Nippon Life India Asset Management Limited analyst Q&A

The first question is from the line of Lalit Deo from Equirus Securities.

Congratulations on a good set of numbers. So just two questions. So firstly, with respect to the consultation paper which SEBI has come up with, could you share the comments around the same like what -- how are we looking at this on the new asset class? So that will be my first question.

Yes. The second question is like so during the quarter like we have seen some compression on the yield side. So what were the reasons for the same? And like also could you give us yields on the asset class wise, like equity, debt, liquid?

Let me take the first question and the second one, I will request my colleague, Amol, to take it. With respect to the new consultation paper , we are still evaluating the paper, given it is out only recently. I think the opportunity could be big. We must also be cauti ous on the new kind of risk associated with the new asset class and not get carried away with it. All options are currently open, and we are trying to see how we can take advantage of it. But we want to remain cautious. While the minimum ticket size what is mentioned is INR 10 lakh, we may evaluate to launch products which will be higher than INR 10 lakhs at the entry level, because we want investors who are really, really understand the risk associated with it to come into such products. But like I said, th ese are the initial days, it just has come two days back. Maybe in the next quarterly call, we'll be able to give you better clarity.

Yes. Thanks, Sundeep. So on the yield part, for the quarter, we have seen a QoQ growth in equity AUM of almost 14%. And as you are aware, due to telescopic pricing, there would be pressure on the yield as the yield contracts as the AUM grows. So that is the main reason why we have seen a contraction in the yield. So on a QoQ basis, if you look at it, there is 1 basis point compression in the yield. On the asset class wise, the yields - on equity stands at around 60 basis points. On debt, it's around 25 basis points. On liquid, it's around 10 to 12 basis points. And on ETF, it's around 8 to 10 basis points.

Sure, sure. And sir, in your opening remarks, you also highlighted the fact that you would be staying out of launching products on the sectoral and thematic side, whereas in the industry, we are looking at a lot of AMCs are looking to launch products on the same, and they are mobilizing funds also. So like what is our thought process on that?

From our point of view, a lot of these products are being launched only with the tailwind of the markets doing well. And past many of the thematic funds which get launched are not able to do so well for a long period of time. Our strategy would be to remain restricted to some of our core flagship products and scale them up. If you were to deep dive into portfolios of some of the thematic funds which have come, 70% to 80% are similar to most of the diversified funds. So we will stay away from launching -- getting into such themes which, seem to be very seasonal in nature. And we'll try to continue focusing on our regular large cap, small cap, mid cap or true -to-label sector al funds, which the investor understands what he's getting into.

The next question is from the line of Shubham Bhatra from ICICI Prudential AMC.

Congratulations on a great set of numbers. I had a question regarding your FY24 numbers. So if I look at your consolidated financials, the PMS revenue comes out to around INR 29 crores, whereas in the standalone, it is INR 42 crores. Why is it the consolidated revenue lower than the standalone?

Yes. So we have to check that what you're referring to probably, then we can get back to you.

The next question is from the line of Madhukar Ladha from Nuvama Wealth Management.

Congratulations on a great set of numbers. So just a couple of quick questions. One, why has staff cost gone up so sharply? And so from INR 89 crores last year in Q4, we've gone to INR 105 crores. And even on a YoY basis, the jump is very material. So wanted to understand that. And what should we sort of be building in for the rest of the year? And second, the AUM is growing really rapidly. And incrementally, are we able to pass on the lower sort of TER in terms of lower distribution cost to our customers? Or are we losing out in terms of incrementally what we are able to keep for us? We are, obviously, but is there any way to stabilize those yields? What's the thought process on that?

Okay. Thanks, Madhukar, for the question. So the reason for the increase in employee costs are manifold. Basically, first of all, is the fresh ESOPs granted during the quarter 1, that has resulted in a P&L hit of around INR 8.3 crores, which has added to that. Another part is the increment that we had for this year, which was higher than the average past increment. So the increment was in the range of 12%, 13%. That is why you see that. Also, the provision for the variable pay that we have made in quarter 1 would be comparatively higher compared to what we did in Q1 of last year, so that's another reason why you will see the higher variance. And also this year, there was a comparatively h igher spend toward the annual employee engagement activity. And so these are some of the reasons why cumulatively, the costs have gone up for the quarter. And if you look at the year, excluding employee costs, probably you can see an increment of around 12% to 13% over the full year. So as Sundeep mentioned, that we have already added 100 employees during the quarter, and we will keep on investing -- wherever we feel necessary, we'll keep on adding resources.

