Reliance Nippon Life Asset Management IPO Review: Riding the SIP wave

When Reliance Nippon Life Asset Management IPO (RNAM IPO) opens for subscription on 25 October, it will be 31^st mainboard IPO in India this year. Priced in the range of INR247 – 252 per share, the IPO of Anil Ambani group will mobilize INR1,511.6 – 1,542.2 crore by selling 61,200,000 shares. This will include fresh shares as well as sale of existing shares by promoter Reliance Capital. Coming on the heels of successful listings of Prataap Snacks and Godrej Agrovet, Reliance Nippon Life Asset Management IPO will carry the load of investors’ high expectations. The offer will also be watched closely as India’s first IPO of an asset management company. Through Reliance Nippon Life IPO review, we try to find out how the public offer stacks up.

Reliance Nippon Life IPO Review: Nippon Life, Reliance Capital to offload  shares

As mentioned above, the IPO will be a mix of fresh shares and an Offer For Sale (OFS) by existing shareholders. At the upper end of the price band, the IPO will raise INR616.9 crore by issuing 24,480,000 shares. These funds are proposed to be used for:

• Setting up new branches and relocating certain existing branches – INR38.1 crore
• Upgrading the IT system – INR40.6 crore
• Advertising, marketing and brand building activities – INR72.1 crore
• Lending to our Subsidiary (Reliance AIF) for investment as continuing interest in the new AIF schemes managed by Reliance AIF – INR125 crore
• Investing towards our continuing interest in new mutual fund schemes managed by us – INR100 crore
• Funding inorganic growth and other strategic initiatives – INR165 crore
• Meeting expenses towards general corporate purposes

In addition, Nippon Life plans to sell 25,489,800 shares while Reliance Capital will offload 11,230,200 shares through the OFS route. Both promoters currently hold 49% and 46.6% stake in the asset management arm and following the IPO, shareholding of the promoters will drop to nearly 42.9% each. IIFL through its IIFL Special Opportunities Fund holds 2.6% but will not participate in the IPO. Nippon Life’s average cost of acquisition is INR115 per share which means the Japanese company will be making more than 100% return on its investment.

RNAM IPO Review: Business overview

With a total AUM (Assets Under Management) of INR3,625.5 billion as of 30 June 2017, RNAM is one of the largest asset management companies in India. As the name suggests, the company manages mutual funds, portfolio management services (PMS), alternative investment funds (AIFs), pension funds, offshore funds and advisory mandates. During the latest reporting period, it had a share of 11.4% in mutual fund quarterly average AUM (QAAUM).

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The company started its mutual fund operations in 1995 as the asset manager for Reliance Mutual Fund and manages 55 open-ended mutual fund schemes including 16 ETFs and 174 closed ended schemes for Reliance Mutual Fund as of 30 June 2017. It has a network of 171 branches and approximately 58,000 distributors including banks, financial institutions, national distributors and independent financial advisors (IFAs), as of 30 June 2017. Reliance Nippon Life Asset Management manages offshore funds through its subsidiaries in Singapore and Mauritius and has a representative office in Dubai.

Also included in its suite of services is the Portfolio Management Service to high net worth individuals (HNIs) and institutional investors including the Employees’ Provident Fund Organization (EPFO) and Coal Mines Provident Fund Organization (CMPFO).

Reliance Nippon Life IPO Review: Financial performance

The company has almost doubled its annual revenues in the last five years. As the asset manager of the Reliance Mutual Fund, this performance is on expected lines. The company’s primary source of income is the management fees it charges as a percentage of AUM. In Reliance Nippon Life IPO review, we find that equity takes the center stage in the company’s AUM universe, by contributing half of its revenues. It is also the fund type with highest management fee (1.35% in FY2017).

RNAM is not just one of the biggest players in its field but it is also among the most profitable asset management companies in India. Its profits increased from INR230.4 crore in FY2013 to INR402.8 crore in FY2017. While profits have increased, the pace of growth has been slower than that of revenues. As a result, profit margins have taken a hit. Net margin peaked at 37.1% in FY2015 and have been declining since then. In the latest year, its margins stood at 28.1%.

Reliance Nippon Life IPO Review: Sahi hai?

We Indians have historically favored gold and land to channel their savings but the situation has changed in recent years with mutual funds coming into reckoning. Soaring SIPs in the industry are indicative of this trend and Reliance Mutual Fund has gained handsomely from this trend. Its average ticket size of new SIPs’ increased to INR3,915 in June 2017 from INR2,822 in April 2015 while the number of SIP accounts also increased by 5.6 lakh to 18.6 lakh. Since 77% of these SIPs have tenure of over five years, lot more money is yet to flow in our equity markets. This retail participation in equities through mutual funds is set to grow in the coming years, if the industry can manage without scams (remember UTI scam at the turn of the century which shooed away investors?).

As we have seen so far in Reliance Nippon Life Asset Management IPO review, it is almost picture perfect with soaring revenues and profits, solid and credible management, strong parentage, and bright outlook. The company is consistently paying dividend over the last five years with average dividend payout ratio of 65%. There are some concerns though and declining profitability is among these. In many ways, this is inevitable as costs grow with portfolio size while management fees don’t. SEBI exercises great control on the fee structure of AMCs and the fee reduces as size of AUM increases.

The company had Earnings Per Share (EPS) of INR6.85 in the year ended 31 March 2017. This means that the price band of INR247 – 252 per share values the business at Price/Earnings (P/E) ratio of 36.05 – 36.78. As the performance dipped in the first quarter, this ratio is set to increase to 41.44 – 42.28. As a matter of prudence, we often discard quarterly results and focus on annual results only. Thanks to its healthy balance sheet, the company had a Return on Net Worth (RONW) of 21% as on June 2017. These are robust figures and even though there are no listed peers, valuations don’t look uncomfortable.

Overall, Reliance Nippon Life IPO review reveals that the company has a tremendous advantage being India’s first AMC, and boasts of robust financial performance and bright outlook. With more retail funds set to flow in the market, it is a nice play on retail participation in Indian equities.