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Global Markets Research

ANCHOR REPORT

India AMCs: Growing stronger, getting better

Best play on financialisation of savings: 3 August 2018

structural tailwinds outweigh cyclical Research analysts


headwinds India Financials
Amit Nanavati - NFASL
We initiate on India’s asset management companies (AMCs) with a bullish amit.nanavati@nomura.com
view, given the strong growth opportunity and improving operational +91 22 4037 4361
metrics, which we believe are more structural and less cyclical. We expect Riddhi Jain - NFASL
a 20% CAGR in AUMs over FY18-25F with improving equity mix, as the riddhi.jain@nomura.com
sector is one of the key beneficiaries of the rising financial savings mix +91 22 4037 4008
while penetration levels are still extremely low. In our view, operating Adarsh Parasrampuria - NFASL
leverage and improving equity mix should take care of yield pressures, adarsh.parasrampuria@nomura.com
while strong AUM growth should support profitability improvement. +91 22 4037 4034

Key themes and analysis in this Anchor Report include:


 Detailed top-down assessment of growth potential: +20% AUM CAGR
over FY18-25F with improvement in equity mix.
 Mutual funds (MFs) have become mainstream investments; we detail
why we are less worried about cyclicality risks.
 We address key investor concerns on growth/cyclicality, distribution
costs, regulatory risks and consolidation.
 We initiate on Reliance Nippon Life Asset Management (RNAM IN)
Production Complete: 2018-08-03 13:57 UTC
with a Buy rating; our INR315 TP implies 24% potential upside.
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
India financials

EQUITY: FINANCIALS

AMCs: Growing stronger, getting better Global Markets Research


3 August 2018
Best play on financialisation of savings: structural
tailwinds outweigh cyclical headwinds Anchor themes
We think AMCs are the best play
Positive on AMCs; best play on financialisation of savings
on financialisation of savings and
We initiate on India’s asset management companies (AMCs) with a positive
expect structural tailwinds to
view, as we see structural tailwinds strengthening even as cyclical risks exist, absorb regulatory headwinds. We
given the strong flows seen in the past 3-4 years. Our positive view is based expect the industry AUM to post
on: 1) strong growth opportunity, with mutual funds (MFs) now a mainstream 20% CAGR over FY18-25F.
investment avenue given the rise in systematic investment plan (SIP) share; 2)
our view that yield pressure should subside with operating leverage kicking in Nomura vs consensus
and some consolidation in the industry as well as a potential capping of We are less worried about
distributor commissions. We expect assets under management (AUM) for the cyclicality as we expect SIP to be
industry to see a 20% CAGR over FY18-25F, with the equity mix improving to on a structural uptrend.
50% from 43%. In the near term, we expect earnings to be affected by recent
total expense ratio (TER) cuts, but we think the impact will be absorbed by Research analysts
operating leverage.
 MFs a mainstream investment product – we expect +20% equity AUM India Financials
growth over 5-7 years: While flows may be cyclical, the SIP book flows is Amit Nanavati - NFASL
growing, and adds ~10% to equity AUM growth annually, making AUM amit.nanavati@nomura.com
growth lot more structural, in our view. MF penetration (as a % of GDP) in +91 22 4037 4361
India remains low at 12.7% in FY18 vs 57-101% in developed economies, Riddhi Jain - NFASL
hence we see 20% AUM CAGR over FY18-25F and 10-15% AUM CAGR riddhi.jain@nomura.com
+91 22 4037 4008
over FY25-35F. Equity mix has increased to 43% in FY18 and offers more
upside given 40-90% equity mix in developed markets. Adarsh Parasrampuria - NFASL
adarsh.parasrampuria@nomura.com
 Yield pressure likely to subside: The MF industry has seen rising +91 22 4037 4034
distributor commissions due to competition from smaller MFs and
regulations are forcing gross yields lower. This has led to profitability
improvement lagging AUM growth. In spite of the high AUM growth, smaller
MFs are unprofitable making a case for sector consolidation, and that
coupled with potential capping of intermediary commission, should aid
profitability in the medium term.
Initiate on RNAM with a Buy (24% potential upside): We initiate on
Reliance Nippon Life Asset Management (RNAM IN) with a Buy and TP of
INR315 (24% potential upside). RNAM is concentrating on the profitable
asset mix with a greater focus on building a retail franchise. We expect a
strong growth opportunity for the sector and believe structural drivers are
intact for RNAM to deliver 22% core PBT CAGR over FY18-21F with
operating leverage to absorb cyclicality/regulatory risks. Current valuations
at 25x Sep-20F core earnings look undemanding to us in that context. Our TP
of INR315 implies 32x Sep-20F core earnings adjusted for 1x value assigned
to its investment book.
Fig. 1: Stock for action
Stock Ticker Rating M cap ($mn) 3M ADTV ($mn) TP (INR) Price (INR) Upside (%)
RNAM RNAM IN Buy 2,247 0.7 315 254 24%

Source: Bloomberg, Nomura estimates. Note: Share price is as of 2 August 2018 close.

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
Nomura | India financials 3 August 2018

Contents

Executive summary ................................................................................ 3


Story in charts ........................................................................................ 4
Is the growth structural or at a cyclical peak? ......................................... 8
Our macro construct ........................................................................................ 9
Expect 20-23% AUM CAGR over FY18-25F ................................................. 11
Our market share expectations ............................................................. 13
Can the equity mix sustainably improve from here? ............................. 15
Regulatory risks to yields: can this risk be mitigated? ........................... 18
Regulations so far have been investor-friendly ............................................. 18
Operating leverage to offset regulatory pressures ........................................ 19
Are passive flows a big threat or a gradual evolution of the industry? ... 21
Household penetration still very low in India ................................................. 21
Manufacturer vs distributor: who has the real bargaining power? ......... 26
Too many players spoil the party: could consolidation be the answer? . 27
Our valuation framework: AMCs deserve premium valuations ................ 29
Reliance Nippon Life Asset Management ............................................. 31
Appendix A-1 ........................................................................................ 52

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Nomura | India financials 3 August 2018

Executive summary
AMCs: A structural story ahead
We think increasing mutual funds share in financial savings is a structural story and has
become a mainstream investment mode with SIPs on the rise. SIP monthly book is
INR75bn as of Jun-18 and continues to grow stronger forming 10% of equity AUM now.
While there may be cyclicality risk in the lump sum equity investment in the near term,
we think the product continues to be most cost competitive and distribution is improving
with regulators pushing the AMCs to cut on costs as well as rewarding penetration.
Flows increased but a long way to go
Penetration levels for MF are still very low at 12.7% (AUM to GDP), and we estimate
only 10% of India’s households invest in mutual funds. Also, when compared to MF
share in financial savings, levels remain very low at 5-7% vs 20-25% for life insurance.
We expect financialisation of savings to continue, with financial savings share improving
from 50% now to 60% by FY25F and MF to be the largest beneficiary of that with
penetration levels improving to 22% by FY25F – still lower than emerging countries. With
this we see a 20% AUM CAGR opportunity for the industry, with the equity mix improving
further to 50% from 43%.
Addressing investor concerns
While the tailwinds are largely known, we try and address a few investor concerns in this
note and detail why we think the structural tailwinds outweigh the cyclical headwinds.
• Is the growth structural? We think MF has now become the mainstream investment,
as it competes across all investment product categories: fixed deposits, savings
deposits and ULIPs (unit-linked insurance plans). SIP continues to strengthen and now
forms 10% of equity AUMs. Despite exceptionally strong flows in the past 3-4 years, the
penetration levels when compared with household participation, its share in financial
savings and GDP remains very low (hence we see no risk of passive flows in the
medium term), and so we see a 20% AUM CAGR opportunity over FY18-25F.
• Can equity mix improve sustainably? Penetration levels are even lower when looked
at equity AUMs, and with SIP share increasing (largely equities-driven) and penetration
levels improving we think equity mix will improve sustainably while near-term cyclicality
cannot be ruled out. We expect equity mix to improve by 100bps p.a. to 50% by FY25F,
which would still be lower than the world average.
• Can the regulatory risk be mitigated? The regulators have always focused on
investor-friendly measures, hence they have been cutting costs which remains a key
risk to yields. But we think operating leverage as well as improving equity mix and
increasing direct share will mitigate regulatory risks on yields.
• Manufacturers vs distributors: With distribution costs rising, increasingly we think the
distributor has the real bargaining power, as the distribution pool is common for the
industry. We think the industry will have to consolidate over time with such thin margins
left, and that will increase the bargaining power of the manufacturer and an increasing
direct share will reduce dependence on the distributor.
Our valuation framework
We believe AMCs in India deserve a substantial premium compared with AMCs in
developed countries, as the share of passive flow in the US is very high and, hence,
profitability is depressed. Also, household penetration in the US is at 45% levels vs. 10%
for India. Additionally, AMCs in the US act only as fund managers and not as distributors;
hence, the business is more B2B-oriented compared with India, where a large part of the
distribution is also done by AMCs so the business is more B2C. We expect AUMs to post
a 20% CAGR over FY18-25F and equity mix to improve by 100bps p.a. to 50% by
FY25F; we expect earnings for the larger AMCs to compound at 20-25% over FY18-25F.
Also given that the capital requirement is very low at INR0.5bn, we expect these
companies to pay out +75% of their profits.
Given higher growth opportunity and full payout ability, we peg P/E multiples in the range
of 30-40x. We think AMCs deserve a significant premium to flow businesses where
cyclicality risks will be high. In contrast, AMCs earn on stock and, hence, the cyclicality
risk is relatively low.

3
Nomura | India financials 3 August 2018

Story in charts
Fig. 2: Household savings to decline as the economy Fig. 3: Financial savings to continue to improve with real
matures estate demand muted
Household Savings (% of GDP) Financial savings (% of savings)
80% Physical savings (% of savings)
28% 26%
26% 24% 24% 24% 70%
23% 23%
24% 23% 22%
60%
22% 20%
20% 50%
18% 16% 16%
16% 14% 40%
14% 30%
12%
10% 20%

FY04

FY08

FY12

FY16
FY02
FY03

FY05
FY06
FY07

FY09
FY10
FY11

FY13
FY14
FY15

FY17
FY18

FY21F
FY20F

FY25F
FY30F
FY35F
FY08

FY12
FY02
FY03
FY04
FY05
FY06
FY07

FY09
FY10
FY11

FY13
FY14
FY15
FY16
FY17
FY18

FY25F
FY20F
FY21F

FY30F
FY35F
Source: RBI, Nomura estimates Source: RBI, Nomura estimates

Fig. 4: MF penetration still very low compared with emerging Fig. 5: Our expectation of improvement in MF penetration
as well as developed economies levels is still lower than the world average
India's Mutual Fund AUM (% of GDP)
AUM to GDP ratio - CY17 70%
180% World Average - FY16
155.4%
160% 60%
140%
114.2% 50%
120%
100% 40%
78.2% 73.0%
80% 62.7% 60.2% 30%
60%
36.1% 20%
40% 29.5%
13.8% 11.8%
20% 10%
0%
0%
Japan

Brazil

India
US

UK

China

Korea
Germany
Canada

Australia

FY03

FY10

FY17
FY02

FY04
FY05
FY06
FY07
FY08
FY09

FY11
FY12
FY13
FY14
FY15
FY16

FY18
FY21F
FY25F
FY30F
FY35F
Source: ICI Factbook Source: RBI, Nomura estimates, ICI Factbook

Fig. 6: We expect MF AUM CAGR of 20% over FY18-25F and Fig. 7: We expect equity mix to improve by 100bps annually
then normalise to 10-15% CAGR over FY25-35F to 50% by FY25F and stabilise beyond that
30% Mutual Fund AUM CAGR Equity AUM mix (% of GDP) Equity AUM mix (%) (LHS)
25.4% 60% 12%
25%
50% 10%
20.0%
20% 40% 8%
15.0%
15% 30% 6%
10.2% 20% 4%
10%
10% 2%
5%
0% 0%
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY21F
FY25F

0%
FY15-18 FY18-25F FY25-30F FY30-35F
Source: AMFI, Nomura estimates Source: AMFI, Nomura estimates

4
Nomura | India financials 3 August 2018

Fig. 8: SIP book on a structural uptrend – forms 9% of equity Fig. 9: We expect lump-sum flows to moderate cyclically,
AUMs while the SIP flow momentum continues
3,000 Net Equity Flows -Non SIP (INRbn)
85 Industry SIP flow (INRbn) Net Equity Flows -SIP (INRbn)
2,500
75
2,000
65
1,500
55
1,000
45
500
35
-
25
(500)
Aug-16
Sep-16

Aug-17
Sep-17
Jul-16

Jul-17

Mar-18
Mar-17
Dec-16

Jan-18
Jun-16

Jan-17

Jun-17

Jun-18
Apr-16

Oct-16
Nov-16

Apr-17

Oct-17
Nov-17
Dec-17

Apr-18
May-16

Feb-17

May-17

Feb-18

May-18

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY21F

FY22F

FY23F
Source: AMFI, Nomura research Source: AMFI, Nomura estimates

Fig. 10: Overall macro construct – we expect 20% AUM CAGR over FY18-25F
2002 2008 2010 2014 2018 2021 2025 2030 2035 CAGR FY18-25F
Nominal GDP 24,038 48,657 63,187 113,451 167,731 233,736 347,065 510,934 666,616 11%
Real grow th (%) 9.96% 11.49% 9.60% 7.01% 4.44%

Household savings 5,453 11,183 16,308 22,853 27,099 37,061 53,643 76,416 96,367 10%
Savings (% of GDP) 22.7% 23.0% 25.8% 20.1% 16.2% 15.9% 15.5% 15.0% 14.5% -0.7%
994 1,000
Physical savings 2,978 5,381 8,560 14,532 13,549 17,419 23,066 30,566 38,547 8%
Financial savings 2,475 5,802 7,748 8,321 13,549 19,643 30,576 45,849 57,820 12%
Financial savings (% of savings) 45.4% 51.9% 47.5% 36.4% 50.0% 53.0% 57.0% 60.0% 60.0% 7.0%

Mutual Fund AUM 1,006 5,052 6,145 8,252 21,360 38,365 76,691 154,194 250,527 20%
% of GDP 4.2% 10.4% 9.7% 7.3% 12.7% 16.4% 22.1% 30.2% 37.6%

Equity AUM 326 1,890 2,156 2,085 9,219 17,710 38,345 77,097 125,263 23%
Equity AUM mix% 32.4% 37.4% 35.1% 25.3% 43.2% 46.2% 50.0% 50.0% 50.0% 6.8%
Grow th y/y 77.9% 10.1% 46.7% 23.4% 20.0% 13.0% 9.0%

Flow led AUM - equities (59) 527 15 (113) 2,608 1,755 2,512 3,014 4,208 -1%
Pricing Led AUM increase - equities 385 36 930 305 328 1,603 3,882 5,856 6,135 42%

SIP yearly 103 672 894


Non SIP net Flow s (59) 527 15 (216) 1,936 861
Redemtion 84 851 680 608 2,590 4,879
Non SIP Gross Flow s 25 1,378 694 392 4,526 5,740

Gross flow s (non SIP) % of Equity AUM 103.8% 57.3% 20.7% 72.0% 40.0%
Redem tions (% of Equiy AUMs) 64.1% 56.1% 32.1% 41.2% 34.0%
Source: World Bank, RBI, AMFI, Nomura estimates

5
Nomura | India financials 3 August 2018

Fig. 11: World comparables provide comfort


Equity AUM
Mutual Fund as a % of
AUM as a % of Equity AUM to Debt AUM to Market cap
GDP - CY17 GDP Dec-16 GDP Dec-16 Equity Mix (%) Debt Mix (%) (Dec-16)
USA 114.2% 62.0% 39.0% 61.4% 38.6% 42.0%
France 89.6% 23.0% 30.0% 43.4% 56.6% 26.0%
Canada 78.2% 45.0% 20.0% 69.2% 30.8% 34.0%
World 61.1% 32.0% 24.0% 57.1% 42.9% 0.0%
Brazil 60.2% 11.0% 42.0% 20.8% 79.2% 26.0%
UK 73.0% 29.0% 9.0% 76.3% 23.7% 27.0%
Germany 62.7% 25.0% 21.0% 54.3% 45.7% 51.0%
South Africa 155.4% 29.0% 16.0% 64.4% 35.6% 9.0%
Japan 52.0% 26.0% 3.0% 89.7% 10.3% 26.0%
Korea 36.1% 5.0% 13.0% 27.8% 72.2% 6.0%
China 29.5% 3.0% 8.0% 27.3% 72.7% 4.0%
India 13.8% 4.0% 6.0% 41.3% 60.0% 4.0%
Source: ICI Factbook, Nomura research

Fig. 12: Detailed macro projection – we still build in conservative penetration levels vs. other emerging countries currently
Our projections
INRbn FY14 FY18 FY20 FY25 FY30 FY35
Indian AUMs 8,252 21,360 31,778 76,691 154,194 250,527
CAGR % 37% 22% 19% 15% 10%

Equity AUMs 2,085 9,219 14,351 38,345 77,097 125,263


CAGR % 64% 25% 22% 15% 10%
Equity m ix (%) 25% 43% 45% 50% 50% 50%

Nom inal GDP 113,451 167,731 209,652 347,065 510,934 666,616


CAGR % 14% 12% 11% 8% 5%

Equity AUM to GDP (%) 1.8% 5.5% 6.8% 11.0% 15.1% 18.8%

Mcap (INR trn) 74,152 142,249 181,638 334,656 538,966 721,259


Market return (%) 10% 10% 8% 5%
New listing (%) 3% 3% 2% 1%

Equity AUM to Mcap (%) 2.8% 6.5% 7.9% 11.5% 14.3% 17.4%
Source: Nomura estimates

6
Nomura | India financials 3 August 2018

Fig. 13: Regulatory impact can be absorbed by operating leverage


Industry AUM Current AUM
Schemes Expense ratios - Regular Expense ratio - Direct (INRmn) Mix
Income 1.00% 0.50% 8,289,410 40.6%
Equity 2.10% 1.10% 5,877,715 28.8%
Liquid 0.25% 0.10% 3,554,080 17.4%
Balanced 2.10% 1.10% 1,348,680 6.6%
ELSS 2.30% 1.40% 714,105 3.5%
ETF 0.50% 0.00% 603,140 3.0%
FOF 0.50% 0.05% 15,880 0.1%
Grand Total 1.29% 0.66% 20,403,010
Equity + Balanced yield 2.10% 1.10%
Other yields 0.76% 0.36%
Equity + Balanced 7,940,500 38.9%

Positive impact Equity Mix change Net yield difference Net impact
Equity mix change 10% 0.53% 0.053%

(1) Negative impact Increase in trail Gross yields Current Maturity Net impact
Higher trail coms 10% 1.29% 50% -0.064%

(2) Negative impact Gross TER reduction Pass on to Distributors Net impact
TER changes -0.15% -0.10% -0.050%

Total impact -0.062%


Core PBT of the industry 0.25%
% of profitability -25%

Set offs from operating leverage and upfront commission reduction


Source: Nomura estimates

7
Nomura | India financials 3 August 2018

Is the growth structural or at a cyclical


peak?
MFs now a mainstream investment product
• Flows into mutual funds (MFs) constituted just 1-3% of gross financial savings over
FY14-17 and remained highly cyclical. Over the past few years, especially with the
financialisation of savings as well as increasing investor awareness, MFs’ contribution
in financial savings is on an uptrend. FY18 share of mutual funds would have expanded
to closer to 5-7%, per our estimates, but will still be a significantly smaller proportion of
overall financial savings.
• We expect overall financial savings to improve from ~50% of total household savings in
FY18 to 60% over the next decade and, within that, we expect MFs to benefit largely
given their competitive (low-cost) products, their increasing distribution network (both
physical and direct channel) and increasing investor awareness.
• We expect MF industry AUM to see a ~20% CAGR over FY18-25F and a 10-15%
CAGR over FY25-35F, which implies that penetration levels (AUM to GDP) will improve
from 12.7% in FY18 to 22% by FY25F, per our estimates, which, however, is still lower
than penetration levels of emerging economies currently (26-59% as of CY16).
• Within that, we expect the equity mix to continue to grow faster, improving from 43% in
FY18 to 50% by FY25F (100bps improvement pa) given the increase in individual
investor participation, which is evident from SIP inflows continuing to grow at a healthy
pace – the SIP book now constitutes 25-40% of total net inflows into equities.
Penetration levels still low
• We estimate household penetration for mutual funds to be around 10% only vs. +45%
for the US and, with just 2-3% of the individual population investing in mutual funds, we
think the penetration levels are materially lower.
• Also, when compared to MF penetration (% of GDP), it is just 12.7% in FY18 despite
such a big spike in flows over the past three years. We expect penetration levels to
improve gradually to 22% by FY25F.
Flows have picked up and can be cyclical but SIP now on a structural uptrend
• While we do not rule out cyclicality in flows, especially into equities, we think MFs have
now become a mainstream investment vehicle with increasing distribution network as
well as investor awareness.
• The SIP book now forms 9-10% of equity AUM and is growing at +60% y/y. We expect
SIP to be on a structural uptrend and expect the SIP book to see a 10% CAGR over
FY18-25F. We expect SIP flows to average ~50% of annualised net flows over FY18-
25F.
We expect flows to moderate but see limited risks to our 20% growth expectations
• While we expect SIP to be more of a structural trend in the way investors invest, we do
not rule out cyclicality, especially in lump-sum flows which are driven more by high-net-
worth individuals (HNIs). The average ticket size of equity AUM is INR120,000 vs.
~INR3,300 for SIP investments in FY18.
• Equity AUM for HNIs have seen a 55% CAGR over FY13-18 vs. retail AUM CAGR of
28%, which implies that HNI flows did dominate increasing equity participation. We
would think that HNIs are more return-sensitive (AUM CAGR of 11% for HNIs vs 14%
CAGR for retail over FY09-13) and, hence, will have higher cyclical tendency vs. retail
investors who are still allocating smaller portions of their savings in long-term capital
building. The average ticket size for HNIs is INR1.3mn vs. INR74,000 for retail
investors – ie, 18x.
• We expect lump-sum net flows to moderate from INR1.9trn to INR550bn in FY19F
(even lower than the INR640bn average in FY14-17) and gradually grow from there, but
we do not expect FY18 flows to repeat even till FY25F on absolute basis.
• Having said that, we expect SIP flows to continue, which are at 9-10% of AUM currently
and expect 10% market return in addition to lump-sum flows; hence, we think there is
limited risk to our +20% CAGR expectations for equity AUMs over FY18-25F.

