Nippon Life India Asset Management Ltd

Ladies and gentlemen, good day and welcome to Nippon Life India Asset Management Q2 FY '25 Earnings Conference Call hosted by InCred Equities.

As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes.

Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr.

Jignesh Shial from InCred Equities. Thank you and over to you, sir.

Yes. Thank you, Steve and good evening, everyone. On behalf of InCred Equities, I welcome all to Nippon Life India Asset Management Q2 FY '25 Earnings Conference Call. We have along with us Mr. Sundeep Sikka, Executive Director and CEO, Mr. Parag Joglekar, the Chief Financial Officer, and the senior management team of Nippon Life India Asset Management. We are thankful to the management for allowing us this opportunity. I would now like to hand it over to Mr. Sundeep Sikka, Executive Director and CEO of Nippon Life India Asset Management for his opening remarks. Over to you, sir.

Good evening and welcome to our Q2 FY25 earnings conference call.

We have with us, Chief Financial Officer – Parag Joglekar who has joined us recently, Chief Business Officer - Saugata Chatterjee, Deputy Chief Financial Officer - Amol Bilagi, Chief Digital Officer - Arpan Saha, Head ETF - Arun Sundaresan, Head AIF - Ashish Chugani, and Shin Matsui-san, nominee from Nippon Life Insurance (Japan).

I would like to share some comments on the recent Industry trends and our performance, prior to addressing your questions.

I would like to start by mentioning that in Q2 FY25, NAM India has achieved its highest ever quarterly Profit After Tax of INR 3.60 bn as well as its highest ever quarterly Operating Profit at INR 3.65 bn. Further, our Equity Net Sales market share and SIP market share remain well above our Equity AUM market share.

Equity markets in Q2 FY25 displayed another strong performance overall.

The NIFTY moved up 7.5% QoQ, while the NIFTY Mid & Small Cap indices rose by 7.1% & 7.6%, respectively. RBI held the repo-rate steady at 6.50%, while the 10 Year G-Sec yield moderated by 26 bps QoQ to 6.75%.

Now, moving to Industry flows: 1) The Equity category (excluding index funds and arbitrage funds) witnessed a gross inflow of INR 2.78 trillion and a net inflow of INR 1.32 trillion – both gross and net inflows were higher on a QoQ basis for a fifth successive quarter. 2) Categories with the highest inflows were Sectoral/Thematic funds, Multi Cap and Multi Asset Allocation funds. 3) Moving on to SIP - Investments via the SIP route further increased, with the SIP contribution for the quarter being INR 714 bn, up 52% YoY and 14% QoQ. 4) Monthly SIP flows in Sep-2024 stood at INR 245 bn, which was another all- time high. 5) The Fixed Income category i.e. (debt + liquid), witnessed a net inflow of INR 507 bn which was lower on a QoQ basis. 6) The ETF category had a net inflow of INR 204 bn.

At the end of the quarter, unique investors in the Mutual Fund Industry increased to 50.1 mn i.e., an increase of 24% YoY.

This includes Mutual Funds, Managed Accounts and Offshore Funds. 2) Our Mutual Fund QAAUM grew 14% QoQ & 57% YoY to reach INR 5.49 trillion. This made us the fastest growing AMC among the Top-5 AMCs

over a 6 month, 1 year and 3 year time frame. We also had the highest increase in QAAUM market share on a YoY basis among all AMCs.

I would also like to touch upon some important aspects of our Systematic

3) As AIF remains an important focus area for us, we have also added resources on this front. 4) We will continue to invest in our future growth, including talent, technology, and other areas.

Now, I would like to briefly update you on our subsidiaries - namely the

3) During the quarter we have undertaken final closing of one of our Real Estate Credit AIFs - a follow-on fund to an existing Real Estate mandate from Japanese Investors. 4) On the Offshore front - We have witnessed good equity inflows in the quarter from various international geographies. Offshore AUM grew 56% YoY to INR 172 bn. 5) Our UCITS Equity Fund has now crossed an AUM of USD 500 mn and we continue to explore new and niche offerings in the Indian Equity space for International Investors.