You said excluding employee costs, the other costs will go up 12%, 13%. I didn't get...

No, excluding ESOP cost, the overall employee cost will go up 12%, 13%.

Excluding ESOP cost, got it, got it. Okay. Understood, understood. And on the other question on the yield...

So in the past, you would have heard from us that we had reduced the brokerage in one of our largest funds, and that continues to be one of the practice which we are doing. We, on a QoQ basis for all new business, what we garner, as per the TER movement, we proportionately reduce the brokerages. And that's been our practice, and we will continue to do that as we go ahead. It does not impact our business that much because the granularity of our business is very different. We have a very strong retail franchise, and we believe in building assets through SIP, and that's probably the reason why we continue to maintain our net sales growth on a QoQ basis.

Understood. And just one follow -up question on the employee cost. What should be billed as ESOP cost for the year?

So the ESOP question would be roughly around INR 45 crores for the full year.

And next couple of years, like?

So it will taper down. So as I mentioned, first, normally, whenever an ESOP is granted, the first year, almost 50% get accounted in the first year and then it tapers down to 25%, 26% in the next year and then it reduces further in the third and fourth year.

Understood. Got it. And all the best.

Thank you, Madhukar.

The next question is from the line of Ranjeet Bhalrao, an individual investor.

This is more of a suggestion or a request than a question. The reports that are published and reported to the exchange, will the amounts be mentioned in lakhs and crores instead of millions and billions? Most of the people in India are more familiar with the former than the latter.

Sure, Ranjeet, we can definitely, surely look into that.

The next question is from the line of Prayesh Jain from Motilal Oswal Financial Service.

Congrats on a good set of numbers. Firstly, if we think about the strategy with respect to branch expansion or deepening your presence, further presence into the country, what are your thoughts there, what are your strategies there? You added some 2,900 distributors in the quarter . So what is the strategy there? That would be my first question. And related to that, second question as to how should we think about your other expenses growing in this year where you guided for the employee cost, but from other expenses standpoint, how do we see this increasing? And coming back to the employee cost of it, addition of employees at the sales and distribution level, do you think that this should continue? Or are we reaching an optimal stage whether you invested enough for the next 1 or 2 years? Or is it that you still will continue to add?

Actually, both the questions are linked to each other. I'll try to club it together. Presently, we are present in 263 locations and 70% of our branches are in B30 locations. So we'll continue evaluating some of our branches. We were relooking at changing, making them bigger. As the penetration and the scale of businesses there is increasing in the cities and towns, will we go really deep and add a lot more branches? Answer is no. I mean, even if there would be, there could be 10, 15 branches in a year. But there'll not be much, because we are also seeing a lot of these B30 locations, the new business, as it was mentioned in the presentation, a lot of this business is coming through digital. So it will be a hub -and-spoke model, but to your question, will we add a lot more branches, having one of the largest branch franchise, I don't think so that we will add too many more branches. It could be maybe 5, 10 branches in a year. That's the kind of trend at this point of time we see. As far as adding employees is concerned, I think, yes, we have added about 94 employees in all, total. ~45 were added in Q1 and 50 ha ve been added after that. Some are in sales and distribution. And also very high percentage of them are basically the new talent and the new skill set we are acquiring for our alternative investment businesses. So will this trend continue? Based on how the penetration is increasing in the country and how the smaller cities are contributing, about 10% addition can happen, I think, for the next 3 to 4 years also. So about 100 more people can be added. I mean most broadly, many of them will be at entry level. Few could be new skill set that we'll require for our alternative business. And regarding the other costs, other than ex of employee cost, we believe it will be in the range of about -- you can expect about 12% to 13% increase every year.

12% to 13% increase and a large portion of that would be in what, because generally, there should be a good scale benefits. So a large portion of this increase would come in from what element, the digital, advertisement, what would kind of take away a large portion of this increase?

Majority of this will be technically investments for future, you're right. It could be digital, advertising, building the brand. Because as we go up, because there's a lot of operating leverage at the fund today, as we have grown from INR 3 lakh crores to touching almost INR5 lakh crores, the basic costs don't go up. So I mean, some of these are inflation -related costs, but majority of the costs are going to be investments for future.

