The AMC industry in India has grown 4 folds in the last decade. And why have we called AMCs as Snowball companies? Because they roll snowballs of clients wealth to make them wealthier.
For those who couldn’t understand what the above references are, AMC or Asset Management Company is a firm that invests pooled funds from clients, putting the Capital to work through different investments including stocks, bonds, real estate, and more. They offer products such as Mutual Funds, PMS (Portfolio Management Services), Gold ETFs, etc. Asset management companies are colloquially referred to as money managers or money management firms.
So let’s find more about these firms as businesses and how are they performing as a company.
Mutual fund industry in India dates back to 1963, when Unit Trust of India (who will list its IPO this month, covered in our analysis) was formed at the initiative of the Government of India, and Reserve Bank of India. With the entry of numerous Mutual Fund players, and a number of products across asset classes, the industry has come a long way. Today, there are 44 such registered firms which offer 2500+ products together.
So is this sector generating actual money for owners or are they some charity?
Apart from the gains that the AMCs generate for their clients, they also have a growing revenue base in Indian Financial Sector. The recent awareness amongst savers regarding mutual funds and ease of access has pumped up money flow towards the sector. And how do we measure this growth?
Using AUM (Assets under Management), just like revenue for any other company, which shows us quantum of assets are managed by AMCs.
Average Assets Under Management (AAUM) of Indian Mutual Fund Industry for the month of Jul 2020 stood at ₹ 27,28,115 crore. The AUM of the Indian MF Industry has grown from ₹ 6.69 trillion as on July 31, 2010 to ₹27.12 trillion as on July 31, 2020 more than 4 fold increase in a span of 10 years. Another important factor to consider is no. of folios under AMCs. The total number of accounts (or folios as per mutual fund parlance) as on July 31, 2020 stood at 9.21 crore (92.1 million), while the number of folios under Equity, Hybrid and Solution Oriented Schemes, wherein the maximum investment is from retail segment stood at about 8.03 crore (80.3 million).
For the AMCs as the AUMs increase, so does the revenue. On an average, AMCs have a gross margin of 0.5% (taking into account all products and services offered, and financial data from leading AMCs in India). Therefore, a ₹27.12 trillion industry implies 135 billion rupees of revenue till date for AMCs. Though this data is manually calculated as per conventions established and generalising margins, we can easily draw a picture to justify the potential of this Industry. And adding to it, Indian mutual funds are underdeveloped as compared to other financial systems around the world.
And with increasing financial awareness, the sector is bound to receive a fresh influx of investors. 83% of AUM of the industry is with the top 10 AMCs.
Let’s have a look at the Top 10 AMCs in India:
1. SBI Mutual Fund-
The SBI MF was started by SBI as a fully owned MF in 1987. In 2004, SBI disinvested 37% stake which was taken up by the global leaders Societe Generale Asset Management.
Asset Under Management (Crore)- 364915.86
Number of Funds- 136
2. HDFC Asset Management Company-
The HDFC AMC is a joint venture between HDFC and Standard Life Investments. HDFC holds approximately around 57.4% of shares. It is an actively managed equity fund in India with 53 lakh investors.
Asset Under Management (Crore)- 356710.86
Number of Funds- 97
3. ICICI Prudential Asset Management Company-
The ICICI PRU AMC was established in 1993 as a joint venture between ICICI Bank India and Prudential Plc which is one of the largest players in financial services in UK. The AMC caters to Mutual Funds spread across various asset class, Portfolio Management Services and Real Estate Division for investors, spread across the country, along with International Advisory Mandates for clients across international markets. ICICI Prudential Mutual Fund has played a major role in setting up the CRISIL rating system in India.
Asset Under Management (Crore)- 333709.53
Number of Funds- 173
4. Birla Sun Life Mutual Fund-
The Birla Sun Life Mutual fund was established in 1994 as a joint venture between Aditya Birla Capital Limited and Sun Life Financial Inc (Canadian insurance provider founded in 1865).
Asset Under Management (Crore)- 214866.37
Number of Funds- 148
5. Nippon India Asset Management Company-
Nippon India AMC, earlier known by the name Reliance Asset Management Limited was founded by late Dhirubhai Ambani. It was later run as a joint venture between Reliance Asset Management limited and Nippon Life Insurance from Japan. In 2019, Nippon Life Insurance went on to own 75% stake in the company allowing Anil Ambani owned Reliance Assets Management to exit. Later, it came to known as Nippon India Asset Management Company.
Asset Under Management (Crore)- 181048.08
Number of Funds- 161
6. Kotak Mahindra Asset Management Company-
Kotak Mahindra Asset Management Company established in 1998 is a wholly-owned subsidiary of Kotak Mahindra Bank Limited. It provides mutual fund and portfolio management services. It has 84 branches spread over 80 cities in India and has more than 7.5 Lakh investors.
