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Higher other income and lower opex drives profitability

Nippon Life AMC reported decent set of numbers in Q3FY21 which was largely in-line with our expectations. Its mutual fund QAAUM grew by 6.5% QoQ led by healthy growth in both equity as well as debt AUM which grew by 7.3% and 5.3% QoQ. Further, despite lower yields, PAT grew by 42.7% QoQ driven by higher other income and cost saving initiatives. Going forward, we remain positive on Nippon AMC as it plans to regain its lost market share through a series of measures. In the long run, its consistent increase in equity assets, industry leading retail assets and strong presence in B-30 cities augurs well for the growth prospects of the company. Recommend Hold.

Result Update Q3FY21

* Nippon AMC’s revenue growth remained tepid as it grew by 4.3% QoQ despite QAAUM growth of 6.5%. This was on account of lower debt yields during the quarter. However, strong growth in other income (+98.6%) driven by higher equity MTM gain, resulted in total income growth of 23.6% QoQ. Additionally, sharp control over operating expense led to PAT growth of 42.7% QoQ to Rs. 205 cr. On a YoY basis, total income and PAT grew by 9.3% and 34.1% YoY. Its QAAUM grew by 4.2% YoY.

* Other key highlights: i) the company has managed to restrict the decline in market share and has plans to increase the same going ahead. This would be led by expanding fund management team and re-alignment of portfolios, ii) the management mentioned that December SIP inflows of Rs. 6.6 bn is higher as certain SIP inflows of November 2020 was recorded in December (due to public holiday from November 28-30).

Outlook & Valuation

The mutual fund industry has witnessed consistent outflows in the recent past which remains a key concern for the industry. However, the long-term growth story remains intact 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, NAM’s consistent increase in equity assets, industry-leading retail assets and strong presence in B-30 cities augur well for the growth prospects of the company. The consistent increase in monthly SIP book (Rs. 6.6 bn) would ensure longevity and regular inflows providing stable growth. We have marginally tweaked our estimates and have a HOLD rating on the stock with a target price of Rs. 348.

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