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Making a comeback

Incorporated in 1995, Nippon Life Asset Management Company (NAM) is one of the leading AMCs in India with a total AUM of ~Rs. 3.79 tn. It is involved in managing the mutual fund (AUM of Rs. 2,442 bn) and managed accounts including Portfolio Management Services (PMS), Alternate Investment Funds (AIF), Pension Funds and Offshore Funds. Nippon Life Insurance (promoter of NAM) is amongst the fortune 500 companies and is Japan’s largest private life insurer. It has 57 Asset Management related operations & 22 Insurance related operations globally.

Investment Rationale

* Long term growth story remains promising: The mutual fund industry has witnessed robust growth of 19% CAGR over FY16-21 mainly on account of increased government focus on financial inclusion, increase in the financialization of savings and greater awareness of mutual funds amongst individual investors. The growth was largely led by equity-oriented schemes which contribute nearly 42% of the overall industry AUM in FY21 (up from 31% in FY16). The inflows including the SIP book had been impacted in FY21 owing to the pandemic and volatility in equity markets. However, positive market sentiments and rising investor base have revived flows into equity-oriented schemes in recent months (last 5 months of consecutive inflows). The monthly SIP book stood at Rs. 96 bn (highest ever) from Rs. 31 bn in Apr-16 and Rs. 86 bn in Mar-20. Going forward, the growth prospects remain promising for the industry with increased thrust on the financialization of savings, higher penetration of mutual funds (especially in B-30 locations), and increased preference of mutual funds over traditional saving avenues. Further, the growing SIP book is good for the industry as it would provide stability and longevity in inflows.

* NAM to capitalize on positive industry growth trends: After losing market share over the last three years due to erstwhile promoter-related issues, NAM has shown signs of stabilizing led by strong rebranding efforts taken by the company. We expect NAM to strengthen its position in the mutual fund industry driven by its extensive distribution network, strong focus on increasing penetration in B-30 locations and increasing retail investors’ base. The growing adoption of ETFs also bodes well for NAM as it enjoys a 73% volume share in ETFs and a 51% share in the number of folios. On the financial front, despite factoring in lower revenue yields, we expect operating margins to improve on the back of cost control measures and higher operating leverage over FY21-FY24E.

Outlook & Valuation

We continue to remain constructive on the Indian mutual fund industry given its low penetration level as compared to major economies (11% AUM to GDP ratio v/s world average of 62%). Further, NAM’s consistent increase in equity assets, industry-leading retail assets, focus on growing SIP book and strong presence in B-30 cities augurs well for the growth prospects of the company. We recommend a Buy on the stock with a target price of Rs. 492.

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