Reliance Nippon Life IPO - Analysis

IPO Rating - 51*

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.

Purpose of the issue

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 Reliance Nippon Life

Reliance Nippon Life is an asset management company with AUM of Rs. 3,62,500 crore as of June 2017. Company is involved in managing 1) MFs ( including ETFs), managing PMS (portfolio management services), AIFs (alternative investment funds) and pension funds. Company's AUM mix as of August 2017 was MFs 59.5%, Managed accounts 40% and Offshore funds and advisory mandates 0.6%. Of the total AUM, retail AUM constitutes 26% while corporate AUM 51%. This is followed by HNI AUM of 17%.

Company is ranked third in terms of quarterly average AUM for mutual funds and enjoys 11.4% market share. Company currently manages reliance Mutual fund’s 55 open-ended mutual funds including 16 ETFs and 174 closed ended schemes.

Under managed funds, company provide PMS to high network individuals and institutions (including EPFO and Coal mines provident fund organization).

Reliance AIF in which company wants to provide lending through this IPO issue manages tow alternative investment funds which are registered with SEBI.

Company’s revenue and PAT has grown at a CAGR of 18.2% and 15% over FY13-17. Company also enjoys the highest Networth among the top five asset management companies based on average AUM in FY16.

Financial performance

Company has doubled its revenue over the five year period from FY13 -17. This was also helped by the higher other income included in the revenue. Company has seen slower growth in FY17 due to higher competition though the mutual fund market has increased tremendously. We also note that company has almost doubled its spend on advertisement and brand building which led to lower PAT growth of 4% yoy in FY17. Company has been for last three years having RoNW in the range of 22.

We expect company to report higher growth in revenue in FY18 due to increase in market size for mutual funds. We see the company with its higher market share to garner growth.

Growth drivers

New branches - Almost doubling company's plan to open 50 new branches per year from FY19 to FY21. This will add 150 new branches under company’s existing retail branch network of 171 branches. This implies nearly doubling the branches by FY21.

Upgradation of IT network and infrastructure with vendors – We think MFs as of now face the bottleneck of being easy to transact with. We believe upgradation of IT network, apps and API-based interface will attract retail investor who have to go through cumbersome process of filling forms and KYC.

Planned acquisitions – We see that with consolidation in Mutual fund schemes planned by SEBI will leads to a opportunities in the MF space. Company plans inorganic growth in the areas of acquisition of AUM under mutual fund schemes, AIF schemes and portfolio management schemes.

Our view and valuation

The company is valued at post offer P/B of 5.4x and P/E of 38x. Though the company doesn’t have any listed peers, we see the P/B to be on the higher side considering that listed NBFCs P/B range between 3 to 6. Also, banks like Kotak Mahindra and HDFC with diversified portfolio has current P/B of 5.17.

However, considering that the company is looking at almost doubling its branch network and Mutual fund industry witnessing a surge in retail investors, we see that valuation on FY19 to range around 4.3x, which looks reasonable. Also, we expect company’s ad spent to yield results over the next couple of years. Hence, we recommend investors to subscribe for the issue.

*40 or lower – Avoid Investment, 41 to 45 – Risky, 46 to 50 – Invest with limited exposure, 51 to 55 – Investment recommended, 56 & above – Excellent Investment

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