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Nippon Life India Asset Management

Annual Report Takeaways: Digital capabilities and diversified portfolio are strong growth enablers

Nippon Life Asset Management (NAM) has witnessed multiple positives in FY21. These include: (1) 10% YoY growth in revenue in Q4FY21 and 15% YoY decline in operating expenses in FY21, (2) growing passive (42% ETF folio share) and nonMF product portfolio (AUM Rs1.32trn), (3) improvement in retail traction (of the total 2mn unique investors added by MF industry in FY21, 0.9mn were added by NAM), (4) improvement in ESG initiatives and (5) upping the ante on digital capabilities. Post 13% rally in past three month, we downgrade the stock from BUY to ADD with an unchanged target price of Rs396 based on 35x core EPS of Rs9.8 and add cash & investments of Rs54 /share.

Yield decline in FY21 driven by mix:

Investment management fees declined from 55.7bps in FY20 to 49.7bps in FY21. Based on FY21 AAUM, overall AUM declined 2% YoY to Rs2.1trn. Mix of ETF increased from 13% in FY20 to 15% in FY21 and equity mix declined from 43% in FY20 to 39%. Debt mix increased to 31% in FY21 vs 29% in FY20 and liquid mix remained stable at 15% of AAUM.

NAM expects a competitive edge in passive segment:

The intrinsic importance of volumes in ETF is lending a meaningful head start to NAM’s passive strategy. The company has the industry’s largest bouquet of 22 ETFs (AUM of Rs373bn with 13% market share) spread across equities, debt and gold. NAM has industry’s highest ETF folios (~42% market share). With 72% market share in ETF volumes on NSE and BSE in Q4FY21, NAM is poised to play the volume game in the segment. Although profitability is low, higher volumes in ETF segment can deliver Rs350mn400mn (based on 10bps yield) to profitability.

ESG measures strengthened in FY21:

Board approved that all the new investments must be done only in AA and above rated issuers. Board inducted Mr Yutaka Ideguchi, Mr Parekh Ashvin and Mr B Sriram – who bring with them decades of experience in international operations, oversight, credit & risk, and other critical operational aspects. NAM has provided last trimester travel allowances to mom-tobe employees, crèche allowance for two years after completing post-maternity leaves and a Sabbatical Policy to improve work-life balance.

NAM has upped its digitalisation game:

NAM conducted 500 online training sessions for its 78,400 distributors in FY21. It also added PhonePe as its digital partner. NAM has over 20 digital partners. Digital business witnessed a strong growth of 31% (1.8mn purchase transaction) in FY21. Share of digital business in lumpsum and SIP purchase transactions rose to 50%/59% in FY21 vs 46%/35% in FY20. Around 24% investors transacting online were new customers. NAM also launched industry’s first Business EASY 2.0 app, which offers digital solutions to its mutual fund distributors for customer relationship management. The company has enhanced digital ecosystem with automated SMS/email communications (nudges for retention, SIP pause, payment retry) and improved platform experience with push notifications on branded apps, e-KYC process.

Highlights of FY21

* AUM based highlights: NAM launched multiple new funds during the year, including the Multi Asset Fund, which grew to be one the largest digital NFOs in FY21. NAM India received the mandate to manage the investments of Post Office Life Insurance Fund and Rural Post Office Life Insurance Fund, becoming the only private AMC in the country to have ever received such a mandate. NAM India manages over INR 1.2trn from government mandates (PLI and ESIC). NAM has utilized Alternative Investment Funds to invest in different sectors and as of March 2021, has raised commitments of over Rs37bn across different funds. The fundraising initiative is underway for domestic investors as well as offshore institutional investors. The ongoing Covid-19 pandemic has affected business activities across sectors. FY21 was most challenging for HNI / lump sum fund raising (given that minimum investment ticket size is Rs10mn). For sectors like real estate and credit, fund raising proved to be very difficult for most of the year.

* Investor addition: NAM acquired 350 new institutional investors and over 0.9mn unique investors in FY21. Total retail folios added were 1.1mn in FY21.

* Likely lower spend ahead: Due to continuously evolving digital ecosystem, transition to Nippon Life being the sole promoter, scheme-specific issues, and more recently, the extensive impact of the ongoing pandemic and meltdown in global capital markets, NAM India not only turned conservative in utilisation of its IPO Proceeds, but also the avenues for inorganic growth and strategic initiatives have shrunk. Due to the exponential surge in digital transactions after the IPO, the need for rapid expansion in physical presence and opening of new branch offices has shrunk considerably. Hence, the Company went slowly on branch expansion in Tier 3 and Tier 4 cities.

ESG measures strengthened

* In May 2020, NAM India’s Board decided that all schemes would make new investments in only AA and above rated issuers. It will take more such decisions fortified by the insights from the Board.

* Last year, NAM India inducted new board members – Mr Yutaka Ideguchi, Mr Parekh Ashvin and Mr B Sriram – who bring with them decades of experience in international operations, oversight, credit & risk, and other critical operational aspects. The professional board will help in the quest to be India’s responsible corporate citizen with the highest principles and strong corporate governance.

* NAM contributed Rs105mn to the PM CARES Fund and Maharashtra CM Relief Fund for COVID-19 relief. It also contributed Rs25mn to the Army Central Welfare Fund to support beloved army veterans and war widows.

* NAM has 17% women ~workforce holding key positions across the organization. To create an enabling environment, NAM has provided last trimester travel allowances to mom-to-be employees, crèche allowance for two years after completing post-maternity leaves and a Sabbatical Policy to improve work-life balance.

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