Reliance Nippon Life Asset Management IPO Review : Group past record vs Strong Tailwinds

Reliance Nippon Life AMC IPO
Reliance Nippon Life Asset Management Limited IPO comprises 6.12 crore equity shares comprises a fresh issue of up to 2.448 crore shares by the company and an offer for sale up to 3.672 crore shares by the selling shareholders. Post the offer, Anil Ambani’s Reliance Capital and Nippon Life will remain equal shareholders with a total stake of about 86 percent. Reliance Nippon Life AMC is ranked third in terms of quarterly average AUM for mutual funds and enjoys 11.4% market share. The Company currently manages reliance Mutual fund’s 55 open-ended mutual funds including 16 ETFs and 174 closed ended schemes.

Reliance Nippon Life IPO Details
Issue Period Wed, Oct 25, 2017-  Friday, Oct 27, 2017
Issue Size ( in Rs.) 11,176 Cr
Issue size (in Shares) Fresh Issue of 24,480,000 Equity Shares and Offer for sale of 36,720,000 Equity Shares.
Price Band Rs.247 – 252
Bid Lot 59 Equity Shares and multiple thereof
Issue Structure :  
QIB 50% of the offer (up to 30,600,000 Equity Shares )  -Rs.771 Cr
NIB 15% of the offer (up to 9,180,000 Equity Shares) (Rs.227~ Cr – Rs.231^ Cr)
Retail 35% of the offer (up to 21,420,000 Equity Shares) Rs.540Cr)
Applications for 1x Retail subscription 3,63,051
GCBRLMs Axis Capital, JM Financial, CLSA India, Nomura Financial
BRLMs Edelweiss Financial, IIFL Holdings, SBI Capital, Yes Securities
Registrar Karvy Computershare Pvt. Ltd.
About Reliance Nippon Life Asset Management Ltd:
  • Reliance Nippon Life Asset Management Ltd. is jointly promoted by Reliance Capital Ltd, a part of Anil Ambani-led Reliance Group (ADAG) which currently holds 46.57%, and Nippon Life Insurance Co., a leading private life insurer in Japan, which holds 49%. Both these holdings would be reduced to 42.88 percent post issue
  • Reliance Nippon Life is one of the largest asset management companies in India and is involved in managing mutual funds (including ETFs); managed accounts, including portfolio management services, alternative investment funds (AIFs) and pension funds; and offshore funds and advisory mandates. As on 31st August the Total managed Funds stood at Rs. 384 thousand crores with breakup as follows:
  • Reliance Mutual Fund AUM
  • The company is ranked the 3rd Largest Asset Management Company, in terms of Mutual Fund quarterly average AUM (“QAAUM”) with a market share of 11.4%, as of June 30, 2017, according to ICRA. For the financial year 2016, they were ranked the 2nd most profitable Asset Management Company in India, according to ICRA.
  • Reliance Nippon started their mutual fund operations in 1995 as the Asset Manager for Reliance Mutual Fund, managing QAAUM of Rs.222,964 crore and 7.01 million investor folios, as of June 30, 2017.
  • As of June 30, 2017, the company manages 55 open-ended mutual fund schemes including 16 ETFs and 174 closed ended schemes. Company has a network of 171 branches and over 58,000 distributors including banks, financial institutions, national distributors and independent financial advisors
  • As of June 30, 2017, the company has 1.86 million SIP accounts with monthly inflows of Rs. 5,100 crore and they are 2nd largest ETF player having market share of 25.4%.
  • RNAM acts as an adviser to India-focused equity funds and fixed-income funds in Japan and South Korea. It also manages offshore funds through its subsidiaries in Singapore and Mauritius, catering to investors across Asia, the US and Europe.
AUM Breakup & Financials:
Reliance Mutual Fund : MAAUM(Monthly Average Asset Under Management)
Category Wise Breakup
Particulars MAAUM on 01-08-2017 % of Total
Equity 7,11,036 30.55%
Debt (Liquid) 3,87,780 16.66%
Debt (Others) 10,92,253 46.94%
ETF 1,10,312 4.74%
Gold 25,724 1.11%
Total MAAUM 23,27,105 100.00%
Reliance Mutual Fund : MAAUM(Monthly Average Asset Under Management)
Customer Wise Breakup
MAAUM August 31, 2017
Retail (` in million) 6,05,838
Corporate (` in million) 11,86,121
HNI (` in million) 4,01,169
Other Institution AUM (including banks/FI, FII/FPI) (` in million) 1,33,977
Retail AUM (%) 26
Corporate AUM (Excl Banks/FI, FII/FPI) (%) 51
HNI AUM (%) 17.2
Other Institution AUM (Banks/FI, FII/FPI) (%) 5.8
Retail Folio Count 69,25,691
Average ticket Size (`) 1,02,946
  Financials in Brief (Rs. In Cr)
Particulars 2017(3) 2017 2016 2015
Revenue from Operations 364.3 1,307.40 1,200.00 847.2
Revenue Growth (%) 8.95% 41.64% 25.36%
Profit Before Tax 130.4 581.3 522.3 463.8
Profit after Tax 87.7 402.7 396.4 354.4
NPM % 24.07% 30.80% 33.03% 41.83%
Face Value 10 10 10 10
Equity Share Capital 11.5 11.5 11.5 11.2
Preference Share Capital 30 30 30.3 30
Share Capital 41.5 41.5 41.5 41.2
Reserves 1,638.70 1,851.00 1,750.30 1,494.70
Net worth 1,680.20 1,892.50 1,791.80 1,536.00
Net Asset Value (Rs.) 28.1 31.71 29.98 25.63
RoNW (%)   21% 22% 23%
IPO or Market Price 252
Equity Post IPO 612 Crore
EPS on Post IPO Equity 6.58  
PE(Post Issue Equity) 38.30
P/BV (Fy17) 7.95  
P/BV (Post issue) 6.8
Market Cap 15422 Crore  
Market Cap/Sales 11.80
Revenues CAGR 3 year 24.60%
PBT CAGR 3 Years 20.80%
PAT CAGR 3 Years 14.16%
Objectives of the Issue:

