ADAG group’s plan to exit the Reliance Nippon AMC gathers steam

Anil Ambani

As per media sources, Reliance Capital has initiated talks with global investors to sell its stake in Reliance Nippon Life Asset Management (RNAM). Earlier, it had invited Nippon Life Insurance to buy up to 42.88 percent of its stake in the asset management company (AMC). Nippon life is co-promoter in the AMC with an equal stake of 42.88 percent.

While further progress needs to be closely monitored, the development will be positive for minority shareholders of the company. Read: What does Reliance ADAG’s intent to exit the mutual fund business mean for Reliance Nippon Life AM's shareholders?

RNAM, the first AMC to list, debuted on the bourses in November 2017 at around Rs 295, a premium of 17 percent over its issue price of Rs 252. Despite reporting healthy trends in asset flows, the stock of RNAM has remained under pressure. The financial problems of the Reliance ADAG Group, of which the company is a part of, has hurt the stock. Even though Nippon Life is an equal partner with 42.88 percent stake in the AMC, Reliance ADAG’s stake has been a key overhang for the stock. Hence, we see Reliance ADAG group’s decision to reduce its stake in the business will help assuage investor concerns.

The stock has rallied more than 30 percent following the announcement. Despite the rally, RNAM’s valuations are reasonable considering its strong retail brand, improving asset mix and well-diversified sourcing platform.

At the current market capitalisation of Rs 12,500 crore, RNAM is trading at 5.3 percent of average MF AUM of Rs 2,36,300 crore as at December-end. In terms of price-to-earnings metric, RNAM’s stock is currently trading at 20 times FY20 estimated earnings.

On a relative basis, valuation are very compelling. RNAM’s stock is trading at a discount of more than 40 percent to HDFC AMC’s valuation. The most common push back to comparison with HDFC AMC’s valuation is that HDFC AMC is in a league of its own and commands a premium valuation for its brand and superior return ratio with a return on equity (RoE) at 40 percent.

While rightful discount to HDFC AMC is justified, RNAM is trading at a significant discount, which could narrow down. Given the reasonable valuations, the stock could further re-rate with exit of ADAG group.

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