Nippon Life shares plunge 9% after steep fall in Q4 profit, but analysts remain bullish

Shares of Nippon Life India Asset Management fell 9.4 percent intraday on May 18 after a sharp decline in profitability for the quarter ended March 2020, but most analysts remained bullish on the stock citing a change in ownership which could gain credibility in the market going forward.

Profit after tax during March quarter fell over 97 percent sequentially as well as year-on-year to Rs 4.1 crore on revenue of Rs 274.5 crore that declined 9.4 percent QoQ and 20 percent YoY on fall in equity in overall assets under management (AUM).

The fall in profitability was also due to loss at other income levels (Rs 124.94 crore against income of Rs 57.50 crore QoQ and 54.27 crore YoY) which hit by (MTM loss Rs 149 crore) write-down of equity/ETF scheme and debt funds investments made in NAM-India schemes.

Core operating profit grew 11 percent QoQ. "Operating expenses rationalisation in terms of variable pay (25 percent of EBE is variable) might protect profitability in FY21," said Centrum Broking which likes NAM-India given its pan-India distribution network and focus on sourcing granular retail AUM from B-30 cities.

Also, the company has added 290 corporate/HNI clients in the second half of FY20 (170 in Q3FY20) and it has partly regained lost market share lost in debt and liquid funds in the past year. Hence, while having buy call, Centrum Broking maintained P/E multiple at 30.6x to arrive at a target of Rs 284 (against Rs 293 earlier).

The brokerage lowered its AUM growth estimates for FY21 while accounting for lower employee costs and rebound in equity markets in FY22 (positively impacting yields). "This might result in lower PAT by 6.8/3.1 percent for FY21/FY22 versus previous estimates."

HDFC Securities also retained buy call on NAM India with a target price of Rs 288, saying while it is concerned about the company's loss of investor confidence which debt schemes face given significant write-downs/offs on exposures to stressed corporates, it believes that post ownership change NAM stands to benefit from increased credibility to raise HNI/institutional capital.

The brokerage expects the company to, over time, regain a part of the lost market share. "Valuation discount of 29.3 percent on FY21 EV/NOPLAT to HDFC AMC's multiple is high and we expect the same to contract.

While having buy rating on NAM India with a target of Rs 300 per share, ICICI Direct said, "In the current environment, near term outlook remains uncertain but structural changes including an increase in financial savings remain positive."

The brokerage further said, "Focus on client acquisition (inducted more than 290 corporate & SME clients in H2FY20) and risk management (board’s decision that all schemes (except two) to invest in debt papers rated AA and above) bodes well to gain lost customer confidence. Strong distribution with around 76,200 partners across the country is expected to further enable improvement in traction in AUM."

"Focus on operating efficiency & proportion of equity AUM is seen to aid profitability margin ahead," it added. Accordingly, ICICI Direct expects MF AUM growth at around 6 percent CAGR in FY21-22E to Rs 2.45 lakh crore and earnings momentum at around 27 percent CAGR in FY21-22 to Rs 667 crore (led by lower base of FY20).

"Near term outlook remains volatile. However, given elevated economic uncertainty, business model without large credit risk remain preferred," said the brokerage.

JM Financial believes FY21 will be a tough year for the company as a) persistent weakness in equity markets will have a negative impact on both the profitability and AUM growth outlook, as equity MFs are the highest-yielding product for AMCs, b) 73 percent decline in commission expenses which aided operating PBT in FY20 will get factored into the base in FY21 and c) revenue yields will continue to taper off gradually over the medium term, with new equity MF flows incurring higher trail commissions expense (led by the ban on upfront commissions).

Hence the brokerage has maintained hold rating on the stock with a target of Rs 225, saying they remained watchful of the retail acceptance of the new brand particularly in the light of recent AUM market share losses for NAM.

The stock was quoting at Rs 230.60, down 5.26 percent on the BSE at 14:31 hours IST.

Date: May 19