To conclude, I would like to again mention that we have been the fastest growing AMC over 6 months, 1 year and 3 years and we will endeavour to continue our journey of profitable growth going forward as well.

With this, I would like to conclude my remarks and open the floor for questions.

Thank you very much. We will now begin the question-and-answer session.

The first question is from the line of Krupanshu from Thinqwise Wealth.

Yes. Sir, you mentioned that ONDC we had a first transaction. So I just wanted to understand how is ONDC helping you and the industry at large basically?

And if you could just speak about ONDC in general, I just wanted to understand that one thing.

Sure. I will request my colleague, Arpan to give some inputs on this. But I'd just like to give an initial comment. ONDC is Government of India's largest initiative equivalent to or bigger than UPI, and it will help a lot for financial inclusion in India. Our transaction is in spirit of continuous innovation that we plan to do and launch new products and try to keep exploring new avenues to reach small investors in small cities and towns. In line with that, I'll request Arpan if he wants to add anything else.

Thank you Sundeep and thank you for the question. So the Open Network for Digital Commerce is as Sundeep mentioned an initiative by the Government of India. The objective is to democratize digital commerce to reach out to the numerous sellers and buyers across the last mile in this country. Also as part of our digital strategy, we believe that in order to have inclusion of new customers for the mutual fund industry it's important to go beyond BFSI partnerships and touch upon the retail space where people have still not got etched on the mutual fund industry. And we believe that ONDC would be a great platform, which will gain a lot of momentum in the years to come.

And each and every Indian customer who would be able to invest in Nippon India Mutual Fund along with the rest of the asset management industry, especially the huge base of B2C customers in Tier 3, 4 locations and the pin codes where internet has penetrated, but mutual fund is just starting to gather momentum. It is the right time to do that. And Nippon, in fact, was the first asset management company to partner and get an opportunity with ONDC to start the mutual fund business on this platform for the consumer. Thank you.

So just one follow-up on that. So are we like paying ONDC for some kind of a data analysis on that sense for those cities where we cannot have reach? Just wanted to understand that.

No, we are not in any kind of payment structure because we believe that both ONDC and Nippon have the same vision of inclusivity for the digital

commerce space, and therefore, it is important that we jointly get customers to the mutual fund for us. So that's the overall vision that we have jointly.

The next question is from the line of Lalit Deo from Equirus Securities. Please go ahead.

Congratulations on the good quarter. Sir, just 2 questions. Firstly, on the SIP flows. So we have gained about more than 50 basis points of market share on a sequential basis. I just wanted to understand, like which of the categories we are seeing a huge improvement in the SIP flows. And also you can talk -- could you talk about the different channels where we have been gaining market share?

So Lalit I'll request my colleague Saugata Chatterjee to answer this question.

Thanks Lalit for this question. Yes. So SIP for us, like we have been mentioning in the previous calls, it's a very, very important part of our strategy.

And when we are trying to acquire these SIPs from the various parts of India.

We use multiple channels. For us, digital is a big channel. We also use the feet- on-street model where our mutual fund distributors, the bank and various stock broking arms, they are all -- they have all onboarded our funds. And through the retail channels, we acquire these SIPs in the market. The good part is we have a very strong franchise of beyond 30 channels who are participating in our SIP growth.

So it's a cumulative effort of digital, physical efforts which we are putting on the ground to increase the SIP book. We also do a lot of digital marketing activities using all our existing client base to enhance the SIP book as well as to ensure that multiple products are acquired through the digital channel. That's the way we are increasing our SIP book.

Sure, sir. And second, on the yield side. So our calculation suggest that revenue yields have broadly been remained stable on a QoQ basis in the standalone business. But despite the strong growth in the overall AUM. So could you give us the segment-wise yields like have you seen any pressure on the -- across different segments?

Amol here. So on the yield side, because of telescope pricing at the AUM growth, I think the pressure on the yield would continue as we have been maintaining same over the call. So for the current quarter, the yield stood at around 37 basis points, a drop of around 0.5 basis point QoQ. As far as asset class wise is concerned, the yield on the equity stood at around 58 basis points.

On debt, it stood around 25 basis points, on liquid around 12 basis points and on ETF around 15 basis points.

