Aditya Birla Sun Life AMC

Fourth largest mutual fund

Maintaining position for a decade with stable market share and healthy return ratios

Aditya Birla Sun Life AMC is the fourth largest asset management companies (AMCs) in India by quarterly average asset under management (QAAUM) since September 2011 and its also the largest non-bank affiliated AMC in India since March 2018. The focus of the company is on consistent investment performance, extensive distribution network, brand, and superior customer service. The company managed total AUM of Rs 293642 crore (closing AUM) under its suite of mutual fund (excluding domestic fund of funds (FoFs)), portfolio management services, offshore and real estate offerings, and approximately 7.18 million investor folios (including domestic FoFs) end June 2021.

The company has established a geographically diversified pan-India distribution presence covering 284 locations spread over 27 states and six union territories. Its distribution network is extensive and multi-channeled with a significant physical as well as digital presence and included over 66,000 Know Your Distributor-compliant mutual fund distributors (MFDs), over 240 national distributors and over 100 banks/financial intermediaries end June 2021. The company had 1,312 employees, of which 1,002 were permanent employees.

The company was incorporated on 5 September 1994 and currently its a 51:49 joint venture between Aditya Birla Capital (ABCL) and Sun Life AMC. ABCL is the listed non-operating holding company of the financial services businesses of the Aditya Birla group, a Fortune 500 global conglomerate. Through its various subsidiaries, ABCL managed total AUM of Rs 343266 crore, had a consolidated lending book of over Rs 57182 crore and an active customer base of over 25 million customers end June 2021. Sun Life Financial Inc., the ultimate holding company of Sun Life AMC, is a leading international financial services organization providing insurance, wealth, and asset management solutions to individual and corporate clients. Sun Life Financial Inc. had a market capitalization of C$ 37.43 billion and total AUM of C$ 1360.69 billion end June 2021.

A. Balasubramanian is the Managing Director and CEO of the company and has been associated as an employee of the Company since 1994. He has been the CEO of the Company since 2009 and was the Chief Investment Officer from 2006 to 2009.

The company managed 118 schemes comprising 37 equity schemes (including, among others, diversified, tax saving, hybrid, and sector schemes), 68 debt schemes (including, among others, ultra short-duration, short-duration, and fixed-maturity schemes), two liquid schemes, five exchange trade funds (ETFs) and six domestic FoFs end June 2021. The company also provides portfolio management services, offshore funds, and alternative investments.

Its total QAAUM grew at a CAGR of 14.55% from Rs 136503 crore end March 2016 to Rs 269278 crore end March 2021 and further rose to Rs 275454 crore end June 2021. The AUM under portfolio management services, offshore and real estate offerings was Rs 11515 crore end June 2021.

The company caters to a wide range of customers from individuals to institutions through its pan-India network and offering of customer solutions. Monthly average AUM (MAAUM) from institutional investors stands at Rs 150304 crore and individual investors at Rs 133353 crore end June 2021.

The leadership position, product mix, cost base and scale has contributed to its strong financial performance. The company has achieved a return on net worth of 34.4% in Q1FY2022 and average 35% for FY2021-FY2019 period.

The focus of the company is on improving equity-oriented scheme mix, which is a significant factor in enhancing profitability, as equity-oriented schemes generally generate higher management fees compared to other schemes. The equity-oriented MAAUM grew at a CAGR of 24.94% from Rs 32345 crore (23.66% of total MAAUM) end March 2016 to Rs 98480 crore end 31 March 2021 and further moved up to Rs 108044 crore (38.09% of total MAAUM) end June 2021.

The company has also achieved substantial growth in individual investor MAAUM and customer base, which comprises both retail and HNI investors. The company is the fifth largest player in terms of market share in individual MAAUM. An individual investor MAAUM grew at a CAGR of 18.38% from Rs 54613 crore (39.95% of total MAAUM) end March 2016 to Rs 126982 crore end March 2021 and further to Rs 133353 crore (47.01% of total MAAUM) end June 2021.

The number of total investor folios (including domestic FoFs) more than doubled from 2.93 million end March 2016 to 7.07 million end March 2021 with a CAGR of 19.27% against the industry increase of 15.48% and further rose to 7.18 million folios end June 2021.

The company has maintained a market leading position in B-30 penetration over the years, further contributing to the growth of individual investor base as well as improvement in profitability. B-30 cities MAAUM was Rs 44701 crore end June 2021 and share in total MAAUM was the second highest amongst the five largest AMCs at 15.76% rising from 13.44% end March 2019.

