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Retail performance remains strong; SIP flows should improve

Market share and retail folio growth, as well as cost performance spanned out favourably for Nippon Life in Q1FY22. However, HNI share improvement will be key for growing the SIP book. Maintain ADD with a revised target price of Rs430 based on 35x FY23E core EPS of Rs10.7, and cash & investments of Rs56 per share.

* Strong performance in retail folios continues; weakness in HNI remains the current challenge. Nippon Life added 630k unique investors in Q1FY22 vs 1.1mn by the industry. Similarly, it added 1.4mn ETF folios in Q1FY22, which accounted for 82% of incremental folios added by the industry. In terms of unique investors, the company’s market share improved to 31% in Q1FY22 vs 30% in Q4FY21. However, systematic transactions in Jun’21 stood at Rs5.9bn vs Rs6.6bn in Mar’21 and Rs6.7bn in Jun’21.

The SIP underperformance is expected to revert with improvement in performance as the company’s key schemes rank in the top two quartiles in current times and, generally, flows come in with a lag. HNI market share (5.3% in Q1FY22), which is mainly supported by banks, has remained weak. Management indicated that HNIs have resumed investing in ETFs Nippon Life’s market share was 18% vs 2% for the industry) and fixed-income schemes. Improved performance and empanelment of large banks / distributors will also aid growth of the HNI category.

* Core PAT grew 8% QoQ in Q1FY22 driven by 8% sequential decline in operating expenses. Nippon Life reported QAAUM growth of 5% QoQ. But operating revenues remained flat QoQ, due to 3bps drop in revenue yields attributable to: a) high growth in ETFs compared to equity segment, b) higher growth in low-yielding short-term segments within debt, and c) some of the legacy assets were replaced by new flows (higher trail commission).

* Sequential improvement in market share: Nippon Life’s Q1FY22 market share improved 120bps sequentially to 7.25% led by equity (6.9% in Q1FY22 vs 6.7% in Q4FY21), debt (7.2% in Q1FY22 vs 6.8% in Q4FY21), and liquid (5.3% in Q1FY22 vs 5.2% in Q4FY22).

* Non-MF initiatives provide growth optionality: Nippon Life manages assets worth Rs1.28bn related to government mandates. In the AIF segment, it has raised commitments of Rs38bn across funds as at Jun’21. In offshore business, the company manages and provides advisory services towards AUMs of Rs71bn and Rs30bn respectively. It is also collaborating with Cathay SITE to expand Nippon Life’s product portfolio to Indian and international investors.

* Maintain ADD with a revised target price of Rs430 based on 35x FY23E core EPS of Rs10.7, and cash & investments of Rs56 per share. We factor-in 18% AUM growth between FY21-end and FY23-end with aggregate MF investment yields moderating from 49.6bps in FY21 to 48bps in FY22E and 47bps in FY23E. This accounts for possible improvement in performance/flows in equities and debt. We expect FY22E operating costs to remain at FY21 levels of Rs5bn and increase to Rs5.2bn in FY23E, which will lead to increase in operating margins (% AAUM) from 27bps in FY21 to 29.7/31.5bps in FY22E/FY23E.

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