For Aditya Birla Sun Life AMC, expanding scale is key to future

Aditya Birla Sun Life (ABSL) Asset Management Company Ltd would be the fourth fund house to list, and judging by the reception its peers have received, the mutual fund will not find it difficult to get a strong response.

The fund house’s conscientious approach to growth may win points with potential investors.

The initial public offering (IPO) through which the fund house aims to raise roughly ₹2,700 crore will open on 29 September at a price band of ₹695-712 per share. At the upper end of the band, the company would be valued at ₹20,505 crore. What will investors get at this valuation?

Mutual funds are conduits or intermediaries that help individuals and institutions invest in the debt and equity markets. Fund houses, therefore, make money through fees, commission and other charges. Thus, building scale is one of the most important ways to increase revenue.

In that, the ABSL fund house is so far winning. With assets under management (AUM) of ₹2.94 trillion, ABSL AMC is the fourth largest fund house in the country. Its growth over the past four years, notwithstanding the pandemic, has been a robust 18% on a compound annual growth rate (CAGR) basis. The dominance of fixed income products in the overall AUM also helped.

“Our approach is that of scaling up for benefit. Our revenue growth would be good going ahead also," said A. Balasubramanian, managing director and chief executive officer, ABSL AMC. “Fixed income always gives more revenue as it generates high volume," he said.

On a quarterly average basis, AUM growth was 9% for FY21 for the company. This compares with 19% growth of HDFC Asset Management Co. Ltd and 12% of Nippon Life India Asset Management Ltd. That said, growth has been driven by systematic investment plan (SIP) flows, which lend stability.

Another factor that helps ABSL AMC is the growth in equity fund AUM. The fund house has shown the second highest growth rate in the equity mix of its AUM among peers in the industry. Equity AUM is now 38.1% of the total AUM on a monthly average basis.

Scale has buttressed profitability metrics. Net revenues as a percentage of average AUM has increased by 2 basis points for FY21 to 45 basis points. One basis point is one-hundredth of a percentage point.

There are some factors, though, that investors need to focus on. At an absolute level, revenue from operations showed an 18% decline over two years.

As much as scale boosts revenues, it also keeps cost ratios under check. The fund house’s cost-to-income ratio has reduced sharply to 46.69% in FY21 but compares poorly to peers such as Nippon AMC having lower ratios.

Further ABSL AMC has been losing market share in the past few years. The market share loss has been across big players as smaller fund houses have been able to increase their share. The fund house will deliver on growth, but market share could be volatile, Balasubramanian said.

“There are new and interesting players coming up. Existing small players are upping their ante. It is not going to be easy to keep up the scale," said an analyst requesting anonymity. Valuation leaves room for a decent listing pop and grey market premium indicates the same, according to analysts.

The upshot is that the fund house has given enough reasons for investors to take a hard look at its offering. However, as far as the disclaimer in mutual funds goes, past performance is no guarantee of future growth.

ABSL AMC needs to deliver on its growth promises or else investors may view the valuation as an entry load that is too stiff.