The number of outstanding systematic investment plans (SIPs) more than tripled from 0.86 million end March 2016 to 2.80 million end June 2021. AUM from SIPs grew from Rs 8523 crore (25.70% of total equity-oriented mutual fund AUM) end March 2016 to Rs 45692 crore (41.70% of total equity-oriented mutual fund AUM) end June 2021.

The company has automated and digitized several aspects of its operations including in relation to customer onboarding, online payments and other transactions, fund management, dealing, accounting, customer service, data analytics and other functions. The online engagement is seeing continued growth in recent years, and proportion of digital transactions in total transactions (excluding SIP and Systematic transfer plan (STP) installments) increased from 70.92% in FY2019 to 87.75% in FY2021. Further, the number of investors that the company added through digital channels increased from 63.66% in FY2020 to 80.98% in FY2021.

The company aims to expand its geographic reach, continue focus on delivering sustained investment performance and portfolio differentiation, strengthen employee value proposition and attract and retain good quality talent, leverage technology and digital platforms to increase customer acquisition and enhance customer experience and further develop investment offerings.

The Offer and the Objects

The initial public offer comprises offer for sale of 38,880,000 equity shares, aggregating to Rs 2702.16 crore at the lower price of Rs 695 and Rs 2768.26 crore at the upper price band of Rs 712. Offer for sale comprises sale of 2,850,880 equity shares by ABCL and up to 36,029,120 equity shares by Sun Life AMC. Up to 1,944,000 equity shares have been reserved for allocation to ABCL Shareholders.

The issue, through the book-building process, will open on 29 September 2021 and will close on 1 October 2021.

The company expects that listing of the Equity Shares will enhance visibility and brand image and provide liquidity to Shareholders and will also provide a public market for the Equity Shares in India.

Strengths

Aditya Birla Sun Life AMC is well-recognized brand with experienced promoters and benefit from the track record, reputation and experience of promoters, enabling to build a brand that customers trust and that has a strong recall.

The size and leading position provides the company with a competitive advantage, raises investor and distributor confidence in products and services and allows to make significant investments toward growth and operational efficiency including in digital platforms and technology initiatives.

The company is the fifth largest player in terms of market share in individual AUM among the top 10 AMCs end June 2021. The share of SIP AUM in total equity-oriented mutual fund AUM at 41.70% is higher than the industry-share of 31.36% end June 2021. The share of MAAUM from B-30 cities in total MAAUM end June 2021 was the second highest amongst the five largest AMCs. The share of equity-oriented MAAUM in total MAAUM has increased to 38.09% end June 2021.

The company has exhibited healthy growth in individual investor customer base driven by strong systematic flows and B-30 penetration. Individual investors prefer equity-oriented schemes and tend to stay invested for longer periods, providing relatively predictable, committed AUMs and profitability. Equity-oriented schemes generally pay higher management fees compared to other schemes, and a higher equity-oriented scheme mix helps to achieve higher revenues and profitability.

Out of 284 locations, the company has 233 branches located in B-30 cities. A large part of industry growth is expected to come from B-30 cities, and AMCs with an existing large presence in B-30 cities would be well placed to attract customers in these locations due to their established position, infrastructure, and distribution capabilities.

The company has well-diversified product suite catering to the varying needs and risk profiles of investors with a long history and track record of innovation in schemes. The company has been able to successfully enhance portfolio of schemes through rigorous and research-driven product development processes and focus on identifying pockets of differentiation.

The company has established a geographically diversified, extensive, and multi-channeled pan-India distribution presence with a significant physical as well as digital presence. The diversification of distribution base has led to a reduction in the concentration of AUM sourced from the top 10 distributors (in terms of AUM sourced) from 49% in FY2016 to 37% in FY2021. Also, the company had the lowest concentration of AUM sourced from the top 20 distributors among the top five AMCs end June 2021.

The company has a history of innovation in the mutual fund area in the use of technology to service investors. The company is committed to enhancing digital platforms and expanding its online reach.

Mutual fund assets in India have seen robust growth, especially in recent years, driven by a growing investor base due to increasing penetration across geographies, strong growth in capital markets, technological progress, and regulatory efforts aimed at making mutual fund products more transparent and investorfriendly.