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

Congratulations on a good set of numbers. I had a question on the SIP flows. And is there any color that you guys gave out on which is your segment where majority of the flows come into, not in terms of the tenure or anything that comes out in the B30 but i n terms of the product segment? And any color on how those -- has there been any change or any need in that segment where the SIP flows were coming? Has that shifted to any other direction? Any of those -- any color on that will be useful.

If you see the SIP flows which are coming to the industry and to us. For us, the good part is we have de -risked our SIP flows across the various funds which we have today. Earlier, probably 2 years back, it was probably small cap was anchoring the entire SIP flows. Today, the dispersion of the SIP flows have moved towards small cap, large cap, mid-cap. And we are also seeing a lot of flows now coming into the sectoral funds. So that's the way the SIP book is now building for us. It is quite de-risked at this point in time. And the other part is the retail franchise, which we have built, along with the digital strength which we have, we are getting a lot of inflows coming in from the B30 market. The reason why our B30 market share is much more than our share of assets in B30 is much higher than the industry average. So that is the way the flow is coming. Even our average ticket size is increasing. So today, because investors want to stay longer with us, they are ready to commit a higher average ticket size, which is also an area of improvement, which we have seen in the last 6 to 12 months.

Sure, sir, and just that you mentioned B30, so should we expect whatever market share you have in B30 market, similar would be the trend with SIP flow or how should we look at that one then?

Yes. So we have a higher -- because B30 market share is now increasing, the SIP flow book always is higher and then the market share moves in tandem to the SIP market share. So if SIP market share, as an example, if it is, say, 10%, our B30 market share maybe 8%, then it starts catching up as we -- as the SIP book starts building.

The next question is from the line of Swarnabha Mukherjee from BK Securities.

Just following up on the previous participant's question in terms of the distribution in B30. So sir, if I see your distributed assets, I can see that over the last few quarters, your MFD share in the stock has kind of slipped by maybe 100 basis points, which has been taken up by the bank side. So I just wanted to understand why would that B30 growth be reflecting in the distributed asset mix? Are we reaching out to customers through the banking channel? What is happening? And secondly, as a ramification on our yields, because as banks see some increase in share in the mix and it being a higher-cost channel, is it also putting a slight pressure on the headline numbers that we are seeing, which we have been discussing that there has been a slight squeeze in that? So that is one. And thirdly, in terms of the flows, so I think the schemes that you have mentioned, I think the larger schemes continue to still -- while the flow is de- risked, but the larger schemes continue to see higher share of flow. Sir, any mitigation strategies which can result in the smaller schemes also maybe getting even more and more share, which can kind of help us maintain some stability in the yields? So these are my two questions.

Yes. So I'll just take this answer. So on the B30 side, like Sundeep also mentioned during the initial comments, there's a plethora of NFOs which have come in the industry. And typically, what happens, the B30 market tends to participate more in the NFOs. And hence, your B30 market share in IFA might have slipped a bit. But what we do, we are also de -risking our business in the sense if we have to broad-base, we have to go to other channels. So for us, banks are not only the private sector banks, we have a very strong PSU bank ties which we run in the company, which is also does give us protection on yields. And that's the way we are trying to build our volumes in these markets. On top of that, the digital penetration in B30 is also very strong for us. So if you combine all the three aspects, we tend to get our fair share of wallet. And we are continuously accessing channels, which will keep giving us inroads to new investors. So that is the strategy which we work with. And that's the first part of the question. Second part is when it comes to de -risking from a scheme perspective, like I mentioned, small cap obviously has reduced. We have moved the flows into mid-cap, multi -cap large -cap, sectoral funds. The entire narrative, which is happening in the industry around sectoral funds, we are capturing it through SIP because it's good to build the book through SIPs rather than having lump- sum because there are cyclical trends in these sort of schemes. So you'll find sequentially as we move ahead, we'll start having more trends in these products. And hopefully, the mix will keep improving as we go ahead from here on. Currently, as we speak, almost 1/4 of the flows are coming from our large cap and multi -cap funds each. So that's again a de -risking strategy, which has helped us. And as I mentioned, it is an ongoing thing.

Understood, sir. Very helpful. Is it possible to give some indication of how -- maybe to what yield level the flow shares are coming vis-a-vis that on the stock equity?

So we don't include that number, Swarnabha, but safer to say that the yield on a new business would be lower than the stock.

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

So the first is a data question. I wanted to know what would be the closing equity book? I think the average is about INR 2.4 trillion.

We have about INR 2.6 trillion.

