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Surge in inflows but revenue yields still lag behind

* NAM India saw a surge in QAAUM to Rs2,404bn in Q1 (+33.5% yoy, +5.2% qoq), mainly due to steady demand for debt schemes, MTM gain in equity AUM and rising demand for ETFs. However, revenue yields fell to ~50bps from ~53bps in Q4FY21 due to weak equity flows. PAT stood at Rs1.8bn and was above our estimate of Rs1.6bn.

* Although we see the surge in overall flows and market share gain of ~13bps in the quarter as positive, profitability of the current AUM mix (elevated share of low-yield products - debt funds and ETFs) remains a challenge. We also believe that operational leverage has peaked already, and only an increase in revenue yields can boost profitability now.

* We increase our FY23/24 AUM estimates by ~19.8% for each year, which in turn make us upgrade our PAT estimates by ~15.0%/12.2%. The shift to a more profitable product mix and an improvement in yields would be the key monitorables. We raise our TP from Rs335 to Rs410 (~28x P/Sep’23E EPS). Maintain Hold and EW stance in EAP.

* On valuation front, the discounting between NAM India and HDFC AMC has narrowed down significantly in spite of superior return ratios of the later. For further valuation upside, we believe that the company needs to maintain consistency in flows along with profitable AUM Mix resulting in superior RoEs.

Focus remains on the granularity of flows: NAM India’s management has been upbeat on increasing flows from B-30 and B-100 cities. Management’s consistent efforts to acquire AUM from Tier-2 and Tier-3 cities should augur well for the company as these assets tend to be stickier. The contribution from B30 cities has remained healthy at 19% vs. the industry average of ~16.3%. The company’s advanced technology platform has ensured smooth operations amid the physical dislocation in the last few quarters due to Covid.

SIP inflows continue to decline: The Company’s SIP book declined to Rs5.9bn in Q1FY22 from Rs6.6bn in Q4FY20. The dip in AUM was due to the rise in lower-ticket SIPs as overall folios (accounts) have witnessed a surge to 3.4mn (+9% yoy). The SIP book provides a more sustainable source of inflows, and we would keenly await for stability in the book in the coming quarters.

Outlook and valuation: We appreciate management’s efforts to rationalize expenses, which in turn will boost profitability. However, in our view, market share gains would be key trigger for further stock momentum. We increase our FY23/24 AUM estimates by ~19.8% for each year, which in turn make us upgrade our PAT estimates by ~15.0%/12.2%. The shift to a more profitable product mix and an improvement in yields would be the key monitorables. We raise our TP from Rs335 to Rs410 (~28x P/Sep’23E EPS). Maintain Hold and EW stance in EAP.

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