A file photo of Anil Ambani (Abhijit Bhatlekar/Mint)
A file photo of Anil Ambani (Abhijit Bhatlekar/Mint)

Reliance Nippon’s likely ownership change is music to investors’ ears

  • If the deal gets dashed or delayed, investors may well be exposed to the wrong side of volatility
  • Investors seem to be sure that a change in management could spark an improvement in the asset manager’s operating parameters

Mutual fund investments are subject to market volatility. If the volatility is of the kind Reliance Nippon Life Asset Management Co. Ltd’s (RNAM’s) shares experienced last week, no one will complain. Reliance Capital Ltd’s intention to sell its 42.8% stake in the asset manager has the latter’s stock all fired up. In just two days, the RNAM stock zoomed a steep 30%.

Investors seem to be sure that a change in management could spark an improvement in the asset manager’s operating parameters. The other expectation is the perception of the fund will change for the better.

RNAM has not been as successful in attracting money from high networth individuals (HNIs). The asset management company, however, struck a chord with retail investors, with the largest share of retail money. RNAM’s retail assets under management (AUM) share is 13.9%, but of HNIs, it is a mere 5.4%.

(Mint)

It is also worth bearing in mind that RNAM has lost market share over the years. In June 2011, it was the largest AMC and the first to reach AUM of 1 trillion. Now it ranks as the fifth largest with 2.36 trillion. Its market share in total industry AUM has shrunk from 14.4% to 10% during this period. Reliance Group’s financial woes seem to have affected the fund’s performance.

AUM market share is correlated with the fund’s performance. Here, RNAM does not have much to tom-tom about. Just 53.1% of its rated AUM is assigned four stars or more, noted HDFC Securities Ltd in a report citing a Value Research study. Rated AUM pertains to funds that are rated, and excludes some small-sized funds. Others such as SBI Mutual Fund, Kotak Asset Management, and ICICI Prudential AMC have 75.5%, 82.8% and 73.6% of rated AUM, respectively, in the top quartile.

Analysts also see the possibility of an improvement in operating metrics once Nippon Life takes management control. For example, RNAM’s Ebitda (earnings before interest, tax, depreciation and amortization) margin is 50.6% while HDFC AMC operates at 77.9%, according to the latest December quarter figures.

Analysts had expressed surprise on the asset manager’s deteriorating quarterly performance. “Core EBIT/AUM declined to 18bps vs. 21-22bps in H1 19, which was a negative surprise as HDFC AMC reported an improvement (adjusted for one-offs) in core profitability despite the equity-mix deteriorating," said Nomura Financial Advisory and Securities (India) Pvt. Ltd in a note to clients.

Lately, though, the fund house has taken a slew of initiatives to get its mojo back. A few old fund management hands have moved out and given way to a new team. Manish Gunwani has been hired from ICICI Prudential MF as the chief investment officer (equity). Besides, Nippon Life may soon come in with its expertise and goodwill of managing $530 billion in global AUM.

Little surprise then, the RNAM stock has narrowed the valuation gap with its only listed peer, HDFC AMC. RNAM’s one-year forward price-earnings multiple has increased to 22.3 times based on consensus forecasts, against HDFC AMC’s 27.6 times.

If the deal swings Reliance Capital’s way, and it is able to secure a plum price, that would still be sweet music to investors’ ears.

But given that the valuation gap with HDFC AMC has narrowed considerably, or if the deal gets dashed or delayed, investors may well be exposed to the wrong side of volatility going forward.

Reliance Group companies have sued HT Media Ltd, Mint’s publisher, and nine others in the Bombay high court over a 2 October 2014 front-page story that they have disputed. HT Media is contesting the case.

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