The expense ratio of passive ETFs and index funds is lower than actively
managed funds, and increasing the contribution of passive products in the
overall AUM mix can dent yields for AMCs. Though passive AUM may grow at
a faster pace compared to other categories, the revenue contribution of
passive products in AMC’s overall revenue mix will remain the same.


The Indian mutual fund industry has 45 AMCs comprising bank-sponsored
and private AMCs. Despite this, the industry continues to remain
consolidated, with the top 10 AMCs accounting for more than 80% of
industry AUM. Bank-sponsored AMCs continue to gain market share on the
back of the better distribution network of their parent.

Direct channel sourcing is gaining prominence…

Direct channel’s contribution of MF assets stood at 45.6% as of March 2022.
Most of the debt AUM is invested via a direct channel as it is the preferred
route by institutional investors. Digitalization and increased adoption of
fintech apps like Zerodha coin, Paytm money, etc., which has made investing
in direct mutual funds an easy process, and increased awareness between
regular and direct plans led to the rise in direct mutual funds. As more and
more investors prefer to Do it Yourself (DIY) compared to advisory
professionals, we believe, this new set of DIY investors will unduly give more
weight to past returns, known brands, and the Total Expense Ratio (TER) of the
fund. The probability of them abandoning will be very high during a short
period of underperformance as no professional guides them through their
investment journey. Given the pickup in DIY trend, AMCs will have to educate
investors during extreme volatility. Hence, AMCs in the future, managing to do
that efficiently might lead in retail participation.

Major regulatory changes in the industry

Capping on Total Expense Ratio (TER) from 1
st April 2019

From 1st Apr’19, TER has been capped based on fund size.
Revised Total Expense Ratio for open-ended schemes:

Additional TER of upto 30 Bps for penetration in B-30 cities

SEBI permitted additional TER up to 30 bps on daily net assets of the scheme
based on inflows from B-30 cities subject to certain minimum inflows. Please
note that this additional TER can be charged based on inflows from retail
investors from B-30 cities. Thus, inflows from corporates and institutions
from B-30 cities would not attract the additional 30 bps TER.


Improving penetration beyond the top cities requires establishing more
branch networks and empanel distributors. Prior to this, AUM growth in B-30
cities does not compensate for additional operational costs. With additional
TER, the market regulator tried to incentive the same.

Scheme related expenses will not be charged on AMC books

All the scheme-related expenses which were borne by AMCs out of their
pocket earlier have to be shifted to the scheme now. Hence, the difference in
TER of the regular and direct plans will be the commission paid to
distributors.

Company Background

Nippon Life India Asset Management (NAM) is a subsidiary of Nippon Life
Insurance Company (NLI) which currently holds 73.8% of its outstanding
shares. NLI, a fortune 500 Company, is one of the largest life insurers in the
world, managing assets of over USD 700 Bn. NLI has an extensive global
network with a presence across the US, Europe, Asia, and Australia, a 130-year
track record in the Life Insurance business, and global investments across
Asset Management companies.

NAM remains among the leaders in the ‘Beyond Top 30 cities’ segment or B-30
locations. B-30 locations have a higher share of equity assets. This segment
contributed an AUM of Rs. 478 Bn, of which 76% were equity assets. 17% of its
total assets are sourced from B-30 cities, higher than the industry average.

NAM has a dominant market share (14%) of the ETF market with assets of Rs.
557 Bn as of 31st March 2022. The company has a product basket of 25-30 ETF
schemes and 6 Index Funds. NAM’s ETF schemes contribute ~68% of the ETF
exchange volumes. When choosing an ETF, the liquidity of an ETF plays a pivot
role in deciding the ETF since the impact cost of acquisition is reduced
substantially. NAM is comfortably placed in ETF space.

Managed Accounts (17% of overall AUM)

In addition to MFs, AMC also offers Portfolio Management Services (PMS),
Alternative Investment Funds (AIF), and offshore management/advisory
services to investors as alternate investments. These services usually generate
higher yields and create additional revenue opportunity for the company.

