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Expect better traction in FY22

Business levers ahead include: 1) Building on performance, which can improve flow share, 2) new product pipeline, and 3) possible industry momentum given the net inflows and increase in SIP witnessed in FY22TD. Maintain BUY with a target price of Rs3,284 (unchanged) based on FY23E core EPS of Rs66.4 plus cash and investments of Rs296 /share, which takes into account 16% AAUM CAGR between FY21-23E along with drop in yields (3bps between FY21-23) and rise in operating costs (Rs4.6bn in FY23E compared to Rs3.9bn in FY21). This will maintain operating profits at ~38bps of AAUM for FY21-23E.

Operational highlights of FY21.

Equity market share (based on closing AUM) declined from 13.7% in FY20 to 12.8% in FY21 and 12.5% in May’21. Debt market share increased from 13.2% in FY20 to 14.4% in FY21 and declined marginally to 14.2% in May’21. Unique investors declined from 5.6mn in FY20 to 5.3mn in FY21. STP came in at Rs10.4mn in FY21 vs Rs11.3mn in FY20. Direct channel mix improved from (quarterly) average of 43% in FY20 to 48% in FY21. Share of national distributors/MFDs remained stable at 17.5%/24.6% while banca channel mix declined from 12% in FY20 to 10% in FY21.

Expectations of Q1FY22-will increase in equity mix help boost earnings in Q1FY22.

Based on available information on AUM for the month of Apr/May’21, we expect Q1FY22 AAUM to be Rs4.2trn. We expect revenue yields of 49.3bps in Q1FY22 compared to 48.8bps in Q4FY21 to factor higher equity mix. This will translate into revenue of Rs5.1bn. We expect 2% QoQ higher operating cost which factors increase in employee cost (Rs650mn in Q1FY22 vs Rs638mn in Q4FY21) due to esops and flattish other expenses (Rs420mn in Q1FY22 vs Rs412mn in Q4FY21). We expect operating profit/PAT of Rs4.1/3.6bn in Q1FY22 with operating margins at 39bps in Q1FY22.

New MD (Mr. Navneet Munot) outlines more definitive outlook for growth.

The strategy includes: 1) Launch of products in passive categories like NIFTY NEXT50 index fund, sector funds like banking & finance, thematic and international funds. The company had indicated in Q4FY21 call that there has been a turnaround in performance Oct’20 onwards and the results thereof will follow. The induction of new fund managers has yielded designed results (they now manage ~15% of the AUM and have received positive response). The aim remains to maintain a balance of cost competitiveness and future growth.

Financial highlights of FY21:

Weaker AUM mix resulted in 8% lower revenues YoY in FY21 despite 3% increase in AAUM. Non-recurring gain in sale of pledged shares related to NCDs has resulted in higher other income of Rs3.5bn, up 149% YoY. There was an increase in employee costs by 6% YoY led by an increase in the number of employees (from 1,194 to 1,254) as well as an increase in certain emoluments. Other costs were lower by 20% YoY due to muted business environment because of the ongoing pandemic.

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