Nippon Life India Asset Management Limited (NAMINDIA) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Nippon Life India Asset Management Limited Q1 FY '24 Earnings Conference Call hosted by Kotak Securities Limited. [Operator Instructions] Please note that this call is being recorded. I now hand over the conference to Mr. Abhijeet Sakhare from Kotak Securities. Thank you. And over to you, Mr. Sakhare.

Good evening, everyone. On behalf of Kotak Securities, I welcome you all to 1Q FY '24 Earnings Call for Nippon Life India Asset Management Limited. We have with us Mr. Sundeep Sikka, ED and CEO, along with the senior management team of Nippon Life Asset Management. I would like to hand over the call to Mr. Sikka for his opening remarks. Over to you, sir.

Thanks. Good evening and welcome to our Q1 FY '24 earnings conference call. We have with us, Chief Financial Officer, Prateek Jain; Chief Business Officer, Saugata Chatterjee; Chief Business Officer, Aashwin Dugal; Chief Digital Officer, Arpan Saha; Head of Product Management and Investor Relations, Arun Sundaresan; and Shin Matsui-san, Nominee of Nippon Life Japan. Our detailed investor presentation and press release have been uploaded on the exchanges as well as on our website. I will break my comments in 3 parts: industry overview, our performance, and the way forward. Starting off with the markets. Equity markets in Q1 FY '24 [ was earned ] with the Nifty [ Next ] 50 rising by 11% and Nifty Mid and Small Cap indices rising by 18% and 20%, respectively. RBI held the repo rates steady at 6.5%, while 10-year G-Sec yield declined by 19 basis points quarter-on-quarter to 7.12%. Coming to the data on the industry. The industry AUM grew by 6.4% quarter-on-quarter in Q1 FY '24 to INR 43.1 trillion. This is the highest quarterly growth since Q2 FY '22 on a year-on-year basis, the quarterly average AUM grew by 14.2%. Now moving to flows. The equity category witnessed a gross inflow of INR 1.13 trillion and a net inflow of INR 137 billion. A large part of the inflows in the category were from small and mid-cap schemes. Investor interest in investing through systematic investment plan further increased with the SIP contribution for the quarter being INR 432 billion, 19% higher than Q1 FY '23 and 3% higher than Q4 FY '23. Monthly SIP flows in June 2023 stood at INR 147 billion, which was marginally below the all-time high achieved in mid-2023, SIP folios increased by 5% quarter-on-quarter to INR 66.5 million. Arbitrage funds also witnessed strong inflows of INR 137 billion. Fixed income category, that is debt plus liquid witnessed a net inflow of INR 1.35 trillion after a large outflow witnessed in Q4 FY '23. ETF flows were healthy at INR 150 billion. At the end of the quarter, the unique investors in the mutual fund industry increased to 38.3 million, which -- while industry folios increased to 149.1 million. Increasing financialization, higher awareness and better reach through new-age technology platforms and distribution network should see continued growth in the mutual fund industry going forward. Now moving to our business performance. We closed the quarter with total assets under management of INR 4.04 trillion. This includes mutual funds, managed accounts, and offshore funds. Our mutual fund quarterly average AUM grew by 7% quarter-on-quarter and 12% year-on-year to reach INR 3.14 trillion. Now I would like to share 5 key highlights for the quarter, starting with market share. Our market share increased 4 basis points quarter-on-quarter to 7.28% with market share increases across all asset categories barring liquid. Our equity market share, which is stable at 6.19% over the last 4 quarters has seen an improvement of 7 basis points and has increased to 6.26%. We also gained market share in our debt segment, which is 44 basis points quarter-on-quarter and ETF 12 basis points quarter-on-quarter. On the segmental front, our HNI category market share improved for the sixth quarter in a row. HNI AUM grew 13% quarter-on-quarter to INR 872 billion. Market share increased 19 basis points quarter-on-quarter to 5.99%. Individual AUM, which consists of retail and HNI AUM, also grew by 13% quarter-on-quarter to INR 1,837 billion. Market share increased 17 basis points quarter-on-quarter to 7.16%. Highlight #5, our B-30 AUM grew by 13.4% quarter-on-quarter to INR 631 billion, which makes us the fastest-growing large AMC in B-30 locations. Our market share improved by 19 basis points quarter-on-quarter to 8.33%. This segment forms 19% of our AUM versus 17% for the industry. I would like to share that NAM India has also been appointed as one of the AMCs for managing EPFO corpus for ETFs, the investments commenced from the beginning of July 2023. I would also like to touch upon other important aspects of our performance. We added 0.5 million investor folios in the quarter and continue to have the largest base in the mutual fund industry with 14.1 million unique investors with a -- which is a market share of 37%. Systematic flows are a stable and a key driver of mutual fund industry's long-term equity flows. I am happy to share that there has been a steady uptick in our systematic flows over the last 8 quarters, and this has led to increase in our market share. Our systematic book rose by 10% to INR 12.2 billion for June 2023 over March 2023. This resulted in an annualized systematic book of approximately INR 147 billion. Number of systematic transactions for the quarter increased 8% quarter-on-quarter to more than 10.7 million. 63% of our SIP AUM has continued for over 5 years versus 25% for the industry. Also, in volatile markets, folios with lower ticket size have demonstrated longer vintage and better stickiness. 