Reliance Nippon AMC IPO: Should you invest?

Being first of its kind, the IPO offers many positives to its investors

Sticking to its schedule, Reliance Capital is on track to list its asset management arm — Reliance Nippon Life Asset Management (RNLAM). The issue, which would open on Wednesday and is the first one by an asset management company (AMC), has many positives such as a diversified asset base with strong investment track record. These attributes have helped RNLAM grow its business profitably. Equally important is its positioning as the number three player (11.4 per cent market share, according to ICRA) among AMCs, which is aided by an exhaustive distribution network. While these pluses augur well, the initial public offering (IPO) priced at 36x FY17 earnings on a pre-issue basis and 38x on a post-issue basis seem to leave little on the table for those interested in immediate listing gains. The offer may, hence, be best suited for long-only investors. Nonetheless, IPO valuations aren’t at a significant premium considering the recent transaction in which IIFL Asset Management bought 2.59 per cent stake in RNLAM for Rs 390 crore, which valued the AMC at Rs 15,000 crore.

Business

RNLAM’s operations can be segmented as mutual funds, managed accounts, offshore funds and advisory mandates. The mutual funds business, which accounts for about 58 per cent of the RNLAM’s assets under management (AUMs), handles debt and equity products including exchange-traded funds (ETFs). Debt funds, including liquid products, account for about 65 per cent of total mutual fund AUMs as of June 30, 2017. The proportion is higher than those of HDFC AMC and ICICI Prudential AMC (55-60 per cent), which is also a reason for RNLAM’s better profitability as managing debt funds involves relatively lower expenses vis-a-vis equity.

As for the managed assets business (41 per cent of AUMs), managing funds of the Employees’ Provident Fund Organisation (EPFO) accounts for over 80 per cent of this portfolio. RNLAM also offers portfolio management services or PMS to individuals (mainly high net worth) and manages alternative investment funds (AIFs), though their contribution to AUMs and revenues is quite meagre for now. 

RNLAM also handles offshore funds across Asia, West Asia, Europe and the US and provides advisory services to its clients.

Financials

The strength of RNLAM lies in its ability to grow its AUMs in a profitable manner. Its total AUMs grew from Rs 1,60,045 crore in FY13 to Rs 3,50,755 crore in FY17 — a compounded annual growth rate (CAGR) of 22 per cent. The mutual funds business clocked 25.7 per cent CAGR during this period, while the managed accounts business witnessed 19.1 per cent growth. On the back of strong AUM growth, its revenue, operating profit and net profit, too, expanded at a CAGR of 21 per cent, 28 per cent and 15 per cent, respectively over FY13–FY17.

Although profit growth has slowed in recent years mainly due to a high base (for the industry as well as RNLAM), brokerages expect RNLAM to grow its AUM at a healthy pace going ahead. This will be supported by its plans to expand investor base by opening new branches and growing its distributor network, besides increased use of the digital platform.

Issue details

The issue proceeds, estimated between Rs 1,512 crore and Rs 1,542 crore, are to be deployed towards RNLAM’s business development plans, which include setting up a new AIF, marketing spends and setting up new branches. Interestingly, Rs 165 crore is set aside for inorganic growth, which, analysts believe, is essential to move at least 50 basis points higher in the league table.

Valuations

At the upper end of the price band, the IPO is valued at 36x FY17 earnings (pre-issue). Due to the lack of an immediate comparable, if these valuations are compared with that of non-banking finance companies (NBFCs) which trade at 30–40x FY17 earnings, the issue appears reasonable. But, considering RNLAM’s higher exposure to debt mutual funds (which traditionally command lower valuations — five per cent of AUMs, versus six-seven per cent for equity) and its business model which is relatively risk-free as against NBFCs which take balance sheet risk, RNLAM’s valuations seem to be on the higher side.

Risks

Unlike ICICI Prudential or HDFC AMC, RNLAM’s model relies on third parties and intermediaries for its distribution network, which currently works on long-term agreements. Any change in this structure could impact RNLAM’s network. Much of the retail investor inflows lately have been channelised through systematic investment plans (SIPs). This insulates them partly from the redemption pressures and the AMC industry, too, hasn’t seen the kind of redemption pressure witnessed during the Lehman crisis. But, a bad spell in equities could impact the AUMs and balance sheets of AMCs, if the industry is exposed to similar pressures. And, this could reflect on their profitability and valuations.

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