Leveraging ONDC And ETFs To Accelerate Profitable Growth In Asset Management

Key Takeaways

• Expansion in high-margin ETF and AIF segments coupled with growing SIP market share will enhance profitability and revenue stability.
  
• Strategic digital initiatives, including ONDC participation, aim to broaden the customer base, boosting future revenue.
  
• Pressure on yields, operating expenses, and a strategic focus on profitable growth could affect Nippon Life India Asset Management's revenue growth and net margins.

Catalysts

Nippon Life Asset Management Limited is a publicly owned investment manager.

• The company has a significant and growing market share, with a focus on profitable growth in its Asset Management business, which is expected to positively impact future earnings and revenue.
  
• There is consistent growth in the Systematic Investment Plan (SIP) market share, indicating a strong and stable source of future revenue.
  
• The company's expansion in the ETF segment, a higher-margin business, is likely to lead to improved net margins.
  
• Strategic digital initiatives, like participation in ONDC for digital commerce, aim to increase the customer base, potentially boosting future revenue.
  
• Increased focus and resources on the AIF business, including upcoming new fund raises, should contribute to future revenue growth.

Nippon Life India Asset Management Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Nippon Life India Asset Management's revenue will grow by 13.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 54.6% today to 53.3% in 3 years time.
• Analysts expect earnings to reach ₹18.6 billion (and earnings per share of ₹27.54) by about December 2027, up from ₹13.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹21.1 billion in earnings, and the most bearish expecting ₹16.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 41.2x on those 2027 earnings, up from 38.7x today. This future PE is greater than the current PE for the IN Capital Markets industry at 23.9x.
• Analysts expect the number of shares outstanding to grow by 2.24% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.59%, as per the Simply Wall St company report.

Nippon Life India Asset Management Future Earnings Per Share Growth

Risks

• The pressure on yield due to telescopic pricing could impact revenue growth as assets under management (AUM) increase.
  
• The potential decrease in revenue yields from the equity segment could affect overall revenue despite growing AUM, potentially weakening net margins.
  
• The competitive landscape and actions by peers to cut yields on the back book of distributors might pressure Nippon Life India Asset Management to follow suit to protect revenue yields, which could impact margins.
  
• Increased employee headcount and associated costs, such as ESOPs, could put pressure on operating expenses, affecting net earnings.
  
• The shift towards focusing on profitable growth over asset gathering through new fund offerings (NFOs) may result in slower AUM growth compared to competitors, potentially affecting topline revenue growth.

Valuation

• The analysts have a consensus price target of ₹775.18 for Nippon Life India Asset Management based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹900.0, and the most bearish reporting a price target of just ₹580.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹35.0 billion, earnings will come to ₹18.6 billion, and it would be trading on a PE ratio of 41.2x, assuming you use a discount rate of 13.6%.
  
• Given the current share price of ₹805.9, the analyst's price target of ₹775.18 is 4.0% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.