8
Nomura | India financials 3 August 2018

Our macro construct


• We run a macro construct to assess the opportunity size of various financial products,
including MFs, over the next 10-15 years.
• In our macro framework, we expect GDP growth/inflation to normalise as we progress
and, in line with that, we expect yields/return expectations (which impacts AUM growth)
to normalise lower as well.
• We think overall domestic savings rate will also fall from 16-20% of GDP over FY14-17
to <15% of GDP by FY35F, but expect financial savings to improve vs. physical
savings. We expect financial savings to improve from 50% of domestic savings in FY18
to ~60% by FY25F and stabilise beyond that.
• Improvement in financial savings will support superior growth in all financial assets and,
particularly for MFs, we expect penetration levels (AUMs as a % of GDP) to improve
from 12.7% in FY18 to ~22% by FY25F and +35% by FY35F which, however, is still at
the lower end as compared to the emerging economies (where penetration levels are at
26-59% currently) and developed economies (where the range is 57-101%).

Fig. 14: Household savings to gradually decline as the Fig. 15: Financial savings to continue to improve with real
economy gets more matured estate demand muted
Household Savings (% of GDP) Financial savings (% of savings)
80% Physical savings (% of savings)
28% 26%
26% 24% 24% 24% 70%
23% 23%
24% 23% 22%
60%
22% 20%
20% 50%
18% 16% 16%
16% 14% 40%
14% 30%
12%
10% 20%
FY04

FY08

FY12

FY16
FY02
FY03

FY05
FY06
FY07

FY09
FY10
FY11

FY13
FY14
FY15

FY17
FY18

FY21F
FY20F

FY25F
FY30F
FY35F
FY08

FY12
FY02
FY03
FY04
FY05
FY06
FY07

FY09
FY10
FY11

FY13
FY14
FY15
FY16
FY17
FY18

FY25F
FY20F
FY21F

FY30F
FY35F

Source: RBI, Nomura estimates Source: RBI, Nomura estimates

Fig. 16: MF penetration still very low as compared to Fig. 17: Our expectation of improvement in MF penetration
emerging as well as developed economies levels is still lower than world average currently
AUM to GDP Ratio - CY17 India's Mutual Fund AUM (% of GDP)
180% 70% World Average - FY17
155.4%
160%
60%
140%
114.2%
120% 50%
100% 89.6% 40%
78.2% 73.0%
80% 61.1%60.2% 62.7%
52.0%
30%
60%
36.1% 20%
40% 29.5%
13.8%11.8%
20% 10%
0%
0%
India
Japan
US

UK

Korea
Brazil

Germany

China
France

World

South
Australia
Canada

Africa

FY21F
FY25F
FY30F
FY35F
FY06

FY11
FY02
FY03
FY04
FY05

FY07
FY08
FY09
FY10

FY12
FY13
FY14
FY15
FY16
FY17
FY18

Source: ICI Factbook Source: RBI, Nomura estimates, ICI Factbook

9
Nomura | India financials 3 August 2018

Fig. 18: Equity penetration even lower vs other countries

Equity AUM to GDP Dec-16 Debt AUM to GDP Dec-16

70%
62%
60%

50% 45%
42%
39%
40%
30% 32%
29% 29%
30% 24% 25% 26%
23% 21%
20%
20% 16%
11% 13%
9% 8%
10%
3% 5% 3% 4%6%

0%

Source: ICI Factbook

Fig. 19: Overall macro construct – we expect 20% AUM CAGR over FY18-25F
2002 2008 2010 2014 2018 2021 2025 2030 2035 CAGR FY18-25F
Nominal GDP 24,038 48,657 63,187 113,451 167,731 233,736 347,065 510,934 666,616 11%
Real grow th (%) 9.96% 11.49% 9.60% 7.01% 4.44%

Household savings 5,453 11,183 16,308 22,853 27,099 37,061 53,643 76,416 96,367 10%
Savings (% of GDP) 22.7% 23.0% 25.8% 20.1% 16.2% 15.9% 15.5% 15.0% 14.5% -0.7%
994 1,000
Physical savings 2,978 5,381 8,560 14,532 13,549 17,419 23,066 30,566 38,547 8%
Financial savings 2,475 5,802 7,748 8,321 13,549 19,643 30,576 45,849 57,820 12%
Financial savings (% of savings) 45.4% 51.9% 47.5% 36.4% 50.0% 53.0% 57.0% 60.0% 60.0% 7.0%

Mutual Fund AUM 1,006 5,052 6,145 8,252 21,360 38,365 76,691 154,194 250,527 20%
% of GDP 4.2% 10.4% 9.7% 7.3% 12.7% 16.4% 22.1% 30.2% 37.6%

Equity AUM 326 1,890 2,156 2,085 9,219 17,710 38,345 77,097 125,263 23%
Equity AUM mix% 32.4% 37.4% 35.1% 25.3% 43.2% 46.2% 50.0% 50.0% 50.0% 6.8%
Grow th y/y 77.9% 10.1% 46.7% 23.4% 20.0% 13.0% 9.0%

Flow led AUM - equities (59) 527 15 (113) 2,608 1,755 2,512 3,014 4,208 -1%
Pricing Led AUM increase - equities 385 36 930 305 328 1,603 3,882 5,856 6,135 42%

SIP yearly 103 672 894


Non SIP net Flow s (59) 527 15 (216) 1,936 861
Redemtion 84 851 680 608 2,590 4,879
Non SIP Gross Flow s 25 1,378 694 392 4,526 5,740

Gross flow s (non SIP) % of Equity AUM 103.8% 57.3% 20.7% 72.0% 40.0%
Redem tions (% of Equiy AUMs) 64.1% 56.1% 32.1% 41.2% 34.0%
Source: World Bank, RBI, AMFI, Nomura estimates

10
Nomura | India financials 3 August 2018

Expect 20-23% AUM CAGR over FY18-25F


• We break down flows into three parts:
1. SIP flows (which is largely equities) – which we think are more structural and
reflective of improving penetration levels;
2. Equity lump-sum flows – which we consider to be more cyclical;
3. Non-equity flows – which we derive based on our equity mix expectations.
• SIPs have seen a very sharp improvement in the past few years, with SIP flows for
FY18 at INR672bn, which is +10% of opening equity AUM and accounted for +25% of
net equity inflows in FY18 (30-40% of op. AUM in FY16/17) despite large lump-sum
equity flows.
• We expect SIPs to be more structural and, hence, expect the SIP book to see a 10%
CAGR over the next five years and account for 5-8% of opening equity AUM.
• Lump-sum gross equity flows had seen a spike in FY18, largely as demonetisation-
led flows into debt + liquid funds in 2HFY17 moved into equities in FY18. Lump-sum
flows in equities were at INR4.5tn and were up 2.6x vs. the INR1.8trn average of FY15-
17. Gross lump-sum flows into equities were at 72% of opening equity AUM vs. an
average of 40% over FY10-17.
• We expect this to be much more cyclical and sensitive to return expectations, and
believe it can be difficult to predict. Hence, we normalise this to 40% of opening AUM
(longer-term average) and estimate gross flows to decline 20% in FY19F and grow in a
20-25% range after that – in line with AUM growth expectations.
• Redemptions have been stable, unlike market concerns of rising redemption in a
tough market environment. Rather, redemption has seen a dip when market return is
weak or negative, highlighting the fear of loss-booking tendency of the retail investor
class as well as reduction in churn. The same was seen in FY09, FY12 and FY16,
when market return was negative. Redemptions in these periods have been 17-27% of
opening AUM vs. 30-55% in a good market.
• Redemptions have averaged around 30-35% of opening AUM over the past decade,
with higher redemptions/churn when market return is good and lower redemptions
when market return is weak. We expect 34% redemption run-rate over the next five
years, which implies that net equity lump-sum inflows reduce to INR550bn vs INR1.9trn
in FY18. From a net inflow perspective, we do not expect lump-sum net inflows of FY18
to recur even in the next five years and on an absolute value basis.
• With this in mind, we expect equity mix to keep moving up as retail participation
increases and given that equity compounding is higher than debt and, hence, we
expect equity mix to improve from 43% in FY18 to 50% by FY25F, similar to other
countries currently.
• With our equity mix expectations, we expect 20% total AUM CAGR for AUMs over
FY18-25F, and normalising to 10-15% CAGR over FY25-35F. In the medium term, we
expect equity to compound at a higher rate given our mix improvement expectations,
and we expect it to see a 23% CAGR over FY18-25F and normalise to overall AUM
growth post that as mix stabilises.

11
Nomura | India financials 3 August 2018

Fig. 20: We expect MF AUM CAGR of 20% over FY18-25F and Fig. 21: We expect equity mix to improve by 100bps annually
then normalise to 10-15% CAGR over FY25-35F to 50% by FY25F and stabilise beyond that
30% Mutual Fund AUM CAGR Equity AUM mix (% of GDP) Equity AUM mix (%) (LHS)
25.4% 60% 12%
25%
50% 10%
20.0%
20% 40% 8%
15.0%
15% 30% 6%
10.2% 20% 4%
10%
10% 2%
5%
0% 0%

FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY21F
FY25F
0%
FY15-18 FY18-25F FY25-30F FY30-35F
Source: AMFI, Nomura estimates Source: AMFI, Nomura estimates

Fig. 22: We do not expect net inflows of FY18 to repeat over Fig. 23: Redemptions have averaged around 30-35% of
the next decade but expect SIP book to be on an structural opening AUM over the past decade: we expect them to
uptrend remain steady
3000 Net Equity Flows -Non SIP (INRbn) Gross flows (non SIP) % of Equity AUM
Net Equity Flows -SIP (INRbn) Redemtions (% of Equiy AUMs)
80%
2500
2000 60%
1500
1000 40%

500
20%
0
-500 0%
FY22F
FY15
FY11

FY12

FY13

FY14

FY16

FY17

FY18

FY19F

FY20F

FY21F

FY23F

FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19F
FY20F
FY21F
FY22F
FY23F
Source: AMFI, Nomura estimates Source: AMFI, Nomura estimates

Fig. 24: Detailed macro projection – we still build in conservative penetration levels vs. other emerging countries currently
Our projections
INRbn FY14 FY18 FY20 FY25 FY30 FY35
Indian AUMs 8,252 21,360 31,778 76,691 154,194 250,527
CAGR % 37% 22% 19% 15% 10%

Equity AUMs 2,085 9,219 14,351 38,345 77,097 125,263


CAGR % 64% 25% 22% 15% 10%
Equity m ix (%) 25% 43% 45% 50% 50% 50%

Nom inal GDP 113,451 167,731 209,652 347,065 510,934 666,616


CAGR % 14% 12% 11% 8% 5%

Equity AUM to GDP (%) 1.8% 5.5% 6.8% 11.0% 15.1% 18.8%

Mcap (INR trn) 74,152 142,249 181,638 334,656 538,966 721,259


Market return (%) 10% 10% 8% 5%
New listing (%) 3% 3% 2% 1%

Equity AUM to Mcap (%) 2.8% 6.5% 7.9% 11.5% 14.3% 17.4%
Source: Nomura estimates

12
Nomura | India financials 3 August 2018

Our market share expectations


• Given our expectations of structural tailwind for growth in the MF industry, we expect all
the players to benefit and, in that context, we expect gradual reduction in top-5 players’
dominance in the market.
• While the top-5 players have gained market share from 50% in FY10 to 57% in FY18,
we expect this to gradually reduce to <55% by FY25F, implying a 50bps market share
decline per annum from FY20-25F.
• Similarly, we expect equity dominance also to moderate with market share of top-5
players declining to ~50% by FY25F from +57% currently. We think continued
outperformance on larger-sized funds also can get difficult and, also, HNI flows can get
impacted more given the returns expectations have moderated (top-5 AMCs –
especially bank-led AMCs – will have higher HNI market share). Hence, we factor in a
higher drop in equity market share vs. total AUM market share.
• We think that, similar to the life insurance industry, distribution is the key for mutual
funds and, unlike the life insurance industry, independent financial advisers (IFAs) and
national distributors are a common pool for the MF industry and, hence, the only key
differentiation is having a captive bank distribution.
• While the MF industry has always been open architecture, captive banks still account
for a lion’s share of the total bank-sourced AUM. And, more importantly, in a weak flow
environment, only the parent bank will be incentivised enough to distribute its MF
products and would likely stop selling other competitors’ MF products.
• We can draw a similar inference in the net outflow period of FY11-14, when all the
bank-led MFs gained market share while RNAM lost +300bps in market share. While
there may be other factors which also might have a role in market share loss, we would
think not selling competitors’ products in a weak flow environment and capturing all the
value creation in the firm itself is not such an illogical thing to do.
• In that context, we expect that, within the top-5 players, RNAM could lose marginally
higher market share over FY18-25F as compared to bank-led players while, overall, we
expect all top-5 to lose market share as their dominance reduces.

Fig. 25: Overall market share – we expect some moderation in market share by the top-5
Market share - Total AUM FY07 FY08 FY10 FY14 FY18 FY19F FY20F FY21F FY25F chng FY18-25F
RNAM 13.5% 17.2% 14.8% 11.4% 10.6% 10.5% 10.3% 10.2% 9.8% -0.8%
ICICI 12.4% 10.3% 10.8% 11.8% 13.3% 13.4% 13.4% 13.4% 13.4% 0.1%
SBI 5.4% 5.5% 5.0% 7.2% 9.4% 9.6% 10.4% 10.1% 9.0% -0.4%
Birla 6.2% 6.8% 8.3% 9.8% 10.7% 10.5% 10.2% 10.1% 9.7% -1.0%
Top-5 market share 46.5% 48.2% 50.8% 52.8% 57.1% 57.1% 57.1% 56.6% 54.6% -2.5%
Source: Company data, Nomura estimates

Fig. 26: Equity market share – we expect some moderation in market share by the top-5
Market share - Equity FY07 FY14 FY18 FY19F FY20F FY21F FY25F chng FY18-25F
RNAM 12.5% 9.3% 9.0% 8.9% 8.6% 7.8% -1.4%
ICICI 10.7% 15.1% 15.0% 15.3% 15.0% 14.2% -0.9%
SBI 7.2% 7.9% 8.1% 9.0% 8.7% 7.5% -0.4%
Birla 5.9% 9.2% 9.0% 9.0% 8.8% 8.0% -1.1%
Top-5 market share 55.7% 57.4% 56.1% 56.5% 55.2% 50.8% -6.7%
Source: Company data, Nomura estimates

13
Nomura | India financials 3 August 2018

Fig. 27: We expect larger market share loss for the non-bank Fig. 28: Non-banca players over the medium term will likely
AMCs lose more in equity market share as well
Total Market share loss - Banca Avg Equity Market share loss - Banca Avg
Total Market share loss - Non-banca Avg Equity Market share loss - Non-banca Avg
12.2% 12.1% 14.0%
12.5% 11.9%
12.0%
11.7%
12.0% 11.6%
11.3% 12.0% 12.8% 12.8% 13.0% 12.7% 12.9% 12.6%
11.5% 12.2% 12.5% 12.1%
10.8% 11.6%
11.0% 10.5% 9.4%
9.6% 9.5%
10.0% 9.2% 9.0% 9.2% 9.0%
11.1% 8.9% 8.7%
10.5% 10.0% 10.8% 10.9%
10.6% 10.7% 7.9%
10.0% 10.5% 10.5%
10.3% 10.2% 8.0%
9.5% 9.8%
9.0%
6.0%
FY13

FY14

FY15

FY16

FY17

FY18

FY19F

FY20F

FY21F

FY25F

FY16
FY13

FY14

FY15

FY17

FY18

FY19F

FY20F

FY21F

FY25F
Source: Company data, Nomura estimates Source: Company data, Nomura estimates

14
Nomura | India financials 3 August 2018

Can the equity mix improve sustainably


from here?
The profitability driver for AMCs clearly is equity, given the higher TERs and higher share
of active money it continues to attract. Penetration levels in India are clarly low and,
when compared with equity penetration, the gap is even wider. Can the equity mix
improvement be a structural story, and can we operate sustainably at a higher equity
mix? While there will always be cyclicality, we think financial savings are on a structural
uptrend and, hence, equity should benefit the most given lower penetration levels and
especially as the products become more competitive.

