Reliance Nippon Life Asset Management Ltd IPO - Review

The latest primary market offering in Dalal Street is Reliance Nippon Life Asset Management Ltd IPO. Let us see in this IPO review if it is a good investment.

Company Information:

Incorporated in 1995, Reliance Nippon Life Asset Management Ltd is Mumbai, India based asset management company. Company has market share of over 11.4% in mutual funds offerings in India. Reliance Nippon Life is ranked the 2nd most profitable asset management company in India.
Company is promoted by Reliance Capital Limited. Reliance Capital is an RBI registered non-banking finance company with business interests including in asset management and mutual funds, life, health and general insurance, commercial and home finance, stock broking, wealth management services, distribution of financial products, asset reconstruction and proprietary investments. Reliance Capital Limited is a part of Reliance Group led by Mr. Anil D. Ambani.
Nippon Life Insurance Company, one of the leading private life insurers in Japan is the co-promoter of the company. Nippon Life offers a wide range of financial products, including individual and group life and annuity policies. Company has assets of over USD 577.00 billion.
Reliance Nippon Life is involved in managing:
1. Mutual funds (including ETFs);
2. Managed accounts, including portfolio management services, alternative investment funds (AIFs) and pension funds; and
3. Offshore funds and advisory mandates.
Company manages 55 open-ended mutual fund schemes including 16 ETFs and 174 closed ended schemes. Company has a network of 171 branches and over 58,000 distributors including banks, financial institutions, national distributors and independent financial advisors as of June 30, 2017.

The company plans to utilize the funds raised from fresh issue of ~616 crore primarily for lending to subsidiary - Reliance AIF (20%), new mutual fund schemes being managed by the company (16%) and funding inorganic growth (26%). The rest will be utilised for setting up new branches/ relocation of existing branches, upgrading IT systems, brand building activities and general purpose. 

About the issue

Company plans to raise Rs. 1,542 crore through issue of 6,12,00,000 shares. Out of this, the fresh issue will comprise 24,480,000 shares representing 40% of the issue. The offer for sale is for 60% of shares currently owned by Nippon Life and Reliance Capital. The retail portion will comprise not less than 35% of the shares issue, implying 21,420,000 shares.

The issue will be open for subscription from October 25 2017 to October 27, 2017. The issue price is Rs. 247 – Rs. 252 and an investor has to subscribe to minimum lot size of 59 shares. The face value of share is Rs 10 and company will be listed at both NSE and BSE.

The lead book runners of the issue are JM Financial, CITIC CLSA, NOMURA and Axis Capital.

Pricing of Issue:

Please note that this is a combination of both Offer for Sale (60% of total issue size) and Fresh Issue (40% of total issue size). Offer for sale money will be pocketed by exiting investors and the Fresh Issue money will be utilized by the company in the below mentioned ways.

Risk Factors:

• Future revenue and profit are largely dependent on the growth, value and composition of AUM of the schemes managed by the company, which may decline.
• Underperformance of investment products in respect of which we provide asset management services could lead to a loss of investors and reduction in AUM and adversely affect our revenue and reputation.
• Business has grown consistently in the recent past and such growth might not continue or might reverse.
• Competition from existing and new market participants offering investment products could reduce their market share or put downward pressure on their fees.
• They regularly introduce new products for their customers, and there is no assurance that the new products will be profitable in the future.
• The asset classes they manage may become less attractive to investors.

Company Strengths:

• Third largest asset management company in India, in terms of mutual fund QAAUM, as of June 30, 2017, according to ICRA.
• Leading Asset Management Company with Strong Credentials to Drive Growth.
• Multi Channel Distribution Network.
• Comprehensive Suite of Products with Distinguished Investment Track Record.
• Focus on Customer Centricity and Innovation.

Balance Sheet:

Observations from Balance Sheet:

• Reserves & Surplus has grown in a consistent manner.
• Current liabilities has been maintained at a certain level over the years.
• Non current Assets has not increased because an AMC does not need long term assets , it just needs current assets.

Profit and Loss Statement:

Observations from Profit and Loss Statement:

• Profits have been growing consistently from 2013.
• Profits have grown at a CAGR of 15% from 2013 to 2017.

Cash Flow Statement:

Observations from Cash Flow Statement:

Cash flow has been positive for the past 5 years. This is a good indicator for a capital intensive AMC company such as Reliance Nippon.

Debt to Equity:

Debt to equity has been at very good levels. This augurs well since they can borrow in the future for big CAPEX plans. Also the latest debt to equity ratio of 0.14 will come down post IPO.

Earnings per Share and Price to Earnings Ratio:

If we annualize the latest EPS of June 30 , 2017 to 7 , at the upper price band the Price to earnings is 36 times. Company is demanding 36₹ for every 1₹ of earning , this is not surprising given that Indian Markets are in the midst of an elongated bull run.

Book Value and Price to Book Value:

At the upper price band of 252₹ , the price to book value is 8.9 times! This is not surprising since Mutual Fund/AMCs do not invest a lot in fixed assets.

Opportunities:

The household savings data compiled by the Ministry of Statistics and Programme Implementation indicates that Indian households have traditionally favored real estate and gold as means of investments. However, over the years there has been an increase in financial awareness and a consequent increase in financial savings.

Within financial savings, there is a marked preference for deposits due to their perceived low risks. Nevertheless, the share of mutual funds has been on the rise from 1.35% of net financial savings in the financial year 2012, to 2.94% in the financial year 2016.

Grey Market Premium:

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Conclusion: Indian’s love for the precious metal Gold and real Estate is known all over the World , Thankfully this love affair has been fading at a good pace which is evident from the Record SIP inflows into Equity schemes. Also more and more people are investing in markets. I believe this company can be played on the “Financial Asset Investing Theme”. In addition to this , Primary markets show heavy subscription for companies which operate in the Niche Segment. Since this is the first AMC to list , it is expected to get good over-subscription.Prominent examples of Stellar listings for Niche Companies include Prataap Snacks(not to forget Prataap was priced at 222 Price to earnings Ratio!) and Sheela Foam.

But retail investors have lost a lot of money in Anil Ambani’s companies (Rcom, Rpower, RInfra, Rel defence). Given all this negative sentiment around Anil Ambani’s companies, I assign a ‘Avoid’ Rating on this IPO.

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