Alternate Investment Funds:

NAM manages 16 Alternative Investment Funds (AIFs) schemes across
Category II and Category III via its subsidiary, Nippon Life India AIF
Management Limited (NIAIF). NIAIF offers various strategies under Listed
Equity, High Yield Real Estate Debt, Credit, and Tech / VC FoF, which are
privately pooled investment vehicles registered with SEBI.


The total commitments raised across all schemes is Rs. 4.4 Bn as of March 31,
2022.

Portfolio Management Service (PMS):

NAM offers four equity strategies to its investors. As of March 31, 2022, the
Company’s total AUM is Rs. 550 Bn. The company also manages two
prestigious government mandates, i.e., Postal Life Insurance and Rural Postal
Life Insurance.

Further, as of March 31, 2022, the Company had a total AUM of Rs. 26.8 Bn as
international advisory mandates. NAM India, in collaboration with BBL Asset
Management Company Ltd., an affiliated company of Bangkok Bank (BBL), the
largest Thai Commercial Bank, has launched Bualuang Bharata Fund in
Thailand for institutional investors and high net worth investors.

Peaking into the past

From 2012 to 2018, NAM was among the second or third largest AMC in India
after HDFC AMC and ICICI Pru AMC. Due to default by erstwhile promoter
Reliance Capital coupled with scheme underperformance hampered their
market share from 11.5% in Mar 2015 to 7.6% in Mar 2020.

Post default, in Sep 2019, NAM took over as the sole promoter with 73.8% of
the outstanding shares and rebranded the company as ‘Nippon Life Asset
Management’. Market share has stabilized since then and bottomed out in Mar
2021 at 7.1%; since then, they have managed to improve overall market share
to 7.4% in Mar 2022 owing to improved fund performance, better risk
management, and further investment into the distribution network.

The main focus area for the management has been increasing the contribution
of retail investors in their overall mix and penetrating further into B-30 cities,
which has largely remained untapped by the mutual fund industry. Along with
this, they continue to focus on passive offering to remain a relevant player in
the passive management space. Management follows the ‘Investor First’
philosophy and would launch schemes to cater to investors’ varied and diverse
needs.

Board of Directors and Top Management

The company is currently headed by Mr. Sundeep Sikka, who has been with the
company since 2003 and CEO since 2009. Most of the company’s top
management has been with NAM for more than 10-15 years, and most have
more than 20 years of relevant industry experience.

Skin in the game and Top Shareholders

The Company was incorporated as ‘Reliance Capital Asset Management’ in
Feb’1995. In 2012, Nippon Life made a strategic investment of 26% in Reliance
Capital Asset Management. Subsequently, Nippon Life holding was further
increased, and in 2015 company was renamed ‘Reliance Nippon Life Asset
Management Ltd.’ Eventually, the name was rechanged to ‘Reliance Nippon Life
Asset Management’ in May’2016. Post-IPO, both promoters held a 42.9% stake
in the Company. Later on, due to default by ADAG group, they sold their
holding to Nippon Life, making them the sole promoter of the Company.
Nippon Life rebranded the Company to ‘Nippon Life India Asset Management,’
and they own 73.8% of the Company.

Where does NAM stand against its peers?

We have taken 6 AMCs (including NAM) for our analysis, representing 60-65%
of industry AUM.


SBI AMC has gained outstanding market share among our chosen peers in the
last decade across all asset classes (Equity/Debt/ETF and Liquid). All the other
AMCs have ceded market share in the last decade except SBI and ICICI Pru
AMC. HDFC AMC has lost significant market share in the equity segment due to
the poor performance of their schemes and the absence of few sector funds.
NAM has lost market share across all segments in the last decade.

