Nippon Life AMC

IPO Snapshot:

Reliance Nippon Life Asset Management is entering the primary market on Wednesday 25^th October 2017 with an IPO of upto 6.12 crore equity shares of Rs. 10 each, comprising a fresh issue of upto 2.45 crore shares and an offer for sale (OFS) of upto 3.67 crore shares by both the promoters, in the price band of Rs.247 to Rs. 252 per share. Representing 10% of the post issue paid-up share capital, issue will raise Rs. 1,542 crore at the upper end of which 40% is fresh issue and 60% is the OFS portion. Issue closes on Friday 27^th October and listing is expected on 6^th November.

Company Overview:

For the starters, company name is so long and confusing – it is engaged in life insurance or asset management business or both?!

Reliance Nippon Life Asset Management (Reliance AMC) is India’s 3^rd largest asset management company, behind ICICI Pru and HDFC AMC, with AUM of Rs. 3.63 lakh crore (as of 30-6-17), of which 61% comes from the domestic mutual fund business, and balance from managed assets such as EPFO, PFRDA, NPS, PMS, AIF, offshore funds etc. Company has pan-India distribution reach comprising 171 branches and 58,000 distributors. While 61% of AUM is from the mutual fund business, ~85% of the revenue is clocked by that vertical alone and nearly the entire profits for the company. Thus, AIF, PMS and other managed assets business not very profitable for the company.

An important factor for fund management business is retention of senior team members – and 3 fund managers (from equity and PMS side) have resigned from the company in the past 12 months, which does not speak too well. This may have an adverse impact on track record and past performance of the funds managed by the company. 

Financials:

While the company’s AUM growth has been healthy between FY13-17, clocking 22.3% CAGR, growth in total income, which is essentially the management fee + other income, has been slower at 18.2%, while profitability growth was even slower at 15%, indicating that growth in AUM does not fully translate into earnings growth for the business.

This can be attributed to twin factors - product mix (higher share of lower margin debt products vs equity) and downward pressure on fees, which can be substantiated by another data point - Growth in topline has slowed down in FY17, when total income of Rs. 1,435 crore rose only 9% YoY as against 38% annual growth clocked in FY16 and 23% in FY15, despite FY17 being a ‘bull’ year for equities. Management fees accounted for 1,307 crore and other income stood at 128 crore. FY17 net profit of Rs. 403 crore was barely 2% higher than FY16’s Rs. 396 crore. Thus, company has not been able to capitalize on the favourable macros, as much as it should, as reflected by poor earnings growth.

Adjusted for a liberal 50:1 bonus of Aug 2017, current equity has expanded to Rs. 588 crore, from Rs. 11.52 crore, which leads to adjusted EPS of Rs. 6.85 for FY17. For Q1FY18, total income stood at Rs. 395 crore, with net profit of Rs. 88 crore. Net margins, which used to rule as high as 42% in FY15, have shrunk to 24% in Q1FY18, indicating larger mix of lower margin debt products in total AUM. Q1FY18 EPS stands at Rs. 1.49, which has also contracted RoE to 20% for Q1FY18annualised, from 21% in FY17, 22% in FY16 and 23% in FY15. Deterioration in financial performance does not bode well for a company looking to tap public funds.

As of 30-6-17, company’s consolidated networth stood at Rs. 1,680 crore, leading to bonus-adjusted BVPS of Rs. 28.60. Company has cash and equivalents of Rs. 264 crore, translating into cash per share of Rs. 4.

Objects of Issue:

Largest pie of fresh issue proceeds of Rs. 617 crore will be used for inorganic growth (Rs. 165 crore) for which opportunity is yet to be identified. Rs. 125 crore is ear-marked for investment in AIF while Rs. 100 crore will be invested as continuing interest in new mutual fund schemes. Other objects are routine business expenses such as advertising and branding (Rs. 72 crore), upgrading IT (Rs. 41 crore) and branch ralionalisation (Rs. 38 crore). Since company is cash rich, most of these operating expenses can be well taken care of through internal resources.

Shareholding and Group Pedigree:

Currently, Reliance Capital holds 46.57% stake in the company while Japanese partner Nippon Life owns 49%. Post IPO, both will have equal stake of 42.88% each. Balance 2.59% (pre-issue) stake is held by IIFL Funds and 1.84% by Valiant Partners.

Company had filed its DRHP on 18^th Aug 2017, and within 2 months, the IPO has been launched, with RHP being dated 11^th Oct 2017. This is one of the shortest ‘turnaround’ time (from filing draft prospectus to launching IPO) I have personally witnessed in my nearly decade-long career in capital markets. Wonder if the thought process behind this was ‘Make hay when the sun shines’, which was also the case nearly 10 years ago, in Jan 2008, when Reliance Power IPO ‘rocked’ Indian stock markets - and not just the primary markets, but took the entire listed stock universe for a tailspin, which will probably never be erased from public memory. Will investors ever pardon the Group, for spoiling equity dreams of millions of Indians in 2008?

At this juncture, it is also essential to draw attention to other companies of the ADAG group:

1. As of 30-9-17, promoter Reliance Capital had net equity exposure of Rs 57 crore and debt exposure of Rs. 1,087 crore to Reliance Communications (RCom), in addition to corporate guarantee for Rs. 450 crore loan availed by the tower subsidiary Reliance Infratel. While debt rating of RCom has been downgraded to junk status and merger with Aircel being called off, sale of telecom towers to Brookfield is also learnt to be re-negotiated at a lower valuation, which all spell BIG trouble for the group.
2. Shares of recently listed Reliance Home Finance, post de-merger from parent Reliance Capital, have been on a downward spiral, falling 23% in less than 4 weeks, from its listing at Rs. 107.20 on 21^st September 2017, when broader markets have marginally risen during this time.
3. Reliance Capital despite a host of high growth businesses such as commercial lending, insurance, asset management, housing finance, broking and wealth management, trades below book value (PBV of 0.9x) and PE multiple of just 12x, vs 2-3x and 20x+ respectively, for peers.
4. As far as other group company Reliance Infra is concerned, let’s not get into details, else analysis of Reliance AMC will never end!

To cut a long story short, credibility and market standing of the group is at rock-bottom, wherein the Group name is actually a ‘liability’ which will definitely weigh adversely on this issue too.

Valuation:

At Rs. 252, company’s market cap will be Rs. 15,422 crore, which leads to PE multiple of 37x and 34x based on FY17 and FY18E earnings. Although not like-to-like comparison, listed PE fund manager IL&FS Investment Managers is currently ruling at historic PE multiple of 25x.

Another more suitable valuation matrix for fund management business is Market cap to AUM ratio, which is 4.25% for the company, based on AUM of Rs. 3.63 lakh crore as of 30-6-17. Since share of equity in company’s mutual fund businesses is lower (27%) vis-à-vis peers (37% share of equity for ICICI and 40% for HDFC), this number of 4.25% is on the higher side, as debt AUM generally command a multiple in the range of 2-3%. Deteriorating growth in EPS does not aid valuations either, despite supportive macros.

Conclusion:

Poor growth in profitability and promoter pedigree make this IPO a clear avoid, despite string industry tailwinds. ADAG group stocks, have time and again, been wealth destroyers for investors, which make exposure to this group ‘A very DAring Gamble’. 

Disclosure: No interest.