. The fund house manages ₹80,800 crore in ETFs.
Nippon Life AMC’s yield (Revenue to AUM) has been around the 45 basis points mark, just a couple of points lower than HDFC AMC’s, but higher than the figures for UTI AMC and Aditya Birla Sun Life AMC. This metric places Nippon Life AMC among the best in the industry, despite a heavy low-cost passive book.
Other lucrative avenues
The AMC also runs 18 AIF schemes focused on public equity, real estate credit, structured credit and tech fund of fund. It has raised about ₹5,780 crore in commitments as of September 2023, nearly 14 per cent more on a YoY basis. Since AIFs have large ticket sizes for investments starting at ₹1 crore, they represent an attractive proposition for Nippon Life AMC. Fee structures are flexible with no major regulatory restrictions.
Nippon Life AMC also runs an offshore business (managed and advisory) with ₹13000 crore in assets as of September 2023 in partnership with overseas entities in Singapore, Dubai and Japan.
Given the rising affluent population in India over the years, the next decade may see a large market for such products from HNIs and others.