The net proceeds from its fresh issue would be used for setting up new branches and relocating certain existing branches; upgrading the IT system; advertising, marketing and brand building activities; and lending to subsidiary (Reliance AIF) for investment as continuing interest in the new AIF schemes managed by Reliance AIF.
The money would also be used for investing towards continuing interest in new mutual fund schemes managed by the company; funding inorganic growth and other strategic initiatives; and meeting expenses towards general corporate purposes.

Rationale for Investment
  • The Indian mutual fund industry has witnessed a strong inflow of funds in the last couple of years. Mutual fund industry’s total assets under management stood at Rs 20.4 trillion at the end of September 2017, a 29% growth since September 2016,
  • Reliance Mutual Fund has a well-diversified product suite across mutual funds and ETFs, managed accounts and offshore funds and advisory mandates. As of June 30, 2017, it managed 55 open-ended mutual fund schemes including 16 ETFs, which covered various indices across different asset classes.
  • As part of it managed accounts business, Reliance Nippon Life AMC provides portfolio management services and manages AIFs(Alternate Investment Funds) and pension funds. It also manages offshore funds, which enable it to cater to investors across Asia, Middle East, UK, US, and Europe. 
  • In 2016-17, the company reported a revenue of Rs1,400.4 crore, up 10% from the previous fiscal. The company reported a profit of Rs405.5 crore in 2016-17, up 4% from a year ago.
  • Focus on AIF(Alternate Investment Funds) Business:Reliance AIF launched its first AIF in 2014 and is currently managing six schemes of which, four are closed for subscription. As of June 30, 2017, Reliance AIF was raising funds in three alternative investment schemes across asset classes in categories including long only equity, sector agnostic credit and high yield real estate structured debt. 
  • In addition to organic growth, Reliance Nippon Life AMC has  demonstrated the ability to successfully acquire and integrate new businesses. Going forward, while continuing to maintain organic growth momentum, it intends to explore inorganic expansion as well by leveraging on the experience it has gained through the previous acquisition. In November 2016, in order to strengthen its ETF offerings, it acquired the asset management rights to 12 schemes launched by the Goldman Sachs Mutual Fund, and then managed by Goldman Sachs Asset Management (India) Private Limited.
  • Future revenue and profit are largely dependent on the growth, value and composition of AUM which in turn is also related to performance of equity and debt markets.
  • Under performance of investment products managed by Reliance Mutual Fund could lead to a loss of investors and reduction in AUM.
  • Changes in Regulations may adversely affect the performance of the AMC. 
  • Incase of ay violation, SEBI may impose penalty on the AMC
  • Reliance Nippon Life Asset Management Ltd may be required to merge, wind up or change the fundamental attributes of some of the mutual fund schemes managed by it, to comply with the recent SEBI circular dated October 6, 2017 which aims to put a cap on number of mutual fund schemes.
  • Reliance Nippon Life Asset Management Ltd  intends to utilize a portion of the Net Proceeds amounting to Rs, 1,250 million to invest in its  subsidiary, Reliance AIF(Alternate Investment Fund)  by way of debt. The SEBI (AIF) Regulations mandate the manager or the sponsor to have minimum continuing interest in the AIF ranging from 2.5%-5% depending on category of AIF and actual investment could range of the  order of 10%.