Although mutual fund AUM as a percentage of GDP grew from 4.3% in FY2002 to approximately 15% in FY2021, penetration levels remained well below those in other developed and fast-growing peers with the world average at 75%, United States 140%, Canada 98%, France 98% and UK 78% and key emerging economies such as Brazil 81% and South Africa 62%. The ratio of the equity mutual fund AUM to GDP in India is considerably low at 6% compared with 89% in the United States, 78% in Canada, 50% in the United Kingdom, and 30% in Brazil. The low penetration level provides strong growth opportunities.

Weaknesses

The revenue and profit are largely dependent on the value and composition of the AUM of the schemes managed and any adverse change in AUM may impact revenues and profit.

Underperformance of investment products could lead to a loss of investors, reduction in AUM and adversely affect performance and reputation. 48 of schemes, representing Rs 147537 crore or 54.65% of total QAAUM (including domestic FoFs) end June 2021, have underperformed their respective benchmarks during the three months ended June 2021.

The value of the debt portfolio (including investments in debt through equity-oriented schemes), which was invested in debt with ratings lower than sovereign-rated debt, AAA-rated debt and A1+ or equivalent-rated debt, amounted to Rs 10555 crore, representing 3.74% of total mutual fund closing AUM (excluding domestic FoFs).

The value of the debt portfolio of schemes could be affected by changes in the credit rating or actual or perceived creditworthiness of an issuer of fixed income securities or a deterioration of credit markets.

Top five distributors contributed Rs 23150 crore or 8.40% of QAAUM (excluding domestic FoFs) and top 10 distributors contributed Rs 33114 crore or 12.02% of QAAUM (excluding domestic FoFs). The problems with these distribution channels and intermediaries or failure to continue to expand current third -party distribution channels and intermediaries could adversely affect business.

The mutual fund business is subject to extensive regulation, including periodic inspections by SEBI and non-compliance with existing regulations, or SEBI's observations, failure, or delay in obtaining, maintaining, or renewing regulatory approvals could expose the company to penalties and restrictions.

Top five schemes accounted for Rs 111017 crore or 40.30% of total QAAUM (excluding domestic FoFs), whereas top five equity-oriented schemes accounted for Rs 61333 crore or 59.73% of total equity-oriented QAAUM and top five debt-oriented schemes accounted for Rs 89494 crore or 69.03% of debt-oriented QAAUM. The performance of these schemes may have a significant impact on AUM and consequently revenues.

The mutual funds industry is rapidly evolving and intensely competitive and competition may continue and intensify in the future.

Reductions of the expense limits for schemes prescribed under SEBI regulations may impact profitability and force the company to cut marketing and other efforts on behalf of the funds.

Ability to operate and remain competitive depends in part on ability to maintain and upgrade information technology systems and infrastructure on a timely and cost-effective basis, including ability to process huge transactions daily. The operations also rely on the secure processing, storage, and transmission of confidential and other information in computer systems and networks.

The offer is entirely an offer for sale of 3.89 crore equity shares by Promoters. The proceeds from the offer will be paid to the promoters, and the company will not receive any proceeds.

Fluctuations in the market values of investments could cause write down in the value of assets, affect liquidity and reduce ability to enforce security, which could adversely affect business.

Key highlights of comparison with peers

Aditya Birla Sun Life AMC has retained the fourth position in terms of QAAUM since September 2011. It has also retained its market share in terms of overall AUM of approximately 10% between March 2016 and March 2019.

Aditya Birla Sun Life AMC witnessed an increase of approximately 14.4% in its equity mix from March 2016 to June 2021, surpassing the industry at 13.6%. This was also the second highest among the top five AMCs and the fourth highest among the top 10 AMCs. In terms of equity AUM, Aditya Birla Sun Life AMC ranked fifth among its top 10 peers end June 2021.

Aditya Birla Sun Life AMC was at the seventh position among its peers with 7.07 million total folios as of FY2021.

Aditya Birla Sun Life AMCs market share in terms of total number of folios and B-30 AUM has improved from March 2016 to June 2021. It ranked fifth in terms of individual MAAUM among the top 10 players and fourth highest among the top five players end June 2021.

Aditya Birla Sun Life AMC has seen a consistent improvement in AUM share from B-30 in the last three years. Aditya Birla Sun Life AMCs proportion of B-30 MAAUM as a percentage of total MAAUM end June2021, was 15.76% which is the highest among the top five players in terms of increase in B-30 proportion (up by approximately 230 bps) from March 2019 to June 2021. Aditya Birla Sun Life AMCs MAAUM share in B-30 was the second highest among the top five players end June 2021.