We expect financial savings to be a structural shift, which should benefit equities


Equity penetration still lower
• Equity mix has improved materially over the past three years for the MF industry, from
25% in FY14 to 43% in FY18. This is led both by market return and by strong net
inflows into equity.
• While penetration levels are very low for MFs at 12.7% AUM to GDP as of FY18, when
looking at equity AUM to GDP, the penetration gap is even wider compared with other
economies. Equity AUM to GDP for India is at <6% as of FY18 compared with
emerging economies (at 5-29%) and developed economies (at 23-62%).
• Also, when compared in terms of equity mix, India’s equity mix is at 43% as compared
to 21-65% for emerging economies and 57% for world average. Equity AUM as a % of
total market cap is just 6% for India as compared to 4-26% for emerging economies
and 26-51% for the developed economies.
Financial savings improving now
• With real estate demand weakening and lower return expectations, there is a big shift
towards financial savings, which has improved from 30% of total savings in FY12 to
~50% levels now.
• We think this shift is structural; in particular, with the black economy shrinking and real
estate demand weakening, we expect financial savings to improve from current 50%
levels to 60% over the next decade. Such an increase in financial savings should
benefit equity participation.
SIP now a structural story
• The Securities and Exchange Board of India (SEBI) in Sep-12 mandated AMCs to
spend 2bps of their AUM towards creating investor awareness, and this has led to a big
shift in investor participation into equities. Annual spend in FY18 towards investor
education would have been INR4.2bn per our estimates, in addition to spend by each
AMC.
• SIP flows are a structural shift visible from this effort, and SIPs now account for 40-50%
of incremental flows into equities in 1Q19. While lump-sum flows have started
moderating from a very high base of FY18, SIP flows are still on an uptrend and
growing by +60% y-y.
• We expect SIP flows to be more structural and expect overall SIP flows to post a 10%
CAGR over FY18-25F, while we expect lump-sum flows to decline from a high base of
INR1.9tn to ~INR550bn in FY19F (currently trending higher than our expectations –
+INR190bn in 1Q19) and grow from there.
• With SIP flows accounting for 9-10% of equity AUM and market return expectations of
10% CAGR in addition to lump-sum flows, we do not think 20-22% CAGR in equity
AUM is a challenge. However, there could be cyclicality risks in the near term.
Equity mix improvement to continue
• Based on our expectation in our macro construct, we expect equity mix to inch up to
50% levels by FY25F, with equity AUM to GDP improving to 11% by FY25F and 15%
by FY30F; we also expect equity AUM to market cap to inch up from 6% in FY18 to
+10% by FY25F and 13% by FY30F, which is still low compared with the emerging
economies today.

15
Nomura | India financials 3 August 2018

• While we do not rule out cyclicality in the near term given strong market returns, large
flows into equities and underperformance by larger equity schemes, we do not see
these risks over the medium term.

Fig. 29: Equity AUM penetration in India is very low Fig. 30: Equity AUM to market cap is also significantly lower
compared with emerging economies 60% 51% Equity AUM as a % of Market cap
70% 62% Equity AUM as a % of GDP 50% 42%
60%
45% 40% 34%
50% 27% 26% 26% 26%
30%
40% 32% 29% 29%
26% 25% 23% 20%
30% 9%
20% 10% 6% 4% 4%
11%
10% 5% 4% 3%
0%

USA

Japan

India
Germany

UK

Korea

China
Brazil

South Africa
Canada

France
0%
USA

Japan

India
UK

Korea

China
Germany
World

Brazil
South Africa
Canada

France

Source: World Bank, ICI Factbook


Source: World Bank, ICI Factbook

Fig. 31: We expect equity mix to improve to 50%, still lower Fig. 32: Mix improvement largely flow-led – financialisation of
than the current world average savings is evident
Equity AUM mix (%) (LHS) Pricing led AUM - Equities (INRbn)
World Equity AUM mix (%) -CY16 4,000
Flow led AUM - Equities (INRbn)
60%
46% 50% 3,000
50% 43% 328
36% 36%
40% 32%
29% 2,000
30% 21% 246 958
29% 822 2,608
20% 25% 1,000
1,318 1,070
809 938
10% 18% 508
- (314) (397)
0%
FY06

FY15
FY02
FY03
FY04
FY05

FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14

FY16
FY17
FY18
FY21F
FY25F

(1,000)
FY03-08 FY09-14 FY15 FY16 FY17 FY18

Source: ICI Factbook, Nomura estimates Source: AMFI, Nomura research

Fig. 33: SIP book on a structural uptrend – forms 9% of Fig. 34: We expect lump-sum flows to moderate cyclically,
equity AUMs with SIP flow momentum to continue
3,000 Net Equity Flows -Non SIP (INRbn)
85 Industry SIP flow (INRbn) Net Equity Flows -SIP (INRbn)
2,500
75
2,000
65
1,500
55
1,000
45
500
35
-
25
(500)
Aug-16
Sep-16

Aug-17
Sep-17
Jul-16

Jul-17

Mar-18
Mar-17
Dec-16

Jan-18
Jun-16

Jan-17

Jun-17

Jun-18
Apr-16

Oct-16
Nov-16

Apr-17

Oct-17
Nov-17
Dec-17

Apr-18
May-16

Feb-17

May-17

Feb-18

May-18

FY13

FY14
FY11

FY12

FY15

FY16

FY17

FY18

FY21F

FY23F

Source: AMFI, Nomura research Source: AMFI, Nomura estimates

16
Nomura | India financials 3 August 2018

Fig. 35: Overall macro construct implies 20% AUM CAGR growth opportunity over FY18-25F
2002 2008 2010 2014 2018 2021 2025 2030 2035 CAGR FY18-25F
Nominal GDP 24,038 48,657 63,187 113,451 167,731 233,736 347,065 510,934 666,616 11%
Real grow th (%) 9.96% 11.49% 9.60% 7.01% 4.44%

Household savings 5,453 11,183 16,308 22,853 27,099 37,061 53,643 76,416 96,367 10%
Savings (% of GDP) 22.7% 23.0% 25.8% 20.1% 16.2% 15.9% 15.5% 15.0% 14.5% -0.7%
994 1,000
Physical savings 2,978 5,381 8,560 14,532 13,549 17,419 23,066 30,566 38,547 8%
Financial savings 2,475 5,802 7,748 8,321 13,549 19,643 30,576 45,849 57,820 12%
Financial savings (% of savings) 45.4% 51.9% 47.5% 36.4% 50.0% 53.0% 57.0% 60.0% 60.0% 7.0%

Mutual Fund AUM 1,006 5,052 6,145 8,252 21,360 38,365 76,691 154,194 250,527 20%
% of GDP 4.2% 10.4% 9.7% 7.3% 12.7% 16.4% 22.1% 30.2% 37.6%

Equity AUM 326 1,890 2,156 2,085 9,219 17,710 38,345 77,097 125,263 23%
Equity AUM mix% 32.4% 37.4% 35.1% 25.3% 43.2% 46.2% 50.0% 50.0% 50.0% 6.8%
Grow th y/y 77.9% 10.1% 46.7% 23.4% 20.0% 13.0% 9.0%

Flow led AUM - equities (59) 527 15 (113) 2,608 1,755 2,512 3,014 4,208 -1%
Pricing Led AUM increase - equities 385 36 930 305 328 1,603 3,882 5,856 6,135 42%

SIP yearly 103 672 894


Non SIP net Flow s (59) 527 15 (216) 1,936 861
Redemtion 84 851 680 608 2,590 4,879
Non SIP Gross Flow s 25 1,378 694 392 4,526 5,740

Gross flow s (non SIP) % of Equity AUM 103.8% 57.3% 20.7% 72.0% 40.0%
Redem tions (% of Equiy AUMs) 64.1% 56.1% 32.1% 41.2% 34.0%
Source: World Bank, RBI, AMFI, Nomura estimates

Fig. 36: Detailed macro projection – we still build in conservative penetration levels vs other emerging countries
Our projections
INRbn FY14 FY18 FY20 FY25 FY30 FY35
Indian AUMs 8,252 21,360 31,778 76,691 154,194 250,527
CAGR % 37% 22% 19% 15% 10%

Equity AUMs 2,085 9,219 14,351 38,345 77,097 125,263


CAGR % 64% 25% 22% 15% 10%
Equity m ix (%) 25% 43% 45% 50% 50% 50%

Nom inal GDP 113,451 167,731 209,652 347,065 510,934 666,616


CAGR % 14% 12% 11% 8% 5%

Equity AUM to GDP (%) 1.8% 5.5% 6.8% 11.0% 15.1% 18.8%

Mcap (INR trn) 74,152 142,249 181,638 334,656 538,966 721,259


Market return (%) 10% 10% 8% 5%
New listing (%) 3% 3% 2% 1%

Equity AUM to Mcap (%) 2.8% 6.5% 7.9% 11.5% 14.3% 17.4%
Source: Nomura estimates

17
Nomura | India financials 3 August 2018

Regulatory risks to yields: can this risk


be mitigated?
Less than a year ago, the market expectation was that there is a huge operating
leverage which will play out over the next 2-3 years for the AMCs, given drag of large
new flows. But with the regulator cutting down TERs recently by 15bps (in lieu of exit
loads) and given the increasing distributor payouts, we believe that operating leverage
may not really play out but rather only offset near-term risks on profitability. Overall, we
expect ~12bps of negative impact on TERs for the industry – 7bps of impact of higher
distribution costs and 5bps of impact due to reduction in TERs which we expect to be
netted off by operating leverage.

Regulations so far have been investor-friendly


• Mutual fund regulations over the years have been more investor-friendly, right from
capping total expenses to upfront commission, and in terms of increasing investor
awareness to deepening the distribution reach.
• In June 2009, the SEBI had removed the entry load on all mutual fund schemes vs. 2-
2.25% entry load earlier. Mutual funds used to pay even more than 2% as upfront
commission, which increased the chances of mis-selling and higher portfolio churns.
• In August 2012, the SEBI removed the internal sub-limits on total expense ratios for
mutual funds, allowing them much more flexibility and to strengthen their distribution
network.
• In September 2012, the SEBI allowed fund houses to charge an additional 30bps in the
total expense ratio, should the new inflows from B-15 cities be at least 30% of the gross
new inflows in the scheme or 15% of the average assets under management,
whichever is higher.
• In April 2015, the Association of Mutual Funds in India (AMFI) capped the upfront
commissions paid to distributors to 1% due to higher upfront commissions and front-
ending of trail commissions.
• In February 2018, the SEBI reclassified cities from B-15 to B-30 for additional TER of
30bps. This was done to increase penetration levels.
• In February and June 2018, the SEBI cut TERs by 15bps of the total 20bps additional
TER allowed to be charged in lieu of exit-load-related income being passed on to
investors.

Fig. 37: Regulatory changes have been investor-friendly


Key regulations changes
SEBI allow ed small-scale investors to enter into cash transactions in mutual funds up
Sep-12 to INR20,000 per mutual fund, per financial year, w ithout PAN.
SEBI allow ed upto 30bp of additional expense charge if the new inflow s from B-15 cities are at least (a) 30% of
gross new inflow s in the scheme or (b) 15% of the average assets under management (year to date) of the
Sep-12 scheme, w hichever is higher.
SEBI mandated mutual Funds to annually set apart at least 2bps of daily net assets w ithin the maximum limit of TER
Sep-12 for investor education and aw areness initiatives.
Mar-14 In the Budget 80C exemption limit w as raised from INR0.1mn to INR0.15mn.
May-14 SEBI raised the limit of cash transactions in mutual funds w ithout PAN to INR50,000 from INR20,000 earlier.
SEBI allow ed instant redemption facility via online mode
May-17 of INR50,000 or 90% of the folio value, w hichever is low er, to individual investors in liquid schemes.
SEBI prescribed categorisation of schemes in equity, debt
and hybrid space aimed at reducing the number of identical schemes in each
Oct-17 category.
With regards to 30bp of additional expense charge allow ed on specified level of new inflow s from B-15 cities,
SEBI announed that additional TER of 30bps w ould be allow ed for inflow s from beyond top 30 cities instead of
Feb-18 beyond top 15 cities earlier.
The additional expenses MFs w ere allow ed to charge in lieu of exit load w ere reduced to 5bps from 20bps
Mar-18 allow ed earlier.
Source: AMFI, SEBI, Budget documents

18
Nomura | India financials 3 August 2018

Operating leverage to offset regulatory pressures


There are three broad risks that impact on longer-term profitability for AMCs in India: 1)
passive flows; 2) TER compression due to competition and regulatory risks; and 3)
distribution costs increasing. In our view, more near-term risks are on TER compression
due to increasing distribution costs and the regulator cutting TERs, while we think
passive flows gaining momentum will take a much longer time to actually play out. In the
section below, we discuss near-term risks on profitability and why we think operating
leverage may not play out for the industry.
Risks on TERs – both regulatory and competition
• In our view, the difference between the Insurance Regulatory and Development
Authority of India (IRDAI) and the SEBI as regulators of insurance and AMCs,
respectively, is that insurance is still dominated by PSUs where the regulator has to
protect the interest of a PSU while, in the case of AMCs, since the industry is
dominated by private players, the regulator is more tilted towards investor interest than
supporting the companies interests and their profitability.
• While this is negative from a profitability perspective for AMCs, we do not see it as a big
negative because the SEBI, by not supporting the AMCs’ interests, is pushing the
companies towards a much leaner cost structure and, hence, more profitable products
vs. the life insurance industry.
• Over the past decade, the SEBI has capped upfront commissions for distributors,
increased penetration costs for AMCs by way of 2bps of investor education related
spends and focusing on B-15 cities and now B-30 cities. While the regulator did allow
30bps extra TER for B-15/B-30, the profit retention from that was negligible and the
distributor used to take all of the benefit.
• In Jun-18, the SEBI has also reduced TERs by 15bps of the 20bps which was allowed
in lieu of exit loads. Our discussions with various stakeholders in the industry suggest
that AMCs will be able to pass on 8-10bps to the distributor while they will have to
absorb 5-7bps of the impact on a sustainable basis.
Increasing distribution costs
• Our discussions with various AMCs and distributors suggest that payouts to distributors
have increased over the past three years given the strong flows. AMCs are paying out
50-60% of the revenues as distribution commissions vs. 40-50% earlier. This is also
visible from the management fee/AUM being largely flat to declining over the past three
years for the top-5 players despite equity mix improving.
• We think revenues still include the legacy book which is at lower commissions and,
hence, once they are replaced by less-profitable new flows, the revenues will be
affected further.
• We estimate 50% of the AUM will still be legacy book and, hence, we estimate that
50% of the AUM will be repriced lower by 10% (approximate increase in distribution
cost), which will likely impact on management revenue/AUM by 6-7bps.

Fig. 38: Management fee/AUM trend for top-5 Fig. 39: Equity mix
Management fee/AUM - Top-5 Equity Mix - Top 5
45.0% 41.1%
0.68% 40.0%
0.65%
0.66% 35.0% 32.8% 32.1%
30.7%
0.64% 0.62% 30.0%
0.62% 0.61% 0.61%
25.0% 23.0%
0.60%
20.0%
0.58%
0.56% 15.0%
0.54% 10.0%
0.52% 5.0%
0.50% 0.0%
FY14 FY15 FY16 FY17 FY14 FY15 FY16 FY17 FY18
Source: Company data, Nomura research Source: Company data, Nomura research

19
Nomura | India financials 3 August 2018

Operating leverage will offset the negative impacts but profitability may not
materially improve
• While we estimate 12bps of negative impact for the industry TERs, we also expect
equity mix to improve by 8-10% over the next 3-5 years and, with equity mix improving,
we expect a positive impact on revenue with management fee/AUM improving by 7bps
(10% increase led by equity mix improvement)
• Also, we expect new flows to normalise, especially on the lump-sum equity net flow
side, which should lead to some normalisation in brokerage cost to AUM which have
increased by 5-10bps over the past 3 years. We expect brokerage to AUM declining
again to 15-16bps vs +20bps – an improvement of 5bps.
• With AUM forecast to see a +20% CAGR over the next 3 years, we expect opex to still
continue to grow at a nominal growth rate and, hence, opex to AUM ex of brokerage
cost will decline by 2bps over the next 2-3 years, on our estimates.
• With these, we think the positives will net off the negatives on profitability, hence we
expect PAT/AUM to be maintained at current levels.
• Having said that, we think the operating leverage in the business will be eaten away by
the regulator reducing TERs and, hence, PAT growth for the industry may trend in line
with AUM growth with some lead lag on TER cuts and normalisation/operating leverage
netting off the impacts.
• While the regulator cutting TERs and operating leverage not kicking in is not good for
the sector, we think this will make the industry cost-effective and offer a much better
product proposition over time which will be able to compete with the best of the
financial products available and, hence, the growth opportunity can be larger than what
we are expecting currently.
• Even with our expectations of no material operating leverage, we think AUM growth of
20-25% CAGR over FY18-20 will lead to +20% PAT CAGR for the AMCs and, with no
capital consumption, this translates into significant payout ability.

Fig. 40: Regulatory impact can be absorbed by operating leverage


Industry AUM Current AUM
Schemes Expense ratios - Regular Expense ratio - Direct (INRmn) Mix
Income 1.00% 0.50% 8,289,410 40.6%
Equity 2.10% 1.10% 5,877,715 28.8%
Liquid 0.25% 0.10% 3,554,080 17.4%
Balanced 2.10% 1.10% 1,348,680 6.6%
ELSS 2.30% 1.40% 714,105 3.5%
ETF 0.50% 0.00% 603,140 3.0%
FOF 0.50% 0.05% 15,880 0.1%
Grand Total 1.29% 0.66% 20,403,010
Equity + Balanced yield 2.10% 1.10%
Other yields 0.76% 0.36%
Equity + Balanced 7,940,500 38.9%

Positive impact Equity Mix change Net yield difference Net impact
Equity mix change 10% 0.53% 0.053%

(1) Negative impact Increase in trail Gross yields Current Maturity Net impact
Higher trail coms 10% 1.29% 50% -0.064%

(2) Negative impact Gross TER reduction Pass on to Distributors Net impact
TER changes -0.15% -0.10% -0.050%

Total impact -0.062%


Core PBT of the industry 0.25%
% of profitability -25%

Set offs from operating leverage and upfront commission reduction


Source: Nomura estimates

20
Nomura | India financials 3 August 2018

Are passive flows a big threat or a


gradual evolution of the industry?
The US is a prime example of passive flows taking over active flows, leading to a decline
in industry expense ratios and profitability. We think the risk of the same emerging in
India is less probable in the near to medium term while, longer term, this risk still remains
high and this can be a natural evolution of the industry. We highlight a few reasons why
we think the risk of passive flows taking over is not imminent in the near to medium term.

Household penetration still very low in India


• India’s AMC industry has total retail folios of ~71mn as on FY18 vs. a population size of
~1.3bn, implying 5% penetration levels. Also, folio will not be a fair representation of
investor population as each investor may hold more than 1 folio. We assume each
investor to hold ~2 folios and, hence, believe that only 2-3% of the population invests in
MFs in India.
• When looking at households, we assume that, almost always, only 1.2 person in a
household actually invests and, hence, we believe that the number of households
investing in India would be closer to 30mn households vs. ~285mn households in India.
• We estimate that only 10% of households invest in mutual funds in India while, in the
US, 40-45% of the households have been investing in mutual funds.
• Therefore, we think there is still a large gap to cover and, till we have healthy
penetration levels and increased awareness levels amongst investor community, we
don't think there is a material risk to active flows switching to passive flows.
• In this analysis, we are not even considering ticket size, which is still very low for India’s
retail investors as their per capita income is also lower.

