IPO Review: Should you invest in the Aditya Birla Sun Life AMC IPO?

If not the fund, should you invest in the fund house? The Aditya Birla Sun Life AMC IPO is open now, through which the AMC’s sponsors Aditya Birla Capital and Sun Life AMC will offload stake. 

The AMC business is an attractive proposition. Once established, AMCs are a high-margin, high-return business. AMCs earn revenues through fees on funds managed. Costs, on the other hand, are relatively fixed and don’t rise in line with growth in assets managed. AMCs, thus, can have high ROEs and with minimal capital requirements beyond the initial setup.

The Aditya Birla Sun Life AMC IPO

At the upper end of the price band of Rs 695 to Rs 712, the IPO will raise around Rs 2,768 crore. The bulk of this will go to Sun Life AMC. This IPO is entirely an offer-for-sale and therefore Aditya Birla Sun Life AMC itself will not raise any additional capital. Post-IPO, the company can have a market capitalization of about Rs 20,000 crore or higher. 

The Aditya Birla Sun Life IPO will join three other listed AMCs –HDFC, Nippon India Life, and UTI. With this expanding basket of AMCs to choose from, does Aditya Birla Sun Life AMC stand out? 

Not by much. Here’s the Aditya Birla Sun Life AMC in a nutshell:

• It is a dominant mutual fund player, with marquee funds, a vast distribution network and low dependence on a small set of distributors. 
• It has improved its grip on individual retail investors and is reasonably spread out into markets beyond the top-tier cities.
• It has high – and improving – profit margins at the operating and net level, strong ROEs and low debt. It does not need capital to grow and keeps its large expenses such as staff cost within control. 

On the other hand, all or most of the above points can be said of the other listed AMCs as well. Going by the growth in asset size and its composition, there is little indication that trends in the future will differ widely enough to warrant an invest in Aditya Birla Sun Life IPO at this point.

Asset size and composition

Aditya Birla Sun Life AMC (ABSL AMC) is the fourth-largest by assets under management (AUM). While mutual funds are its biggest product, accounting for over 95% of its AUM, the AMC also has PMS, alternative funds and offshore funds.

Revenue comes from a fund’s expense ratio – i.e., the management fee component of a mutual fund’s expense ratio goes to the AMC, for which it becomes fee income. Larger the AUM, the more the AMC collects through fees. Further, an AUM mix tilted in favour of equity and hybrid funds, on which funds charge higher management fee, affords better revenues and margins. 

ABSL AMC is among the largest mutual fund players, ranking below only SBI, HDFC and ICICI fund houses. ABSL AMC’s AUM of Rs 3.04 lakh crore (end-August 2021) is far above UTI AMC’s Rs 2.13 lakh crore and Nippon AMC’s Rs 2.70 lakh crore. Its market share at 8% is also above both these AMCs. ABSL also has built a strong and diversified distribution network across the country – a necessary step as the AMC does not have a vast branch network that bank-sponsored AMCs piggyback on.

ABSL AMC’s large AUM and distribution network are key positives. However, a large AUM alone is not enough to drive growth and maintain high margins. What also matters – for revenue and profit growth, and margins – is the AUM composition, how well it is growing, and where AUMs come from. It is on these counts that ABSL AMC takes something of a backseat in comparison to listed AMCs.

#1 AUM growth

For ABSL AMC, quarterly average AUMs grew steadily over the past year since the market correction in early 2020, and growth has been better than the overall MF industry. Equity fund AUM (excluding passive) clocked a faster growth pace than overall AUM, as did hybrid fund AUM. All these are positives for the AMC itself. 

But comparing these figures to the industry or listed peers tells a slightly different story. On equity AUM expansion, ABSL was behind more than half its peers, including Nippon Life India and UTI. What this means is that other AMC’s funds found more takers, making it harder for ABSL AMC to push its own equity schemes. The latter two AMCs also managed to turn around better than ABSL AMC. Larger AMCs such as SBI have also stolen a march over ABSL, with the result that ABSL AMC lost market share from 10.1% in FY-16 to 8.3% in FY-21. Market share loss by other AMCs was relatively smaller.

ABSL AMC plans to launch more equity funds, PMS, and offshore funds. However, investor interest will depend on performance. This is where it could get a tad difficult as several of ABSL AMC’s equity funds have been below-average performers for a few years now. On the other hand, a performance turnaround in their equity funds is among the reasons propelling AUM growth for UTI and Nippon India Life AMCs. 

ABSL AMC also has a very small presence in passive funds, which are seeing rapidly-increasing investor interest. It is planning to remedy this as well, through fund launches and has already floated index schemes in equity and debt. Here again, though, upping AUM may not come by easily. For one, there is high competition in the segment. AMCs such as Nippon India Life, UTI, ICICI Prudential and Motilal Oswal have already made strong inroads. The up-and-coming Navi AMC is almost exclusively focusing on differentiated passive products, using low expense ratios as a pull.

#2 Investor stickiness

Retaining assets during times of correction or poor performance, and getting fresh inflows is a key step to maintaining AUMs. A higher individual investor share in the AUM offers a level of stickiness. Second, individual investors are a higher-growth market, compared to institutional investors. Third, these investors are typically geared towards equity/ hybrid funds and other longer-term debt funds – all of which offer better fees than the liquid funds/very short-term debt funds that institutional investors go for. 

