Fourth Largest Mutual Fund Company, Aditya Birla Sun Life AMC's IPO Will Be An Offer For Sale

Aditya Birla Sun Life Asset Management Company (ABSL) received the final approval for an initial public offering (IPO) from SEBI earlier this month. The IPO will be an offer for sale by Aditya Birla Capital and Sun Life AMC. The company will not be receiving any proceeds from the IPO.

Business Overview

ABSL is the fourth largest mutual fund company, with Rs 2.73 lakh crore in assets under management (AUM). Despite the rapid rise in the stock markets due to global liquidity, ABSL’s AUM has remained at similar levels for the past three fiscals in spite of having shown strong growth until fiscal 18.

Nevertheless, ABSL has been focusing on increasing the share of equity-oriented schemes in its AUM base. Equity-oriented schemes have high margins. Other high margin products like portfolio management services, infrastructure funds, alternate investment funds, real estate funds, and others, usually have much lower volumes.

The company has also developed its presence in B-30 cities, referring to the 30 cities beyond the top 30 cities. These cities are expected to grow at a high rate with the rise in mutual fund awareness. Along with discount brokers like Zerodha, apps such as Paytm, Mobikwik, PhonePe have managed to penetrate into the second and third-tier cities. People from B-30 cities have also taken to investing in the stock markets and mutual funds.

Finances

Despite an increase in AUM, the company has been unable to increase its earnings. Revenue has been falling from Rs 1,326 in 2019 to Rs 1,067 in 2021. For the year 2021, lower revenues stemmed from higher market volatility, due to which investors withdrew from equity funds, according to the company. On the other hand, the drop in revenue for 2020 came from a change in fee and commission regulations by the Securities and Exchange Board of India (SEBI).

The mutual fund takes a percentage out of the investors’ AUM, known as the total expense ratio (TER). After taking care of costs and commission, the remaining money is passed on to AMCs and recorded as revenues. SEBI’s 2018 TER guidelines resulted in lower revenue for ABSL in FY20.

The company has a low reliance on fixed assets and has a high net fixed asset ratio of more than 20 times. It is dependent on human capital for its operations. The company has generated strong cash flows from operations consistently, but has an asset-light business, resulting in consistent dividend payments and a high cash balance.

Overall, the company has healthy financials except for the decrease in revenues and a relative stagnancy in AUM.

Key Risks

Competition:

ABSL Operates in a highly competitive environment with multiple competitors. Further, NJ Invest, Samco, Zerodha, PhonePe, among other players with strong distribution and brand awareness, plan to or have already started asset management operations. Strong competition, especially in the high-margin equity-oriented fund space, can adversely affect the business.

Regulatory Risks:

The company operates in the financial services sector, which is highly regulated by several regulatory bodies. In the past, the mutual fund sector aced several adverse regulatory changes regarding fee caps, fund size regulations, and other regulations.

Changes in AUM:

The company derives its revenues by charging a percentage of its assets under management. The investment fee is then used to meet the AMCs expenses. Lower AUM can imply lower revenues for the company. At the same time, any increase in the proportion of low-margin products such as debt-oriented schemes in the AUM can result in lower revenues and margins.

Increase in Passive Investing:

The rising tide of passive investing can affect asset management companies negatively as these funds have extremely low margins and immense competition.