Fig. 41: Retail folios Fig. 42: investor penetration levels %


80.0 Retail + HNI Folios (mn) 3.0% No of MF investors (as % of population)
70.9 2.6%
70.0
2.5%
60.0 54.8 2.1%
2.0% 2.0% 1.9%
47.0 47.6 46.8 46.0 47.2 2.0% 1.8% 1.8%
50.0 1.7%
42.3
39.2 41.4 1.5% 1.6%
40.0 1.5%
30.0
1.0%
20.0
0.5%
10.0
- 0.0%
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
Source: AMFI, Nomura research Source: AMFI, Nomura estimates

21
Nomura | India financials 3 August 2018

Fig. 43: We estimate only 10% of India households investing in MFs


Mn FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
No of retail folios 47.0 47.6 46.8 46.0 42.3 39.2 41.4 47.2 54.8 70.9
No of MF investors 23.5 23.8 23.4 23.0 21.2 19.6 20.7 23.6 27.4 35.5
MF investors per household 19.6 19.8 19.5 19.2 17.6 16.3 17.2 19.7 22.8 29.6

Total Population 1,198.4 1,214.6 1,231.0 1,247.4 1,263.6 1,279.5 1,295.3 1,311.1 1,326.8 1,342.5
No of households 249.7 253.0 256.5 259.9 263.2 266.6 269.9 273.1 276.4 279.7

MF household penetration - India 7.8% 7.8% 7.6% 7.4% 6.7% 6.1% 6.4% 7.2% 8.3% 10.6%

MF household penetration - USA 45.3% 45.3% 44.1% 44.4% 46.3% 43.3% 43.0% 43.0% 43.6% 44.5%

No of MF investors (as % of
population) 2.0% 2.0% 1.9% 1.8% 1.7% 1.5% 1.6% 1.8% 2.1% 2.6%
Source: ICI Factbook, Nomura estimates

Fig. 44: India household penetration way lower to worry for passive funds

50% MF household penetration - India MF household penetration - USA

45%
45.3% 45.3% 46.3%
44.1% 44.4% 43.6% 44.5%
40% 43.3% 43.0% 43.0%

35%

30%

25%

20%

15%
10.6%
7.8% 7.8% 7.6% 7.4% 7.2% 8.3%
10% 6.7% 6.1% 6.4%
5%

0%
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

Source: AMFI, Nomura estimates

Comparison on other parameters also provides comfort


• India’s MF AUM as a % of GDP is way below even emerging economies, which are at
30-60% vs. India at 12% of GDP. The ratio looks even weaker when comparing equity
AUM to GDP – where India is at 4% levels vs. the world average of 24%.
• Equity mix for India is ~40-45% of total AUM, which is lower than 60% for the US and
57% for the world average.
• Also, a comparison of equity AUM to market cap shows that only 4% of market cap is
MF AUM for India, while it is 10-50% of other countries.

22
Nomura | India financials 3 August 2018

Fig. 45: MF penetration levels still low Fig. 46: Equity AUM to market cap is very low compared with
emerging economies
180% AUM to GDP ratio - CY17 60% 51% Equity AUM as a % of Market cap
155.4%
160% 50% 42%
140% 34%
114.2% 40%
120% 27% 26% 26% 26%
100% 30%
78.2% 73.0%
80% 62.7% 60.2% 20%
60% 9% 6%
36.1%
29.5%
10% 4% 4%
40%
13.8% 11.8% 0%
20%

USA

India
Japan
UK

Korea

China
Germany

Brazil

South Africa
Canada

France
0%

Japan

India
US

UK

Korea
Germany

Brazil

China
Australia
Canada

Source: ICI Factbook, Nomura research Source: ICI Factbook, Nomura research

Fig. 47: World comparables provide comfort


Equity AUM
Mutual Fund as a % of
AUM as a % of Equity AUM to Debt AUM to Market cap
GDP - CY17 GDP Dec-16 GDP Dec-16 Equity Mix (%) Debt Mix (%) (Dec-16)
USA 114.2% 62.0% 39.0% 61.4% 38.6% 42.0%
France 89.6% 23.0% 30.0% 43.4% 56.6% 26.0%
Canada 78.2% 45.0% 20.0% 69.2% 30.8% 34.0%
World 61.1% 32.0% 24.0% 57.1% 42.9% 0.0%
Brazil 60.2% 11.0% 42.0% 20.8% 79.2% 26.0%
UK 73.0% 29.0% 9.0% 76.3% 23.7% 27.0%
Germany 62.7% 25.0% 21.0% 54.3% 45.7% 51.0%
South Africa 155.4% 29.0% 16.0% 64.4% 35.6% 9.0%
Japan 52.0% 26.0% 3.0% 89.7% 10.3% 26.0%
Korea 36.1% 5.0% 13.0% 27.8% 72.2% 6.0%
China 29.5% 3.0% 8.0% 27.3% 72.7% 4.0%
India 13.8% 4.0% 6.0% 41.3% 60.0% 4.0%
Source: ICI Factbook, Nomura research

Fig. 48: Our projections implies India will be lower than current world averages even in FY35F
Our projections
INRbn FY14 FY18 FY20 FY25 FY30 FY35
Indian AUMs 8,252 21,360 31,778 76,691 154,194 250,527
CAGR % 37% 22% 19% 15% 10%

Equity AUMs 2,085 9,219 14,351 38,345 77,097 125,263


CAGR % 64% 25% 22% 15% 10%
Equity m ix (%) 25% 43% 45% 50% 50% 50%

Nom inal GDP 113,451 167,731 209,652 347,065 510,934 666,616


CAGR % 14% 12% 11% 8% 5%

Equity AUM to GDP (%) 1.8% 5.5% 6.8% 11.0% 15.1% 18.8%

Mcap (INR trn) 74,152 142,249 181,638 334,656 538,966 721,259


Market return (%) 10% 10% 8% 5%
New listing (%) 3% 3% 2% 1%

Equity AUM to Mcap (%) 2.8% 6.5% 7.9% 11.5% 14.3% 17.4%
Source: Nomura estimates

23
Nomura | India financials 3 August 2018

Equity ETFs on the rise but not replacing active flows as yet
• Actively managed funds still remain the preferred way for investing in mutual funds,
while equity ETFs (exchange-traded funds – passive funds) account for 7% of equity
AUM as on FY18. Passive funds like ETFs have definitely gained traction, with a 60%
CAGR over the past five years, with mix increasing from <1% of equity AUMs to +7%
now.
• The Employees' Provident Fund Organisation (EPFO) was allowed to invest a portion
of its net inflows in equity ETFs, wherein it started with allocating 5% of its incremental
inflows in FY16, which increased to 10% of incremental inflows in FY17, and further
increased to 15% of incremental flows into equity in FY18. This has led to a sharp
surge in equity ETFs in the past three years.
• The government is further thinking of raising the limit to 25% of the incremental flows
which will be a massive boost to the passive flows.
• Having said that, net inflows into equity ETFs were just 8% of total net inflows into
equities in FY18 and accounted for 11% of the total net inflows into equity over the past
3 years cumulatively.
• Ex of EPFO, flows into ETFs are limited and, once the limit increase is halted, the flows
of EPFO into ETFs will also likely grow in line with nominal salary increases.

Fig. 49: ETF still account for just 7% of equity AUMs

8.0% 7.3%
ETF AUM as % of Total Equity AUM
7.0% 6.6%

6.0%
5.0%
4.0% 3.6%

3.0%
2.1% 2.1%
2.0%
1.2%
0.8% 0.8%
1.0% 0.5% 0.4%
0.0%
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
Source: SEBI, AMFI

Fig. 50: EPFO flows inched up due to increase in investable Fig. 51: But flow still is just 8% of total equity net inflows
limits for EPFO

ETF Net Flows (INRbn) ETF flows as % of Total Equity Net Flows
300 30%
241 240 18%
250 20%
9% 8%
200 10% 3%
1%
150 0%
87
100 -10%

50 29 23 -20%

0 -30%
(2)
-50 -40% -35%
FY13 FY14 FY15 FY16 FY17 FY18 FY13 FY14 FY15 FY16 FY17 FY18

Source: SEBI, AMFI Source: SEBI, AMFI

24
Nomura | India financials 3 August 2018

Passive funds in US picked up after significant increase in household penetration


• Household penetration increased dramatically in US from 1990-2000 from 25% levels
to 45% levels.
• Post 2000 household penetration stabilised at 45% levels, which is when we saw a real
pick-up in passive funds (as a % of total equity AUM) materially from <10% of AUM to
+25% of AUM.
• When looked at on an incremental AUM basis, the passive flow share is even larger at
~40% in the past five years.
• We see limited risk of this emerging for India in the medium term, as household
penetration levels remain low at just 10%.

Fig. 52: Passive flows picked up after household penetration flattened at higher levels

50% 30%

45%
25%
40%

35%
20%
30%

25% 15%

20%
10%
15%

10%
Household penetration - USA (LHS) 5%
5%
Passive flows (% of total equity AUM) - USA
0% 0%
FY91 FY96 FY01 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

Source: ICI Factbook, Nomura research

Fig. 53: Passive AUM now forms 25% of total equity AUMs

Active Fund AUM (LHS) Passive fund AUM (RHS)

100% 30%

95% 25%

90% 20%

85% 15%

80% 10%

75% 5%

70% 0%
1998

2017
1993
1994
1995
1996
1997

1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016

Source: ICI Factbook, Nomura research

25
Nomura | India financials 3 August 2018

Manufacturer vs distributor: who has the


real bargaining power?
• In recent years, increasing payouts to distributors despite very strong net inflows, both
into equity and non-equity segments, raises some concerns on who has the real
bargaining power – a distributor who owns an investor or a manufacturer who delivers
returns for the investor.
• We think the real bargaining power lies with the distributor, given that India is still at a
level where investor participation and awareness are low and, hence, is totally
dependent on the distributor to guide towards where they should invest. Hence, the
disintermediation in the MF industry has not really played out while we see
disintermediation across all segments of the economy playing out.
• This is also evident from the fact that, despite huge increases in net inflows, the
distributor payouts have increased over the past 2-3 years. Our discussions with
various AMCs suggest that payouts have increased from 40-50% of revenues to 50-
60% of revenues.
• With the regulator cutting down TERs, we think the AMCs may not be able to fully pass
on the impact to the distributors. Of the 15bps cut in TERs, we expect ~10bps being
passed on to the distributors while 5bps will have to be absorbed by the AMCs. This
would mean a 20% dent in industry profitability, which stands at 25bps.

Fig. 54: Management fees have compressed in the past few Fig. 55: …despite a sharp improvement in equity mix
years…

Management fee/AUM - Top-5 Equity Mix - Top 5


45.0% 41.1%
0.70% 0.65% 40.0%
0.61% 0.62% 0.61%
0.60% 35.0% 32.8% 32.1%
0.54% 30.7%
0.50% 30.0%
25.0% 23.0%
0.40%
20.0%
0.30%
15.0%
0.20%
10.0%
0.10% 5.0%
0.00% 0.0%
FY13 FY14 FY15 FY16 FY17 FY14 FY15 FY16 FY17 FY18
Source: AMFI, Nomura research Source: AMFI, Nomura research

What gives distributors the bargaining chip?


• Unlike insurance companies, IFAs for MF industry is a common pool and total IFA
strength is just 65,000 across India. In addition to this, the bank distribution was always
on open architecture and, hence, there is no material differentiation in distribution.
• Also, given the large number of players struggling to gain market share and with no
unique strength in distribution, payouts have been the only way to gain market share.
• Over time, we think that, with consolidation in the industry and falling TERs, pricing
discipline will be followed better and, hence, distributors’ payouts will be adjusted lower.
Also, with increasing share of direct business, the dependence on distributors is
reducing, thus shifting the bargaining power back to manufacturers.
Capping distribution commission will be big boon to the industry
• Recent media articles suggest SEBI is looking to cap life time distribution commission
to 4-5% (link).
• We think this will be a big positive for the industry and increase payout discipline
dramatically. Caps on payout to distributor will mean companies with better scheme
performance and improving distribution capabilities will gain large market shares, while
market share grabbing by higher payouts will come off materially.

26
Nomura | India financials 3 August 2018

Too many players spoil the party: could


consolidation be the answer?
• We think the real reason why the distributor retains larger bargaining power is the
problem of too many participants. The MF industry has too many fragmented players
and only scale can lead to profitability. Also, on the distribution side, apart from the
bank-led AMCs, there is very little differentiation in the distribution as the IFA pool is the
same and given the open architecture for banks to distribute MF products. Hence, the
only way to gain market share with the same distribution engine is by increasing
payouts.
• Given that the MF industry has too many fragmented players, payout discipline has
been limited and, hence, the payouts have increased over the past 3-4 years despite
strong flows. Management fee/AUM have declined from 65bps in FY16 to 61bps in
FY17 (would have compressed further in FY18), and this is despite equity mix
increasing from 33bps to 41bps over FY15-18 for the top-5 players.
• With reducing TERs, profitability for the fringe players is severely affected as AUM
market share ex the top-10 players is 19% and the profitability share is just 7% – which
means their PAT/AUM is far lower vs. the top players and 5bps absorption of the 15bps
TER cut would mean a large erosion in profitability.
• Such a sharp reduction in profitability would mean payouts to the distributors will have
to be rationalised, hence the payout discipline will improve over time if the regulator
keeps cutting TERs.
Consolidation in the industry is the only solution to declining profitability
• With pressure on profitability, consolidation could be the only solution to declining
profitability.
• With consolidation and lesser number of players controlling larger market share, the
payout discipline will also be enforced in the industry, thus reducing risks to reducing
margins.
• We think that, while consolidation is required, attaining a very large size in AUM will
also restrict alpha creation and, hence, a few smaller and specialised players will
always exist in the market which will benefit from alpha creation vs. large-sized AMCs.
• The way we see the industry panning out is that larger players will support their
profitability by inorganic opportunities-led pricing discipline and operating leverage,
while a few smaller players will gain market share by continued alpha creation.

Fig. 56: Management revenue to AUM trend – top 5 players Fig. 57: Ex top 10 AMCs profitability is very low
Management fee/AUM - Top-5 Ex Top 10 PAT share Ex Top 10 Market share

0.70% 0.65%
0.61% 0.62% 0.61% 26% 25% 23%
30% 22% 19%
0.60% 0.54% 20%
7%
0.50% 10% 2%
0.40% 0%
-10%
0.30% -6%
-20%
0.20% -30% -19%

0.10% -40%
-37%
-50%
0.00%
FY13 FY14 FY15 FY16 FY17
FY13 FY14 FY15 FY16 FY17
Source: Company data, Nomura research Source: SEBI, Nomura research

27
Nomura | India financials 3 August 2018

Fig. 58: Recent deals in the sector


Stake
Derived Acquisition/Sc
AUM Estimated deal Derived valuation valuation (%) heme
Acquirer Target Stake (%) Year (INRbn) value (INRbn) (INRbn) AUM Acquisition

Societe Generale
Asset Management SBI MF 37% 2004 56.00 1.61 4.35 7.77 Stake
Robeco Canara MF 49% 2007 22.00 1.15 2.35 10.67 Stake
Pioneer Baroda MF 51% 2007 n.a. n.a. n.a. 10.00 Stake
IDFC Standard Chartered 100% 2008 145.79 8.31 8.31 5.70 Stake
Religare Lotus AMC 100% 2008 54.58 0.5-1.5 0.5-1.5 n.a. Stake
L&T Finance DBS Chola MF 100% 2009 30.00 0.45 0.45 1.50 Stake
Nomura LIC MF 35% 2009 324.10 2.80 8.00 2.50 Stake
T Rowe Price UTI AMC 26% 2010 694.44 6.50 25.00 3.60 Stake
Goldman Sachs Benchmark 100% 2011 31.83 1.31 1.31 4.10 Stake
BOI AXA MF 51% 2011 n.a. n.a. n.a. n.a. Stake
Amundi SA SBI MF 37% 2011 416.72 n.a. n.a. n.a. Stake
Nippon Life Reliance 26% 2012 842.99 14.50 56.00 6.64 Stake
Schroders Axis AMC 25% 2012 n.a. n.a. n.a. n.a. Stake
L&T Finance Fidelity India 100% 2012 88.81 5.50 5.50 6.19 Stake
Invesco Religare 49% 2012 146.00 4.65 9.49 6.50 Stake
HDFC MF Morgan Stanley 100% 2013 32.90 1.5-1.7 1.5-1.7 4.5-5 Scheme
SBI MF Daiwa MF 100% 2013 2.66 0.03-0.04 0.03-0.04 1 - 1.5 Scheme
Nippon Life Reliance 9% 2014 1,288.88 6.57 73.00 5.66 Stake
Kotak AMC PineBridge 100% 2014 6.60 n.a. n.a. n.a. Scheme
Birla Sunlife ING MF 100% 2014 11.00 n.a. n.a. 1.50 Scheme
Dewan Housing Pramerica 50% 2014 20.60 0.24 0.49 2.42 Stake
Pramerica Deutsche 100% 2015 224.27 4.00 4.00 1.80 Stake
Reliance Goldman Sachs 100% 2015 71.32 2.43 2.43 3.41 Scheme
Nippon Life Reliance 14% 2015 1,510.06 11.96 85.42 5.66 Stake
Union Bank KBC AMC 49% 2015 26.72 n.a. n.a. n.a. Stake
Invesco Religare 51% 2015 215.93 7 to 10 n.a. n.a. Stake
Edelweiss JP Morgan AMC India 100% 2016 75.01 1.12-1.50 1.12-1.50 1.5 – 2 Scheme
LIC Nomura 35% 2016 111.57 0.27 1.42 1.27 Stake
Essel Finance Peerless MF 100% 2016 9.70 n.a. n.a. n.a. Stake
Source: SEBI, Nomura research.

28
Nomura | India financials 3 August 2018

Our valuation framework: AMCs deserve


premium valuations
India should deserve substantial premium vs developed countries
We AMCs in India should deserve a substantial premium as compared to AMCs in
developed countries as the share of passive flow in US is very high and hence
profitability is depressed. Also, household penetration in US is at 45% levels vs 10%
levels for India. We think the growth opportunity in India is very high, with only 3% of the
population investing in mutual funds. Also, we see limited risks of passive funds taking
over active funds in the medium term as penetration levels are very low. Additionally,
AMCs in US acts only as fund managers and not as distributors, hence the business is
more B2B-oriented compared with India, where a large part of the distribution is also
done by AMCs hence the business is more B2C.
Life insurance vs AMCs: which business should get higher multiples?
Life insurance companies, especially those with higher ULIP share, such as IPRU Life
(IPRU IN, Buy; TP: INR550) and SBI Life (SBILIFE IN, Buy; TP: INR880), trade at 16x
Sep-20F VNB, and our TPs imply ~23-26x Sep-20F VNB for the two companies.
We think AMCs should fetch higher multiples than life insurance companies, because:
(1) the AMC business is less capital-intensive; hence, the payout ability is high; (2) the
regulator is forcing AMCs to be more cost-efficient; (3) increasing distribution strength,
especially with the direct share increasing; (4) lower share in financial savings and hence
larger growth opportunity; (5) better product offerings which compete with bank deposits
(debt funds), saving deposits (liquid funds) as well as ULIPs (equity and balance funds)
and (6) no liability risks in terms of mortality or hedging related risks.
However, the negatives are: (1) higher competition with +40 players in the same
distribution pool; (2) higher bargaining power with distributors due to open architecture;
(3) risks of passive flows impacting on profitability.
We think AMCs should fetch higher multiples than life insurance companies. Our target
price for RNAM implies a similar valuation that we assign for IPRU/SBI Life at 27x FY20F
EPS, given that it loses out in distribution.
We peg valuations at 30-40x Sep-20F P/E for the top-5 insurers
We expect AUMs to grow at 20% CAGR over FY18-25F, and the equity mix to improve
sustainably by 100bps p.a. to 50% by FY25F, when we expect earnings for the larger
AMCs to compound at 20-25% over FY18-25F. Also given that the capital requirement is
very low at INR0.5bn, we expect these companies to pay out +75% of their profits.
Given higher growth opportunity and full payout ability, we peg P/E multiples in the range
of 30-40x. We think AMCs should deserve a significant premium to flow businesses
where cyclicality risks will be high. On the other hand, AMCs earn on stock, hence
cyclicality risk is relatively low. We think AMCs should be valued closer to consumer
companies given better cash flow conversion, infinite ROE potential, underpenetrated
market but cyclicality risks should lead to some discount as well.
We initiate on RNAM with 24% potential upside
We think valuations depend on factors like: (1) distribution strength; (2) equity mix which
is the most profitable portfolio; (3) stability in earnings; (4) payout ability. We think
distribution franchise and the focus on the profitable pools remain more important from a
valuation perspective. Given that RNAM’s capital allocation is not the best, we choose to
value its investment book separately and its core earnings separately.
We expect core PBT to AUM for RNAM to dip to 19bps in FY19F given the cuts in TERs,
and then normalise upwards to 22bps by FY21F with operating leverage kicking in. We
expect core PBT CAGR of 22% over FY18-21F, while PAT will be hit with investment
gains coming off (14% CAGR over FY18-21F). With 75% payout expected, we assign a
32x multiple to Sep-20F core PAT, which implies INR280/share for the core business,
and assign 1x multiple to Sep-20F investment book (INR35/share) to arrive at
INR315/share for the total business (our core value implies 4.8% of Sep-20F AUM). On
overall earnings, our TP implies 27x Sep-20F EPS.

