Markets
Nippon Life AMC is narrowing its valuation gap with HDFC AMC
Summary
Nippon Life AMC has outpaced its larger rival with 25% gains in 2021. In comparison, the HDFC AMC stock has returned a meagre 3%
Nippon Life India Asset Management Co. Ltd’s (NAM) valuations have always lagged behind sector leader HDFC Asset Management Co. Ltd. But the gap has narrowed considerably in recent months. NAM has outpaced its larger rival with 25% gains in 2021. In comparison, the HDFC AMC stock has returned a meagre 3%.
NAM may just be able to hold that lead this year. Analysts attribute the improved show largely to the better performance of some of its funds. This could even help market share gains in Q4 and build on NAM’s quarterly average 11.6% year-on-year growth in assets under management (AUM). The industry leader, meanwhile, has seen market share losses, especially on the equities side, which also helped NAM shares outperform.
“We could see a recovery in its market share on the recent improvement in fund performance," said Prayesh Jain, an analyst at Yes Securities. Of course, the fund house has ground to cover in market share, which has been slipping for a while.
Retail investors could drive some of that shift in coming quarters, analysts say. Already, a huge chunk of its AUM comprises retail, at about 28% of its total AUM in Q4. This compares well with the industry average of 22%.
Besides, bullish markets are not only driving AUM higher but considerably fuelling fresh investor interest. The slowdown in systematic investment plans or SIPs also seems to have bottomed out, with SIPs clocking ₹660 crore inflows in Q4, similar to Q3.
Industry-wide equity fund inflows of ₹1,783 crore in April are encouraging too. With markets on an uptrend, there could be further investor interest. But any fall in the market poses a risk to AUM growth.
The firm is still faced with challenges in market-share gains in B-30 towns and cities, note analysts. The flat B-30 AUM growth suggests that the firm may still have some way to go in brand awareness in smaller towns.
NAM may see synergy benefits from its parent Japan’s Nippon Life Insurance Co.’s strengths. NAM is expanding its reach and offering alternative investments such as real estate. That should diversify its revenue streams ahead.
NAM has contained operating costs. In Q4, it spiced up its IT infrastructure, but automation should pay off in the longer run. “We believe that cost controls demonstrated by the company over the last few quarters has been commendable, thus contributing significantly towards its overall profitability. The company is unlikely to see any significant increase in absolute level of fixed expenses," said analysts at Nirmal Bang in a client note
Hence, further gains in AUM could swing operating metrics higher. At a price-earnings multiple of 34 times one-year forward earnings estimated by Bloomberg, the catchup with HDFC AMC’s 42 PE is still some way off, though.