Sure. And sir, another thing was like one of our competitive peer has probably cut distribution -- has cut yields on the back book of the distributors. So going ahead, do we see any similar kind of reaction from our side just to protect our revenue yield?

As a process, we continue to always keep evaluating wherever there's an opportunity. As I mentioned in closing remarks, we will continue focusing on profitable growth. And as a part of that, we have it in past also, we looked at the brokerages, and we will continue doing that irrespective of what the competition does or not do. Our focus remains, while we have seen a lot of increase in our market share. But between market share, top line and bottom line, our focus has always been on bottom line.

The next question is from the line of Shreya Shivani from CLSA. Please go ahead.

So just wanted to check on the tax that has come in. So whatever was the excess that we would have incurred because of the change from March '23 till now, we've taken all of it 2Q, and we should not expect anything higher than this coming up in the coming quarters. I'm just asking because this tax rate was a big question mark for this quarter and your tax rate and what probably your peer has reported is very different. And I understand the mix is very different and so many things could be different for the calculation of it, but I just wanted a clarification on that.

Second, I wanted to check that on the employee addition, you mentioned -- you had mentioned 55 management trainees had joined in July. And had you also mentioned about 45 new employees’ addition in this financial year? So is it like there are 90 people added in FY '25? This is my second question.

And my third question is just something that I was wondering that on your small and mid-cap fund, so I understand that if I take Nippon small and mid- cap fund as a market share of the total small and mid-cap industry, it's been -- it dipped a little back to about 13% or so. Do we internally keep any market share limits over here or any market share limits in the non -- in the other large caps, et cetera, because there, you've significantly gained market share in the small and mid-cap equity portfolio. So do we internally keep any limits, any ranges that we want to be in? Those are my 3 questions.

Yes. Thanks, Shreya for the question. So I would take the tax part of it and then probably other colleagues can take the other part. So on the tax front, see, how we go about when we provide for taxes on a yearly basis, what is the effective tax rate that we foresee that is going to happen. So on that basis, what we force is the tax rate for the year is as of now tax rate forecast is 25.7% of - - roughly 26%. And that is what you will see in the half yearly results tax rate if you look at it.

So we -- that is how we posted as mentioned. So we have taken the full impact of the change in the tax rate and the indexation benefit that is 1. We have taken the full impact of that in this quarter.

So on the other 2 questions on the employees. We have added 130 employees in H1, 45 were added in Q1 and 85 were added in Q2. We broadly feel for this financial year, this number will not go up maybe by about another 10, 15, but we have finished our recruitment for this year. That is point number one of the employees.

Coming to the other question on the small cap and market share. We do not like to approach it like from a market share of a segment point of view. Our focus is very simple that we'll continue every fund, every category is important for us. We will ensure that we continue to deliver superior returns and let the investor decide where he wants to come rather than put individual market share targets in a subcategory. We feel that is not a very customer-centric approach.

Let customers take the decision whether he wants to come based on risk appetite.

From our perspective, overall, as a portfolio, every fund remains equally important. It's not that small cap is more important than others. And as we have mentioned in the past, the inflows for us, even after we put a cap on the small cap, inflows we are seeing across the various funds. I hope this answers your question.

Yes. That's useful. One more question, if I can add is on your managed account.

That book -- okay, I'm not very sure of this, but that includes your AIF business, right, the INR825 billion?

Yes, that includes.

Yes. So I was just trying to understand that book has been largely flat between June and September. So any color around that? What has happened and some color on that would be useful?

So you're right, it's broadly been flat. There has been some fundraise, but there's also some maturities. There are some funds which have matured, I think, and they have seen an outflow. From our perspective, as I mentioned earlier, we are currently underway in our fundraise for our listed equity AIF, performing credit AIF and a direct venture fund.

So as you can understand unlike mutual funds, many of these things - some of these are also foreign flows they take a little time, and they are more binary.

We believe we are building up a strong foundation. And even maybe in the next quarter or two also you might see it relatively flat because it will take a little time. But all I can say is this is going to be an important business for us.

