Nippon Life India Asset Management Limited analyst Q&A

Thank you very much. We will now begin the question -and-answer session. The first question is from the line of Lalit Mohan Deo from Equirus Securities. Please go ahead.

Sir, I have two questions. Firstly, we have seen some sharp growth in gold and silver ETFs. Could you also give us a share in terms of the topline, like how much of the revenues do come from these two segments? And also, a bookkeeping question, could you spell out the segment -wise yields in equity, debt, liquid, and ETFs? And lastly, we are seeing some moderation in the market share and monthly shift flows. Is there anything material to read over there?

So, Lalit, the yield for equity is around 53 basis. Debt is 25 basis. ETF is 20 basis. And overall yield is 37 basis. We don't specifically give asset class-wise fees and their contribution to revenue. But as you rightly said, our overall gold and silver pie in the overall A UM has increased. So, it has impacted the increase in the overall revenue also.

Sir, on the point of the SIP market, there is a slight dip in the market share. So, like it was mentioned in the opening speech, there has been a market volatility which is there in the equity market. And if one has seen the AMFI data, the flows in equities are now narrowing down to certain categories. There is one category called Flexi Cap which is a very lar ge category in the MF industry, which is where there is a lot of investment coming in. We are working towards building our market share in that particular category or any other alternate category. But else, our SIP flows are consistently moving up, barring these few aberrations during the course of the quarter.

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

Congrats on a good set of numbers. Firstly, just a probably naïve question here. But when you, gold ETFs and silver ETFs basically purchase, what natu re of gold and silver and then?

As per SEBI regulation, it is all backed by physical asset class.

And you cannot take any exposure to derivatives on this?

No, we cannot. Not only we, SEBI does not allow for any SEBI registered ETF.

Okay, got that. Sorry. The other question was on, if I look at the cost and particularly the overall cost for us has been quite moderate in this quarter. Happy to see that. But what is the kind of driving force behind the moderation in other expenses on a sequential basis in this quarter? Was there any one-offs in the previous quarter which have not come in this quarter?

No, there is nothing specific. The cost is more or less lying in the last quarter. There is a small dip which is there. But there is nothing to read in this.

Okay.

We will at times continue with the discretionary spending depending on the market conditions, branding, technology, various things. But I would not like you to see it as any directional thing if it has come down. It is in line with our overall planning.

I think you mentioned the guidance of 15% growth in overall expenses. That should sustain for next year also?

Yes, it should.

And structurally, how do you think passive as a segment has been growing very strongly? So, from a contribution of profit perspective or some understanding as to given the scale that Nippon AMC has on the passive side which is not linked to EPFO, there is a massive size out there. Some understanding as to what is the contribution that comes into the profit. Like you mentioned, the yields on the ETF. But what is the kind of cost against it? How do we kind of size the profitability against this category? And that has been growing at a very fast pace.

So, we break it into two parts. One is profitability and how do you see from future point of view? From our point of view, the way we see is in the Indian context, both active and passive will continue to grow at a very strong pace. And these are totally two different verticals. I mean it is not one is cannibalizing the other. These are two different set of investors who would like to go for passive and there are investors who would like to go for active. We are in a very strong and dominant position where both as far as active and passive, we have a very strong record and also trusted by millions of investors. I want to also give you another way to look at this specifically for the ETF business. Unlike mutual fund business, ETF business globally, the top 2-3 players always have the lion's share. Because I mean unlike a mutual fund where an investor typically likes to diversify in 2-3 different schemes, here the underlying is the same. And typically for us because we have, as we talked about today, more than 56 lakh investors. More investors mean more liquidity, more trading and it is a chicken and egg. And that is exactly the reason you see, you talked about gold and ETF earli er, someone asked this question, t he fact that between gold and silver ETF, we are ~35% of the entire industry. So, we will continue. We believe this does not have any additional cost. This is a scale game. And thi s is not a business which can be replicated very easily. Again, I repeat, globally, country after country, the top 3-4 will have 80 %- 90%. Then you will have a long tail with 2%-3%-4%. So, that is one. On the yields, the blended yield for ETF is around 20 basis. And so, it is a very profitable business to run. As the cost is very low and the new increase in the AUM doesn't really require to have a higher cost element. So, it is a very profitable business.

Thank you. The next question is from the line of Mohit Mangal from Centrum. Please go ahead.

Thanks for the opportunity. Congratulations on a good set of numbers. First question is towards the SIF strategy. First of all, how do you intend to take it forward? And now it is a six -member team, so how will the economics work in terms of yield and profitability?

