Reliance Nippon AMC: Why equity AUM growth is crucial for the company

The life insurance stocks, though not many in number, were considered the best option for investors to tap India’s booming equity market, thanks to unit-linked insurance policy products or Ulips. This changed to some extent with the listing of Reliance Nippon Life Asset Management or RNLAM last year in November. The public issue was well-received by investors and they have nothing to compliant considering the post-listing gains of 25 per cent, over the initial public offering (IPO) price. 

Yet, the scarcity premium that RNLAM shares ought to enjoy seems to be missing despite being India’s third-largest asset management company (AMC) and among the most profitable fund houses. 

So, what is holding back RNLAM? 

Perhaps, its relatively lower exposure to equity funds. The top two players — ICICI Prudential and HDFC Mutual — draw nearly 42-44 per cent of their assets under management (AUMs) from equity schemes. On the contrary, RNLAM’s equity exposure is about 34 per cent as on December quarter (Q3), while a large part of assets (44 per cent) is from debt funds. Equity funds typically carry higher fees vis-à-vis debt, and hence bump-up profitability and overall valuations. Therefore, the RNLAM stock could catch up with investors, if this aspect is taken care of. Positively, the share of equity AUM is rising, given it was 27 per cent in Q3FY17.

Yet, if investors overlook the stock, they could be caught on the wrong foot. A report by CLSA highlights that despite a higher share of debt products, RNLAM’s profit as a percentage of its AUM stood at 22 basis points (bps) in FY17, against 27 bps and 23 bps for HDFC AMC and ICICI AMC, respectively. The profitability gap between RNLAM and its immediate competitor SBI AMC is four bps. This points toward two important aspects. First, despite a relatively higher dependence on debt funds, its profitability isn’t a much of laggard and the fee on equity schemes compensate for margins. 

“As a strategy, we don’t focus on institutional money that stays for about a month or two,” says Sundeep Sikka, executive director and chief executive officer, RNLAM. Sikka is therefore confident that maintaining profitability shouldn’t be a challenge, even if the trend of hardening bond yields continues.

Second, much of the growth for RNLAM is organic and without support from a strong banking channel. RNLAM’s primary focus on retail segment and B15 cities (beyond the top 15 cities) are its key strengths. In Q3, contribution of retail average AUM grew 55 per cent year-on-year (y-o-y), taking the overall AUM growth to 24 per cent y-o-y (Rs 2,434 billion). This, in turn, helped in growing revenues by 31 per cent to Rs 4.7 billion and net profit by 25 per cent to Rs 1.3 billion. 

The industry-wide phenomenon of increasing financialisation of savings is also aiding RNLAM. These positives, adding up with reasonable valuations (25 times its FY19 estimated earnings), augur well. The key risk is, however, the vulnerability of AMCs to stock market trends though money coming in through systematic investment plans (SIPs) should partially insulate them.