ABSL AMC’s individual investor share in AUM rose to 47% in the June 21 quarter, up from the 45.6% in the year-ago period and a significant jump from the 39.9% share in the March 2016 quarter. Again, while this expansion works in ABSL AMC’s favour, both HDFC and Nippon India Life are far ahead in individual investor share. UTI AMC is at a similar level.

#3 Smaller-city share in AUM

ABSL AMC ranks fourth in terms of AUM sourced from cities beyond the top 30, with a 15.8% share. A larger share from such cities works on three counts – one, it offers a market outside the saturating top-tier cities. Two, it helps tap into growing investor demand and cementing its brand early on. Three, it allows the company to charge an additional expense ratio on AUM from these cities due to the higher cost involved in investor servicing and awareness. 

Here again, ABSL AMC has a solid foundation in B-30 cities in terms of distribution reach and initiatives to draw in investors, but is overshadowed by both UTI AMC and Nippon India.

#5 Fund categories

ABSL AMC is a major player in the debt space and boasts of top-performers in most debt fund categories. As a result, the share of debt mutual funds in its AUM has hovered around 60% over the past three years (including liquid funds), with the remaining in equity/hybrid funds. A good debt component also helps keep AUM more stable as it is less prone to the kind of fluctuations that equity markets see. 

However, debt funds expense ratios are much below equity or even hybrid funds. Therefore, a heavy debt tilt is likely to keep revenue growth slower. AUM mix of other listed AMCs are better-tilted towards equity compared to ABSL AMC - though it's partly because the debt funds of both Nippon Life India and UTI took severe blows.

Moreover, AUMs in the higher-margin PMS and offshore funds have declined significantly for ABSL AMC – from accounting for about 7% of AUM in FY-19, alternative funds are now just about 4%. With the slower equity AUM growth as explained above, ABSL could see continued reliance on lower-margin debt funds for some time yet.

Revenue growth

AUMs are the bedrock for revenues for any AMC. The severe market correction in 2020 and the slow 2019 saw AUMs fall in the last quarter of FY-20, for ABSL AMC and other AMCs. Revenues, therefore, dropped 12.6% in FY-20 over the year ago. 

But while toplines revived for other listed AMCs in FY-21, ABSL AMC saw a continued hit of 7.9% on fee income, though valuation gains compensated partly for the decline. While there appears to be a revival going by the June 2021 quarter figures, how this sustains remains to be seen.

Fee income rides both on AUM and expense ratios charged to funds. A larger AUM, but lower expense ratios can mean a lower revenue. ABSL AMC’s comparatively lower equity share could have also contributed to slower topline expansion. What also hurt revenues is SEBI’s 2018 directive that capped fund expense ratios, based on type of fund and the size. Average expense ratios across funds for ABSL AMC saw a more significant dip, especially in direct plans, between 2018 and 2021 than the other AMCs. 

On a broader note, AUM growth is a factor of both fresh inflows and the return the fund generates, besides equity and debt market movements. Any correction, or shift to other funds due to poor performance is a key risk. It must be noted here that outside of debt funds, most ABSL AMC funds do not feature in the top quartiles. AMCs such as Mirae Asset India or Axis, for example, have grown smartly owing to their strong fund performance apart from new fund launches. So while ABSL AMC holds a strong position currently, challenges are creeping in that can unfold over the coming years. 

To keep margins and earnings expanding, ABSL AMC controlled costs. Margins improved significantly from 48.2% in FY-19 to 60.8% in FY-21. With no interest costs and low depreciation to deal with, net profit margins are also similarly healthy. ABSL AMC also sports superior ROEs compared to listed peers.

However, further significant margin expansion from here could be limited as it was regulatory changes in 2018-19 that allowed a good chunk of cost savings. Apart from netting a higher AUM growth, ABSL AMC will need to draw in a better fund mix in order to further buttress margins and drive revenue growth.

Valuations

The final factor to consider comes down to valuations. On this front, ABSL AMC appears reasonably priced keeping in mind its positives and drawbacks. At the upper end of the price band, the Aditya Birla Sun Life AMC IPO is at a PE multiple of 38.8 times FY-21 earnings and 32.8 times annualized FY-22 EPS. The table below shows PEs of listed AMCs:

While HDFC AMC is far more expensive, it has a much superior margin profile and AUM. UTI AMC is significantly cheaper, but the AMC is also smaller and with lower ROEs and margins as well.

However, we’d still give the Aditya Birla Sun Life AMC IPO a miss despite favourable valuations. The only metric on which an AMC earns is its AUM. Revenue and earnings growth hinges on how well the AMC is able to translate its AUM into fee income. That revenues have dropped for ABSL AMC despite healthy AUM growth is a sign that needs watching. AUM increase in higher-margin funds for other AMCs poses competition to ABSL as well. 

The mutual fund landscape itself is seeing changes with increased competition as newer AMCs enter the market; the AMC business is not necessarily a high-moat one. This apart, newer funds and investor sentiment are increasingly focusing on fund costs – and lower expense ratios will have an impact on revenue. Therefore, how well Aditya Birla Sun Life AMC keeps its AUM growth and improves its mix needs to be seen before taking a call on its long-term prospects.

Please note that this review does not take into consideration the possibility of listing gains.

General Disclosures & Disclaimers