ICICI Pru AMC has the highest revenue yield among the chosen peers owning to
a high equity mix of ~50% (which are the highest yielding) and very minimal ETF
exposure at ~6% (which are the lowest yielding). ICICI Pru is the only AMC that
has managed to improve its yield in the last ten years. All other AMCs have seen
an erosion of yields. With a ban on upfront commission to distributors and the
adoption of trailing commission, revenue yields have declined for AMCs.
However, expenses related to the schemes are expensed from the mutual fund
schemes and hence had a limited impact on operating profit yields. All AMCs
have managed to maintain their operating profit in last decade. Revenue yield
will continue to remain under pressure for all AMCs as old AUM (at high yields)
gets replaced with new AUM at lower yields, but due to significant operating
leverage in AMC business, the impact on profitability will be limited.

ICICI Pru has the highest ROE among its peers, owing to high operating profit
and revenue yield.

Ranking of scheme performance in their respective category for Listed AMCs

Opportunities

Strong retail franchise

The share of retail investors in the AUM mix of NAM has increased from 13.6%
in FY14 to 27.5% in FY22. A similar number in the industry is 23.3%. Retail
investors tend to be more inclined towards equity products and are more sticky
than other investor classes. A rising share of retail investors bodes well for
AMC’s AUM yield. NAM has a higher market share in the retail segment at 8.7%
vs. 7.4% overall market share.

The loss of market share is warranted since the company was among the few
AMCs to launch ETF products initially. Hence, they had a dominant market
share, but NAM’s market share eroded as other AMCs started expanding their
ETF offering. Market share also errored as major AUM is being contributed by
EPFO, which invests via SBI and UTI AMC’s ETF offering only. The magnitude of
the ETF offering by NAM is unmatched by its peers, placing them in a favorable
position.

A high share of the direct channel in the distribution mix:

NAM has a distribution network of around 160 banks, 95 national distributors,
and ~84,100 mutual fund distributors. Of the overall AUM, 56% is sourced via
direct channel as of Mar’ 2022. It is favorable for the AMC since their reliance
on distributors reduces, and they are better placed to charge higher fees. To
further strengthen its direct channel reach, they have partnered with 20 digital
platforms such as Paytmmoney, Groww, ETMoney, etc. This will give them
access to a direct customer base and enable them to cross-sell their offerings.

Liquid category market share improved, equity category to follow

NAM has regained its lost market share in the liquid category in the Apr-Mar
22 period owing to better risk management practices followed by Nippon
Group, which has led to improved investor confidence. During FY22, liquid
AUM of NAM delivered a growth of 23.6% vs. negative -7.2% growth delivered
by industry.


Equity category market share has also stabilized in the last few quarters, and
recent improvement in scheme performance should be followed by market
share gain for them.

Challenges

Profitability vs market share, walking a tight rope

With increasing competitive intensity, AMCs face the dilemma of either
maintaining their market share or maintaining their profitability. With many
AMCs aggressively pricing their offerings, AMCs not matching up with the
industry pricing could lead to erosion of market share. NAM has been focused
on improving its profitability over market share. Hence, if pricing indiscipline
persists for a period greater than anticipated, the AUM growth of NAM could
be impacted.

Absence of strong captive banking channel and brand recall

Despite being a non-Bank AMC, Nippon has become the 6
th largest AMC inIndia. But NAM lacks captive banking channel access that all of the banking
AMC enjoy. Penetrating the untapped market of B-30 cities will need better
brand recall and an extensive distribution network, the benefit of which is
available to banking AMCs.

Losing market share in B-30 cities

AUM from B-30 cities provides the maximum yield to the AMCs as they tend to
have more inclination towards equities, and SEBI allows AMCs to charge a
further 30 bps. But in the last decade, the company’s AUM contribution from B-30 cities has remained stagnant and has been reducing since 2018 (around the
ADAG group default). They have been losing market share from B-30 cities,
which decreased to 7.7% in Mar 2022 compared to 12.1% in Mar 2018.


NAM’s AUM contribution (17.2%) from B-30 is higher than the industry’s
(16.6%). NAM’s market share from B-30 cities (7.7%) is better than T-30 cities
(7.3%) as of Mar-22.

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