This week’s tactical pick is Reliance Nippon Life Asset Management (RNAM). While its FY19 earnings look off-colour, any progress in the stake sale as announced by the ADAG group will be the foremost driver of the stock.
With mutual fund assets of Rs 2.33 lakh crore as of March-end, RNAM is the fifth largest asset management company (AMC) in the country. While its overall AUM growth moderated in FY19, the finer details of its business are very encouraging. For instance, 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 positive as retail flows typically consists of high earning equity assets and are relatively sticky than institutional flows. Read: Reliance Nippon: Soft FY19 numbers, but ADAG stake sale may move the needle
Despite reporting such 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.
According to the stock exchange release earlier this year, the parent - Reliance Capital - was looking to sell its stake in the AMC and invited the co-promoter Nippon Life Insurance to buy up to 42.88 percent of its stake in the AMC.
Considering the mounting financial problems of ADAG group, stake sale in RNAM looks imminent especially after the recent rating downgrade of ADAG’s group lending businesses: Reliance Home Finance and Reliance Commercial. Investors can expect an announcement of the same in coming months. The management has indicated six weeks during its analyst call.
Reliance ADAG group’s decision to reduce its stake in the business will help assuage investor concerns and can trigger open offer benefitting minority shareholders.
That said, a lot hinges on deal–timing. RNAM’s exposure to group companies remains a key risk factor.
At the current market price of Rs 193 (market capitalisation: Rs 11,800 crore), RNAM is trading at 5.2 percent of the average MF AUM of Rs 2,33,600 crore as of March-end. The stock is trading at 23 times FY20 estimated price-to- earnings.
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
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
