Buy Reliance Nippon Life Asset Management; target of Rs 275: JM Financial

JM Financial's research report on Reliance Nippon Life Asset Management

In its board meeting held today, SEBI has notified reductions in the maximum TER that can be charged to mutual fund schemes. The regulator has also notified that that all commissions and expenses are to be expensed from the MF schemes alone and not through any other route (AMC/Trustee P&Ls – a common industry practice). Moreover, AMCs will no longer be allowed to pay out upfront commissions (except for certain relaxations in the case of SIPs). While the move is a positive step towards increasing reach and reducing costs for retail MF investors while also improving transparency, it has a negative impact on profitability for AMCs. We believe there will be a period of growth/profitability reset as the industry reconfigures to the new cost structure. We expect the brunt of the impact to be borne in equity MF schemes (which are heavily dependent on distributors, with direct plan accounting for 17% for the industry). Moreover, as shown in Exhibit 1 below, the cut in TER is larger for larger MF schemes.

Outlook

We have cut our PAT estimates for RNAM by 7% / 15% in FY19/FY20E, as a result of the fee yield compression from TER cut.