Asset Under Management (Crore)- 167787.88
Number of Funds- 80
7. Axis Asset Management Company-
Axis Asset Management Company was launched in the year 2009. It is a joint venture between Axis Bank and Schroder Singapore Holdings Private Limited.
Asset Under Management (Crore)- 134482.57
Number of Funds- 54
8. UTI Mutual Fund-
Unit Trust of India (UTI) is the largest and oldest mutual fund management company which is an initiative of Government of India and RBI. UTI Mutual Funds started the mark of mutual fund industry in India in 1963.
Asset Under Management (Crore)- 133631.09
Number of Funds- 156
9. IDFC Asset Management Company-
One of the leading AMCs started in 2000.The corporation has grown to cover most of the domestic market and has several regional headquarters across the Central and Eastern parts of the country, where economic growth is higher and more investment options are needed.Its parent company is IDFC Ltd.
Asset Under Management (Crore)- 101933.56
Number of Funds- 55
10. Franklin Templeton-
Franklin Templeton is an American establishment which began its operationsin India in 1996. The consistent growth of the mutual fund has made it one of the largest foreign fund houses in India.
Asset Under Management (Crore)- 80640.33
Number of Funds- 71
These 10 AMCs combined control more than 80% of the AMC Industry in India. However, only 2 of the above are listed. While UTI AMC is almost prepared to list its IPO in September itself.
HDFC Asset Management Company:
Market leader in AMC Sector, HDFC AMC has the highest market share on the basis of QAAUM. HDFC AMC, set up as a joint venture between Housing Development Finance Corporation Limited (“HDFC”) and Standard Life Investments Limited (“SLI”) in 1999. It now has AUM worth Rs. 3.79 Lakh Crore.
Products & Fund Managers:
HDFC AMC offers more than 150 schemes across asset classes to meet the varying investment needs of investors.It also offers portfolio management/non-binding investment advisory services since 18 September 2016.
It's CIO, Prashant Jain has over 27 years of experience in fund management and research in Mutual Fund Industry. He received his undergraduate degree from Indian Institute of Technology Kanpur and a graduate degree from Indian Institute of Management Bangalore.
Fundamental Analysis:
Sales revenue has grown at 7.08% CAGR over the last 5 years. Healthy Sales 5 year CAGR for Large Caps should be between 5%-10%.
Average net sales for the last 5 years have been 93% of the total revenue.
Expenses for the last term have fallen at 11% CAGR.
EBITDA which the most important fundamental aspect has grown at 19% CAGR.
EBITDA margin measured 49% of the total revenue in 2016 and currently it stands at 85 of the total revenue. (23% Growth YoY)
Net profit Margin has been recorded as 33% in 2016 and 66% in 2020. (35.69% Growth YoY)
Net worth of the company has grown at 22% CAGR for the lustrum and currently stands at 4022.84 Crore
Attractive debt to equity ratio of 0.07. Minimal debt in the financing structure.
Stable balance sheet with large reserves.
Cash flow from operations has grown 44% YoY
Solid Cash inflow relative to past 4 years.
Market Cap (51,589 crore)
Market leader in terms of market capitalization in listed space.
High PE of 40.53 with High EPS growth in the last 3 years.
Return on Equity at 29.43% with growing profits.
Technical Analysis:
Nippon India Asset Management Company:
Nippon India AMC, earlier known by the name Reliance Asset Management Limited was founded by late Dhirubhai Ambani. It was later run as a joint venture between Reliance Asset Management limited and Nippon Life Insurance from Japan. In 2019, Nippon Life Insurance went on to own 75% stake in the company allowing Anil Ambani owned Reliance Assets Management to exit. Later, it came to known as Nippon India Asset Management Company.It manages assets across managed accounts, mutual funds, pension funds, alternative investments, and offshore funds.
Products & Fund Managers:
Nippon mutual funds schemes includes 52 equity, 266 debt, and 40 balanced funds.
Manish Gunwani is CIO - Equity Investments at Nippon India Mutual Fund. He has over 21 years of work experience primarily in equities spanning roles in equity research and fund management. Whereas Amit Tripathi is CIO - Fixed Income Investments and has more than 20 years of experience in Financial Services. He has been with NIMF for around 14 years and in that time, he has evolved into a stellar portfolio manager, combining experience across the yield curve, with robust credit evaluation skills.
Fundamental Analysis:
Revenue has grown at 4.56% CAGR for the last 4 years. Sales for 2020 have plunged down by 23%.
Average sales for the last 5 years have been recorded as 91% of the total sales.
Expenses have fallen significantly from the last 3 years at 15% CAGR.
EBITDA has grown at 3.6% CAGR but has fallen YoY (599cr vs 892cr in 2019)
EBITDA Margin in 2016 was recorded as 42% of total revenue and recorded as 53% in 2020.