And then sort of coming back to Chatterjee-sir on question on yields. So in one of the earlier questions around the current level of commission payouts, you were sort of giving a sense that it doesn't seem to be a matter of too much concern. We've seen almost, I think, 10 basis points sort of a correction on the equity yields on a YoY basis. But I guess, the pass-through for the distributor hasn't been to a similar extent. So what is your thought process around this? Where you're planning for the rest of the year or maybe 1 to 2 years, when would you kind of think about passing slightly higher share to the distributor as well?

So at least for us, as I mentioned, the telescopic TER movement, which we had seen in every fund, we try to replicate that in the brokerage structure to quite an extent. And the reason why QoQ, the brokerage structures do tend to follow the glide path. The previous question which has come in, we have a ratio which has old assets as well as new assets. So we get protection from the old assets too. And as we progress, and we -- so there is an equation where if you are bringing down the new business brokerage and the old assets continue to probably remain with us, the blended yield for us will gradually go down. It will not go down in proportion to the TER movement.

And just to add to it, having said that, we have various levers that we will keep working on to ensure that a decline in yield is not very steep.

Okay. And then just a clarification, the commission payouts on SIP versus lump sum, is there a difference in how you structured the overall commission structure?

No, it is similar. It is both for lump-sum and SIP, we have the same structure.

Got it. And sorry, one last thing, just again, a qualitative sense. Given that we are staying out of the NFO market and we are sort of preferring to bring more money through the SIP route versus lump sum, how does it work with the distributor, right? Because for him, generally, it seems like there is lots of opportunity when it comes to pushing your products versus others. So do we read this as just the performance sort of doing the heavy lifting? Or is there some other way we are sort of keeping ourselves relevant in the market?

So it's not an SIP versus lump sum. There are enough number of distributors who also believe in the same strategy as ours that it is important to be -- it's far better for the investor to get into averaging to SIPs rather than lump-sum. So I would not say that -- I will not paint all distributors in the same brush that they want only lump-sum. The other trend we have seen is very different. A lot of distributors and AMCs thinking in the interest of the investors prefer the SIP route. So I don't think so we have to make an extra effort for it. It's a question of like -minded thought process, that it works good for the investor, if it works good for the investor, it's good for the distributor and good for the AMC.

The next question is from the line of Jignesh Shial from InCred Research.

Just wanted to check, it's more of curiosity I'm asking. You are seeing that your overall market share ex ETF and equity is also 6.88%, which is roughly 12 bps higher, right? So -- and even your market share, your ETFs have also seen a significant improvement sequentially. So with ETF also, if you see like what other large AMC gives….

Jignesh, can you repeat your question?

Yes. So your equity market share, excluding ETF, is 6.88%, correct, which is 12 bps kind of a rise sequentially?

Yes, correct.

So if you put -- with ETF also, we will be seeing a significant improvement only, right? I just wanted to reconfirm because I see sequentially, your ETF market share also has gone up.

Correct, you're right. And secondly, we tried to give it different , this is separately. But your understanding is correct, if you were to see both ETF and equity, the market share has gone up sort of from 12 basis point and more than 100 basis point in ETF.

We have seen a significant improvement on the corporate segment side. Retail and HNI had anyhow been decent, but corporate is also right now doing good for us. And direct channel has also seen a significant improvement. So anything specific you want to mention for this particular segment because once the debt market opens up, which we are seeing now, the flow is improving, the corporate plays an important role. Anything worth highlighting that would be here or something that you want to comment upon? That is the only thing I wanted to understand.

Broadly, if you would have seen, there has been an improvement in all segments, retail, HNI, corporate and all asset classes. I will not attribute to anything specific that we have done in the last quarter, but a lot of things we've done in the last 5 or 6 years. And I believe a lot of these things come with a lag effect. So definitely, things are falling in place. And we see structurally, across all segments of asset classes, that we have done and the way the company is positioned, we will benefit with higher inflows and higher market share in times to come.

Just roughly one more thing. With the almost 90% profit we are distributing as dividend, so roughly around 90%. Our ROE has been significantly improving, up to somewhere around 30% now But do we know that number will continue to go with our dividend? Is still policy remaining at the similar level? Can we assume that the ROEs can even cross 40% plus over a period of next one or two years, is that a fair assumption? Just an assumption I'm asking for.

