Nippon Life India Asset Management Ltd (NIMF) (NSE: NAM-INDIA, BSE: 540767) is the 5th largest asset management company (AMC) in India with assets under management (AUM) market share of 8.3% as of FY19. The total AUM in India stood at INR 3.10 trillion as on December 2019, with mutual funds, managed funds and international contributions standing at INR 1.997 trillion, INR 1.036 trillion and INR 68 billion respectively.
This AMC is also the first and one of the only two listed AMCs in the country, the other being HDFC Asset Management Company Ltd. NIMF enjoys the highest retail AUM contribution among its peers.
Growth Drivers
Untapped AMC Industry – Indian mutual fund industry AUM rose at a CAGR of 17.4%, from INR 1.1 trillion as on FY00 to INR 23.8 trillion as on FY19. The mutual fund industry had 41 AMCs (excluding Infrastructure Debt Funds) as of March 2019, up from 32 in March 2000, after a brief drop to 28 in 2004. Mutual fund AUM as a percentage of GDP rose from 4.3% in FY02 to 12.5% in FY19. However, the industry still has tremendous potential for growth, considering a large untapped market with favourable demographics of a young population. Mutual fund penetration ratio (AUM to GDP) is significantly lower in India, compared to the world average of 62% and emerging economies like Brazil and South Africa at 59% & 49%, respectively.
Changing dynamics in India’s household savings – India has historically been, and is expected to continue to be, a high savings economy. While India’s overall household savings (as a % of GDP) have been on a declining trend since FY 2011-12, the bulk of the decline is attributable to fall in physical savings rather than financial savings. The main reason behind this appears to be falling or stagnating returns in real estate and gold as opposed to higher returns in equity and debt markets. As of FY18, gross financial savings is about 51% of the total household savings with headroom to grow even further driven by a structural decline in inflation and ongoing formalization of the economy. Within financial assets, the share of non-bank deposit instruments like mutual funds and insurance are on the rise. MF AUM as a share of bank deposits has grown from 13% to 19% in the last four years.
Rise of Individual Investors and smaller SIP size – Individual (HNI + retail) investor AUM share increased from 44% in FY14 to 55% in FY19. On the other hand, the institutional investor shares in industry assets gradually declined from 56% in FY14 to 45% in FY19. Distributors currently thrive on larger ticket sizes, with HNIs contributing 32 per cent of the industry AUM. This is set to change as retail (non-HNI) investors are growing at a faster rate than the HNI segment. Moreover, with the industry focusing on acquiring middle income and lower affluent families (income range Rs. 3-10 lakhs) to expand the base for mutual fund investors, distributors will have to look at sizeably larger volumes with smaller ticket sizes to earn the same revenue. In what may be a correlated trend, Association of Mutual Funds in India (AMFI) data has started to show a shrinking trend in the average size of SIPs. While SIP ticket sizes initially rose from Rs. 2300 in 2014 to Rs. 3200 in 2017, data released in December 2019 shows that average SIP sizes have fallen to Rs 2800 per ticket.
Focus on B30 cities – In the mutual fund industry, the top 30 (T30) cities account for ~84% of AUM as on February 2020. Though T30 cities have a major share of AUM, smaller cities are the likely way forward for supporting incremental business; the share of B30 (beyond top 30) cities has increased from 14.1% in June 18 to ~16% in February 2020. In February 2020, 24.22% of assets held by individual investors are from the B30 locations. Also 6.39% of institutional assets come from B30 locations. This rise is attributable to a push by distributors and rising penetration led by improvement in technology and access to data.
TERs will continue to fall – Globally, India registered the second largest fall in the total expense ratios of its mutual funds, out of 26 countries outlined in the Morningstar Global Investor Experience Report, 2019. Despite this, it remains one of the most expensive markets in the world for equity and balanced funds, with average TERs of 1.93% and 1.78% respectively. As the Indian market matures with greater retail participation, TERs will fall further in line with developed markets; for example, with over 80 per cent (AMFI Report) of its AUM coming from retail investors, TER for US equity funds is 0.59%.