17% of our SIP folios have continued to -- continued for more than 5 years and as against the industry average of 12%. Generally, as market moves up, we typically tend to see higher redemptions in equity segment. However, given the granular nature of our AUM and specifically SIP AUM for us, we have seen lower impact of redemptions versus the industry. This is evident from the fact that we have had net sales market share in excess of 20% in equity for Q1 FY '24 except for arbitrage and Ind AS. At Nippon India Mutual Fund, we offer industry best suite of passive products with an ETF ecosystem which is already in place and far ahead of the peers in terms of investor base and mind share. We continue to be one of the largest ETF player with an AUM of INR 738 billion and a market share of 13.9%. Gold ETF is the biggest in the category with INR 78 billion in assets. Our share in industry ETF folios is 61%. We have 70% of the ETF volumes on NSE and BSE. Our ETF average daily volumes across key funds remain far higher than the rest of the industry. Now I would like to provide a brief update on our AIF and international businesses. Under Nippon India AIF, we offer Category III -- Category II and Category III alternate investment funds and have a total commitment of INR 57.5 billion across various schemes. We had launched our Tech Fund of Funds in 2020, which will anchor the large Japanese institutional corporate investors. We are now in the process of raising commitments for a second similar fund. We have also recently launched a credit AIF, for which fundraising process is underway. We continue to strengthen our AIF offering, and in the quarter, we appointed a new Head of AIF, Mr. Ashish Chugani, post the superannuation of previous head. We would like to continue focus on fundraising from international markets, and as mentioned in our recent AGM by Yao-san, who is the Chairman and CEO of Nippon Life Asia and Director on the NAM India Board, Nippon Life remains committed in supporting NAM India's offshore operations. Moving to our strong distribution franchise. A digital-centric strategy remains at the core of our future growth. Digital has always been the potential beta at Nippon India Mutual Fund. Our digital lead with leverage, evolution, access, and privacy, doctrine across the organization and our franchises helping us to be trusted, agile, and future-ready. We will keep continue to strengthen our digital ecosystem to simplify the investment experience and build a frictionless ecosystem for our investor partners. Digital purchase transactions rose to 1.06 million in Q1 FY '24, up 42% year-on-year. This is the first time that our digital transactions crossed 1 million in a quarter. The digital channels also contributed 57% to the total new purchase transactions for the quarter. While I have already spoken about our digital infrastructure, we have a well-diversified physical distribution base with a wide presence through 270 locations across the country. We have over 93,000 distributors, including over 92,800 MFDs. We added over 2,000 distributors during the quarter. Now I would now like to take you about a few other developments. Starting with our small cap fund, while the AUM growth is of high importance for AUM, we continue to act in the -- act with highest priority towards investors' interest. With this backdrop and seeing the current market conditions, we stopped accepting lump sum investments in our small cap fund with effect from July 7, and continue with the SIPs. We would like to evaluate the restarting of the lump sum investments when we feel the market opportunity is right. Now on the regulatory environment, as you are aware, SEBI came out with a consultation paper in May 2023 regarding the review of TER charged by AMCs. Post that, as mentioned in media, SEBI is expected to come with a revised paper after incorporating industry feedback. We await the details regarding the same. Now on our financial performance. For Q1 FY '24, operating profit stood at INR 1.93 billion, up 13% year-on-year. Profit after tax stood at INR 2.36 billion, an increase of 107% year-on-year and 19% quarter-on-quarter. As a part of our capital allocation strategy, we would like to reiterate, we have a stated dividend policy to distribute 60% to 90% of our profits to shareholders. In FY '23, we distributed 100% of our profits. In addition, we also remain open to evaluate investments in strategic opportunities that add to the profitability and complement our existing businesses. Briefly moving onto ESG. As a signatory to UN-PRI, we are integrating ESG aspects into the various areas of planning, operations, fund management, risk, and governance. Our goal is to encourage higher adoption of ESG principles within the asset management industry. Our ESG ratings are amongst the best in the financial industry with NAM India now rated low risk by Sustainalytics. As a responsible investment manager, we are building a resilient portfolio that will, not only provide sustainable returns to our portfolio -- to our investors, but will also have a positive environmental and social impact. For those of you that may be -- for those of you that may have a greater interest in ESG, I urge you to go through our recent annual report, which also contains a complete ESG report and BRSR Report for FY '23. To sum up, I would like to reiterate that investor-first remains our key theme. We will continue to do what is right for our investors with sustainable profitable growth for our shareholders. We will continue to build our business going forward on the pillars of brand, distribution, performance, people, process, and trust. I'm happy to state that 1 out of 3 mutual fund investors in India invest with NAM India. With these comments, we are happy to take your questions. Thank you.