29
Nomura | India financials 3 August 2018

Fig. 59: Valuation comparison across financial sub sectors

Current P/E ROE Comments


FY19F FY20F FY19F FY20F EPS CAGR Growth Payout Cyclicality
- FY18-20F potential ability ROE potential risk
Flow businesses
ICICI Securities 16.7 13.0 70.8% 65.7% 21.9%
Motilal oswal 21.4 15.9 25.4% 24.6% 24.3%
Average 19.0 14.4 48.1% 45.1% 23.1% High Moderate High High

Retail Bank
HDFC Bank 26.7 21.5 17.7% 17.9% 17.7%
Indusind Bank 26.5 20.8 18.1% 19.2% 27.2%
Kotak Bank 32.0 25.3 14.1% 15.3% 24.4%
Average 28.4 22.5 16.6% 17.5% 23.1% High Low Moderate Moderate

Exchanges/Depositories
BSE 17.6 15.6 7.8% 8.6%
CDSL 24.9 19.5 18.9% 19.9% 17.8%
Average 21.3 17.6 13.4% 14.2% 17.8% Moderate High High High

Consumer
Hindustan Unilever 60.2 51.2 83.1% 90.1% 19.1%
Marico 46.8 39.6 35.8% 37.7% 18.6%
Godrej Consumer Products 51.2 44.3 25.5% 25.8% 11.8%
Dabur India 47.6 41.4 26.7% 27.7% 16.0%
Asian Paints 55.8 47.6 26.3% 27.2% 18.4%
Average 52.3 44.8 39.5% 41.7% 16.8% High High High Low

AMCs
Reliance AMC 28.1 24.5 24.9% 26.7% 14.7% High High High Moderate
Source: Bloomberg, Nomura estimates

Fig. 60: Valuation comparison across AMCs globally


AMCs Mkt cap P/E 3Yr Expctd CAGR ROE Mkt Cap/AUM PAT/AUM

Company Name Ticker Rating TP (USD) FY19F FY20F EPS AUM FY19F FY20F FY19F FY20F FY19F FY20F
India
Reliance Nippon RNAM IN BUY 315 2,269 28.1 24.5 15% 20% 24.9% 26.7% 0.1% 0.1% 0.20% 0.19%
US
Blackrock BLK US NR NR 76,590 17.2 15.6 14% 8% 13.8 14.0 0.0% 0.0% 0.00% 0.00%
BNY Mellon BK US NR NR 52,627 12.6 11.7 11% 2% 11.1 11.2 2.8% 2.7% 0.23% 0.23%
State Street STT US NR NR 32,945 11.4 10.6 13% 3% 14.2 14.3 1.2% 1.1% 0.10% 0.11%
Franklin Templeton BEN US NR NR 16,766 11.1 10.2 1% -1% 10.2 15.6 2.3% 2.3% 0.19% 0.22%
T Rowe Price TROW US NR NR 28,560 16.0 15.0 16% 8% 29.5 28.1 2.6% 2.4% 0.17% 0.16%
Invesco Ltd IVZ US NR NR 10,255 9.3 8.7 4% 5% 12.6 12.6 0.0% 1.0% 0.00% 0.11%
Average 12.9 12.0 10% 4% 15.2 16.0 1.5% 1.6% 0.11% 0.14%

EMEA
Amundi AMUN FP NR NR 14,415 13.1 12.2 4% 4% 11.3 11.9 0.8% 0.8% 0.05% 0.06%
Schroders AMC SDR LN NR NR 10,809 13.7 13.1 4% 7% 17.2 16.7 1.8% 1.7% 0.10% 0.10%
UBS UBS US NR NR 62,176 0.1 0.1 3% 9.0 10.4 1.9% 1.8% 0.16% 0.18%
Investec INVP LN NR NR 6,908 9.5 8.5 9% 7% 12.3 12.7 4.5% 4.0% 0.34% 0.34%
Ashmore Group ASHM LN NR NR 3,328 16.7 14.8 5% 19% 20.9 22.2 3.5% 2.9% 0.16% 0.15%
Jupiter Fund JUP LN NR NR 2,497 12.5 12.2 3% 6% 23.7 23.6 3.8% 3.4% 0.23% 0.22%
Average 11.0 10.2 5% 8% 15.7 16.3 2.7% 2.4% 0.17% 0.17%

Australia
Magelian MFG AU NR NR 3,080 16.9 14.7 10% 48.3 50.9
Platinum PTM AU NR NR 2,333 17.0 17.0 -36% 9% 53.7 51.9 11.7% 11.1% 0.93% 0.88%
Perpetual PPT AU NR NR 1,468 14.2 14.2 35% 3% 22.0 21.1 6.3% 6.1% 0.61% 0.58%
Average 16.0 15.3 3% 6% 41.3 41.3 9.0% 8.6% 0.77% 0.73%

Asia
China Cinda 1359 HK BUY 3.84 10,356 3.2 2.7 17.6 20.5 - - - -
China Huarong 2799 HK REDUCE 3.13 9,607 3.2 3.0 10% 16.9 15.7 - - - -
Average 3.2 2.8 10% 14.6 14.6 - - - -
Global average 14.2 13.0 9% 9% 17.4 17.7 3.3% 3.2% 0.31% 0.31%
Source: Bloomberg consensus forecasts for Not Rated (NR) stocks, Nomura estimates. Note: share prices are as of 2 August 2018 close.

30
Reliance Nippon Life Asset
Management RELL.NS RNAM IN
EQUITY: FINANCIALS

Improving franchise Global Markets Research


3 August 2018
Growth opportunity too large to worry over cyclicality;
Rating
initiating with a Buy rating Starts at Buy
Initiate with Buy and TP of INR315; core profitability trends to improve Target Price
Starts at INR 315
We initiate on Reliance Nippon Life Asset Management (RNAM) with a Buy
rating and TP of INR315, implying 24% upside. RNAM has been rightly Closing price
focusing on a profitable asset mix which has helped to gain retail market share 2 August 2018 INR 254
(500bps in the past four years) as well as improve the equity mix to 37%.
While there is some regulatory pressure on yields, recent news flow around Potential upside +23.9%
capping dealer commissions (link) could be a big positive. RNAM has built its
distribution strength through independent financial advisors (IFAs) which
Anchor themes
benefits the company on better stickiness as well as lower distribution cost,
We think AMCs are the best bet
and helps to overcome the shortfall of not having a captive bank distribution.
on financialisation of savings and
We think current valuations at 25x Sep-20F core earnings factor in the yield expect structural tailwinds to
pressure, but any cap on distributor commission will restrict the compression absorb regulatory headwinds. We
in profitability. We expect 22% core PBT CAGR in FY18-21F with operating expect the industry to record 20%
leverage and higher equity mix netting off regulatory yield pressure. The AUM CAGR in FY18-25F.
current valuation looks undemanding at +75% payout and 22% core earnings
growth. Our TP implies 32x Sep-20F core earnings and 1x value assigned to Nomura vs consensus
its investment book. Key downside risks are any further increase in ICDs (inter We think operating leverage will
corporate deposits) and large market share loss in equities. net off pressure on yields but do
 Focus rightly shifting towards a profitable asset mix: RNAM’s focus on not expect any material
building IFA distribution has helped it gain sticky retail asset market share improvement in profitability. We
over the past three-four years (+500bps) and focus on improving its value the core earnings and
profitable equity mix vs. chasing overall market share which has led to investment book separately given
500bps expansion in the equity mix over FY16-18, in our view. higher cash on balance sheet.
 Core profitability to improve despite yield pressure: We think improving
equity mix and operating leverage will absorb the yield pressure which Research analysts
should translate into core PBT/AUM improving by FY21F to 22bps from
India Financials
20bps in FY18 and any cap on distributor commission will lead to further
profitability improvement. We build in some compression in profitability in Amit Nanavati - NFASL
FY19F due to total expense ratio (TER) cuts, but a full pass-through of the amit.nanavati@nomura.com
+91 22 4037 4361
cut should drive further re-rating of the stock.
Riddhi Jain - NFASL
riddhi.jain@nomura.com
Year-end 31 Mar FY18 FY19F FY20F FY21F +91 22 4037 4008
Currency (INR) Actual Old New Old New Old New
Adarsh Parasrampuria - NFASL
Revenue (mn) 18,150 20,226 22,982 27,426 adarsh.parasrampuria@nomura.com
+91 22 4037 4034
Reported net profit (mn) 5,220 5,538 6,356 7,870
Normalised net profit (mn) 5,220 5,538 6,356 7,870
FD normalised EPS 8.88 9.05 10.39 12.86
FD norm. EPS growth (%) 29.6 1.9 14.8 23.8
FD normalised P/E (x) 28.6 N/A 28.1 N/A 24.5 N/A 19.8
EV/EBITDA (x) 19.7 N/A 19.2 N/A 16.7 N/A 13.6
Price/book (x) 6.8 N/A 7.0 N/A 6.5 N/A 6.0
Dividend yield (%) 2.4 N/A 2.7 N/A 3.1 N/A 3.8
ROE (%) 25.0 24.5 27.6 31.7
Net debt/equity (%) net cash net cash net cash net cash
Source: Company data, Nomura estimates

Key company data: See next page for company data and detailed price/index chart.

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
Nomura | Reliance Nippon Life Asset Management 3 August 2018

Key data on Reliance Nippon Life Asset Management


Relative performance chart Cashflow statement (INRmn)
Year-end 31 Mar FY17 FY18 FY19F FY20F FY21F
EBITDA 5,992 7,600 8,066 9,239 11,382
Change in working capital 1,624 173 185 197
Other operating cashflow -3,008 -3,400 -5,735 -3,123 -4,399
Cashflow from operations 2,984 5,824 2,505 6,301 7,180
Capital expenditure -2,571 -149 -838 -551 -599
Free cashflow 413 5,676 1,667 5,751 6,581
Reduction in investments -358 755 -5,313 -3,213 -3,531
Net acquisitions
Dec in other LT assets
Inc in other LT liabilities
Adjustments 1,284 2,290 2,269 1,775 1,914
CF after investing acts 1,339 8,721 -1,377 4,313 4,964
Source: Thomson Reuters, Nomura research Cash dividends -1,737 -3,003 -3,683 -4,154 -4,767
Equity issue 0 245 0 0 0
Notes: Debt issue
Convertible debt issue
Others 0 -300 0 0 0
CF from financial acts -1,737 -3,058 -3,683 -4,154 -4,767
Performance Net cashflow -398 5,663 -5,060 159 197
(%) 1M 3M 12M Beginning cash 795 397 6,060 1,000 1,159
Absolute (INR) 12.5 1.8 M cap (USDmn) 2,265.4 Ending cash 397 6,060 1,000 1,159 1,356
Absolute (USD) 12.6 -1.2 Free float (%) 0.1 Ending net debt -397 -6,060 -1,000 -1,159 -1,356
Rel to MSCI India 6.4 -1.9 3-mth ADT (USDmn) 0.6
Balance sheet (INRmn)
Income statement (INRmn) As at 31 Mar FY17 FY18 FY19F FY20F FY21F
Year-end 31 Mar FY17 FY18 FY19F FY20F FY21F Cash & equivalents 397 6,060 1,000 1,159 1,356
Revenue 14,359 18,150 20,226 22,982 27,426 Marketable securities
Cost of goods sold Accounts receivable
Gross profit 14,359 18,150 20,226 22,982 27,426 Inventories
SG&A -8,546 -10,890 -12,533 -14,154 -16,496 Other current assets 1,111 740 851 979 1,125
Employee share expense Total current assets 1,508 6,800 1,851 2,138 2,481
Operating profit 5,813 7,260 7,692 8,828 10,930 LT investments 9,465 8,710 14,023 17,236 20,767
EBITDA 5,992 7,600 8,066 9,239 11,382 Fixed assets 2,511 2,320 2,784 2,923 3,069
Depreciation -179 -340 -374 -411 -453 Goodwill
Amortisation Other intangible assets
EBIT 5,813 7,260 7,692 8,828 10,930 Other LT assets 7,328 7,880 6,721 4,984 3,274
Net interest expense Total assets 20,813 25,710 25,379 27,280 29,591
Associates & JCEs Short-term debt
Other income Accounts payable
Earnings before tax 5,813 7,260 7,692 8,828 10,930 Other current liabilities 1,587 2,840 3,124 3,436 3,780
Income tax -1,786 -2,040 -2,154 -2,472 -3,060 Total current liabilities 1,587 2,840 3,124 3,436 3,780
Net profit after tax 4,028 5,220 5,538 6,356 7,870 Long-term debt
Minority interests 0 0 0 0 0 Convertible debt
Other items Other LT liabilities
Preferred dividends Total liabilities 1,587 2,840 3,124 3,436 3,780
Normalised NPAT 4,028 5,220 5,538 6,356 7,870 Minority interest
Extraordinary items Preferred stock 300 0 0 0 0
Reported NPAT 4,028 5,220 5,538 6,356 7,870 Common stock 5,875 6,120 6,120 6,120 6,120
Dividends -3,003 -3,683 -4,154 -4,767 -5,902 Retained earnings
Transfer to reserves 1,025 1,537 1,385 1,589 1,967 Proposed dividends
Valuations and ratios Other equity and reserves 13,051 16,750 16,135 17,724 19,691
Reported P/E (x) 37.1 28.6 28.1 24.5 19.8 Total shareholders' equity 19,226 22,870 22,255 23,844 25,811
Normalised P/E (x) 37.1 28.6 28.1 24.5 19.8 Total equity & liabilities 20,813 25,710 25,379 27,280 29,591
FD normalised P/E (x) 37.1 28.6 28.1 24.5 19.8
Dividend yield (%) 2.0 2.4 2.7 3.1 3.8 Liquidity (x)
Price/cashflow (x) 50.1 25.6 62.1 24.7 21.7 Current ratio 0.95 2.39 0.59 0.62 0.66
Price/book (x) 7.8 6.8 7.0 6.5 6.0 Interest cover na na na na na
EV/EBITDA (x) 26.0 19.7 19.2 16.7 13.6 Leverage
EV/EBIT (x) 26.8 20.6 20.1 17.5 14.1 Net debt/EBITDA (x) net cash net cash net cash net cash net cash
Gross margin (%) 100.0 100.0 100.0 100.0 100.0 Net debt/equity (%) net cash net cash net cash net cash net cash
EBITDA margin (%) 41.7 41.9 39.9 40.2 41.5
EBIT margin (%) 40.5 40.0 38.0 38.4 39.9 Per share
Net margin (%) 28.0 28.8 27.4 27.7 28.7 Reported EPS (INR) 6.86 8.88 9.05 10.39 12.86
Effective tax rate (%) 30.7 28.1 28.0 28.0 28.0 Norm EPS (INR) 6.86 8.88 9.05 10.39 12.86
Dividend payout (%) 74.6 70.6 75.0 75.0 75.0 FD norm EPS (INR) 6.86 8.88 9.05 10.39 12.86
ROE (%) na 25.0 24.5 27.6 31.7 BVPS (INR) 32.72 37.37 36.36 38.96 42.17
ROA (pretax %) na 36.2 34.9 35.0 40.2 DPS (INR) 5.11 6.02 6.79 7.79 9.64
Growth (%) Activity (days)
Revenue 26.4 11.4 13.6 19.3 Days receivable 0.0 0.0 0.0 0.0
EBITDA 26.8 6.1 14.5 23.2 Days inventory na na na na
Normalised EPS 29.6 1.9 14.8 23.8 Days payable na na na na
Normalised FDEPS 29.6 1.9 14.8 23.8 Cash cycle 0.0 na na na na
Source: Company data, Nomura estimates Source: Company data, Nomura estimates

32
Nomura | Reliance Nippon Life Asset Management 3 August 2018

Reliance Nippon Life Asset Management


Company
Introduction and history: Reliance Nippon Life Asset Management Company
(RNAMC), co-promoted by Reliance Capital Limited (42.9% owned by Reliance Capital
Limited and 42.9% owned by Nippon Life Insurance Company), started its operations in
1995 as an exclusive asset manager for Reliance Mutual Fund. It is now the fourth-
largest asset management company in India with a total AUM of INR2.4tr as of June
2018 (INR4.1tr including managed AUM). It is also involved in managing: (i) ETFs; (ii)
managed accounts, including portfolio management services, alternative investment
funds and pension funds; and (iii) offshore fund management and advisory mandates. It
also manages offshore funds in Singapore and Mauritius through its subsidiary and has
a representative office in Dubai.

Distribution is the key strength despite not having a captive


bank distribution
• Reliance Mutual Fund is the fourth-largest mutual fund in India with a total AUM of
INR2.4tr as of FY18. It has 8.1mn of investor folios, with a folio market share of +11%
vs. overall market share of 10%.
• RNAM has maintained its market share in the range of 10-12% over the past three-four
years despite not being a bank-led AMC. This highlights the brand franchise and
distribution strength of RNAM which is despite it not being a bank-led AMC. However,
over the past decade, RNAM has lost market share, especially in weak market cycles
where bank-led AMCs gained market share.
• We think the reasons for market share loss were: (1) the inherent weakness of not
being a bank-led AMC; and (2) the focus on building retail AUMs vs. high net worth
individuals’ (HNIs) AUM as the stickiness is much better for retail AUMs. The HNI mix
has come down from 30% of the AUM in FY14 to currently 16%.
• RNAM has rightly shifted its focus to building a profitable portfolio pool with focus on
building sticky retail equity AUMs while shedding market share in the lower profitable
liquid segment and relatively cyclical HNI segment.
• With this, RNAM has been able to ramp up its retail AUM mix to +30% - the highest
among top-5 AMCs. Its retail market share has improved to 14% as of FY18 from <9%
in FY14 (up 500bps) and while it has lost overall market share by +100bps over the
same period led by +250bps market share loss in liquid in the past 15 months and
marginal market share loss in the debt segment.
• However, in the past five years, the AUM growth for HNIs has been very strong and
has recorded +50% CAGR in equity AUM where RNAM has lost out given its focus on
building a sticky retail franchise (which has recorded a 26% CAGR) and given that HNI
flows would happen through the bank channel.
• RNAM has to be ahead of the curve in developing the IFA distribution pool to offset its
weakness in bank distribution, in our view. The same is also evident from the sourcing
mix of RNAM which is more IFA-heavy and constitutes 48% of the AUMs, while the
bank channel constitutes 33% of AUMs and national distributors constitute 19% of
AUMs as of FY18.
• While having a higher share in IFAs is positive from a stickiness as well as distribution
cost perspective as smaller IFAs will have lesser bargaining power, this also means
RNAM will have to perpetually incur higher cost to develop the IFA pool which
eventually gets absorbed by other AMCs later.
• The strength in its distribution is also evident from the fact that only RNAM has 16% of
its AUM coming from B-30 cities vs. SEBI requirement of 15% to avail of additional
30bps TER benefit. A higher share in B-30 would also mean much better stickiness as
well as higher equity share.