  • The penetration levels of mutual funds in the country remain very low, with a total AUM to GDP ratio of about 12%, against a global average of 55%
  • in August, IIFL Special Opportunities Fund bought a 2.59% stake in Reliance Nippon Life AMC IPO for $60 million (about Rs 390 crore) through a secondary market purchase. The deal valued Reliance Nippon Life at around Rs 15,000 crore.
  • EPS for FY2017 works out to Rs 6.58 on post-IPO equity basis. The scrip is offered at P/E multiple of 38.3 times FY2017 EPS at the upper price band.
  • Reliance Nippon Life AMC  valuation stands roughly at 4.25% of its  AUM while some of  the listed AMCs in US command average multiple is 2.3 % . Thus RNLAM is seeking a premium factoring into the higher expected growth rate in the Indian market. 
  • While profits of Reliance Nippon Life AMC  have increased, the rate of  growth in profits as been slower than that of revenues with Net margin going down after hitting a peak in the year 2015. This may be partly on account of SEBI limits on charges which tend to go down as AUM increases.
  • For Reliance Nippon Life AMC, the ratio  PAT/AAAUM (Average annual AUM) which stands at .26% for the year 2016 compares favorably with  peers like HDFC Mutual Fund(.28%), ICICI Mutual Fund(0.19%) , Birla SL Mutual Fund (  0.16% ).
  • It is difficult to erase the memories of Reliance Power IPO in 2008 which took investors for a ride and investors ended up in huge losses. Reliance General insurance has also filed its IPO papers with SEBI and investors have genuine concerns that group again wants to reap investors when market is at top
  • Group company Reliance Capital trades at valuations much below other companies in similar line of business indicating investors lack of trust in the group. Same is the case with Reliance Home Finance Ltd.
  • Debt forms a significant chunk of Reliance Nippon Life AMC ( Rs. 148 Billion against equity component of 71 billion and total AUM of ~272 billion). Debt heavy AUM enjoys lower valuation multiples than equity and thus price being demanded for IPO is not cheap.
  • Unlike the two larger AMCs, ICICI Prudential or HDFC AMC and SBI Mutual Fund( 5th position)  RNLAM  relies on third parties and intermediaries for its distribution network which is  a slight disadvantage. Reliance Nippon Life AMC IPO is strengthening its distribution network from proceeds of this IPO. 
  • Reliance Nippon Life asset management IPO is classic case where poor track records of its promoters is pitted against strong tailwinds for the AMC business.
  • Despite being the first AMC to go public & immense potential for growth of Mutual funds, boost from demonetization etc, the past of Reliance ADAG group may continue to cast shadow on Reliance  Nippon Life AMC IPO market price.
  • While this is first IPO from an AMC n India, it is quite common in international markets. Thus  It will be closely watched how FIIs who understand this business quite well, respond to the IPO. 
  • Even with many Plus points mainly pertaining to a very bright future for AMCs, I shall apply in Reliance Nippon Life AMC IPO keeping watch that the Grey Market premium which is presently at Rs. 60+ sustains at reasonable level and also look into subscription levels. My chances of investing in Reliance Nippon Life AMC IPO are more than avoiding it. 
  • I have small holdings in Reliance Capital and Reliance Housing Finance Ltd. fo the same group which I continue to hold based on my assessment that ADAG group will be able to come out of crisis caused by precarious financial position of Reliance communications and thus valuation of these companies will improve. 
  • Buying of stake by IIFL special Opportunities fund almost at same valuation as present IPO pricing  offers some little comfort.
  • 25/10/17 : Reliance Nippon Life AMC IPO has Elicited a stronger than expected demand on Day1: QIB 6.13x, NII-11.38x, Retail – 0.9x, Overall 4.64x. With strong demand in Grey market as well, Iam  putting all applications in the Reliance Nippon Life AMC IPO. 
  • As on earlier occasions I shall update last minute changes if any at this place. 

Standard disclaimer: I am not a SEBI registered analyst and above analysis is for educational purpose only. I may have vested interest in every stock I discuss and my views may be biased. Please do your own due diligence as stock market investments have high degree of inherent risk.

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