So, as you rightly mentioned, we have a team led by Andrew Holland. We are very bullish and excited about SIF. We believe it has just started over the last 3-4 months ever since the scheme has started, which are about 4,000 crores- 5,000 crores have been collected. But this is like the starting of the mutual fund industry, because for this segment, the segment which is the HNI segment they are accredited investors. We believe this will become a very important and critical area. And from our point of view, we will continue investing as a six - member team today. We are at this point of time also back-testing, getting risk management ready. We believe this will be a very important segment. If I was to look at what you talked about, the earlier question I was to go, a separate vertical of ETF and passive was discussed. I believe wh en we will be discussing 5 or 10 years down the line, SIF will be a separate business vertical, and we will be discussing that in that much detail.

Right. But do you think that over the medium term, next 2 to 3 years, we will have decent yields on these businesses, or do you think it will be little on our lower side?

It depends on different players, how they want to approach it. Somebody may want to do it for AUM, may want to do it at lower yields. We are very clear. We would like to add value to the investors and do it at higher yields. So, we do not want to run it like a liquid fund. We do not want to run it like a passive fund. This is a specialized product. We clearly see if you can add value to the investor, the investor will be willing to pay. So, our strategy for SIF will be not AUM but more profitability.

Understood. This is very clear. Secondly, in terms of growth, I think we had very, very solid growth led by equity and debt. But I think liquid has kind of disappointed. So, do you think that is a concern or will it bounce back in Q4?

I think I will rephrase the word disappointed to yes, it was a little lower. It is a temporary thing that keeps happening at times. I do not think you should read too much into it. Overall, as a company, as a portfolio, there will be at times, there could be a particular scheme or a set class which may underperform for one particular quarter. But I will request you not to read too much into it.

Understood. My last question is towards the performance. We have been in the top quarter over a longer period of time, greater than three years. But I think in some of the schemes, our short-term performance has been a little weaker. So, are we coming out with any strategies to prove that or do you think that it will become more clear maybe next 3 to 6 months down the line?

Even as we talk today, almost two-thirds of our key equity funds are in the top two quartile s over one year bucket. Definitely we continuously keep monitoring our equity debt performance very closely. However, we have to also differentiate between noise and sound because what you have to see is last one year, market has been volatile and has not moved in any particular direction. And certain things may not have played out the way we expected. But is it basically a reason for us to panic or try to change the portfolio? The answer is no. We stick to our conviction. So, this 1 or 2 quarters plus or minus does not matter. Effectively we are not going to b e taking much, a lot of extreme steps. But we continue monitoring the schemes very closely.

Understood. This is very clear. Thanks, and wish you all the best.

Thank you very much.

Thank you. The next question is from the line of Ankit B ihani from Nomura. Please go ahead.

Hi. Thank you for the opportunity and congrats on a good set of numbers. So, my question is on the yield part. So, the yield has held up quite well on the QoQ basis while we have seen substantial growth in the lower yielding ETF space also. So, what has led to that? And the second is, have you done any assessment on the new SEBI regulations and what could be the impact?

So, the yield on ETF is mainly driven by the gold and silver commodities ETF which has been helping the yield to grow on the ETF side, and which is resulting in the overall increase in the yield because the ETF as a pie is increasing in the overall AUM. So, that has helped to improve the overall yield on ETFs. O n the SEBI regulation, the regulator has been consistently taking steps in the interest of industry and the investors, and this is one of the steps in the same direction. Coming to specifics, the removal of the 5 basis points exit load will surely have some impact on the overall industry equity-oriented AUM and even the revision in TER slab will have some impact on the bigger scheme but on the smaller scheme it will see some benefit. Lastly, the brokerage on the cash transaction was reduced to 6 basis against 12 basis but the average brokerage used to be in the range of around 8 -8.5 basis on cash transaction so there is not much dip on that side. So, this will not have a major thing to read currently. Anything which comes as an impact, we will have to look at how we will adjust or do it in our financials, how to pass on or anything.

And Ankit, also to add to what Parag mentioned, over the last 2 -3 years, as I have always mentioned, irrespective if it is not the regulator, whether it is the regulatory push, whether it is the investor demand, one needs to be mentally prepared that the yields can come down by 1 or 2 basis points year after year and that is the direction we will keep moving. Whatever the reason, the idea is how do you build up efficiency in the Company to absorb that.

Agreed, ye s. And just a follow -up, so on the ETF space, what I could understand, the yields are higher on the gold ETF side. Could you give a number? I think 30-35 would be a fair assumption?

