Hold Nippon Life Ltd For Target Rs. 306 - Emkay Global
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Inflows weak but operational performance steady
* NAM India has reported ~4.2% yoy (+6.5% qoq) growth in MF QAAUM to Rs2,130bn in Q3FY21, mainly supported by stability in debt AUMs. However, operating revenues remained flat sequentially amid declining revenue yields. PAT outperformance during the quarter was aided by treasury gains due to a rebound in equity markets.
* Going forward, though the quantum of outflows might subside, revenue yields will be affected by a change in portfolio mix toward the rising share of liquid schemes over equity, which will hurt profitability. We expect the overall trend to improve in the coming quarters with normalization of inflows.
* We like the AMC business due to the limited credit risk; however, we remain concerned about the volatility in revenues/profitability in the near term. We are confident about the company’s liquidity position during current volatile times, considering its healthy AUM mix, timely support from banks and strong parentage.
* We appreciate management’s efforts to rationalize expenses, which in turn will support profitability. However, the rise in equity flows would be a key trigger for the stock. We maintain Hold with a revised TP of Rs306 (Rs282 earlier), corresponding to 25x P/Mar’23E EPS. We maintain EW stance in our NBFC EAP.
Current volatility and economic slowdown to impact inflows: Being the largest retail AMC with retail/total MF AUM of ~26% and steady SIP flows, NAM India’s management has been upbeat about increasing flows from B30 and B100 cities. Management’s consistent efforts to acquire wealth in Tier-2 and Tier-3 cities should bear fruit.
SIP flows depicting more realistic picture: The company has restated its SIP inflow numbers, which are significantly lower than previous reporting as the recognition of SIP has now shifted to actual receipt basis against accrual basis earlier. The company’s SIP book has seen a steady decline over quarters, falling to Rs6.6bn in Q3FY21 from Rs7.1bn in Q3FY20.
Focus remains on granularity of flows: NAM India’s management focuses on Tier-2 and Tier-3 cities to pave way for growth as these assets tend to be stickier. It continues to enjoy increasing flows from B30 and B100 cities. Contribution from B30 cities has remained healthy at 17.5% against the industry average of ~16%. The company’s advanced technology platform has ensured smooth operations amid physical dislocation in the last quarter.
Outlook and valuation: We appreciate management’s efforts to rationalize expenses, which in turn will support profitability. However, the rise in equity flows would be a key trigger for the stock. We maintain hold with a revised TP of Rs306 (Rs282 earlier), corresponding to 25x P/Mar’23E EPS. We maintain EW stance in our NBFC EAP.
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