[Operator Instructions] Our first question comes from the line of Prayesh Jain of Motilal Oswal.

Firstly on the yield front, could you throw some light as to why the yield dropped in this quarter?

Yes. So Prayesh, we have been maintaining that -- we have always been focusing on sustainable growth, and unit economics have been our guiding lighthouse for all our product launches, distribution strategies, et cetera. But if you look at overall operating income at 45 basis point is in line with the industry. Our operating income is up 13% Y-o-Y, and even if you look at expense income ratio has been about 34%, improved from 48% last year. See, the declining yields are more function of the industry for 2 or 3 reasons. One, that as and when our equity AUM keeps growing, because of the nature of the TER provided by SEBI, our yields goes down. The second is that, given the fact that B-30 incentives, there has been a moratorium, obviously, for the pressure flows from -- and as you are aware that for us, the IFAs and the smaller cities and towns has been our biggest constituency, which support us and, therefore, once that was down, obviously, the cost of acquisition has been marginally higher, that is the second reason. The other reason is, we have strategically reduced some of the expenses, some of our debt schemes, where we believe that if we -- we will be able to get more absolute AUM, which will compensate the yield decline and we will see an absolute growth in profitability. So that is, again, tactically few things which we have made changes. Also, the composition of index increasing, which you've seen again an industry index in ETF, because that is also -- the composition change will also lead to this yield compression. So as I've mentioned that broadly this is in line with the industry realization, and also most of the factors are beyond our controls and these are all [ separate ] issues, and the increase in AUM for the respective schemes.

Got that. Prateek, one more -- on the employee expense that is up sequentially. What's the reason for the same?

Sorry.

Employee expenses, which was up sequentially in the quarter.

No. So if you look at it on quarter-on-quarter basis, sequentially, if you see the last year quarter 1 versus this year, it is flat. Sequentially, if you recollect that, look, we have mentioned that, we have reduced our bonus provisions what we were carrying throughout the year in the fourth quarter and, therefore, there was a decline in the fourth quarter last year. Yes. So that was a one-off and, therefore, this time it looks -- it appears higher. But otherwise, it is in line with actually what we had provided in the -- or what we have spent in the first quarter of last year. On the contrary, there is an efficiency, which has come in, because of the fact that despite giving an increase of 7% to 8%, which I mentioned, we are clocking the similar run rate for our employee cost.

Okay. Got that. And from a more strategic standpoint and correct me if I'm wrong, you said 20% of your -- you have 20% share in equity in net inflows. Is that correct?

Yes, that's correct.

Yes.

Okay. That's a great number. And apart from the fact that the performance has improved, is there anything else from a strategic point that you would have changed in the -- and that would have started yielding more results for you in terms of distribution for that matter?

Well, Sundeep, this side. I think we continued -- it is a continuous effort over a period of time, which is yielding results. I think SIP continues to be our focus because SIP numbers have also doubled almost in last 12 months. So I think you're getting with the lag effect, I think you are getting higher inflows. So I think it's, not only one thing, it's multiple things, which have been done over the last 2 to 3 years, which is now showing results.

There's nothing on the commission front that you would have changed materially, right?

No. We have not changed any commissions.

The next question comes from the line of Lalit Deo from Equirus Securities.

Sir, just 2, 3 questions. Firstly, sir, you mentioned that we have been given a mandate to manage the EPFO corpus from July onwards. Sir, like what will be the allocation over there? And like what kind of yields do we make in those -- in that AUM?

So I think broadly, it will be very difficult to put a number to it, because I think it's been more on a percentage basis. So typically we'll be getting about -- roughly about 1/4 of all the allocation of the -- allocation being done by EPFO. It will be coming into our existing ETFs, I think. And the average ETF, I think, if you see our present Nifty ETF, the yield is about 4 -- between 4 to 5 basis point, and that will continue because it's coming in the same fund.

Sir, just a clarification on this, this will be only in the equity area, not on the like the PMS kind of a method?

This mandate is, this money will be coming in our -- both our ETFs, Nifty and the Sensex ETFs.

Okay. Sure. And sir, like we have done based on net sales market share. So like, could you also qualitatively comment on our gross sales number like how it has improved? And has now -- is it like better than our AUM market share? Because like for us, our equity AUM market share has been pretty much stagnant -- pretty much stable around 6.1%, 6.2%. So just wanted to understand over there.