Blended is 20, Parag just mentioned that, 20 basis points.

You can check in DTER because it is publicly documented. Gold is around 60 basis, and silver is around 30 odd basis.

Okay, 60 for gold and 30 for silver. Thank you.

Thank you. The next question is from the line of Rahul Kumar from Vaikarya Fund. Please go ahead.

Hi. Just one question. Can you help us understand the trends on the net flows on your small-cap funds?

See, the small -cap fund, as you know, it has been almost two years , we have stopped taking lump sum investments. We were very clear that at that point in time, the market was getting more heated, and I think we were right to have arrested more flows in this fund. As we speak, we continue to be in that camp. Like you have heard Parag saying that last year also, the small -cap index did have a negative return. The valuations are still stretched, though there is some news flow or noise about small-caps getting rightly valued. But we are in the camp of still observing the valuation movement from here on. The earnings trajectory also is going to be something which we are going to look at very minutely. So, maybe at this point in time, we still believe that flows into this fund should be through SIP. We have not yet seen any sort of negative net flows in this fund. This fund continues to be net sales positive. But ye s, directionally the inflows are going down because lump sums we don't accept in this fund.

Okay. And I think on Flexi Cap, you mentioned that you are seeing a strong correction.

Correct.

And over there, it seems like you are trying to improve. Can you help us understand that point as well?

Yes, so if you go back to history, the Flexi Cap category in the industry is a new category which was approved by SEBI. And that's when many of the multi-cap funds or the large and mid-cap funds which were having a flexi sort of a strategy got migrated into the Flexi Cap category and that's the reason why this category became big. We were late starters in 2021 with this fund. And it's a five -year product at this point in time. The mid and small -cap correction which has happened has impacted, does impact the fund performance in the near term. And what we are looking at is that how do we bring in more stability into this performance. And that should lead us to start getting more market share in the Flexi Cap category. So, that's where we stand at this point in time. So, for sure, Money flow and SIPs are moving into this category. As you also should know that the Flexi Cap schemes in the industry are more large -cap oriented. We want to be true to Flexi Cap. Hence, sometimes near -term performance might impact the near -term return. But we will stick to our mandate of being true blue Flexi Cap.

Thank you.

Thank you. The next question is from the line of Abhijeet Sakhare from Kotak Securities. Please go ahead.

Hi, good evening everyone. My first question was, is it possible to indicate or give some sense of what would be your flow market share in gold and silver ETFs?

It would be approximately 30%.

Got it. And like in terms of yields, what I saw from AMF I disclosures is that the yields on the gold and silver ETFs, if I kind of combine that book, is probably better than what you get on your equity book. So, the question here was that, as we look into the next few quarters, do we get a sense that it's possible that our yields kind of inch upwards, could remain flat even while the overall AUM keeps growing?

Again, we won't be able to do a futuristic thing, but the only thing specific to ETF I can share with you, when there is a higher liquidity, it adds value to the investor by low tracking error, low impact cost, and allows you or gives you the cushion to charge higher. That's the only thing I can share with you at this point of time. Which way it will go, we do not know, because the mix will keep changing. But the only thing, generally, when we talk of ETFs, and I'm not sticking to gold or this thing, liquidity helps the investor get a lower impact cost, low tracking error, and these two things put together, if you get it right, it allows you the capability to charge higher. Whether you charge or not is a different thing, but it allows you to charge higher. And you are not forced to play a game of lowering the expenses to garner AUM.

Got it. So, is it fair to assume that your price to NAV gap or the tracking error would be one of the best in these two categories?

Very much.

Okay, got it. And then, on the OpEx, did I hear this number correctly, that for next year, we are looking at somewhere close to 15% headline growth in overall OpEx?

We've been consistently saying, I think you can look at expense growth of about 15%, plus, minus 1-2. That's what we've always said.

Okay. Got it. That's all from my side. Thank you so much.

Thank you.

Thank you. The next question is from the line of Meghna Luthra from InCred Equities. Please go ahead.

Hello. Thank you for the opportunity. Sir, I just wanted your thoughts around the SIP movement. Do you think it has any correlation with the slowdown in thematic and sectoral schemes? Or general market sentiment, broad market sentiment is what it is following? Do we see that the pace of SIP flows will now stagnate or plateau at these levels?