Got it. So should I interpret it as it is an account whether inflow outflow can be chunky. That bit is correct, right? If the money can come in huge amounts and then exit in huge amounts, right?

So there are two parts to it. I mean, definitely when you look at the offshore mandates and all, they are chunky. But I want to also clarify, what you're seeing in the managed account, a very large is the Postal Life Insurance mandate that we manage. And so that also has a reflection of mark-to-market their flows and inflows.

But on your bigger question on - is that AIF remains very critical for us. In fact, when I talked about recruitment also head count, as specifically mentioned we are adding a lot more senior resources in AIF business. And we're building a strong foundation for future.

Thank you. The next question is from the line of Prayesh Jain from Motilal Oswal. Please go ahead.

Firstly, I just wanted to understand the behaviour of the customers especially coming in from the digital players like Groww, Angel One and those kind of digital customers. Is it that a lion's share comes to the top three schemes -- top rank three schemes the category and the lower schemes get a much lower share.

So basically trying to understand whether the quartile -- importance of quartile is kind of receding, and the top three rank is kind of holding up better? That would be my first question?

I would not like to go for the customers of a particular channel, coming through ABC distribution on its digital partner. But broadly, what we have seen is digital, investors which are coming through digital are also in offline. There can be divided in 2 different categories. There are investors who are especially some of the first-time investors for whom the returns become a very, very important thing. they look at the only the returns. But what we have seen as investors mature and they try to see a longer track record of the companies, which have been -- how they have performed in different market cycles. And no two investors are the same.

So these are the investors, there will be investors who like to see funds which have a track record of 20 years. For them, the -- some investors that could be a very important thing. For some investors, performance of the last quarter forget 1 year could also be important. So there's no single trend that we can figure out from digital channels, but one thing that you must see that works whether it is digital or offline, funds having the long-term track record and have performed through different market cycles, they tend to get away with the lion's share, irrespective in one or two quarters, you can see a little bit of slip here or there, but consistency over a long period of time is what gets rewarded.

Got that. Secondly, on the international fundraising - what are the recent developments? And what are the things that you guys have planned for the next couple of years?

There are two parts to it. I'll break it down Japan and ex-Japan. So as a regular day-to-day basis, because of our UCITS structure, and we have come some advisory mandates globally, which keeps happening. But we've also seen a lot of interest from Japan. At this point of time, while I won't be able to give specifics. But over the next 6 to 9 months, you will see a couple of new funds, India dedicated funds getting launched in Japan, which will be managed by us.

And Japan?

In next 6 to 9 months.

So you said a couple of schemes in Japan in the next 6 to 9 months, right?

Yes.

And what about ex-Japan?

Japan is like our home country, we're very strong there. But other than that, also there are a couple of Middle Eastern sovereign wealth funds that we are managing. We are seeing flow coming from Europe also. But in Japan, we have a distinct advantage being the home country for us. We are very bullish on that.

Okay. And last question is on the commission structure you mentioned that you make corrective actions here and there. But is it a trend that you basically to protect the further fall in yields from here on with respect to the growth in AUM, would you want to kind of link to the commission structure to the TERs and rather protect your yield as well by not passing on -- by passing on the hit of the TER to the distributors? Is that a thought that we are working with so that our yields kind of get protected in further falling TERs because of the telescopic structure?

I won't get into the nitty-gritty, but my sense is you will see industry moving towards that.

Thank you. The next question is from the line of Madhukar Ladha from Nuvama Wealth Management. Please go ahead.

Congratulations on a great set of numbers. So just a couple of questions from my side. I don't know whether you've already addressed this because I missed a little bit of the call. First, is there some reduction in Q-o-Q equity yields?

And I just wanted to get a sense of what is driving that? And if you could also give your segment-wise yield, that would be useful.

Second, what is driving such a strong other income? And third, even if I adjust your tax amount by the INR 29.5 crores of that deferred tax liability, our tax rate for the quarter is still quite low. So what is happening there? If you could help us with that.

Madhukar, I'll request Parag and Amol to take this question.

