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Focusing more on AUM growth

The big 14% QoQ growth in equity AAUM for Nippon Life India Asset Management’s (NAM) AMC in Q2FY22 translated to less than expected 8% QoQ growth in operating profit driven by lower yields. This is a dampener to an otherwise strong operating performance in terms of AUM market share, folios and systematic investment share. The apparently tactical move to garner more AUM at lower yields is noteworthy. We expect the company to report stable yield performance ahead with improvement in overall performance. Maintain ADD with a revised target price of Rs460 (earlier: Rs477) based on 35x FY23E core EPS of Rs11.5 (earlier: Rs12), and cash & investments of Rs58 per share.

* Strong operating performance: NAM reported AAUM growth of 10% QoQ in Q2FY22 led by strong 14% growth in equity AAUM. On QoQ basis, its overall market share improved to 7.33% in Q2FY22 vs 7.25% in Q1FY22 while equity market share declined to 6.75% from 6.88% in the same period. Debt market share improved in Q2FY22 to 7.6% from 7.2% in Q1FY22. In terms of unique investors, NAM’s market share increased to 32% from 30% in Q4FY21. Share of industry’s retail folios rose from 10.2% in Mar’21 to 11.1% in Q1FY22 and 12.5% in Q2FY22. NAM added 1.8mn investors vs 4.0mn for the industry in H1FY22. SIP folios’ market share fell from 9% in FY21 to 8% in Sep’21 while SIP AUM market share rose from 7.4% to 9.1% in the same period. Company has filed eight products with SEBI, and majority of them have no distribution fees. ETFs will not be offered at lower cost as NAM has market leadership in this category in terms of volumes traded.

* However, lower yields led to miss in Q2FY22 operating profits: Despite 14% QoQ growth in equity AAUM, operating revenues grew only 8% QoQ due to lower yields. Revenue yields (% of AAUM) declined by 1bp to 49.4bps in Q2FY22. Total operating expenses were up 8% QoQ led by 14% QoQ rise in other expenses and 5% QoQ rise in employee costs. EBITDA as % of AAUM declined marginally by 0.4bps to 29.1bps in Q2FY22. Core PAT grew 8% QoQ to Rs1.4bn. PAT was up 18% QoQ driven by higher ‘other income’ attributed to MTM gains in equity portfolio and higher yields in the bond portfolio.

* Maintain ADD with a revised target price of Rs460 (earlier: Rs477) based on 35x FY23E core EPS of Rs11.5 (earlier: Rs12), and cash & investments of Rs58 per share. We factor-in AUM growth at 25% CAGR between FY21-end and FY23- end with aggregate revenue yields moderating from 51bps in FY21 to 49.5bps in FY22E and 47.9bps in FY23E. This accounts for possible improvement in performance / flows in equities and debt. We expect operating costs to increase from Rs5bn in FY21 to Rs6.1bn in FY23E. This can result in operating margins, as % of AAUM, at 30bps / 29.5bps in FY22E/FY23E vs 27bps in FY21.

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