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Slight miss in terms of revenue, but PAT spurred by other income

* Revenue – Management Fees was at Rs.4.81bn was slightly lower than our estimates of Rs.4.83bn. Management fees declined by 8% yoy and witnessed a growth of 6% on sequential basis.

* Yield on Management fees ‐ The Yield on Management fees was at 0.49%, which was an deterioration of 5bps YoY, against our estimate of 0.50%.  

* Operating Profit ‐ Operating profit came at Rs.3.86bn which was lower than our estimates of Rs.3.9bn due to higher than expected employee cost.   

* Profits – PAT stood at Rs.3.69bn v/s our estimates of Rs.3.4bn led by higher other income. Other income included unrealized gain on NCDs to the tune of Rs.115.5mn recognized in Q3FY21.

* Change in forecasts – EPS for 9MFY21 stands at Rs.47, which is 74% of our revised estimate of Rs.64 for FY21.  

* Valuations ‐ The stock currently trades at FY23E P/E of 35x. 

Our view: Given our house view of a sustained rally in Indian equity markets in the near term, we expect AUM growth of the industry to remain strong. We have raised our MTM gains impact on AUM from 12% to 15% for the next three years. This will also lead to improvement in profitability as yields on Equity AUM is 2x of the overall yield. Rising investment book has translated into higher other income, which has been better than our estimates. Building these factors into our forecast, we have raised our earnings estimates by 10‐15% and have raised our multiple to 36x from 34x FY23E EPS leading to our target price increase from Rs2,757 to Rs3,302. Retain our ADD rating

Concall Takeways AUM

* Strong player in B30 AUM with 14.3% contributed by B30. It would be difficult to bridge the gap with SBI as it has vast number of branches. Lot of branches are opened in B30 market to continue increasing the B30 share.  

* Economy has recovered but people’s life is yet to normalize. The risk taking appetite of retail investors has not been unlocked and therefore, bank deposits are in an upswing even at bottom rock interest rate due to need for safe heaven. Once the Market stabilize, the appetite to invest in Equity funds shall come back.  

* There is segment of retail investors who are better informed to make direct investment, but the industry is catering to a totally distinct and large audience who is not yet informed enough to invest into direct equity.

* Performance of the equity schemes in last 2‐3 quarters has been relatively weak but the same saw a strong rebound in Q3FY21 (in comparison with Peer performance). In the next 2‐3 quarters, shall see equity growth aligned to the market growth on back of diversified investment methodology.

* SIP December number has gone up compared to November due to spillover effect from the month of November (as last few days of November were public holiday). The momentum in SIP has almost remained stable.

* Able to increase market share in Debt funds on y/y basis. Witnessed strong inflows in the debt schemes. (13.8% in Q3FY21 from 13.2% in Q3FY20) 

* Lower yields and increased systematic liquidity in the country has aided growth of Debt funds.  

* The possibility of MTM gain in Debt Fund due to falling yields looks unlikely in the next year.

* New fund launched collected to Rs.15bn. Strong pipeline of new product as two new fund offers are awaiting SEBI approval and one product which is approved in Board meeting is expected to be filed with SEBI in the next 15 days.

Yields

* 72% of the revenue is contributed by Equity AUM as its margin lucrative.

* Shift towards Debt funds from liquid funds shall contribute positively to the revenue growth but the impact on yield is not very clear.  

Expenses

* Would be doing some cost tightening, saw strong savings of Rs.250mn in 9MFY21. Some part of these savings were due to lockdown and part of this is a result of cost tightening efforts.

* Can witness some cost increase in line with revenue trajectory. 

Distribution

* B30 does not have any distinct distribution channel. Bank branches and IFAs with reach to smaller towns have been able to attract good flows in smaller towns.

* SBI MF has been a clear leader in B30 market as they benefit from SBI’s branch reach in these cities.

* IFAs has always been the key and strong distribution channel. (41% of Equity AUM contributed by IFAs) 

* Increased Debt Composition in total AUM has led to higher share of direct business.  

Other Income

* Better realization on Debt funds, increase in investment book size and MTM gain on NCDs has led to strong other income. However, this level of other income may not be sustainable.

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