So Madhukar, I think, Amol covered the realization which we have. So there is a slight drop because due to the telescopic pricing in equity, it has dropped to from 60-odd to 58 around. And so that is there. So as telescopic pricing, there will be some more movement in the yields will happen on equity. Debt remained in the range of around 24, 25 basis and liquid remain in the range of around 12 basis.

Got it.

Yes. On the other income front, Madhukar, it is more due to mark-to-market.

There's nothing -- anything one-off or something like that. It is clearly mark- to-market. It is on the investment that we have in the mutual fund equity debt scheme.

That's why the tax rate is low because...

Yes. Tax definitely the higher the other income, it would have a positively impact on the overall tax rate.

Thank you. The next question is from the line of Darshan Shah from Multi-Act Equity. Please go ahead.

My question is on the commission rationalization part. So on what percentage of AUM have you rationalized the commission? And have we seen the full impact in this quarter?

Yes. Darshan, this is Saugata. So commission rationalization, like we have mentioned in our earlier calls. So we had done in our small-cap fund, which was the largest fund of ours. We have done the entire -- on the book, the commission rationalization was done, which continues to fall in place because we have now set up a system whereas per the TER movement, the commercials keep going down in case of small cap fund. The similar logic has been applied to all the new businesses which come in all the funds.

So depending on the telescopic pricing, the new brokerage structure on the new flows continues to move in that direction. So we are technically, it's a pass- through what is happening at this point in time.

But there is no change in the back book commission side, except for the small cap fund?

On the entire book, of course, it was the small-cap fund, and we are evaluating.

As you progress, we will definitely keep assessing opportunities to look at the entire book on certain funds.

Thank you. The next question is from the line of Santosh Keshri from SKK HUF. Please go ahead.

Actually, a few queries from the financials. Like, I can see that our revenue QoQ went up by 13%, whereas the PBT is up only by 10.78%. Now in this kind of business, the operating metrics is more in favour of the business, it should not -- it should be more than the percentage of revenue that it went up by. So may I know the reason? Is this because of ESOP cost?

So if you look at it -- you're right, the revenue from operation has gone over 13%, but the other income is down 8%. So that is also having an impact on the PBT level. So that's why the PBT is up by 11%.

Okay. And what is the impact of ESOP cost in this quarter? And how long it will continue if you can just give full numbers?

So the ESOP for the quarter, it would be around INR 11-12 crores. And for this year, as we have maintained that for this year, the ESOP hit on account of the ESOP granted would be around in the range of INR 42-45 crores.

And second thing is from the business point of view, I guess we haven't launched any new ETF or new fund for fund for subscription by the investors.

But even then, we can see that the fees and commission line is going up, like we have seen an increase of almost 7% QoQ and 23% YoY. So what's the reason that the fees and commission will go up while we are not launching any new fund?

So Santosh this is not only for the mutual fund, but also on the AIF side. That is why there is a slight increase on the fees and commission.

What you're seeing is a consolidated basis.

Yes, not mutual fund.

And any reason, sir, we are not launching new funds because our competition is launching new funds, and they are collecting money in buckets. And most of the subscriptions are hugely successful, a lot of funds are coming in and their profits are also -- even though they are quite large, their profits are much more appreciating QoQ increment is much more than us. So any reason we're averse to launching new funds?

So Santosh, I think, as we have mentioned in the past, we would not like to launch multiple NFOs. We like to focus scaling up our existing schemes, and wherever we have good performance, continue creating wealth for investors and scale it up. We do not believe in launching NFOs which is more asset gathering strategy. From our point of view, the two principles guide us.

Number one is to create wealth for investors, we focus on the existing schemes.

And for the shareholders, the focus will be on profitable growth. So we do not want to be distracted by short-term increase in AUM, which comes with NFOs, which may or may not be sticky or sustainable from long-term point of view.

Okay. So that's the biggest call we have taken.

And also Santosh. Just a reference point should be that our net sales growth is very consistent over the last 1 year, month-on-month. So we don't get impacted by these NFOs, because there's a lot of churn money which keeps coming in NFOs. We are looking at fresh flows which keeps giving us growth.

So what you should see is basically our SIP book has almost doubled. And the market share has doubled in last 3, 4 years. And we believe it is slow growth, but consistent and stable growth.