33
Nomura | Reliance Nippon Life Asset Management 3 August 2018

Fig. 61: RNAM is gradually losing market share… Fig. 62: …led by HNI market share loss
20.0% RNAM AUM Market share (%) 14% RNAM Equity Market share
13%
13.4%
15.0% 17%
16% 12%
12.5%
15% 14% 12.2%
13% 11%
11.4%
10.0% 12% 12% 11% 12% 12% 12% 10%
11% 10%
9% 9.6%
5.0% 9.3% 9.4% 9.1% 9.1% 9.2% 9.1% 9.2%
8%
7%
0.0%
6%
FY11

FY17
FY07

FY08

FY09

FY10

FY12

FY13

FY14

FY15

FY16

FY18

1QFY19

Jan-18

Jun-18
FY18

Mar-18
FY13

FY14

FY15

FY16

FY17

Apr-18
Feb-18

May-18
Source: AMFI, Nomura research Source: AMFI, Nomura research

Fig. 63: Folio market share still better than overall market Fig. 64: SIP market share higher than equity market share
share with focus on retail segment
Folio Market share - RNAM 12.0% SIP Market share - RNAM
13.5%
11.8%
13.0% 13.3% 11.5%

11.0% 10.8%
12.5%
11.1% 10.5%
12.0% 12.4% 12.4% 10.5% 10.7%
10.6% 10.6%
11.5% 10.0%
10.1% 10.2%

11.0% 11.4% 9.5%

10.5% 9.0%

Jul-16

Dec-16

Jun-17

Dec-17
Jun-16

Aug-16
Sep-16
Oct-16
Nov-16

Jan-17

Sep-17
Apr-16

Feb-17
Mar-17
Apr-17

Mar-18
May-16

May-17
10.0%
FY15 FY16 FY17 FY18
Source: AMFI, Nomura research Source: AMFI, Nomura research

Fig. 65: Sourcing mix – IFAs contribute ~50% of the AUMs Fig. 66: IFA’s AUM has grown in line with overall AUM growth
at 22-24% CAGR over FY14-18 despite large flows sourced
by banks for the industry

19% 700 IFA AUM (INRbn)


585
600
484
IFAs 500
Banca 400 350 373
48%
National Distributors 260
300

200

33% 100

0
FY14 FY15 FY16 FY17 FY18
Source: Company data, Nomura research Source: Company data, Nomura research

34
Nomura | Reliance Nippon Life Asset Management 3 August 2018

Distribution strength driving market share gains in retail


• RNAM in the past cycle had significantly higher share of HNI AUM which led to an
erosion in market share during market correction as HNIs would be much more return
sensitive and the swings in AUM will be large.
• For the industry, HNIs’ total AUMs recorded a 20% CAGR over FY09-14, while it was
30% CAGR over FY14-18. In total equities, HNIs’ AUMs grew by 13% over FY09-14,
while it was 66% CAGR over FY14-18.
• Retail AUM during the same period grew slower in the upturn at 34% CAGR vs. 66%
CAGR for HNI AUMs. We think the redemption and inflow behaviour would be more
sensitive for HNIs with market return expectations, and hence the cyclicality risk is
higher.
• RNAM during the current cycle has rightly de-focused of HNIs with equity AUMs
growing by just 5% during FY14-18 vs. retail equity AUMs recording 40% CAGR.
• Since RNAM does not have a captive bank, it has built its strength in creating IFAs
which has helped it gain retail market share as well as higher share in B-15 cities.
RNAM has a B-15 mix of 21% of total AUM as of FY18 which is the highest in the
industry after SBI which has an inherent distribution advantage given its reach. Also,
the equity AUM contribution from B-15 cities is 35% which is the highest after SBI. Its
strength is also evident from the fact that in B-15 cities RNAM has an equity mix of just
58%, which is the lowest among the top-5 after SBI which implies that investor
penetration is much more broad-based and not just focused on equity AUMs. RNAM is
the only AMC to have a +15% mix coming from B-30 cities which highlights its granular
distribution strength.

Fig. 67: Retail mix has improved materially over the past few Fig. 68: RNAM has gained retail AUM market share from <9%
years in FY14 to ~14% now

Retail Mix (%) HNI Mix (%) 15.0% RNAM- Retail AUM Market Share (%)
35.0% 30.5%
30.0% 13.0% 13.8% 13.7%
25.7% 24.6%
29.7% 13.0%
25.0% 21.3%
11.0%
20.0% 11.2%
13.6% 19.3% 19.8%
15.0% 9.0%
17.1% 16.2%
10.0% 8.6%
7.0%
5.0%

0.0% 5.0%
FY14 FY15 FY16 FY17 FY18 FY14 FY15 FY16 FY17 FY18
Source: Company data, Nomura research Source: AMFI, company data, Nomura research

Fig. 69: RNAM has been consistently growing its retail AUMs Fig. 70: ...while it has significantly run-down its HNI AUMs,
faster than the industry… thus reducing the cyclicality risk
Retail AUM growth y-y - Industry HNI AUM growth y-y - Industry HNI AUM growth y-y - RNAM
100.0% 94.5% Retail AUM growth y-y - RNAM 36.1%
40.0% 33.2% 34.2%
90.0%
80.0% 30.0%
70.0% 18.4%
54.6%
20.0% 15.0%
60.0% 12.5%
50.2%
45.6% 6.8%
50.0% 40.0% 39.0% 10.0%
40.0%
30.0% 24.7% 0.0%
20.0% -10.0%
7.6%
10.0%
-12.7%
0.0% -20.0%
FY15 FY16 FY17 FY18 FY15 FY16 FY17 FY18
Source: AMFI, company data, Nomura research Source: AMFI, company data, Nomura research

35
Nomura | Reliance Nippon Life Asset Management 3 August 2018

Fig. 71: RNAM’s retail mix has improved materially vs Fig. 72: RNAM has a much lower share of HNI’s in its AUMs
industry levels since FY14 now
Retail Mix (%) - Industry Retail Mix (%) - RNAM HNI Mix (%) - Industry HNI Mix (%) - RNAM
35.0% 35.0%
30.5% 29.7%
30.0% 30.0% 27.8%
25.8% 26.0% 25.7% 26.1% 25.3%
24.6%
25.0% 23.6% 25.0%
21.3% 20.6%
20.3% 19.8%
19.3% 19.4%
20.0% 18.2% 20.0%
17.1%
16.2%
15.0% 13.6% 15.0%

10.0% 10.0%
FY14 FY15 FY16 FY17 FY18 FY14 FY15 FY16 FY17 FY18
Source: AMFI, company data, Nomura research Source: AMFI, company data, Nomura research

SIP share and retail share better than overall market share
• Improving retail market share is also visible from the traction in the systematic
investment plan (SIP) book. RNAM has been able to maintain its SIP market share at
+10% in FY18 and has seen a marginal improvement in market share in the past 12
months.
• Its SIP book in FY18 stood at INR7.5bn which implies +10% of opening equity AUMs
which will continue to support the equity mix improvement for RNAM, in our view.
• We think despite having a disadvantage in terms of distribution, RNAM has got its
strategy right to focus on the retail segment and source it through IFAs and this should
help build stickiness in its AUMs.
• Similar to the industry, we expect RNAM’s SIP book to continue to record a 10% CAGR
over the next three-five years, while we expect a cyclicality in non-SIP flows.

Fig. 73: SIP book growing in line with industry trends Fig. 74: SIP market share improving marginally
SIP monthly flow (INRbn) - RNAM 12.0% SIP Market share - RNAM
8.00 7.50
7.00 11.8%
11.5%
6.00
11.0% 10.8%
5.00 11.1% 10.5%
4.00 10.5% 10.7%
10.6% 10.6%
3.00
10.0%
2.00 10.1% 10.2%
1.00 9.5%
- 9.0%
Sep-15

Sep-16

Sep-17
Jul-15

Jul-16
Mar-16

Mar-17

Mar-18
Nov-15
Jan-16

Nov-16
Jan-17

May-17
May-15

May-16

Jul-16

Dec-16

Jun-17

Dec-17
Jun-16

Aug-16
Sep-16
Oct-16
Nov-16

Jan-17
Apr-16

Feb-17
Mar-17
Apr-17

Sep-17

Mar-18
May-16

May-17

Source: Company data, Nomura research Source: AMFI, company data, Nomura research

Fig. 75: SIP book forms 10% of opening equity AUM – higher than industry average
SIP book (annualized) as % of Equity AUM- Industry

10.5%
SIP book (annualized) as % of Equity AUM- RNAM 10.32%

10.0%

9.5% 9.28%
8.96% 9.06%
9.0% 8.69% 8.78%

8.5%

8.0%

7.5%
FY16 FY17 FY18
Source: AMFI, company data, Nomura research

36
Nomura | Reliance Nippon Life Asset Management 3 August 2018

Equity mix lower due to the loss of HNI share, but stickiness
should be better
• RNAM has lost equity market share by 400bps over FY13-17 with the company
defocusing on the HNI segment where equity flows were stronger in general. However,
RNAM has been able to arrest further market share loss with market share gains in the
retail equity segment.
• We think lump sum flows will get impacted during weak market environment where
flows dry out and hence non-bank AMCs get impacted more in general as the parent
bank is always incentivized to create value within the organization and hence stop
selling other AMCs’ products aggressively.
• With this, we expect non-bank AMCs to lose higher market share in general as
cyclicality inflows may play out in the near-term given the exceptionally strong inflows in
the past four years.
• But, we still expect RNAM’s cyclicality risks to be lower given the lower share of HNIs.
We expect the equity mix for RNAM to improve by 35bps annually over FY18-25F vs.
100bps for the industry and expect a marginal market share loss in the equity segment
– 20bps annually (in-line with top-5 players).

Fig. 76: RNAM’s equity market share vs. top-5 average Fig. 77: RNAM’s equity mix expectations vs. top-5
RNAM equity market share Top-5 avg equity market share Equity Mix (%) - RNAM Equity Mix (%) - Top 5
50% 46%
12% 11.5% 11.2% 11.3% 45% 45%
11.0% 43%
45% 42%
11% 10.2%
10% 9.3% 9.0% 40%
8.9% 8.6% 34% 34%
9% 35% 32% 39% 39% 40%
7.8% 37% 38%
8% 35%
30% 33% 33%
7% 31%
30%
6% 25%
5% 20%
FY18

FY19F

FY20F

FY21F

FY25F

FY16
FY13

FY14

FY15

FY17

FY18

FY19F

FY20F

FY21F

FY25F
Source: AMFI, company data, Nomura estimates Source: AMFI, company data, Nomura estimates

Fig. 78: Equity market share expectations – we expect the top-5 to lose equity market share as smaller funds have an ability to
outperform better
Market share - Equity FY13 FY14 FY15 FY16 FY17 FY18 FY19F FY20F FY21F FY22F FY23F FY24F FY25F
RNAM 13.4% 12.5% 12.2% 11.4% 9.6% 9.3% 9.0% 8.9% 8.6% 8.4% 8.2% 8.0% 7.8%
ICICI 8.5% 10.7% 13.4% 14.2% 14.9% 15.1% 15.0% 15.3% 15.0% 14.8% 14.6% 14.3% 14.2%
SBI 7.5% 7.2% 6.0% 6.8% 7.9% 7.9% 8.1% 9.0% 8.7% 8.4% 8.1% 7.8% 7.5%
Birla 5.3% 5.9% 7.1% 7.6% 8.4% 9.2% 9.0% 9.0% 8.8% 8.6% 8.4% 8.2% 8.0%
Top-5 market share 55.4% 55.7% 57.6% 55.2% 56.5% 57.4% 56.1% 56.5% 55.2% 54.0% 52.8% 51.7% 50.8%
Source: Company data, Nomura estimates

37
Nomura | Reliance Nippon Life Asset Management 3 August 2018

Yields under pressure but strong AUM growth to provide


support
• RNAM has recorded revenue CAGR of 15% over FY16-18, lower than its AUM CAGR
of 24%. The revenue growth has lagged AUM growth and more importantly
management fee to AUM has compressed by 13bps over FY16-18 (the only
comparable period due to the accounting change since FY16) and this is despite the
equity mix improving by 500bps over FY16-18.
• Equity remains the most profitable segment where management fee net of trail was 1.3-
1.4% prior to FY16 but this has come down to 125bps, in our view, with payouts to
distributors increasing from 40-50% of AUM to 50-60% now.
• With SEBI now cutting TERs by 15bps of the total 20bps allowed earlier in lieu of the
exit loads, we expect AMCs to absorb some part of the impact, while pass on the rest
to the distributors. We expect 5-7bps to be absorbed by the AMCs of the total 15bps
cut.
• In addition, we think the current AUM will also include old AUMs which were at a lower
payout and once they get replaced by new AUMs, the profitability will decline further.
We expect 50% of the AUMs to be at better profitability and once that gets replaced
with new AUMs, the revenue can decline further by 5-7bps.
• Overall, we expect 10-15bps of impact on revenue, which will get reflected in the next
one-two years.
• With these expectations, we build in revenue CAGR of 17% over FY18-21F vs. AUM
CAGR of 20% despite our expectation of the equity mix improving by ~270bps (90bps
annually).

Fig. 79: Moderation in revenue growth vs. AUM growth is Fig. 80: Management fees to AUM has compressed despite
reflective of the increase in payouts the improvement in the equity mix
Revenue Growth CAGR AUM Growth CAGR Management fee to AUM (%)
30.0% 0.9%
0.84%
25.0% 23.8% 24.4% 24.4% 0.9%

19.9% 0.8%
20.0% 0.75% 0.73%
17.2% 0.8% 0.72% 0.71%
15.0% 0.69%
15.0% 0.7% 0.67% 0.67%

0.7%
10.0%
0.6%
5.0% 0.6%
0.0% 0.5%
FY14-18 FY16-18 FY18-21F FY14 FY15 FY16 FY17 FY18 FY19F FY20F FY21F
Source: Company data, Nomura estimates Source: Company data, Nomura estimates

Fig. 81: Moderation in revenue yield is due to the Fig. 82: We expect revenue CAGR of 17% vs. a 23% equity
compression in equity yields AUM CAGR and overall AUM CAGR of 20%
Equity fee to AUM (%)

1.5% 1.42% 1.43%


1.4% 1.35%
1.3% 1.25%
1.21%
1.2% 1.16% 1.15%
1.10% 1.10%
1.1%
1.0%
0.9%
0.8%
0.7%
FY13 FY14 FY15 FY16 FY17 FY18 FY19FFY20FFY21F
Source: Company data, Nomura estimates Source: Company data, Nomura estimates

38
Nomura | Reliance Nippon Life Asset Management 3 August 2018

Fig. 83: Impending negative impact on revenue for the sector – we think the impact can be absorbed by operating leverage
kicking in
Industry AUM Current AUM
Schemes Expense ratios - Regular Expense ratio - Direct (INRmn) Mix
Income 1.00% 0.50% 8,289,410 40.6%
Equity 2.10% 1.10% 5,877,715 28.8%
Liquid 0.25% 0.10% 3,554,080 17.4%
Balanced 2.10% 1.10% 1,348,680 6.6%
ELSS 2.30% 1.40% 714,105 3.5%
ETF 0.50% 0.00% 603,140 3.0%
FOF 0.50% 0.05% 15,880 0.1%
Grand Total 1.29% 0.66% 20,403,010
Equity + Balanced yield 2.10% 1.10%
Other yields 0.76% 0.36%
Equity + Balanced 7,940,500 38.9%

Positive impact Equity Mix change Net yield difference Net impact
Equity mix change 10% 0.53% 0.053%

(1) Negative impact Increase in trail Gross yields Current Maturity Net impact
Higher trail coms 10% 1.29% 50% -0.064%

(2) Negative impact Gross TER reduction Pass on to Distributors Net impact
TER changes -0.15% -0.10% -0.050%

Total impact -0.062%


Core PBT of the industry 0.25%
% of profitability -25%

Set offs from operating leverage and upfront commission reduction


Source: Nomura estimates

• Management fees form a large part of the total revenue for RNAMC, with management
fees contributing 85% of total FY18 revenue. Advisory fees form a smaller portion of the
total revenue at <3% of total FY18 revenue.
• However, given that RNAM is focused on managing assets beyond mutual funds, the
company is present in portfolio management services, alternate investment funds,
pension funds, offshore funds and advisory mandates.
• We expect advisory fees to record +35% CAGR, while the contribution will still remain
low at ~3% of total revenue by FY21F.
• In FY18, RNAM booked a large other income linked to its investment book due to the
recently-raised capital through its IPO as well as booking of income which was
otherwise sitting as mark to market (MTM) gains. We think this may not be sustainable
as the IPO-led funds get expensed as well as booking gains can be lumpy in few years.
We expect investment gains to come down from INR2.3bn in FY18 to less than INR2bn
in FY21F.

Fig. 84: We expect total revenue CAGR of 15% over FY18-21F


CAGR
INRm n FY13 FY14 FY15 FY16 FY17 FY18 FY19F FY20F FY21F FY14-18 FY16-18 FY18-21F
Revenue 6,087 6,759 8,472 12,001 13,075 15,860 17,956 21,208 25,512 23.8% 15.0% 17.2%
Management fees 5,890 6,555 8,202 11,581 12,676 15,343 17,245 20,248 24,215 23.7% 15.1% 16.4%
Advisory fees 198 201 267 418 398 517 711 960 1,297 26.7% 11.2% 35.9%

Other income 1,259 1,029 1,079 1,137 1,284 2,290 2,269 1,775 1,914 22.1% 41.9% -5.8%
Total revenue 7,346 7,788 9,551 13,138 14,359 18,150 20,226 22,982 27,426 23.6% 17.5% 14.8%
Source: Company data, Nomura estimates

39
Nomura | Reliance Nippon Life Asset Management 3 August 2018

Operating leverage to net off regulatory pressures


• Operating expenses are largely inflation-linked like employee expenses and
administration expenses, while brokerage/commission are linked to new fund flows and
assets managed. Marketing expenses are also somewhat linked to flows, with
companies spending more on advertisements when the flows are strong.
• With exceptionally strong flows over the past three-four years, the P&L of AMCs are
impacted by the new business drag given that the brokerages for AUMs have recorded
51% CAGR over FY14-18 vs. revenue CAGR of 24%. The brokerages for AUMs have
increased from 9bps in FY14 to 18bps in FY18.
• Operating leverage will kick in when the flows stabilise, leading to some stability in
brokerage/commission expenses, while management fees will grow in-line with growing
AUMs.
• We expect brokerage expenses to record a 15-16% CAGR over FY18-21F vs.
management fees CAGR of 16-17% and brokerage to AUM coming down marginally to
17bps by FY21F vs 18bps currently.
• We expect some parts of the brokerage expenses to spill over to FY19F as well given
the strong flows in 2H18, but expect the same to normalise in FY20F. For FY19-21F,
we expect a 15% CAGR in brokerages paid vs. 19% revenue CAGR.
• Also, other expenses like employee expenses should grow at a nominal rate and we
expect a 12% CAGR in employee expense over FY19-21F, while other expenses ex-
employee and brokerages should record a 16% CAGR over FY19-21F.
• With the normalisation in expenses, we expect operating leverage to start kicking in
post-FY19F as the TER impact is absorbed; hence, we expect core PBT to AUM to rise
to 22bps by FY21F after dipping to 19bps in FY19F (21bps in FY18).