Aditya Birla Sun Life AMC had the fourth lowest concentration in the top five states in terms of equity AUM among the top 10 peers end June 2021.

Aditya Birla Sun Life AMC is the fifth largest player in terms of market share in individual AUM among the top 10 players end June 2021.

Aditya Birla Sun Life AMC ranks among the highest in terms of share of digital transactions with digital transactions contributing 85% to the overall transactions as of FY2021. Overall digital on-boarding for listed players ranged from 42% to 84% for the same period.

Aditya Birla Sun Life AMC ranked fifth in terms of revenue. In terms of total revenue as a percentage of AAUM, it ranks sixth with a ratio of 0.43% in FY2021. Among the top-10 AMCs, DSP AMC ranks highest in terms of total revenues as a percentage of AAUM in FY2021 followed by Nippon India AMC (0.65%) and UTI AMC (0.60%).

Aditya Birla Sun Life AMCs operating profit as a percentage of AAUM was the third highest among the top five and sixth highest among the top 10 players as of FY2021.

Aditya Birla Sun Life AMC witnessed a consistent improvement in PBT as a percentage of AAUM over the past four years. PBT as a percentage of AAUM for Aditya Birla Sun Life AMC stood at 0.28% as of FY2021, which is the fifth highest among the top 10 players.

Aditya Birla Sun Life AMC has witnessed consistent improvement in its net profit as a percentage of AAUM. Aditya Birla Sun Life holds the sixth position among the top 10 AMCs in terms of net profit to AAUM as of FY2021.

Given the high operating leverage in the business, once AMCs achieve a reasonable scale, their profits tend to grow at a much faster pace than revenues. Aditya Birla Sun Life AMCs net profit recorded a 19.8% CAGR between FY2016 and FY2021.

Aditya Birla Sun Life AMC is the sixth largest player in terms of RoE in FY2021. ICICI Prudential AMC has the highest RoE (80.28%), followed by Axis AMC (43.07%) and IDFC AMC (42.56%) as of FY2021.

Aditya Birla Sun Life AMC has been able to keep its costs in check, relative to its income. The total cost to income ratio for Aditya Birla Sun Life AMC dropped to 46.69% in FY2021 from 49.32% in FY2020. HDFC AMC and ICICI Prudential had the lowest total cost to income ratio of 20.57% and 28.24%, respectively, in FY2021.

Aditya Birla Sun Life AMC too saw its employee costs as a percentage of AAUM declining from 0.12% in FY2016 to 0.09% in FY2021.

Valuation

Aditya Birla Sun Life AMC has recorded 30% growth in the revenue from operations to Rs 333.24 crore in the three-month period ended June 2021. The operating profit galloped 57% to Rs 210.50 crore, with an improvement in the operating profit margin by 1090 bps to 63.2%. The net profit has surged 59% to Rs 154.94 crore in Q1FY2022, after 6% growth to Rs 526.28 crore in FY2021.

TTM EPS for the period ended June 2021 works out to Rs 20.3. The scrip is offered at P/E multiple of 35.1 times TTM EPS for the period ended June 2021 at the upper price band.

The book value of the company is Rs 62.6 end June 2021. The scrip is offered at a P/BV multiple of 11.4 times at the upper price band.

While Aditya Birla Sun Life AMC is the fourth largest AMC, HDFC AMC is the second largest mutual fund in India with AAUM of Rs 426900 crore end June 2020, Nippon Life India Asset Management is the fifth largest mutual fund with AAUM of Rs 248100 crore and UTI AMC is eighth largest mutual fund with AAUM of Rs 193600 crore.

HDFC AMC is trading at P/E multiple of 47.9 times TTM EPS of Rs 64.2 for the period ended June 2021. Nippon Life India Asset Management is trading at P/E multiple of 37.9 times TTM EPS of Rs 11.4 for the period ended June 2021 and UTI AMC is trading at P/E multiple of 25.4 times TTM EPS of Rs 43.2 for the period ended June 2021.

HDFC AMC is trading P/BV multiple of 13.2 times BV end June 2021, Nippon Life India Asset Management at 8.3 times and UTI AMC at 4.1 times

Aditya Birla Sun Life AMC is valued at Rs 20506 crore at upper price band and is offered at 0.072 times of AAUM, while HDFC AMC is trading at 0.154 times of AAUM, Nippon Life India Asset Management trading at 0.108 times of AAUM and UTI AMC at 0.071 times of AAUM.