Investment Rationale
Nippon Life brand to aid in future inflows - In September 2019, Nippon Life Insurance of Japan completed the acquisition of 75% stake in NIPM from Reliance Capital. Nippon Life Insurance (a 130-year old company) is one of the largest life insurance companies in Japan, managing assets of over USD 700 billion. Nippon Life’s buyout of the previous promoter’s stake should stem the outflow that the company has recently witnessed in debt & liquid funds.
Post transaction, the AMC witnessed reversal in AUM growth after 4 quarters of decline. The share of equity assets has also improved over the quarters. Fall in fixed income assets is mainly attributable to redemptions from corporate and HNI Investors. The Nippon Life brand is likely to aid better inflows from domestic corporates as well as offshore segment. The company also plans to continue to further leverage Nippon Life’s corporate relations with global tech and insurance companies to get further overseas funds.
Established Distribution Franchise – The company has a strong presence across India with a distribution network across 290 locations with ~75,600 distributors (independent financial advisors), 74 banks (including foreign banks, and 94 National distributors (e.g. Karvy).
In the absence of a bank promoter, Nippon focused on developing a strong IFA network. IFA AUM, over the years, has increased from Rs 350 bn in FY15 to Rs 585 bn in Q3FY20. The company added ~600 new distributors in Q3 FY20. No Single distributor contributes more than 5.3% of AUM.
Focus on retail investors - The company has higher contribution from retail assets. Retail Average Assets Under Management (AAUM)/Total AUM stands at 26% vs the industry average of 20% as on Dec 2019. This is positive as retail flows typically consist of higher-yielding equity assets and are typically ‘stickier’ than institutional flows. With increased awareness about mutual funds, the share of household savings is shifting towards financial savings and NIMF is well placed with its strong focus on the retail segment. B30 AAUM/Total AUM stood at 19% vs the industry average of 16% in Dec 2019.
Long and stable SIPs – NIMF has an avg. ticket size of INR 2,580 v/s Industry average of INR 2,850. Over 80% of Incremental SIPs have a tenure of 5+ years.
Tale of Two listed AMCs
|
HDFC AMC |
FY15 |
FY16 |
FY17 |
FY18 |
FY19 |
|
ROCE (%) |
61.61 |
62.37 |
62.14 |
57.56 |
51.64 |
|
ROE (%) |
41.12 |
42.08 |
42.75 |
38.79 |
35.08 |
|
Operating Margins (%) |
61.88 |
49.86 |
54.85 |
60.77 |
72.45 |
|
Net Margins (%) |
39.04 |
31.98 |
34.65 |
38.04 |
44.38 |
|
Nippon Life AMC |
FY15 |
FY16 |
FY17 |
FY18 |
FY19 |
|
ROCE (%) |
30.02 |
31.39 |
31.73 |
31.04 |
28.38 |
|
ROE (%) |
23.17 |
24.26 |
22.30 |
21.74 |
19.93 |
|
Operating Margins (%) |
55.56 |
48.39 |
45.83 |
41.86 |
48.04 |
|
Net Margins (%) |
36.81 |
30.17 |
27.91 |
26.15 |
29.50 |
HDFC AMC has showcased superior performance in its operations and profitability over the years. However, with the takeover from RNAM, NIMF has had structural changes in its organisation which we believe will propel its future growth especially in the retail investor sector. The company has the highest share of Retail AUM composition.
In FY19, multiple downgrades on the previous owner & exposure to stressed companies in past led to outflows in debt & liquid funds, impacting AUM growth. The inter-corporate deposits (ICDs) exposure of the previous parent company had been an overhang on the profitability of the AMC. This has changed after the takeover by Nippon Life.
With clearing off this exposure, going forward we do not expect any more of such intra-group transactions since, AMC would now be under the Nippon Life umbrella. The share of Nippon Life Insurance Company in the AMC stands at 75% as on Dec 2019. Going ahead, the Nippon Life buyout is seen aiding in garnering better flows from domestic corporates as well as offshore flows. With its strategic focus on retail segment via presence in B30 cities through a widespread distribution network of IFAs and improving share of retail equity flows & gradual revival in debt & liquid flows, we believe NIMF will display stabilised and increasing SIP flows and AUM growth in the future.
NIMF is currently available at a CMP of INR 242.55 (as on March 28, 2020) at a PE of 26.38, which is below its 3-year median PE of 28.53.
Team 3C Capitals
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