Fig. 85: Brokerage payouts to normalise with a normalisation Fig. 86: Brokerage to AUM to compress marginally over the
in new flows next two-three years with the normalisation of flows
7 Brokerage exp (INRbn)
6.13 Brokerage/AUM
6 0.25% 0.23%
5.10
5 4.62
0.20% 0.18% 0.18%
3.96 0.17% 0.17%
4 0.15%
3.12
2.59 0.15%
3
2 0.10% 0.09% 0.08%
0.75 0.93
1
0.05%
-
FY14

FY15

FY16

FY17

FY18

FY20F
FY19F

FY21F

0.00%
FY14 FY15 FY16 FY17 FY18 FY19F FY20F FY21F
Source: Company data, Nomura estimates
Source: Company data, Nomura estimates

Fig. 87: Employee expense growth to remain steady Fig. 88: Other operating expense growth to moderate with
some moderation in AUM growth
Employee exp (INRbn) 3.23 8.0 Other operating expenses
3.5 7.14
(INRbn)
2.89 7.0 6.17
3.0
2.58
2.30 6.0 5.34
2.5 4.63
1.92 1.96 5.0
2.0 3.99
1.60 1.51 1.61 4.0
1.5 2.87
3.0 2.22 2.37
1.0 1.73
2.0
0.5 1.0
- -
FY19F

FY20F

FY21F
FY16
FY13

FY14

FY15

FY17

FY18
FY13

FY14

FY15

FY16

FY17

FY18

FY20F
FY19F

FY21F

Source: Company data, Nomura estimates Source: Company data, Nomura estimates

40
Nomura | Reliance Nippon Life Asset Management 3 August 2018

Fig. 89: We expect opex growth to normalise with the normalisation in flow-related expenses
CAGR
INRm n FY13 FY14 FY15 FY16 FY17 FY18 FY19F FY20F FY21F FY14-18 FY16-18 FY18-21F
Opex 4,414 4,490 4,913 7,914 8,546 10,890 12,533 14,154 16,496 24.8% 17.3% 14.8%
Em ployee expense 1,601 1,512 1,613 1,923 1,957 2,300 2,576 2,885 3,231 11.1% 9.4% 12.0%
Adm in expense 1,305 1,668 1,810 2,159 2,559 3,130 3,693 4,358 5,143 17.0% 20.4% 18.0%
Legal and professional charges 243 333 300 324 424 518 611 721 851 11.7% 26.5% 18.0%
Rent 196 176 102 159 207 253 298 352 416 9.5% 26.2% 18.0%
Outsourced services 291 558 649 802 875 1,070 1,263 1,490 1,759 17.7% 15.5% 18.0%
Marketing expense 1,390 1,105 1,501 3,752 3,892 5,120 5,890 6,500 7,669 46.7% 16.8% 14.4%
Brokerage, incentives and others 1,083 754 927 3,120 2,594 3,961 4,615 5,097 6,126 51.4% 12.7% 15.6%
Marketing expenses 219 254 391 382 696 557 612 674 741 21.7% 20.8% 10.0%
Advertisement 88 98 183 250 602 602 663 729 802 57.4% 55.2% 10.0%
Depreciation 85 143 69 43 179 340 374 411 453 24.1% 180.9% 10.0%
Source: Company data, Nomura estimates

Fig. 90: Yields to get impacted by recent TER cuts Fig. 91: Operating leverage to kick in by FY20F
Management fee to AUM (%) Opex to AUM (%)
0.9% 0.6% 0.57%
0.84%
0.9%
0.6%
0.8% 0.51% 0.51% 0.50%
0.75% 0.49%
0.73% 0.72%
0.5% 0.47%
0.8% 0.71% 0.46%
0.69% 0.44%
0.7% 0.67% 0.67% 0.5%
0.7%
0.4%
0.6%
0.4%
0.6%
0.5% 0.3%
FY14 FY15 FY16 FY17 FY18 FY19F FY20F FY21F FY14 FY15 FY16 FY17 FY18 FY19F FY20F FY21F
Source: Company data, Nomura estimates Source: Company data, Nomura estimates

Fig. 92: Core profitability to improve with operating leverage Fig. 93: PAT to AUM to remain stable at 20-22bps
kicking in
Core PBT/AUM PAT/AUM
0.35% 0.35%
0.29% 0.31% 0.32%
0.30% 0.29%
0.27% 0.30%
0.24% 0.24% 0.24%
0.25% 0.22% 0.25% 0.23% 0.22% 0.21% 0.22%
0.21% 0.20%
0.19%
0.20% 0.20%
0.15% 0.15%
0.10% 0.10%
0.05% 0.05%
0.00% 0.00%
FY14 FY15 FY16 FY17 FY18 FY19F FY20F FY21F FY14 FY15 FY16 FY17 FY18 FY19F FY20F FY21F
Source: Company data, Nomura estimates Source: Company data, Nomura estimates

41
Nomura | Reliance Nippon Life Asset Management 3 August 2018

ROEs have remained strong


• RNAMC has consistently delivered strong EBIT/core EBIT margins over FY14-18, led
by an improving retail mix (the retail mix has improved from 10% of AUMs to +30%
over FY13-18) and AUM CAGR of 25% over FY13-18.
• EBIT margins have been in the range of 40-50% over FY13-18 and core EBIT margins
in the range of 30-40% over FY13-18, with some drop in margins in the past two years
(down 300bps) due to new flow-related drags, which led to brokerage expenses
averaging higher at 20bps on AUM over FY16-18 and a compression in yields.
• RNAM delivered a core PBT CAGR of 24% over FY13-18 and only ~10% CAGR over
FY16-18 as higher new flow-related drag impacting profitability in recent years.
• Since the regulatory capital requirement is low in this business at just INR0.5bn, the
ability to payout is very high and the same is visible with a +75% payout averaged over
FY13-18.
• Given the less retained capital and growing profitability, ROEs have risen from 17% in
FY14 to 23% in FY18 despite declining profitability. We expect ROEs to improve further
to +30% levels by FY21F.

Fig. 94: Core EBIT margin has been in the range of 35-50% Fig. 95: Core PBT/AUM in the range of 20-30bps

EBIT margin Core EBIT margin PAT/AUM Core PBT/AUM


60% 0.35% 0.32%
0.31%
49% 0.29% 0.29%
50% 0.30%
42% 42% 0.27%
40% 40% 40% 40% 38% 38% 40% 0.24% 0.24% 0.24%
40% 35% 0.25% 0.23% 0.22%
0.21% 0.22%
34% 34% 35% 33% 0.21% 0.22%
31% 30% 0.19% 0.20%
27% 0.20%
30%
0.15%
20%
0.10%
10%
0.05%
0%
0.00%
FY13

FY14

FY15

FY16

FY17

FY18

FY19F

FY20F

FY21F

FY14 FY15 FY16 FY17 FY18 FY19F FY20F FY21F

Source: Company data, Nomura estimates Source: Company data, Nomura estimates

Fig. 96: ROEs have been improving despite new flow drags – we expect ROEs to
improve further to 35% by FY21F despite stable core PBT to AUM

35.0% ROE
30.5%
30.0%
26.7%
24.9%
25.0% 23.1% 22.8%
22.1% 21.3%
20.0% 17.4%

15.0%

10.0%

5.0%

0.0%
FY14 FY15 FY16 FY17 FY18 FY19F FY20F FY21F

Source: Company data, Nomura estimates

42
Nomura | Reliance Nippon Life Asset Management 3 August 2018

Capital intensity lower but capital allocation not the best


• The regulatory capital required in an AMC business is very low at INR0.5bn and hence
the payout ability of such businesses is very high. RNAM has paid out 70-75% of its
profit as dividend over FY13-18.
• Despite this, RNAM has an accumulated net worth of INR22.9bn, which is much higher
than required.
• Of its INR22.9bn of net worth, 80-85% is invested in the form of cash + investment +
ICDs where RNAM earns investment income. Its investment income contribution has
been 9-13% of total revenue over FY14-18. This translates investment income to AUM
of 7-11bps vs. 1-5bps for larger peers.
• More importantly, RNAM has given ICDs (inter corporate deposits) to a few of its group
companies to the tune of INR4-4.5bn which remain one of the key worries for investors
as the recoverability risk is high as well as there is a risk of leakage of earnings to
support these group companies.
• We expect these ICDs to gradually get repaid over the next two years, but any further
increase in exposure towards these group companies is a clear negative.
• RNAM maintains much higher net worth than its peers; hence, we value the book
separately as it would not be fair to include this as a part of core profitability.
• We believe that RNAM is maintaining a higher net worth to have the ability to do a large
M&A which is also the reason why it raised funds during the IPO. Hence, whenever it
goes for an M&A, the net worth will get utilised more efficiently and will be value-
accretive.
• However, we still do not see the need for RNAM to have raised money through the IPO
given that the capital raised is less than one year of profits and hence we do not give
any option value to the net worth and value it at 1x book.

Fig. 97: Payout has been in the range of 70-75%

120.0% 114.0% Dividend payout

100.0%

81.4%
80.0% 74.1% 75.0% 75.0% 75.0%
69.7% 70.6%

60.0%
43.7%
40.0%

20.0%

0.0%
FY13 FY14 FY15 FY16 FY17 FY18 FY19F FY20F FY21F

Source: Company data, Nomura estimates

43
Nomura | Reliance Nippon Life Asset Management 3 August 2018

Valuations factoring in cyclicality risks and regulatory


pressure now
Valuations factoring in the risks now
RNAM is currently trading at 25x core PAT (Sep-20F), adjusting for the investment book
(valued at 1x book) and <27x Sep-20F EPS. Its current value for the core business
implies 3.8% Sep-20F AUM. With muted stock performance since its listing (Nov-17) we
think it does factor in: (1) cyclicality risks - with flows moderating; (2) regulatory
pressures –recent TER cuts; (3) inefficient allocation of capital – ICDs of INR4-4.5bn
towards group companies; and (4) distribution risks – as it loses market share. We think
while the near-term cyclicality risk may be high, medium-term growth opportunity
remains solid and with the regulator pushing MFs to get more cost efficient, products are
getting stronger and will become the main stream investment product. Also, with SEBI
looking to cut distribution payouts, yield compression can get arrested.
Life insurance vs. AMCs – which business should get higher multiples
Life insurance companies, especially those with higher ULIP share such as IPRU Life
and SBI Life, currently trade at 16x Sep-20F VNB and our TPs imply 23-26x Sep-20F
VNB for the two companies.
We think AMCs should fetch higher multiples than life insurance companies as: (1) the
AMC business is less capital-intensive; hence, the payout ability is high; (2) the regulator
is forcing AMCs to get more cost efficient; (3) increasing distribution strength, especially
with the direct share increasing; (4) lower share in financial savings and hence larger
growth opportunity; and (5) better product offerings which compete with bank deposits
(debt funds), saving deposits (liquid funds) as well as ULIPs (equity and balance funds).
However, the negatives are: (1) higher competition with +40 players competing in the
same distribution pool; (2) higher bargaining power with distributors due to open
architecture; and (3) risks of passive flows impacting profitability.
We think AMCs should fetch higher multiples than life insurance companies. We
benchmark our valuation multiples higher than other flow business (given relatively
stable earnings), retail banks (given higher payout ability) and lower than consumer
companies (given higher cyclicality). Our target price for RNAM implies similar valuation
we assign for IPRU/SBI Life at 26x Sep-20F EPS given that it loses out in distribution.
We remain positive on the medium-term growth outlook and hence our valuation
multiples reflects better growth opportunity
We think valuations for AMC will depend on factors like: (1) distribution strength; (2)
equity mix which is the most profitable portfolio; (3) stability in earnings; and (4) payout
ability. We do not focus more on how its schemes’ performance has been in the past.
While scheme performance determines flows in the short-term, we think the performance
will be difficult to predict and we have seen top schemes of top AMCs outperforming and
underperforming at various time frames. Hence, over the medium to longer term, we
think distribution franchise and the focus on the profitable pools remain more important
from a valuation perspective. Given that RNAM’s capital allocation is not the best, we
chose to value its investment book separately and its core earnings separately.
We expect core PBT to AUM for RNAM to dip to 19bps in FY19F given the cuts in TERs
and then normalise upwards to 22bps by FY21F with operating leverage kicking in, while
any cap on distribution commissions will be an upside risk. We expect core PBT CAGR
of 22% over FY18-21F, while PAT will get impacted with investment gains coming off
(14% CAGR over FY18-21F). With 75% payout expected, we assign 32x multiple to Sep-
20F core PAT, which implies INR280/share for the core business and assign 1x multiple
to Sept-20F investment book (INR35/share) to arrive at INR315/share for the total
business (27x Sep-20F overall EPS) and our core value implies 4.8% of Sep-20F AUM.

44
Nomura | Reliance Nippon Life Asset Management 3 August 2018

Fig. 98: Our TP of INR315/share implies 32x Sep-20F core PAT and 1x book value for its
investments
At current At PT
RNAM valuation (INRmn) FY19F FY20F FY21F price Sep-20
MF business
PBT ex other income 5,423 7,053 9,016 8,035 8,035
Adjusted core PAT for MF 3,633 4,726 6,041 5,383 5,383
Value of MF business @ 30x 109,908 142,951 182,739 134,247 171,458
Value per share 180 234 299 219 280

Value of investments
Investable networth 19,038 20,402 22,123 21,262 21,262
Value of investments @ 1x book 19,609 21,014 22,786 21,262 21,262
Value per share 32 34 37 35 35

Total firm value 129,517 163,965 205,525 155,509 192,720


Per share value 254 315

EPS 9.0 10.4 12.9 11.6 11.6

Implied overall P/E 34.8 30.3 24.5 21.9 27.1


Implied core P/E 25 32
% of AUM 4.0% 4.4% 4.7% 3.7% 4.8%

PAT CAGR 17.3% 10.3% 14.7% 12.5%


Core PAT CAGR 9.4% 19.1% 22.0% 20.5%
AUM CAGR 16.0% 20.5% 19.9% 20.2%
Equity AUM CAGR 30.5% 22.9% 22.4% 22.6%

ROEs 24.9% 26.7% 30.5% 28.6%


Payout% 75.0% 75.0% 75.0% 75.0%

Source: Nomura estimates

Fig. 99: Valuation comparison across financial sub sectors


Current P/E ROE EPS CAGR - Com m ents
FY19F FY20F FY19F FY20F FY18-20F Grow th Payout ROE Cyclicality
potential ability potential risk
Flow businesses
ICICI Securities 15.0 12.4 70.8% 65.7% 21.9%
Motilal osw al 20.0 16.4 25.4% 24.6% 24.3%
Average 17.5 14.4 48.1% 45.1% 23.1% High Moderate High High

Retail Bank
HDFC Bank 26.7 21.9 17.7% 17.9% 17.7%
Indusind Bank 25.8 20.3 18.1% 19.2% 27.2%
Kotak Bank 32.3 25.7 14.1% 15.3% 24.4%
Average 28.3 22.6 16.6% 17.5% 23.1% High Low Moderate Moderate

Exchanges/Depositories
BSE 17.5 15.5 7.8% 8.6%
CDSL 23.0 19.5 18.9% 19.9% 17.8%
Average 20.2 17.5 13.4% 14.2% 17.8% Moderate High High High

Consum er
Hindustan Unilever 57.8 49.1 83.1% 90.1% 19.1%
Marico 48.2 40.8 35.8% 37.7% 18.6%
Godrej Consumer Products 51.5 44.0 25.5% 25.8% 11.8%
Dabur India 43.7 37.8 26.7% 27.7% 16.0%
Asian Paints 57.3 48.6 26.3% 27.2% 18.4%
Average 51.7 44.1 39.5% 41.7% 16.8% High High High Low

AMCs
Reliance AMC 24.3 21.2 24.9% 26.7% 14.7% High High High Moderate
Source: Bloomberg, Nomura estimates

45
Nomura | Reliance Nippon Life Asset Management 3 August 2018

Fig. 100: Valuation comparison across AMCs globally

AMCs Mkt cap P/E 3Yr Expctd CAGR ROE Mkt Cap/AUM PAT/AUM

Company Name Ticker Rating TP (USD) FY19F FY20F EPS AUM FY19F FY20F FY19F FY20F FY19F FY20F
India
Reliance Nippon RNAM IN BUY 315 2,269 28.1 24.5 15% 20% 24.9% 26.7% 0.1% 0.1% 0.20% 0.19%
US
Blackrock BLK US NR NR 76,590 17.2 15.6 14% 8% 13.8 14.0 0.0% 0.0% 0.00% 0.00%
BNY Mellon BK US NR NR 52,627 12.6 11.7 11% 2% 11.1 11.2 2.8% 2.7% 0.23% 0.23%
State Street STT US NR NR 32,945 11.4 10.6 13% 3% 14.2 14.3 1.2% 1.1% 0.10% 0.11%
Franklin Templeton BEN US NR NR 16,766 11.1 10.2 1% -1% 10.2 15.6 2.3% 2.3% 0.19% 0.22%
T Rowe Price TROW US NR NR 28,560 16.0 15.0 16% 8% 29.5 28.1 2.6% 2.4% 0.17% 0.16%
Invesco Ltd IVZ US NR NR 10,255 9.3 8.7 4% 5% 12.6 12.6 0.0% 1.0% 0.00% 0.11%
Average 12.9 12.0 10% 4% 15.2 16.0 1.5% 1.6% 0.11% 0.14%

EMEA
Amundi AMUN FP NR NR 14,415 13.1 12.2 4% 4% 11.3 11.9 0.8% 0.8% 0.05% 0.06%
Schroders AMC SDR LN NR NR 10,809 13.7 13.1 4% 7% 17.2 16.7 1.8% 1.7% 0.10% 0.10%
UBS UBS US NR NR 62,176 0.1 0.1 3% 9.0 10.4 1.9% 1.8% 0.16% 0.18%
Investec INVP LN NR NR 6,908 9.5 8.5 9% 7% 12.3 12.7 4.5% 4.0% 0.34% 0.34%
Ashmore Group ASHM LN NR NR 3,328 16.7 14.8 5% 19% 20.9 22.2 3.5% 2.9% 0.16% 0.15%
Jupiter Fund JUP LN NR NR 2,497 12.5 12.2 3% 6% 23.7 23.6 3.8% 3.4% 0.23% 0.22%
Average 11.0 10.2 5% 8% 15.7 16.3 2.7% 2.4% 0.17% 0.17%

Australia
Magelian MFG AU NR NR 3,080 16.9 14.7 10% 48.3 50.9
Platinum PTM AU NR NR 2,333 17.0 17.0 -36% 9% 53.7 51.9 11.7% 11.1% 0.93% 0.88%
Perpetual PPT AU NR NR 1,468 14.2 14.2 35% 3% 22.0 21.1 6.3% 6.1% 0.61% 0.58%
Average 16.0 15.3 3% 6% 41.3 41.3 9.0% 8.6% 0.77% 0.73%

Asia
China Cinda 1359 HK BUY 3.84 10,356 3.2 2.7 17.6 20.5 - - - -
China Huarong 2799 HK REDUCE 3.13 9,607 3.2 3.0 10% 16.9 15.7 - - - -
Average 3.2 2.8 10% 14.6 14.6 - - - -
Global average 14.2 13.0 9% 9% 17.4 17.7 3.3% 3.2% 0.31% 0.31%
Source: Bloomberg, Nomura estimates. Bloomberg consensus for not-rated stocks. Note: Share prices are as of 2 August 2018 close.

46
Nomura | Reliance Nippon Life Asset Management 3 August 2018

Board members and key management


According to the Companies Act 2013, at least one-third of total number of directors on
the Board of Directors of a listed company should be independent directors. Among
RNAMC's board, Sundeep Sikka and Vijayendra Nath Kaul are the nominees of
Reliance Capital Limited, and Kazuhide Toda and Takayuki Murai are the nominees of
Nippon Life Insurance Company. Independent directors form 50% of the board.
Sundeep Sikka is the Executive Director and CEO of Reliance Nippon Life Asset
Management Limited. He is a board member of Reliance AIF Management Company
Limited, Reliance Asset Management (Mauritius) Limited and Reliance Asset
Management (Singapore) Pte Limited. He is also the ex- chairman of the Association of
Mutual Funds in India (AMFI).

Fig. 101: Key board members and management details

Board of Directors
Name Designation Education Description
A board member of Reliance AIF Management Company Limited,
Reliance Asset Management (Mauritius) Limited and Reliance Asset
Executive Director and Management (Singapore) Pte Limited. Ex- chairman of the Association of
Sundeep Sikka CEO MBA (University of Pune) Mutual Funds in India (AMFI).
Non-Executive Bachelor of Laws (Kyoto Executive Officer, Head of Asia Pacific with the Nippon Life Insurance
Minoru Kimura Director University, Japan) Company..
Non-Executive Currently the General Manager overseeing Global business planning at
Akira Shibata Director Bachelor of Laws, MBA Nippon Life.

