Back with a bang
We initiate coverage on NAM with ‘BUY’ rating given (1) consistent equity outperformance translating to improved net flows and in-turn market share gains (2) focus on stronger investment process and risk management and (3) robust retail franchise as indicated by enhancing SIP AUM and healthy addition of unique investors plus folios over FY19 to 9MFY24. Significant under-penetration in Indian MF industry suggests strong growth prospects of AMC space which could benefit NAM (4th largest player). We expect healthy core earnings CAGR of 23.4% over FY24-26E led by higher than industry equity AAuM growth and operational efficiency. The stock is valued at 25x FY26E core EPS implying 32% discount to HDFC AMC. We assign multiple of 30x to arrive at a TP of Rs610. Initiate with ‘BUY’.
Investment process and risk management bolstered: Market share declined in debt/equity over FY17-21 due to credit/brand related issues and equity under-performance. After Nippon bought majority stake, focus was on strengthening investment process and risk management. Thrust was to align KPIs with objective performance of the research team, to generate superior alpha with consistent performance. On risk management, various measures such as sector deviation, active share thresholds, stock concentration limits were defined – aligned to the mandates of respective schemes.
Better performance driving market share gains: Analysis across top-10 MFs suggests that weighted alpha for NAM in 1-yr bucket materially improved from Feb’21 and NAM has consistently featured in top-3 MFs since May’21. Performance in 3-yr and 5-yr bucket has also been enhancing. Better performance is translating to improved net equity flows resulting in market share gains. Market share in net equity flows enhanced from 0.1% in FY22 to 5.3% in FY23 and 12.9% in 9MFY24. Hence, equity QAAuM market share stabilized post Q4FY22 at 6.0% and improved to 6.7% in Q3FY24. Debt market share has also stabilized near 7.0%
Strong retail franchise; SIP market share enhancing: Being non-bank backed, focus has been on retail segment, which also entailed increasing B-30 presence. Capturing greater mindshare of the retail investor has led to superior SIP contribution. As a result, SIP AuM market share has improved from 8.5% in Q4’23 to 9.2% in Q3’24. Over FY19-23 unique investor base CAGR was 26% (18% for industry) while folios saw a 21% CAGR (15% for industry). As emphasis has been on deeper geographic penetration, concentration risk with respect to distributors is also lower for NAM. Contribution of top 1780 distributors to AuM is lesser at 37.5% (vs 42.6% for industry).
Strong core earnings growth led by operating leverage: Basis superior equity performance and further market share gains we expect NAM equity AAuM to outgrow the industry by 6% CAGR over FY24-26E. Driven by healthy equity AAuM CAGR of 26%, we see operating leverage to play out; despite a 2bps reduction in AMC yields, revenue CAGR (17.7%) is likely to surpass that of opex (9.3%). Hence, core income CAGR is expected at 23.4% over FY24- 26E with core profitability maintained between at 26-27bps (pre-tax).
Click here to download the research report on Nippon Life by Prabhudas Lilladher
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