Buy Nippon Life Asset Management Ltd For Target Rs.333
- HDFC Securities
Nippon Life Asset Management (NAM India) is one of the largest asset management companies in India with a market share of 29% in terms of number of Unique Investors. The total AUM size of the company is ~ Rs. 2.73 lakh Cr. A complete exit of ADAG and promoter backing of global giant Nippon gives us confidence in the company’s future. Extensive expansion to newer locations and industry leading B30 AUM augurs well for NAM India. Given the massive under-penetration of financial products and inclusion in India, there is enough scope for AMCs like NAM India to continue to expand profitably. The industry will continue to benefit from shift of household savings towards mutual funds from physical assets and bank deposits. Players with strong brand equity and brand recall gain market share in tougher times, and hence consolidation of assets within top few players could continue for some time.
Change of product mix strategy could bring higher margins for the company in future. We expect the company to focus on improving investment return performance and gradually recoup part of its lost market share. Resolution to not invest in any debt paper below AA would help the company gain investors’ confidence and aid in mobilizing funds.
View & Valuation:
On the back of rising concerns related to economic slowdown due to COVID-19, we have envisaged a decline of 1.4% CAGR for topline while PAT is expected to grow by 16.7% CAGR on the back of margin improvement over FY20-22E. Assets Under Management is expected to rise by 9% annually over same time frame. RoE is expected to improve from 16.1% in FY20 to 19.9% in FY22E. We expect a gradual recovery in assets and earnings from FY22 onwards. Cash and investments of the company is Rs. 27,239 mn as at FY20 (~16% of the market capitalization). The company is trading 30.4x FY22E earnings which is still 13.3% discount to peer company- HDFCAMC.
We feel that investors can buy NAM India at the LTP (29.6xFY22E EPS) and add on dips to Rs.242-248 (26.5xFY22E EPS) band for Base case fair value of Rs.301 (32.5xFY22E EPS) and the Bull case fair value of Rs.333 (36.0xFY22E EPS) over next 6 months. In terms of Mcap to AUM, NAM India is available at a reasonable valuation as compared to HDFC AMC despite almost similar equity % and better retail AUM proportion.
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