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Opex efficiency to benefit core performance

Nippon Life (NAM) earnings surprised positively on an operational level. QAAuM at Rs2,806bn was in-line growing by 5.7% QoQ mainly led by equity/ETF. Overall market share (MS) was stable QoQ at 7.35% while debt MS has consistently improved over the last 4 quarters from 7.0% to 8.0%. Trend of MS loss in equity could reverse in a few quarters as NAM has seen stronger active equity performance in FY21 and FY22YTD. Yields were better at 48bps while opex was lower at Rs1.34bn (est. Rs1.48bn) mainly led by softer other opex. Hence core income at Rs2.05bn beat estimates by 12.5%. NAM has done well on controlling costs in the recent past and we trim our opex estimates. Owing to sharper cost control and likely trend reversal in equity MS we upgrade NAM from ADD to BUY. Maintain multiple at 42x Sep’23 EPS but raise TP to Rs510.

Q3FY22 results – Better than expected core income led by lower opex

QAAuM came in as expected at Rs2,806bn (est. Rs2,807bn) growing by 5.7% QoQ mainly led by equity/ETF which grew by 6.4%/15.0%. Revenue being a beat, also improved by 3.2% QoQ to Rs3.39bn (est. Rs3.3bn). Equity share saw a slight uptick QoQ from 42.5% to 42.8% largely due to the MTM impact. Yields were better at 48bps that saw a 1bp blip QoQ. Opex was a beat at Rs1.33bn (est. Rs1.45bn) with employee cost being Rs729mn (est. Rs750mn). ESOP cost for the quarter was Rs59mn while 9MFY22 it was Rs106mn. Core income was Rs2.05bn (est. Rs1.8bn) while operating yields were a beat 29bps. Other income shrunk QoQ to Rs304mn (est. Rs600mn) and bulk of the decrease was due to MTM impact in equity. Hence PAT was a miss at Rs1.74bn (est. Rs1.82bn) though core PAT was ahead at Rs1.52bn (est. Rs1.37bn).

Debt market share improves; expect market share in net equity flows to improve

Basis QAAuM, overall market share (MS) was stable QoQ at 7.35% while there has been a consistent improvement in debt MS over the last 4 quarters from 7.0% to 8.0%. Q3FY22 SIP flows improved QoQ from Rs18.8bn to Rs20.1bn though equity MS declined QoQ from 6.8% to 6.6%. However, we expect this trend to reverse in a few quarters and MS in net flows could enhance as NAM has seen stronger active equity performance in FY21 and FY22YTD. Usually higher net flows lag good fund performance by a few quarters.

Focus on profitability over growth; we expect further opex efficiency

Yields saw a slight decline of 2bps YoY as there was a sharp cut in TER during Aug-Sep’21 between 5-20bps for different schemes due to multiple factors. The company suggested that due to increased competition industry yields would decline over the near term post which they would mean revert. Due to its focus on profitability over growth, NAM stayed away from lauching larger NFOs in the quarter. The quarter saw a positive surprise on opex yet again and NAM has fared well on controlling costs in the recent past. We expect operating efficiencies to further propel core profits and we trim our opex estimates.

Valuation and risks

We trim opex est. for FY22/23/24 which may positively impact core inc. by 13% each. Expect a trend reversal in equity MS as net flows could enhance. On Sep’23 EPS we maintain multiple at 42x but raise TP to Rs510 (earlier Rs475) due to a higher operating income. Retain ADD. Risks: lower AUM growth, regulatory challenges.

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