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Home >Companies >News >Aditya Birla Mutual Fund, headed for a listing, has one missing ingredient

Last week, Aditya Birla Sun Life Asset Management Company (AMC) filed a prospectus to list itself on Indian stock markets. If it manages to, it will become only the fourth mutual fund in India to go public.

For an industry that has got millions of Indian households on board, and has seen 65 firms try to make their mark over the past three decades, four’s a small number. It highlights the capital-light nature of the industry and how it has flattered to deceive even global giants who thought they could make inroads quickly. Equally, it has rewarded some who stayed the course, such as Aditya Birla Sun Life AMC.

India allowed private players into the mutual fund industry in 1993, and this AMC was one of the first ones, in 1994. Interestingly, it is not looking to raise any fresh funds. Instead, its promoters plan to sell 13.5% to the public. The Indian promoter is Aditya Birla Group, which is currently dealing with a massive, fund-intensive turnaround of its telecom venture, Vodafone Idea.

Aditya Birla Sun Life AMC is ranked fourth on assets managed. It has a lot going for it: history, size, performance, network, and lineage. However, it is the only one among the top five fund houses that doesn’t have a bank as a parent or sibling. That could be a risk factor, given that the industry is moving towards direct sales, and eyeing tier-II and tier-III cities for growth. In the last 5 years, among the top five, the four with banking links have grown better than Aditya Birla Sun Life.

Chasing HDFC

One of those four is HDFC AMC. It is also one of the three fund houses listed. Aditya Birla Sun Life has been chasing it as a competitor, and will now see it as a valuation benchmark. HDFC AMC (ranked second in assets) has a market capitalization of 60,000 crore, while that of Nippon Life India is 20,000 crore. Given its size and profitability, Aditya Birla Sun Life will expect to be valued more towards HDFC than Nippon.

It’s also withstood attrition. Since 1993, when the industry was privatized, India has seen the birth of 65 fund houses. Today, 43 fund houses remain. In other words, about one-third of fund houses have exited. Since 2012, there have been 10 exits, primarily in the middle and lower rungs. This includes American financial giants such as Morgan Stanley, Goldman Sachs, and JP Morgan, and European ones such as Deutsche Bank and BNP Paribas.

Retail Expansion

As of March 2021, the mutual fund industry was managing assets of 32.1 trillion. In the past 10 years, the industry’s assets have grown at a compounded annual rate of 16.4%, while that of Aditya Birla Sun Life at 15.5%. About half the industry’s assets come from institutions (primarily companies parking short-term surpluses in debt funds). The remaining half comes from individuals (70% of which is in equity-oriented funds).

Companies are evolved investors. Hence, the growth kicker for fund houses is more likely to come from individuals. Only about 2% of Indian household savings are in mutual funds, according to data from the central bank. But this is increasing. Between March 2015 and December 2020, the number of individual folios increased from 53 million to 94 million. The average ticket size increased from 1.35 lakh to 1.76 lakh, with the big drivers being high net worth individuals.

Destination Tier-III

India’s fund assets-to-GDP ratio has increased from 4% in March 2002 to 12% in December 2020. This is still a fraction of the 32% for South Korea or 120% for the US, according to the Aditya Birla Sun Life filing. Indian fund houses are chasing this expansion. In this construct, household savings (as opposed to corporate savings) are more attractive, as they are habit-forming and sticky.

Tapping such assets, increasingly, means going beyond traditional urban centres. Reach starts to matter more, especially as the needle is moving towards direct sales, rather than through intermediaries. Aditya Birla Sun Life is present in 284 locations, through 194 branches and 90 emerging market representatives. But it has to compete with bank-linked mutual funds, whose banking presence gives them a wider distribution and cross-selling advantage in these tier-III centres. How it competes for that pie will be a key factor in how Aditya Birla Sun Life grows from here, and how it is valued by the market.

(www.howindialives.com is a database and search engine for public data)

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