In an interaction with Prateek Jain, CFO, Nippon Life India Asset Management (NAM India)
NAM India remains focussed on its digital infrastructure with our platform being a partner of choice to customers, distributors and financial technology partners alike
Nippon Life India Asset Management’s revenue from operations climbed 12 per cent to Rs 354 crore while the net profit of the company zoomed 107 per cent on YoY basis to Rs 236 crore. What were the factors responsible for the company’s performance?
NAM India is a true-blue diversified asset manager with total assets under management of Rs 4.04 trillion (USD 49 billion) as of June 30, 2023. In Q1FY24, NAM India’s revenue growth of 12 per cent YoY has been in line with AUM growth of 12 per cent. AUM growth, especially in the equity segment, has been driven by strong scheme performance which has now started to translate into market share gains. Further this has been aided by our strong focus on SIPs and there has been a steady uptick in our systematic flows over the past eight quarters from Rs 5.9 billion per month in June 2021 to Rs 12.2 billion per month in June 2023. We now have an annualised systematic book of Rs 147 billion and expect this SIP juggernaut to snowball further. On the segmental front, we have been focusing on growth in the HNI segment.
This has started to bear fruit with market share increasing 19 bps QoQ to 5.99 per cent. Further, we have benefitted from our strong presence in B 30 locations and the fact that we are one of the fastest growing large AMCs here. In Q1FY24, we were also relatively better insulated from redemption pressure versus the industry given the granular nature of our AUM. On the operating expense front, we were able to control growth to lower than revenue growth, leading to a 13 per cent YoY growth in core operating profit. Higher growth in net profit was also driven by higher other income owing to increase in value of equity investments driven by equity market performance and the downward movement of rates, which led to mark-to-market gains on our debt investments.
Mutual fund investors have increased at 21 per cent CAGR over FY20-23. What is your outlook on the mutual fund industry in India for the next few years?
Unique investors in mutual funds in India grew at about 21 per cent CAGR over FY20-23. This has been driven by increasing financialisation and formalisation of the economy, higher awareness and better reach through new-age technology platforms and distribution networks. Further, the potential of mutual fund products as a long-term wealth creator is being realised by investors. This has driven the mutual fund AUM to a historic high of Rs 43.1 trillion as of Q1FY24. Going forward too, growth is expected to remain strong, especially given the levels of under-penetration for the mutual fund industry.
Even today, less than 3 per cent of the Indian population invests in mutual funds. Further, despite the AUM reaching an all-time high, mutual funds still account for only 6-7 per cent of the gross household financial savings in India. As of Q1FY24, India had about 38 million unique mutual fund investors, which is only a fraction of the total PAN cardholders at 610 million plus. Realising the potential for growth, NAM India started investing in ‘Bharat’ much earlier than other AMCs, set-up a large branch network and embraced the retail segment to capitalise on this opportunity.
Could you please explain the rationale behind the recent decision to halt accepting lump sum investments in the Small-Cap fund considering the importance of AUM growth, and do you believe that there might be a potential risk of losing some market share in this move given the possibility that investors’ risk appetite may have increased over time?
AUM growth is of high importance for any AMC. However, we continue to act keeping the investors’ interest in mind. Therefore, seeing the current market conditions, we stopped accepting lump sum investments in our small-cap fund from July 7, 2023 while continuing with SIPs. We believe that this is a correct decision in line with the gradual deployment of funds associated with small-cap investing and also given the sharp rally in the small-cap space (Nifty Small-Cap index was up 20 per cent QoQ in Q1FY24).
Also, please note that this is not the first time such a step has been taken by us. Further, another competitor has also restricted flows in the same category. We would evaluate the restarting of lump sum investments when the market opportunity is right. In terms of the risk of losing market share, it is important to note that about 50 per cent of the flows into our small-cap fund come via SIPs and this flow will continue to grow. We expect to cover any gap due to lump sum stoppage with higher SIP flows and higher flows into other schemes.
Regarding market share, could you elaborate on the performance across different channels? Specifically, which channels have shown strong recovery, and conversely, in which channels are the funds under-indexed?
While we do not put out data on market share across channels, we have been seeing a positive response across the spectrum. Traditionally, we have been stronger in the mutual fund distributor channel and this continues to be very important for us. We have one of the largest distributor bases in the country. Further, about 40 per cent of our AUM comes from smaller distributors (outside the top 1,800) and this number is much higher for us versus the industry, indicating the granular nature of our AUM.
Congratulations on the impressive numbers, especially given the challenging operating environment. The operating parameters are looking favourable. However, we have observed significant increases in administration and other operating expenses both year-over-year and quarter-over-quarter. Could you provide some insight into the factors driving these increases and what we should anticipate for the rest of the year?
Our non-employee expenses grew 7 per cent QoQ on a consolidated basis. This has been driven by inflationary cost adjustments on routine expenses and higher discretionary spends primarily directed towards brand-building and marketing activities – the benefits of which would accrue to us over the longer term. It is also important to note that despite the increase in expenses, non-employee expenses or AUM has remained very stable at 10-11 bps over the course of the last one year.
Over the last two years, the total operating expenses have remained in the range of 20-21 bps of AUM. Going forward, we expect this to trend downward as operating efficiencies kick in, aided by automation, process improvements and with increase in AUM. NAM India has controlled its operating expenses and therefore for FY23 these were 7 per cent below the FY20 levels. Going forward too, the operating expenses should grow at a slower rate than AUM.
How does your company plan to further enhance and strengthen the digital ecosystem to simplify the investment experience and create a frictionless environment for your investor partners?
NAM India remains focussed on its digital infrastructure with our platform being a partner of choice to customers, distributors and financial technology partners alike. Over the past few years, we have been on a relentless journey of building a user-centric digital ecosystem that is not just frictionless but also friendly and futuristic. We have in place a robust framework of digital experiences and journeys that straddle across segments – retail and institutional investors, distributors and partners – and across platforms – web, native and open – which help us serve a multitude of users in line with their preference and proficiency. This approach has helped us reach a state where digital is a cornerstone of our growth and future scalability and expansion.
With this deep-rooted foundation in place, we are now ready to shift gears. We believe that deep data integrations and real-time, intelligent interventions will help us drive deeper and more meaningful engagements with the users of our digital platforms and we are already in advanced stages of implementation on this front. Also, we constantly keep exploring newer and more contemporary means and methods to optimise and improve our core and allied processes like purchase journeys, payments, e-KYC, authentications, etc. Another domain that we are proactively working on to simplify the life of an investor is that of localisation through vernacular coupled with the highly intuitive voice-based technologies that are helping our drive for digital-led penetration and adoption in the underpenetrated and unpenetrated markets.
Our strategy simply articulated is ‘Voice, Video, Vernacular and Bharat’. We as an organisation have implemented LEAP. Our digital LEAP (leverage, evolution, access and privacy) doctrine is spread across the organisation and our franchise which in turn is amplifying our vision to be trusted, agile and future-ready for our investors. Digital purchase transactions rose to 1.06 million in Q1FY24, up 42 per cent YoY. This is the first time that digital transactions crossed 1 million in a quarter. Our digital franchise contributed 57 per cent to total purchase transactions in Q1FY24 and we had 11 new digital purchases every minute.