October 2017


Reliance Nippon Life Asset Management company is coming up with an IPO, and the market seems super Excited about Financialization of Savings as a theme.


Stallion Assets View – We Strongly believe that Markets are underestimating the financialization of savings as a theme, the total Profit pool of top 5 Asset management companies (57% Market Share) in India is just 1800 Crores in FY2017. The Profit Pool is so small that one midsized popular hedge fund Pershing Square made more Profit than the Entire Indian Asset Management Industry, We at Stallion Asset have absolutely no doubt that the Profit Pool will grow multi fold in next 5-10 years and there will be massive wealth Created in this space.

These are the 7 Main Factors you need to know about Reliance Nippon Life Asset Management Company.


Factor #1 – Opportunity Size – The Below Chart will Exactly tell you where Indians are Investing their Savings. Indian Savings for last 5 years have Grown at 6%CAGR, Saving in Physical asset (Land & Gold) Grew 1% CAGR,whereas Financial Assets at 14%CAGR.

The Savings in Mutual Fund as a percentage of overall Savings  in India was at 3% in FY2016, this is Exactly the same place where it was in USA in 1980, this moved to 18-19% by 1998 in USA. Since there is consensus that Gold and Real Estate wont move a lot for next 4-5 years, a similar move is expected in India. If this happens in India, it can be the trillion dollar Opportunity in Asset Management Companies.


In 1979 the total AUM with Mutual Funds in America was just 94 Billion $, in the next 20 years by the end of 1999 the Asset under management grew to 6,846 Billion$, i.e. it grew at 24% CAGR. In the Year 1980, only 4.6% USA Citizens  owned mutual fund, which is the similar Rate of that in India today, whereas in the next 20 years in USA this number shot up to 48.6%. This was also the Period where Legends like Peter Lynch, Paul Tudor Jones, George Sorus, Warren Buffet were created, we expect a repeat of the same in the Indian Market.

Factor #2 -Understanding the Mutual Fund BusinessThe Top 5 AMC’s in India have 57% Market shares and top 10 Mutual Funds have 80% Market Share, the competition is fierce among the Top 5 with broadly the same market Share.

Mutual Fund AUM is the worse metric to look at and judge a company because there is huge variation in fees structure across products.. In FY2017, The Fees Reliance AMC got for Equity Funds was 1.35% of AUM, in debt 0.48% of AUM, but just 0.09% in Liquid Fund and 0.95% in Gold. The obvious thing is that more the Equity Portion in the AUM, Higher the fees they Make. HDFC has the highest Revenue as % of AUM at 0.68% as 44.7% of its AUM is Equity Mutual Funds whereas SBI has the lowest Revenue as % of AUM at 0.47% as it has only 31% in Equity Mutual Funds. Reliance AMC has lower AUM in Equity compared to SBI MF at only 28% of its total AUM but still has a good Revenue % of AUM at 0.62% as its fees are higher compared to peers.

Factor #3- Growth – The AUM of Mutual funds has grown from 8.96 Lakh Crores in FY2014 to 18.58 Lakh Crore in FY2017, a growth of 27%, but the Interesting thing is that the high margin Equity AUM has grown from 1.98 Lakh Crore in FY2014 to 6.09 Lakh Crores in FY2017, showing a mindblowing CAGR growth of 45% in last 3 years. As Retail Investors invest in Equity Again since FY2014, Birla Sunlife AMC grew its Equity portfolio the fastest at 63%, whereas Reliance AMC underperformed the market with lowest growth of 34%. It is important to note that within the Top 5 AMC’s of India ICICI AMC has gained the highest share in the recent run and its Equity AUM Grew at 60%. HDFC on the other hand underperformed as well with last 3 year CAGR of only 34% and might lose its position of the largest Equity AMC Company to ICICI AMC in FY2018.

Persistency Ratio – You might be thinking why are we using Persistency ratio in a AMC Company which is commonly used in Insurance companies right? You will be Surprised to know that In FY2017, 43% of Equity Mutual Fund Investors booked out of their fund within a year, 62% Investors sold out within 2 Years. We at Stallion Asset believe that the overall long term trend of the Industry is positive, but there will be huge cyclical Upturns and Downturns in between.  Low Yield of other asset classes like Real Estate, Gold and Fixed Deposit will keep getting new Investors in Equity Market, but as soon as Inflation rises above 7% in India, there will be a shift of Asset class preference.


Return on Equity – When i read the Prospectus of Reliance AMC for the First time, i was hurt to see that this AMC’s is generating just so much less ROE in a Super upcycle. Asset Management is a business which needs very less capital and should have very High ROE. In FY 2017 Reliance AMC had a Return of Equity of just 21%, whereas ICICI AMC Was the Leader in the Pack with 65% ROE. ICICI AMC was the one to grow its Equity AUM the fastest at 60% CAGR in last 3 years, whereas Reliance AMC was the slowest Equity AUM Gainer with 33% CAGR hence the return ratio’s are  poor.  The Largest Equity AUM was with HDFC AMC and it had an ROE of 39% in FY2017.