I think broadly, if you were to look at our equity market share has gone up a few basis points. Yes, I think 7 basis points. And clearly, as we mentioned, and as I mentioned to the earlier question, the SIP numbers have been increasing. I think the SIPs have almost doubled. The SIP book 12 months back, I think, was about, say, INR 550 crores. Today, it has come to about INR 1,200 crores. So I think all these are helping in the -- with the lag effect. And also, because of the granular business, I think typically when the markets go up, we see redemptions. And businesses like ours, where we -- we deal with lots of small ticket size SIPs, this business -- this AUM is lot more sticky. So I think it's a combination of multiple things, it's not one thing that is leading to this increase. Overall equity gross sales have also moved up from 6% to 8%.

Okay. Sure, sir. And sir, lastly, like on the passive side, so now we are -- in the industry we are seeing that all of the major players are like rolling out their new products in this segment. And also there has been a recent announcement, like a new player is going to come up in the industry as well as newer industry participants are also going to focus on this segment. So how are we looking to maintain our leadership in this segment going ahead, like over the next 3 to 5 years?

The only thing is, we'll continue executing, I think that's the only thing we can say. I think the market is big, I think. And I think we will continue, I think, we have a good product suite. And we have stated in past also, we will not be launching NFOs just for the sake of launching NFOs. I think till that time we feel that there is a need for that in our portfolio and also in investor portfolio. So you saw last full year almost 18 months, we have not launched any NFO. So I think the only answer I can give is, I think our approach will be to launch funds which are scalable, and the focus will be to continue executing well. That's the only thing will be in our strategy.

[Operator Instructions] The next question comes from the line of Madhukar Ladha from Nuvama Wealth Management.

Am I audible?

Yes.

Congratulations on good numbers, particularly in a difficult operating environment and some of the operating parameters are actually doing well and they are looking good. So first thing, sir, on the admin and other OpEx, I think there's a pretty big jump on a year-over-year basis and also on a quarter-over-quarter basis there has been some increases there. So some color on what is driving this and what should we expect for the year? Second, on the regulatory aspect, maybe you could throw some light on what the industry has -- what industry representations have gone to the regulator? And what do you see happening from here, if you're comfortable in discussing that?

So Madhukar, I'll take the second question first and give it back to Prateek for the other -- on the admin expenses. I think as far as the regulatory changes are concerned, I think, as you're aware, I think as it's been in media, I think we saw a paper, which had come in May, consultation paper and after that in media, as you would have heard that there is a new consultation paper expected anytime, while I think there have been various consultations, but I would not like to speculate. I think I'll rather wait for the new consultation paper to come. And I think it should be and it may come soon. And I think it's better to have this discussion after that because otherwise, it will just be speculation. So I think regarding the first question on admin, I think, I'll request Prateek to, please share.

So Madhukar, from the corresponding quarter last year, there has been a jump, but broadly, I'll divide it into 3 parts. One is, obviously, there has been an inflationary cost adjustment to whatever running -- routine cost what we have. The second part is that, in terms of the other non-discretionary costs, we have seen some savings because we keep working on that. We have been maintaining that. Look, there are scopes for further efficiencies. So we keep working on it, and we've seen some positive development there. However, this quarter, if you would have seen that we have actually increased our discretionary spend significantly and we have gone. And for our brand building purposes, we have considerably spent on our marketing activity. So -- because of this discretionary spend, you'll see our expenses are higher as compared to previous quarter. And as regards to the corresponding quarter, it is a function of 2 things, one is that, the inflationary spend -- inflationary increase plus the discretionary spend. These discretionary spends actually are more -- we see more as an investment for the future growth. And currently, as you mentioned, that your performances are being good, and at this point of time, the impact that if you go out and go to the market and have more visibility around.

Got it. Just one data keeping question. Can you give me your closing AUM category-wise, equity, debt, liquid, and ETFs?

Closing AUM, okay, one second.

So Madhukar, you want the quarterly average AUM, right?

No, closing AUM.

So the total, including equity arbitrage is about INR 150,000 crores. Debt, including the passives is INR 77,000 crores. Liquid is INR 31,600 crores. ETF is INR 75,000 crores. So all together as of June end, it was INR 325,000 crores.

[Operator Instructions] The next question is from the line of Mohit from BOB Capital.

Sir, if I look at the debt to AUM, I think it has risen by around INR 105 billion. So I just wanted to know which schemes we saw the maximum inflows?

This is Aashwin here. And see, most of the -- industry level, most of the money has come at the shorter end of curve. So most of the money has come in the ultra short-term scheme. There was some lag effect that it happened because in March end the tax benefit from debt were taken away. So we got -- the industry got some INR 50,000-odd crores at March end. So the impact of that on average basis was added to the overall debt to AUM in Q1.