Post-ownership change, Reliance Nippon investors must keep an eye on AUM growth

Reliance Nippon Life Asset Management Ltd (RNAM) turning into a fully-owned subsidiary of Nippon Life Insurance Co. Ltd of Japan, has brought some cheer to the stock. The deal will mark the exit of Reliance Capital Ltd from the mutual fund business. But, considering that much of this news has already been priced in with the stock clocking gains of 22% in the last three months, investors may be wondering what next.

A key factor that investors must watch out for is whether there will be an improvement or deterioration in assets under management (AUM). The company has been seeing some losses on the AUM front. In FY19, its AUM dipped 4.6% to around ₹2.34 trillion. However, with Reliance Group’s exit, analysts say the fund house can better its standing in the mutual fund business. “We are excited by the prospects of exit of ADAG (Reliance Group) as promoter, which we believe will aid fundraising from HNIs and institutions,” said HDFC Securities Ltd in a note to clients. HNIs are high net-worth individuals.

New investors are more likely to watch the performance of its mutual fund schemes while choosing where to park their assets, say analysts. RNAM has a good share of retail portfolio in its AUM, and post the elections, analysts expect more fund flows into mutual funds in general.

RNAM’s performance metrics have improved on the back of changes in distributor commissions. While total expense ratio has been reduced, at the same time the Securities and Exchange Board of India has banned payment of upfront commissions to agents.

So, while revenues in the fourth quarter have expectedly come down 21.4% year-on-year, margins have expanded. The company’s Ebitda margins expanded to 41% due to a drop in fees and commissions paid to distributors. They stood at 30.9% a year ago. Ebitda is earnings before interest, taxes, depreciation and amortization. As such, absolute Ebitda was at ₹141.5 crore in the March quarter, slightly higher than ₹135.4 crore in the year-ago period.

But the stock’s valuations have already factored in some market share gains. At the current price, the one-year forward price-earnings ratio stands at about 24 times earnings. Stock gains from here on will depend on how fast RNAM can regain some of its lost market share.

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