Thank you. The next question is from the line of Amit Gupta, an Individual Investor. Please go ahead.

Most of the questions have been answered. But one question which I've been looking to ask is like we are the leading player in the ETF and ETF segment.

But we are not launching any innovative products like triple ETF, triple leverage ETFs, which are like in U.S.? Are we not allowed to do launch such ETFs in India, or we have not pushed those to -- SEBI to introduce such ETFs India?

Mr. Amit, broadly, we continue, like we mentioned in the opening address, we launched two new products this time in this quarter, which was Nippon India Nifty 500 Equal Weight and Nippon India 500 Momentum 50 Index Fund.

Some of these are industry first. We continue evaluating various products.

Some of the products that you mentioned right now, some are not allowed by the regulator and some we have a very strong view. Overall, we like to launch products such as simple and easy for investors to understand.

We do not want to get into complex products, which basically is difficult for investors to understand. And while in the short-term, they look very exciting.

But from a long-term point of view, they may or may not be good for investor.

But we'll continue evaluating. I would also like to share with you our ETF and passive product suite is one of the largest in the industry. And this also gets reflected in the number of investors and the total market share we have.

The next question is from the line of Abhijeet Sakhare from Kotak Securities.

I just have one number question. What would be your realizations or yields in the pension in the offshore business?

Generally, we don't give out that number. So it would be in the range -- actually you see on the government, it will be on the lower side, but on the AIF and other businesses it could be in the range of 0.5% to 1.5%.

Got it. And just one more, if you can share any outlook on expense growth for the next 6 to 12 months?

So Abhijeet, the expense growth we are looking at except ESOP should be in the range of around 15%-odd that should be the outlook we are looking at.

Thank you. The next question is from the line of Gaurav Jani from Prabhudas Lilladher. Please go ahead.

Congrats on the quarter. So two questions from my side. One is a slightly broader question. I mean also according to the industry, I mean, not only you guys, but last 2-odd years we have seen elevated commissions, elevated payouts which is sort of normalizing right across some of the AMCs. So could this trend continue for 1.5, 2 years? I mean, how should we look at it? That's number one?

And secondly, what would be the impact on net sales overall for the industry and especially for the players that are doing well?

So it will be very difficult to answer it for the industry. But one thing is very clear. If you were to see in any industry, there will be different players depending on what the Board and the shareholders guide, whether you want to work for top line or bottom line. What you are seeing is basically -- I mean

there will be industry players who will continue to pay higher commissions for whom the market share is more important. As over multiple quarters and including the address earlier I mentioned, as a company we will focus on growth, but it will be profitable growth.

While we have seen market share go up, but if ever it's a question between market top line and bottom line, it will be the bottom line that will guide us. So for us that will be the guiding principle.

So, Sundeep, what I understand is certain amount of flows can be compromised?

If it's incremental, they do not add to the profitability, yes, we will.

Thank you. The next question is from the line of Bhavin Pande from Athena Investments. Please go ahead.

Congratulations on a great set of numbers. I just had one question regarding the filing that we had done last month in which we spoke about investments made by erstwhile promoters. So has there been any measurable progress on that front?

We continue working with the regulator. There's no new update. the last update, which has been informed to the stock exchanges, there's no further update after that. And if there is any, I think, we'll keep you informed.

Thank you. The next question is from the line of Jatin, an individual investor.

My question is like whether Nippon India Mutual Fund will look to expand in other verticals like health insurance or life insurance in near future?

So, Jatin as mentioned earlier, our focus will remain on profitable growth within the regulatory framework that we can do. As per Section 24, we can only continue focusing on asset management businesses. So we will continue focusing and expanding our businesses and continuously evaluate both growing organically and acquiring any business that is related to asset

management. And as when there is anything further update, we'll be in touch with you.

Thank you. As there are no further questions from the participants, I would now like to hand the conference over to the management for their closing comments.

So thank you very much. As mentioned earlier, the management team will continue focusing on profitable growth. Thank you very much and wishing all of you very Happy Diwali.

On behalf of InCred Equities, that concludes this conference. Thank you for joining us and you may now disconnect your lines. Thank you.