No, I will not be able to give a futuristic thing. I'm sure you can put it in the spreadsheet and see how it will look like. But from our perspective, the Board of the company has a very clear view to keep sharing the profits of the company with all shareholders, including the minority shareholders, and we'll continue with that trend. But ROE, this business has high operating leverage. As AUM increase, expenses do not go up the same way. And -- but we'll not be able to give a number to it. But yes, for this quarter, the ROE was 32%.

The next question is from the line of Bhavin Pande from Athena Investments.

Congratulations on a wonderful set of numbers. I just wanted to draw your attention to Slide 44 regarding operating leverage. Of course, assets are a factor of how markets do and profits in turn would be a manifestation of that. But looking at variables which are controllable, do we think that if things sort of go in tandem, we could see some sort of accretion happening on per branch and per employee basis?

Amol here. Thanks for the question. So if you look at our expenses, like almost 53% of our expenses come from the employee cost. Of this, almost 25% would be a variable component of it. So whenever there are tough times already that is -- which is directly into the profit of the company, right? So as and when there's internal profitability, that component which automatically coming down. On the other expenses part, the majority of the expenses would be fixed in nature, except for some part of marketing and everything that are variable and that can be depending on the market situation that can be tapered down a little bit. But excluding tha t, I say, most of the expenses are fixed, and they will continue.

The discretionary expenses, depending on the market conditions, one can take a call on them. But having said that, as we have always said, we see this business from a long-term point of view. We would not like to cut down short- term cost and investments which can give us long-term benefits.

Okay. Sir, secondly, on the -- expanding on the employee expenses front, of course, variable payouts and head count addition, they are sort of cyclical in nature and would keep happening for business cycles. But we have seen this kind of spending on employ ee engagement. So do you think this will also continue or it's more of a cyclical thing that's prevailing right now?

No, I will not say this is cyclical, but post-COVID and all has happened for the first time. But broadly, it will continue. Whether the expense amount will be the same or not, that is still a question mark, but employee engagement remains a very important part of the strategy of the company becau se ultimately, you have 1,000 plus employees, I mean small cities and towns, you have to engage with them, get them together. So all those things still important too, but employee engagement will continue. Amount will be difficult to ascertain at this point of time.

And just lastly, on adjustment of commission on account of the TER formula with the distribution partners. Of course, their TER on an absolute basis would also go down, probably their share of TER would go down. So do you think the industry -- why the spre ad of this activity would happen? Has it always started happening but other AMCs are sort of adjusting payout with the distributors?

I will not be able to comment on behalf of the industry in this call. It will depend on which AMC wants to work on top line or bottom line. For us, again, as I mentioned in the earlier question, our focus is again on profitable growth, and rather than just being about the top line.

Mr. Sikka, congratulations to you and your team for the wonderful quarter and good luck.

Thank you very much.

This will be the last question for today's conference call. It's from the line of Pradeep, an individual investor.

Congratulations for the great set of results, and I hope it continues going forward. My question is on AIF. I was seeing on the website on AIF, we are taking stakes in these companies who are doing AIFs or we are doing mix of both?

Can you repeat the question, please?

My major question is on AIF. I just want to ask that I was seeing on the website that we have some funds which we are taking stakes in. So these are the companies which we're taking stakes in who are doing AIF or it's a mix of both there? We have our own A IFs and we are doing some via some other companies as well?

I'll just try to clarify. I think this is in reference to our tech fund of fund or our venture fund, which was launched in 2020. That fund, actually, we consider it as a fund of fund and it was about INR 183 million was invested from investors in Japan. And that has invested in 12 different funds. So our idea is not to take stake. We maintain all these based on the constitution of the fund and with the RFPs what has been decided. So we have not bought stake in this. We are investors in this.

Yes. I just wanted to add on the earlier question. So there was a question from Shubham on why the PMS revenue in the stand -alone is higher than your consol. So I just wanted to clarify on that. So if you look at on a stand -alone basis, that contains -- includes option advisory fees that we receive from our Singapore subsidiary. So when we do the consolidation, that gets eliminated, and that's why the figure in the consolidated numbers are below the numbers on the stand-alone numbers. And also, there was a question on the closing AUMs. So just wanted to provide the numbers. So on the equity, the closing AUM is around INR 2,598 billion. on the debt side, it's INR 733 billion, on liquid it's INR 336 billion and on the ETF, it is INR 1,402 billion. Thank you.

Ladies and gentlemen, that was the last question for today's conference call. I would now like to hand the conference over to the management for closing comments.

Yes. Thank you all for joining the call. Have a happy weekend.

On behalf of Batlivala & Karani Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.