Net profit margin recorded as 31% in 2016 and 36% in 2020.
Net worth for the firm has grown at 11.45% CAGR.
Attractive D to E ratio 0.09
Cash flow from operations has grown at 45% YoY
Solid Cash inflow (YoY growth 1736%)
Market Cap 17,311 crore
PE is at 38.96 relative to industrial PE of 39.75 (taking average of the two large AMCs in the space) with stable EPS growth.
Return on Equity stands at 16.67%
Technical Analysis:
As these two are only AMCs in the listed space, we did a comparison of their top performing funds to find out which one generates more alpha for their clients.
As the recent data suggests, there is an outflow from equity Mutual Funds Industry (Read here) and a new strong influx into debt market products (Read Here). Therefore, the fund we chose is top performing debt fund for both the AMCs : Nippon India Banking & PSU Debt Fund DIrect Growth & HDFC Banking & PSU Debt Fund DIrect Plan Growth Option.
While the fund size of Nippon's debt fund is 5424 Cr., HDFC AMCs same fund has a size of 7544 Cr. Both the funds have shown great returns for it's investors. However, the distinction is not certain when having an overview, if we dig in deeper, we can find the information ratio which is much higher for Nippon then for HDFC (Higher the info ratio, better alpha) and tracking error is also low for Nippon's Debt Fund (which is also a positive indicator).
Also, Nippon has a upper hand when it comes to debt funds in Indian Mutual Fund Industry overall as well. And with growth of debt fund as investment instrument, so will the AUM of top performing debt funds.
UTI AMC is coming up with its IPO this September!
UTI AMC IPO Analysis
UTI AMC is the largest AMC in India in terms of Total AUM, seventh-largest AMC in India in terms of mutual fund QAAUM with ₹1,542.3 billion, and also has the largest share of monthly average AUM amongst top ten Indian AMC coming from B30 cities. Incorporated in 2002, UTI AMC is in the business of managing the domestic mutual funds of UTI Mutual Fund, provides portfolio management services to institutional clients and high net worth individuals like Employee Provident Fund Organisation, and various other services & Products. Since this will be the third AMC to get listed and expected to have a decent price band with fair valuations, it could be a win for the investors.
It established the first mutual fund in India and has been in the asset management industry for more than 55 years with a strong history and proven track record in mutual fund mutual industry with strong brand recognition. The institution has shown great resilience and has grown from strength to strength overcoming economic turbulence and global turnarounds. It has a national footprint with 163 UTI Financial Centres, 273 Business Development Associates and Chief Agents and 33 other Official Points of Acceptance. UTI AMC also has approximately 51,000 Independent Financial Advisors.
So should you apply for this IPO?
The details regarding the price band were not released until the writing of this report. However, the qualitative analysis suggests that the company is a gem and can be bought at fair valuation. The company was established as an Act, and thus don't have a promoter however, has four sponsors SBI, LIC, PNB and BOB each of which has the Government of India as a majority shareholder. It also has a global asset management company T. Rowe Price International Ltd as one of its major stakeholders with a 26% stake in the Company. Thus, it has strong backing and the pre-IPO financials are also impressive.
Whats next for AMCs in India?
Savings rate as a part of GDP stands at a fair percentage for India compared to other financial systems around the globe in India.
However, the money managed by AMCs (AUM) is less as a percentage of GDP compared to other developed economies such as USA & UK. There has been a subsequent growth in the passive fund industry in India, from fiscal year 2014, a CAGR% of 75% (passive funds have grown from 0.8% of aggregate industry AUM as of March 31, 2014 to 6.1% of aggregate industry AUM as of September 30, 2019).
However, their share in aggregate industry AUM remains well below that in other developed markets (e.g., approximately 35% of in the United States as of December 2018). Indian system has witnessed an up surge in overall money flow from conventional holdings of wealth towards market products. However, a large market still remains untapped. AMCs now undertake various initiatives to educate people and make them aware of other forms of investments and this approach has worked fairly well in India. The sector is continued to receive additional growth even because of the recent government initiatives. And as the AUM increases with the industry, so will the AMC's revenue and profits.
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I feel very bullish on UTI IPO after seeing the chart showing AUM breakup for all categories. Since PMS is a premium service, and UTI is a market leader there, UTI will enjoy very fat margins for themselves. The fact that it's publicly listed competitors don't have much share in PMS and NPS domain, UTI will definitely crush it in the market.
Wonderful read! Extremely comprehensive, yet so subtle. To add on to this, I have an anti-thesis about the bullish AMC industry. Although AUM is bound to grow at insanely high rates in the forthcoming future, I fear that as and when this industry further develops, the "Gross Margins" will definitely fall as is witnessed in all fairly developed countries where mutual fund industry exploded. As the AUM rises, the expense ratio to be charged by AMCs will witness a decline (probably), hence hurting the company's topline.