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Last Updated : May 02, 2019 03:25 PM IST | Source: Moneycontrol.com

Reliance Nippon Life: Soft FY19 earnings, but ADAG stake sale may move the needle

Neha Dave @nehadave01
Anil Ambani
Anil Ambani
 
 
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Highlights:
- Total AUM growth in FY19 moderates, but finer details are encouraging
- Business and customer mix changes favourably with higher equity and retail assets, respectively
- Limited impact of TER cut on profitability, valuation reasonable
- RNAM’s Balance Sheet exposure to group companies is around Rs 380 crore
- Stake sale by Reliance ADAG looks imminent. It will help allay investors’ concerns and can trigger re-rating

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Reliance Nippon Life Asset Management’s (RNAM) 2018-19 earnings numbers look off-colour, but the foremost driver of the stock will be any progress in the stake sale as announced by the ADAG group.

Also, RNAM’s exposure to group companies remains a key variable, especially after the recent rating downgrade of ADAG’s group lending businesses -- Reliance Home Finance and Reliance Commercial.

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Nonetheless, earnings of the fifth largest asset manager merit a quick glance. RNAM’s mutual fund assets under management (AUM) declined in FY19, leading to a modest net profit growth of seven percent year-on-year (YoY).

Without digging deeper into RNAM’s earnings, we touch upon two most relevant parameters of its performance – the trend in AUM growth and the likely impact of the latest SEBI directive on its profitability in order to get the full picture.

Trend in AUM growth

RNAM’s total AUM stood at Rs 4.22 lakh crore as of March-end, up six percent YoY, which was mainly on the back of pension assets managed. Since the management fees on pension assets are minuscule, investors should focus on the MF AUM, which constitutes nearly 54 percent of the total pie.

The asset management company’s (AMC) MF AUM came off by five percent YoY to Rs 2.33 lakh crore, in contrast to the industry growth of 11 percent.

RNAM AUM

The highlight of the quarter gone by was the business mix turning favourable for equity assets, which grew three percent YoY to Rs 91,100 crore. This, coupled with a huge fall in debt assets, improved the share of equity assets to 39 percent of AUM against 36 percent last year.

This is positive as fee on equity assets is much higher than other asset classes, which drives a profitable growth.

RNAM asset mix

The other readings from RNAM’s asset profile are listed below.

- RNAM is the industry leader in retail assets. The latter forms 39 percent of its average AUM, much better than the industry’s retail AUM of 26 percent. This is comforting as retail assets tend to be equity oriented and have better persistence than institutional flows.

- We are enthused by equity inflows through systematic investment plans (SIPs) that continues with the monthly run-rate of Rs 827 crore. SIP flows provide better visibility of AUM growth as they are generally for long term and tend to be relatively sticky.

- Despite not having a captive bank distribution channel, RNAM is ahead of the industry in sourcing assets from beyond top 30 cities, referred to as B30 locations. These locations contributed 20 percent of RNAM’s average AUM, compared to the industry’s B30 AUM at 15 percent. The strategy will result in expansion of the market and drive assets growth for the AMC in future as MFs are a largely underrepresented investment class at these locations.

Overall, the trend in RNAM’s asset flows is very encouraging.

Impact of TER cut and banning of upfront commissions

SEBI had earlier announced an overhaul of the fee structure of AMCs vis-a-vis investors. Read: SEBI cap on MF fee income will have a widespread impact, and not just on AMCs

The proposed reduction in total expense ratio (TER) by the regulator came into effect from April 1. While the impact of this will be around 12-13 bps on equity assets, the management expects to pass on majority (80-90 percent) of the TER reduction by cutting distributor commissions.

Hence, the net impact on profitability (PAT/average AUM) would be only 1- 2 bps. The limited adverse impact should comfort investors to a large extent, who were spooked by SEBI’s initial announcement leading to a free fall in the stock.

RNAM’s intragroup exposures

RNAM has extended inter-corporate deposits (ICDs) to companies belonging to the ADAG group. As of March last year, RNAM had ICDs of Rs 425 crore, which have now reduced to around Rs 380 crore.

At the scheme level, debt funds have exposure of around Rs 1,600-1,700 crore to group companies. Investors need to closely monitor the unwinding of these exposures.

RNAM expo

Exit of Reliance ADAG can help soothe investor worries

Despite reporting healthy trends in asset flows, the stock of RNAM has remained under pressure. The financial problems of the Reliance ADAG Group — which the company is part of — have given the scrip a hard time. Reliance Capital may fully exit its stake (42.88 percent) in the AMC, according to a stock exchange release.

Considering the mounting financials problems of ADAG group, the stake sale in RNAM looks imminent and we can expect an announcement on the same in coming months. The management indicated six weeks during its analyst call.

Even though Nippon Life is an equal partner with 42.88 percent stake in the AMC, Reliance Capital’s stake has been a key overhang for the stock. Hence, Reliance ADAG group’s decision to reduce its stake in the business will help assuage investor concerns.

But the key question for investors is: Will the stake sale by Reliance Capital trigger an open offer? For more insights read: What does Reliance ADAG’s intention to exit the AMC business mean to Reliance Nippon’s shareholders?

What should investors do?

At the current market price of Rs 198 per share (market capitalisation: Rs 12,100 crore), RNAM is trading at 5.2 percent its average MF AUM of Rs 2,33,600 crore as of March-end. In terms of price-to-earnings metric, the stock is trading at 23 times FY20 estimated earnings.

The stock valuations are reasonable, considering return on equity (RoE) of around 19-20 percent, its strong retail brand, improving asset mix and well-diversified sourcing platform.

Hence, the stock could re-rate, if the deal goes through. Given the calculated risks, long-term investors who can stomach some volatility can look to buy the stock.

For more research articles, visit our Moneycontrol Research page

Disclaimer: Moneycontrol Research analysts do not hold positions in the companies discussed here
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First Published on May 2, 2019 03:25 pm
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