Professor Emeritus (Finance) at Welingkar Institute of Management,


Kanu Harkisondas Mumbai. He is a director on boards of Edelweiss Asset Management
Doshi Independent Director Bcom, Chartered Accountant Limited and Motilal Oswal Asset Management Company Limited.
MSc in Physics, Post- A former IAS, he was the Secretary at Ministry of Petroleum and Natural
graduate diploma in Gas. He's a member of Supreme Court Bar Association and a director on
Sushil Chandra Development Studies the boards of IL&FS Energy Development Company and IL&FS
Tripathi Independent Director Infrastructure Development Corporation.
Bcom, Post-graduate diploma Board member of JSW Infrastructure Limited, JSW Jaigarh Port Limited
Ameeta Chatterjee Independent Director in management and JSW Nandgaon Port Private Limited.

General Ved Ex-Chief of the Army. Board member of Hero Motocorp Limited and
Prakash Malik (retd.) Independent Director NDA, IMA HMC MM Auto Limited.

Non Executive BSc in Management (Warwick


Anmol Ambani Chairman Business School, UK) Ex summer intern with Reliance Mutual Fund.

Key management personnel


Name Designation Education Description
A board member of Reliance AIF Management Company Limited,
Reliance Asset Management (Mauritius) Limited and Reliance Asset
Executive Director and Management (Singapore) Pte Limited. Ex- chairman of the Association of
Sundeep Sikka CEO MBA (University of Pune) Mutual Funds in India (AMFI).
Former CFO & Head of Risk Management at PineBridge Investments
Prateek Jain CFO Bcom, Chartered Accountant Asset Management Company (India) Private Limited.
Bachelor’s in Law, Company
Deepak Mukhija Company Secretary Secretary Worked with Kotak Investment Advisors.
Chief Legal and
Muneesh Sud Compliance officer Qualified Company Secretary Worked with DLF Hilton Hotels.
Milind Nesarikar Chief Risk Officer Bcom, MA, PGDM Worked with Thermax Limited.
Amit Tripathi CIO-Fixed Income PGDM- Finance
Btech (IIT Chennai), MBA (IIM
Manish Gunwani CIO-Equities Bangalore) Has managed two flagship funds with ICICI Pru AMC.
Manager and Head -
Ajay Patel Banking Operations Bcom, Chartered Accountant
Source: Company filings

47
Nomura | Reliance Nippon Life Asset Management 3 August 2018

Key risks
• Litigations against the company: There are few outstanding proceedings against
RNAMC and its promoters which may impact the financials of the company. RNAMC
has tax litigation outstanding of INR925bn and other civil litigation of INR44mn currently
and Reliance Capital (its promoter) also has a tax litigation of INR455mn.
• Revenue impacted by market volatility: Reliance AMC earns management fee on
the value of AUMs, where the equity is a substantial portion of total AUMs. Any sharp
decline in equity markets can lead to a decline in AUMs and also impact new flows into
equity which can lead to a material impact on revenue. Also, its debt portion of AUMs is
linked to the interest rate cycle and also subject to default risk.
• Underperformance of schemes: Inflows into schemes are dependent of the
performance of the schemes and hence at a risk if a scheme underperforms its
benchmark. This may lead to relatively lower growth in AUM and management fees vs.
peers as well as lead to higher redemptions and lower new flows. Continued
underperformance of various schemes may also impact the brand of the company.
• Distribution: Since Reliance AMC is not backed by a parent bank, it is relatively more
dependent on its third-party distributors who are not exclusive distributors for Reliance
AMC and may also be offering similar products of competitors. These third-party
distributors may choose to promote competitors’ products depending on their
compensation arrangements.
• Reduction in financial savings: The flow into mutual funds is a result of the
improvement in financial savings and any shift to physical savings may materially
impact new fund flows into mutual funds.
• Dependence on investment professionals: Reliance AMC is dependent on its key
investment professionals for driving the investment strategy and returns. The key risk is
of losing these key personnel which may impact the fund performance and flows.
• Increased competition: Increased flows seen in the past few years may lead to new
participants entering the market, leading to higher competition. Also, this can impact
profitability due to a reduction in the management fees and increase in commissions
paid out. Also, international funds can become more competitive if the flows and
profitability of the industry remain robust.
• Regulatory risks: Regulations so far have been favourable for the industry and have
been investor-friendly, leading to increasing preference towards investment in mutual
funds. But, with increasing profitability, the regulator has been tightening the
management fees charges and may also restrict the expenses (especially
commissions), which may have an adverse impact on the profitability.

48
Nomura | Reliance Nippon Life Asset Management 3 August 2018

Financials
Fig. 102: RNAM – P&L: We expect 22% core PBT CAGR over FY18-21F

CAGR
RNAMC P&L (INRm n) FY13 FY14 FY15 FY16 FY17 FY18 FY19F FY20F FY21F FY13-18 FY16-18 FY18-21F
Revenue 6,087 6,759 8,472 12,001 13,075 15,860 16,658 19,543 23,369 21.1% 15.0% 13.8%
Management fees 5,890 6,555 8,202 11,581 12,676 15,343 17,245 20,248 24,215 21.1% 15.1% 16.4%
Advisory fees 198 201 267 418 398 517 (588) (705) (846) 21.2% 11.2% -217.8%
Share of profit in LLP - 3 3 2 1 - - - -

Other income 1,259 1,029 1,079 1,137 1,284 2,290 2,255 1,649 1,573 12.7% 41.9% -11.8%
Total revenue 7,346 7,788 9,551 13,138 14,359 18,150 18,913 21,192 24,943 19.8% 17.5% 11.2%
Opex 4,414 4,490 4,913 7,914 8,546 10,890 12,533 14,154 16,496 19.8% 17.3% 14.8%
Em ployee expense 1,601 1,512 1,613 1,923 1,957 2,300 2,576 2,885 3,231 7.5% 9.4% 12.0%
Adm in expense 1,305 1,668 1,810 2,159 2,559 3,130 3,693 4,358 5,143 19.1% 20.4% 18.0%
Legal/professional charges 243 333 300 324 424 518.12 611.38 721.43 851.28 16.3% 26.5% 18.0%
Rent 196 176 102 159 207 252.93 298.46 352.18 415.58 5.2% 26.2% 18.0%
Outsourced services 291 558 649 802 875 1,070.43 1,263.11 1,490.47 1,758.75 29.7% 15.5% 18.0%
Marketing expense 1,390 1,105 1,501 3,752 3,892 5,120 5,890 6,500 7,669 29.8% 16.8% 14.4%
Brokerage/commissions 1,083 754 927 3,120 2,594 3,961 4,615 5,097 6,126 29.6% 12.7% 15.6%
Marketing expenses 219 254 391 382 696 557 612 674 741 20.5% 20.8% 10.0%
Advertisement 88 98 183 250 602 602 663 729 802 46.8% 55.2% 10.0%
Depreciation 85 143 69 43 179 340 374 411 453 31.9% 180.9% 10.0%
Investment depreciation 33 61 (80) 38 (42) - - - -
EBIT 2,933 3,298 4,639 5,224 5,813 7,260 6,380 7,037 8,447 19.9% 17.9% 5.2%
Core EBIT 1,674 2,269 3,560 4,087 4,529 4,970 4,125 5,388 6,874 24.3% 10.3% 11.4%
Exceptional items - - 29 - -
PBT 2,933 3,298 4,609 5,224 5,813 7,260 6,380 7,037 8,447 19.9% 17.9% 5.2%
Tax 628 591 1,065 1,260 1,786 2,040 1,786 1,970 2,365 26.6% 27.3% 5.1%
PAT 2,304 2,707 3,545 3,964 4,028 5,220 4,593 5,067 6,082 17.8% 14.7% 5.2%
Minority interest 0.4 0.5 0.3 0.1 -
PAT after m inority interest 2,304 2,706 3,545 3,964 4,028 5,220 4,593 5,067 6,082 17.8% 14.7% 5.2%

PBT ex other incom e 1,674 2,269 3,531 4,087 4,529 4,970 4,125 5,388 6,874 24.3% 10.3% 11.4%

Dividend 1,613 1,613 3,410 1,440 2,477 3,147.8 2,945 3,248 3,899 14.3% 47.8% 7.4%
Dividend - preference shares 0.02 0.02 - 3.11 18.00
Dividend tax 262 274 630 294 508 535.1 501 552 663 15.4% 35.0% 7.4%
Total payout 1,874 1,887 4,040 1,737 3,003 3,683 3,445 3,800 4,561 14.5% 45.6% 7.4%

Dividend Payout 81.4% 69.7% 114.0% 43.7% 74.1% 70.6% 75.0% 75.0% 75.0%
Source: Company data, Nomura estimates

49
Nomura | Reliance Nippon Life Asset Management 3 August 2018

Fig. 103: RNAM – Dupont table: We expect core PBT to AUM to improve to 22bps by FY21F after dipping to 19bps in FY19F

ROA tree on core AUM FY13 FY14 FY15 FY16 FY17 FY18 FY19F FY20F FY21F
Revenue 0.77% 0.76% 0.87% 0.75% 0.74% 0.72% 0.70% 0.71%
Management fees 0.75% 0.73% 0.84% 0.72% 0.71% 0.69% 0.67% 0.67%
Advisory fees 0.02% 0.02% 0.03% 0.02% 0.02% 0.03% 0.03% 0.04%
Share of profit in limited liability partnership 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Other income 0.12% 0.10% 0.08% 0.07% 0.11% 0.09% 0.06% 0.05%
Total revenue 0.89% 0.85% 0.95% 0.82% 0.84% 0.81% 0.76% 0.76%
Opex 0.51% 0.44% 0.57% 0.49% 0.51% 0.50% 0.47% 0.46%
Em ployee expense 0.17% 0.14% 0.14% 0.11% 0.11% 0.10% 0.10% 0.09%
Adm in expense 0.19% 0.16% 0.16% 0.15% 0.15% 0.15% 0.14% 0.14%
Legal and professional charges 0.04% 0.03% 0.02% 0.02% 0.02% 0.02% 0.02% 0.02%
Rent 0.02% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01%
Outsourced services 0.06% 0.06% 0.06% 0.05% 0.05% 0.05% 0.05% 0.05%
Marketing expense 0.13% 0.13% 0.27% 0.22% 0.24% 0.24% 0.22% 0.21%
Brokerage, incentives and others 0.09% 0.08% 0.23% 0.15% 0.18% 0.18% 0.17% 0.17%
Marketing expenses 0.03% 0.03% 0.03% 0.04% 0.03% 0.02% 0.02% 0.02%
Advertisement 0.01% 0.02% 0.02% 0.03% 0.03% 0.03% 0.02% 0.02%
Others 0.02% 0.00% 0.01% 0.01% 0.02% 0.01% 0.01% 0.01%
EBIT 0.37% 0.41% 0.38% 0.33% 0.34% 0.31% 0.29% 0.30%
Core EBIT 0.26% 0.32% 0.30% 0.26% 0.23% 0.22% 0.23% 0.25%
Exceptional items 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
PBT 0.37% 0.41% 0.38% 0.33% 0.34% 0.31% 0.29% 0.30%
Tax 0.07% 0.10% 0.09% 0.10% 0.09% 0.09% 0.08% 0.09%
PAT 0.31% 0.32% 0.29% 0.23% 0.24% 0.22% 0.21% 0.22%

Core PBT-other incom e/advisory incom e to 0.24%


AUM 0.29% 0.27% 0.24% 0.21% 0.19% 0.20% 0.22%
Source: Company data, Nomura estimates

Fig. 104: RNAM – Balance sheet

RNAMC Balance sheet (INRm n) FY13 FY14 FY15 FY16 FY17 FY18 FY19F FY20F FY21F
Share capital 5,748 5,748 5,748 5,875 5,875 6,120 6,120 6,120 6,120
Reserves and surplus 8,830 9,794 9,613 12,044 13,051 16,750 16,135 17,724 19,691
Netw orth 14,577 15,541 15,360 17,919 18,926 22,870 22,255 23,844 25,811

Preference shares 2 - 300 300 300 - - - -

Minority interest 38 38 89 89 - - - - -

Other liabilities 932 1,452 1,440 1,190 1,372 2,540 2,794 3,073 3,381
Provisions 64 57 128 110 216 300 330 363 399
Total liabilities 15,613 17,089 17,316 19,608 20,813 25,710 25,379 27,280 29,591

Fixed assets 200 142 71 119 2,511 2,320 2,784 2,923 3,069
Investm ents 6,025 7,412 8,349 9,108 9,465 8,710 14,023 17,236 20,767
Cash 552 652 602 795 397 6,060 1,000 1,159 1,356
Inter corporate deposits 7,000 6,250 2,000 3,150 4,265 4,015 4,015 2,008 -
Loans and advances 1,565 2,234 5,537 5,232 3,063 3,865 2,706 2,976 3,274
Prepaid expenses 470 1,030 4,238 2,881 2,062 2,578 3,223 4,028 5,035
Long term prepaid expenses 252 523 2,026 1,053 528 660 825 1,031 1,289
Short term prepaid expenses 219 508 2,212 1,828 1,535 1,918 2,398 2,997 3,747
Other assets 271 398 757 1,203 1,111 740 851 979 1,125
Total assets 15,613 17,089 17,316 19,608 20,813 25,710 25,379 27,280 29,591
Source: Company data, Nomura estimates

50
Nomura | India financials 3 August 2018

51
Nomura | India financials 3 August 2018

Appendix A-1
Analyst Certification
We, Amit Nanavati, Riddhi Jain and Adarsh Parasrampuria, hereby certify (1) that the views expressed in this Research report
accurately reflect our personal views about any or all of the subject securities or issuers referred to in this Research report, (2)
no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in
this Research report and (3) no part of our compensation is tied to any specific investment banking transactions performed by
Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.

Issuer Specific Regulatory Disclosures


The terms "Nomura" and "Nomura Group" used herein refers to Nomura Holdings, Inc. and its affiliates and subsidiaries, including Nomura
Securities International, Inc. ('NSI') and Instinet, LLC('ILLC'), U. S. registered broker dealers and members of SIPC.

Materially mentioned issuers

Issuer Ticker Price Price date Stock rating Sector rating Disclosures
ICICI Prudential Life
Insurance IPRU IN INR 413 03-Aug-2018 Buy N/A
Reliance Nippon Life Asset
Management RNAM IN INR 268 03-Aug-2018 Buy N/A A4,A5,A6
SBI Life Insurance SBILIFE IN INR 690 03-Aug-2018 Buy N/A

A4 The Nomura Group has had an investment banking services client relationship with the subject company during the past 12 months.
A5 The Nomura Group has received compensation for investment banking services from the subject company in the past 12 months.
A6 The Nomura Group expects to receive or intends to seek compensation for investment banking services from the subject company in the
next three months.

Reliance Nippon Life Asset Management (RNAM IN) INR 268 (03-Aug-2018) Buy (Sector rating: N/A)
Chart Not Available

Valuation Methodology Our TP of INR315/share implies 32x Sep-20F core earnings adjusted for 1x value assigned to its
investment book. Nifty is the benchmark for the stock.

Risks that may impede the achievement of the target price Significant slowdown in net inflows and compression in yields is
the key risk.

52
Nomura | India financials 3 August 2018

ICICI Prudential Life Insurance (IPRU IN) INR 413 (03-Aug-2018) Buy (Sector rating: N/A)
Rating and target price chart (three year history)
Date Rating Target price Closing price
25-Jul-18 550.00 403.60
25-Apr-18 570.00 437.149
20-Jan-18 540.00 428.523
05-Jan-18 Buy 393.07
05-Jan-18 490.00 393.07

For explanation of ratings refer to the stock rating keys located after chart(s)

Valuation Methodology Our TP of INR550 implies 3x Sep-20F EV multiple. The benchmark index for this stock is Nifty 50.

Risks that may impede the achievement of the target price Capital market volatility and higher tax rates are key downside
risks.

SBI Life Insurance (SBILIFE IN) INR 690 (03-Aug-2018) Buy (Sector rating: N/A)
Rating and target price chart (three year history)
Date Rating Target price Closing price
27-Apr-18 880.00 758.85
05-Jan-18 Buy 701.95
05-Jan-18 840.00 701.95

For explanation of ratings refer to the stock rating keys located after chart(s)

Valuation Methodology Our TP of INR880/share implies 3.2x FY20F EV. The benchmark index for this stock is NIFTY 50.

Risks that may impede the achievement of the target price Higher tax rate and lower persistency are the key risks.

Rating and target price changes


Issuer Ticker Old stock rating New stock rating Old target price New target price
Reliance Nippon Life Asset
Management RNAM IN Not rated Buy N/A INR 315

Important Disclosures

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Nomura | India financials 3 August 2018

Online availability of research and conflict-of-interest disclosures


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Distribution of ratings (Nomura Group)


The distribution of all ratings published by Nomura Group Global Equity Research is as follows:
53% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 42% of companies with this
rating are investment banking clients of the Nomura Group*. 0% of companies (which are admitted to trading on a regulated market in the EEA)
with this rating were supplied material services** by the Nomura Group.
42% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 53% of companies with
this rating are investment banking clients of the Nomura Group*. 0% of companies (which are admitted to trading on a regulated market in the
EEA) with this rating were supplied material services by the Nomura Group
5% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 13% of companies with
this rating are investment banking clients of the Nomura Group*. 0% of companies (which are admitted to trading on a regulated market in the
EEA) with this rating were supplied material services by the Nomura Group.
As at 30 June 2018.
*The Nomura Group as defined in the Disclaimer section at the end of this report.
** As defined by the EU Market Abuse Regulation

Distribution of ratings (Instinet, LLC)


The distribution of all ratings published by Instinet, LLC Equity Research is as follows:
59% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; Instinet LLC has provided
investment banking services to 0% of companies with this rating within the previous 12 months.
37% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; Instinet LLC has provided
investment banking services to 0% of companies with this rating within the previous 12 months.
4% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; Instinet LLC has provided
investment banking services to 0% of companies with this rating within the previous 12 months.

Definition of Nomura Group's equity research rating system and sectors


The rating system is a relative system, indicating expected performance against a specific benchmark identified for each individual stock,
subject to limited management discretion. An analyst’s target price is an assessment of the current intrinsic fair value of the stock based on an
appropriate valuation methodology determined by the analyst. Valuation methodologies include, but are not limited to, discounted cash flow
analysis, expected return on equity and multiple analysis. Analysts may also indicate expected absolute upside/downside relative to the stated
target price, defined as (target price - current price)/current price.

STOCKS
A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral',
indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates that
the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating, target
price and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies. Securities and/or companies
that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage. Investors should not expect continuing or
additional information from Nomura relating to such securities and/or companies. Benchmarks are as follows: United States/Europe/Asia ex-
Japan: please see valuation methodologies for explanations of relevant benchmarks for stocks, which can be accessed at:
http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx; Global Emerging Markets (ex-Asia): MSCI
Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology; Japan: Russell/Nomura Large Cap.

SECTORS
A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance,
indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that
the analyst expects the sector to underperform the Benchmark during the next 12 months. Sectors that are labelled as 'Not rated' or shown as
'N/A' are not assigned ratings. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging
Markets (ex-Asia): MSCI Emerging Markets ex-Asia. Japan/Asia ex-Japan: Sector ratings are not assigned.

Target Price
A Target Price, if discussed, indicates the analyst’s forecast for the share price with a 12-month time horizon, reflecting in part the analyst's
estimates for the company's earnings. The achievement of any target price may be impeded by general market and macroeconomic trends, and
by other risks related to the company or the market, and may not occur if the company's earnings differ from estimates.

Disclaimers

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Nomura | India financials 3 August 2018

This publication contains material that has been prepared by the Nomura Group entity identified on page 1 and, if applicable, with the
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as a “benchmark” as defined by the European Benchmark Regulation.

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Nomura | India financials 3 August 2018

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