Valuation –

Reliance AMC IPO is coming at a Market Cap of 15,400 Crore or a  PE Multiple of 38 or 7.3% of FY2017 AUM. Nippon Life had last Increased stake in Reliance AMC in 2015 at a valuation of 8,500 Crores or 5.66% of AUM. In Last 5 years, there has been a lot of consolidation in the Mutual fund space and most foreign players have exited to Indian players getting Valued at 1.5-6% as a % of AUM . We at Stallion Asset have absolutely no Doubt that the Profit Pool in AMC’s will grow 5-10x in next 10 years as financialization of savings theme gains momentum.



Conclusion – The bet here is on the Opportunity size though Reliance Asset management has probably the worse matrix in the top 5 asset management companies. The IPO is a Bull Market IPO and definitely not cheap but there is huge longevity of Growth in AMC companies. We believe Reliance AMC since its the First AMC to be listed will get scarcity premium but as and when more AMC’s get listed the scarcity premium will vanish. Reliance AMC is what it is today due to 2 main Inspirational gentlemen 1) Mr Sunil Singhania 2) Madhu Kela, though both have left the company in last 6 months. We believe ICICI is the best managed AMC whereas Reliance and Birla AMC is the Bottom Pyramid within the top 5. There is no Doubt the business of AMC is great and Huge Operating leverage in it, the wind is blowing in favor of Asset Management companies and Reliance AMC will ride the wave in this bull Market. We Recommend a Subscribe on it but be ready to shift your capital to better AMC’s in the coming Months.

About the IPO – 



Last Week we met the Management of PNB Housing and spend the entire day with the whole top management. We got amazing insights about the housing finance Industry & the road Ahead. These are the 5 main takeaways from the meet.

1)  Opportunity Size – The Run up in Housing Finance Companies has been very strong and we wanted to understand the opportunity as every company is coming out with exciting target’s, for example newly launched Piramal is targeting 15,000 Crores AUM  by FY 2020, Reliance Home has guided to Increase AUM by 57% CAGR from 13000 Crores now to 50,000 Crores by 2020, Kapil Wadhawan of DHFL guided in an Interview last week to more than double AUM from 90,000 Crores to 2,00,000 Crores in 3 years, & Finally Indiabulls Housing finance has guided for 30% CAGR AUM Growth. This is more important as these guidance are coming at a point when the supply to new housing is very weak & most builders are struggling with weak sales.

Sanjaya Gupta, the CEO of PNB Housing and a man who is one of the most passionate 54 year old man i have seen has spent his entire life in the mortgage Industry, told me that there is no doubt that supply is weak in the new retail housing this year due to factors like RERA & Demonetization but a lot of builders have started to line up projects next year, and  FY2018 will be the inflection point for affordable housing in India.  He also added that he will sweat his assets and ensure that they have reasonable growth. The whole Industry is looking towards affordable housing and the same point was repeated by Khushru Jijina on Wednesday on the launch of Piramal Housing finance that FY2018 will be a super Kicker for Housing Finance Companies as affordable housing really starts. We at Stallion Asset always verify the information and we spoke to a few builders in affordable housing & their reply was every top builder in major cities are definitely foraying and betting big on it. The model of Purvankara of having a separate low cost housing subsidiary has been well taken by the market & that’s the model they will work on.


2) Growth – We all know Housing Finance Industry in India has been growing at 18% historically, though the banks have been growing at just 15% and losing market share to Housing finance companies who are growing at 21%, but what about growth ahead. The Question was that if we break up the growth for last 15 Years there was a 10% Growth in Prices of Real Estate & 8% volume Growth, but now that there is no growth in Real Estate Prices, will the Industry be able to grow at 18%? The Answer was affordability for housing has improved as prices have been stagnant for last 5 years and with falling interest rates and subsidies on housing loan, they remain super bullish.

The most Important point i picked up during the Conversation was that only 20% of new registrations for house that happen are new houses (Seller is the builder), and the rest 80% are Consumer to Consumer transfer (Resale).


3) Competition- Since Competition has increased from New HFC’s as well as banks getting aggressive on retail lending, our next concern was will the Spreads sustain? There is pressure on the Salaried Class for spread as government banks are getting aggressive there but self employed remain 50% of Retail book for PNB Housing where competition is limited.


4) Loss Given Default & Credit Risk – We asked that there is a common phenomena and the one that we at Stallion Asset also believe that Profits for an NBFC are Front Ended, Whereas Losses are Back ended.  Sanjaya Gupta Clarified that it all depends on the Credit Quality, and we at Stallion Asset learned from our visit that PNB Housing definitely has the best System in Place for credit Checks. When i asked Jayesh Jain, CFO of PNB Housing about the Loss given default, he told me its about 4% of NPA i.e. if the loan book is 10,000 Crores, assuming NPA is 1% of that i.e. about 100 Crores, in that case only 4 crores is real bad debt, the rest is recovered from selling mortgage.


5) Conclusion – The Growth in Housing Finance going forward is going to be a volume game. Raamdeo  Agarwal of Motilal Oswal who himself runs a Housing finance company (Aspire) gave PNB Housing a thumps up, calling a 1 Lakh Crore ki Kahani. Valuation of most HFC’s are pricing in a pick up in affordable housing, the housing finance story is now depended on affordable housing story, but remember only 20% of housing sold in India is via builders and the rest 80% is by Consumer to Consumer. The conclusion of the meet was that if Affordable housing really picks up the HFC’s would grow at 30%, and if it doesn’t they will grow at 15%.

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