It will be very difficult to predict that. What we have seen in past is, it depends on which segment you are catering to. When you look at the segment which is basically SIPs which are, let's take, 20,000 -50,000 and above, they are more vulnerable to market conditions. Compared to very small retail ticket size, they are not as vulnerable. So, we continue, our focus continues to be on very small ticket size, which is one. Having said that, whenever it is not a thematic or this, if investors over a longer period of time, see over 2 -3 years' time, the returns are not there . There can, from a sentiment point of view, there can definitely be a slowdown. I am not saying it will go negative, but growth can slow down for sure. If it is over a longer period of time, investors see negative growth or no growth in the portfolio.

Got it, sir. Sir, on the ticket size, what would be our average ticket size on the SIP and SIP?

For us, 75% of SIPs by value have a ticket size of less than INR 10,000.

Okay, so that is very granular. Got it. And, sir, again a similar question on the offshore fund. Is there, how do you think that the book will move going forward? I know it is difficult to give guidance, but any sentiment or color on that?

I have mentioned in past also - clearly we would have expected offshore contribution to be higher. It has taken a little more time; it is a little binary. Unlike SIP, when we talk, when you are doing, whether you will get 1 lakh SIP or 90,000 SIP or 1,10,000 SIP, I mean it is very easy to predict, that could be plus minus 10 % variation. But majority of these businesses also have institutional deal mandates. It will be difficult to predict which direction will go, but all I can share with you, I shared in the last meet also, that there is a lot of work in progress that is going on. We, clearly a lot of work going on in Japan. We launched the first NISA scheme in Japan. As I mentioned in my speech earlier, our AIF is getting into a JV with DWS. Again, the idea will be to get more global flow into India. So, this is again continuous work in progress. It will be very difficult to give guidance on this. In the last few years also, USD-INR depreciation has also gone against us. But there is a lot of work in progress you would see over the next 2 -3 years. I think more positive numbers on this compared to what you have seen in the last few years.

Okay, got it. That is very helpful. And sir, on this deal, do you think, I mean, I know it is a small, I mean, proportion of the whole book. But can you give more color on this, on the transaction? When is it likely or anything?

At this point, we will not , as shared with the stock exchange on 13 th of November. It is a non-binding agreement we have got into DWS. As and when there is further update, we will be coming back to you, sure.

Okay, sir. And lastly, on giving this guide on the ESOP expense, what it was this quarter and how do we look at it going forward?

Yes, so ESOP expense for this quarter was around Rs. 11 crores. And for next year, of the current ESOP scheme, we are expecting ESOP expense rate of around Rs. 26 crores for the next financial year.

Okay, got it. Thank you. That is all from my side.

Thank you. The next question is from the line of Mohit Mangal from Centrum. Please go ahead.

Thanks for the follow-up. Just one question. So, last quarter, you said that you have been successful in rationalizing distributor commission across four equity schemes, which covered around 60% of total equity area. Any further, I mean, developments in this quarter?

Directionally, we will keep moving in that direction. I think quarter-by-quarter, number of schemes will be very difficult to share with you. But directionally, as Parag mentioned, with respect to the SEBI changes, the new regulation, we will try to mitigate any impact on us by either absorbing, or by getting better efficiency or passing on. We will continue working on those lines.

Understood. This is helpful. Thank you.

Thank you. Sir, just two quick questions. You mentioned the ESOP charge for the quarter to be about Rs. 11 crore. The notes to accounts mention Rs. 6 crores. So, where is the difference? Please explain.

So, the 6 crore pertains to the new ESOP scheme, which was granted in the current financial year. And 11 crore is the overall ESOP expense, including the new scheme and the old scheme.

Okay. Understood. That is clear. Secondly, I had a question on the “Labour Code” impact incrementally. So, this quarter we have taken the one time. By how much would the staff cost increase or how should we kind of look at that?

So, the “Labour Code” impact is the one -time changes to the gratuity. There are still some clarifications still awaited. So, we will do a needful, if anything, in the March quarter. But the one-time impact is on the gratuity changes on the basic and definition of wages, which has been notified, which has been taken in the financials.

So, as of now, sir, no incremental material impact seems to be there?

No. For the gratuity, at least, we have worked out as per the law.

Okay. Thanks. That is it.

Thank you. Ladies and gentlemen, we will take this as the last question for today. I now hand the conference over to the management for closing remarks.

Thank you, everybody, for joining this call. If you have any questions, if you need some inputs, you can reach out to our IR , Arash and he can help you to answer the questions. Thank you and good night.

Thank you very much. That concludes this conference call. Thank you all for joining us today and you may now disconnect your lines.