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Aditya Birla Sun Life AMC IPO: Should You Subscribe?

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Basis Structure of Aditya Birla Sun Life AMC IPO

The Aditya Birla Sun Life AMC IPO is all set for the offering. It is expected to open for subscription in 2021.

This IPO is of a book-building nature – the shares will be quoted with a price band and not a specific price.

There is no fresh issue segment to this IPO – the company is not diluting any stake and will therefore not receive any of the proceeds from the IPO.

The offer for sale segment consists of 3.8 crore equity shares. The proceeds from this sale will be credited directly to the existing shareholders. The promoters will be selling a 13.5% stake in the company.

The table below lists out the details about the Aditya Birla Sun Life AMC IPO. Details like the Aditya Birla IPO date, Aditya Birla IPO details, Aditya Birla IPO price and more have been summarised.

Aditya Birla Sun Life AMC IPO details

Aditya Birla Sun Life AMC: An Overview

Aditya Birla Sun Life AMC came into existence in 1994 when Aditya Birla Capital and Sun Life AMC started the joint-stock venture. The company’s total AUM amounted to Rs. 2.73 lakh crores as of December 2020.

Aditya Birla Sun Life AMC has established a distinct presence across India over the years. As of December 2020, the company had a network that spanned 27 states and 6 union territories.

Since 2018, it is the largest non-banking AMC in terms of the quarterly average AUM.

Aditya Birla Sun Life AMC: Products

As is clear from the name, Aditya Birla Sun Life AMC’s product portfolio includes a wide range of mutual fund schemes, portfolio management services, offshore funds and alternative investments.

Aditya Birla Sun Life AMC revenue from different products

Aditya Birla Sun Life AMC mutual fund revenue

As of December 2020, the company had 135 mutual fund schemes on offer, which included 6 FoFs (Fund of Funds). 95.74% of the company’s total AUM was invested in mutual funds. Portfolio management and offshore investments are minor contributors, which a 0.68% and 3.39% share respectively.

Promoter Shareholding Pattern

The table below outlines the promoter shareholding pattern before the Aditya Birla Sun Life AMC IPO.

Aditya Birla Sun Life AMC promoter shareholding

Industry Analysis

The mutual fund industry in India is poised for immense growth. The average AUM in the Indian mutual fund industry has grown at a CAGR of 13.7% between 2010 and 2020, to reach Rs. 29.7 lakh crores. CRISIL estimates that the AUM will reach Rs. 57 lakh crores by 2026.

Mutual fund industry in India: AUM growth

Mutual fund industry in India: AUM as a percentage of GDP

India’s mutual fund industry penetration is one of the lowest in the world. Among a population of over 130 crores, it is only 12%, as opposed to the global average of 63%. This means, there is an endless supply of potential customers just waiting to be tapped into.

Mutual fund industry penetration: Global comparison

The growth of the mutual fund industry in India is backed by several factors such as demographics, urbanisation, increasing GDP and digitalisation.

India has one of the largest young populations in the world. In fact, in 2021, 90% of Indians are expected to be under the age of 60. Further, the United Nations estimates that at least 37% of the population will be living in urban areas by 2025. If you combine this with the rising influence of technology on the financial sector, a clear growth trend comes out.

The fact that the fintech adoption rate in India is one of the highest in the world comes as no surprise. India boasts of an impressive 87% adoption rate as opposed to the global average of 64%.

All these factors contribute to the growing per capita nominal GDP in India over the years.

India: Per capita nominal GDP

Of course, we also have to consider the impact of COVID-19 on the mutual fund industry. The lockdown imposed to curtail the first wave of the virus caused a 7.7% year-on-year contraction in real GDP. The savings rate in India reached its lowest level in 15 years.

Household savings in India over the years

Now, the mutual fund industry in India is made up of 44 fund houses. The market is dominated by the larger players. As of January 2020, the top five AMCs accounted for 56.47% of the total AUM.

Mutual fund industry in India: Market share

With a market share of 8.52%, Aditya Birla Sun Life AMC is the fourth largest in India, in terms of the average assets under management.

Financial Analysis of Aditya Birla Sun Life AMC IPO

The table below lists the main financial figures for the Aditya Birla Sun Life AMC IPO for the last 7 years. All the figures mentioned below are in Rs. crores.

Aditya Birla Sun Life AMC IPO: Financial Analysis

One of the strong points about the Aditya Birla Sun Life AMC balance sheet is that the company has no debt. Also, the fact that the fixed assets make up only about 1-2% of the total assets signifies that the company is asset-light.

The company has maintained a good reserve of cash and cash equivalents over the years, which makes it easier to deal with contingencies and unforeseen circumstances.

Aditya Birla Sun Life AMC has reported steady growth in total revenue and net profit. Between 2014 and 2020, the total revenue increased at a CAGR of 15.73% and the net profit has grown at a CAGR of 29.33%.

There is also the fact that the company has consistently reported positive values for the net cash flow from operating activities. The only flaw is the inconsistent trend over the years.

Competitive Analysis of Aditya Birla Sun Life AMC IPO

The table below compares the key ratios of Aditya Birla Sun Life AMC with those of its listed peers.

Aditya Birla Sun Life AMC IPO: Competitive Analysis

Weaknesses of Aditya Birla Sun Life AMC IPO

It is impossible to ignore the impact of COVID-19 on any sector, let alone the asset management industry. Whenever our own futures are in uncertainty, savings and investments tend to take a back seat. Until the global economy can weather the impacts of the crisis, the innate risk to the industry remains.

Apart from that, there is the structure of the market in which Aditya Birla Sun Life AMC operates. There is a total of 44 AMCs in India. This monopolistic competition structure implies strong competition among the top companies, where each attempt to outsmart the other to gain market share.

This means Aditya Birla faces immense competition from the other top AMCs. Any missteps can affect its position in the market.

There is also the fact that the asset management industry is highly regulated. Sensitive and bounteous, this market is subject to a strict set of controls, periodic inspections and special approvals. Any failures to comply will pose serious restrictions to the company’s continued operations.

SEBI also imposes restrictions on the expense ratios that AMCs can charge. Because a major chunk of operational revenue comes from the management fees charged, any changes in SEBI’s regulatory dictates can have quite an impact on the company’s profits. In the financial year 2020, Rs. 752.59 crores from the total revenue of Aditya Birla Sun Life AMC came from the management fees.

Some of the Aditya Birla Sun Life AMC management is also involved in certain legal and criminal proceedings.

Valuation of Aditya Birla Sun Life AMC IPO

For the valuation of the Aditya Birla Sun Life AMC, we have used the DCF method. This is because the company will not be diluting any fresh stake; the number of equity shares will remain the same even after the IPO.

Step 1: Calculate the company’s average free cash flow.

Step 2: Determine the future growth rate for the next few decades.

Step 3: Discount the amount to arrive at the present value.

Step 4: Summation of amount and introduction of margin of error.

According to the DCF method, the Aditya Birla Sun Life AMC shares should be priced at around Rs. 309 to be fairly valued.

Once the price band and other details about the Aditya Birla Sun Life AMC are released, we can compare the valuation.

SWOT Analysis

Strengths:

  1. Largest non-bank affiliated AMC in India
  2. Vast distribution network
  3. Strong balance sheet
  4. Positive free cash flow

Weaknesses:

  1. Inconsistent revenue growth
  2. Inconsistent growth in cash flow from operations

Opportunities:

  1. Low industry penetration
  2. Demographic advantage

Threats:

  1. Immense competition

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