Equity Research – Aditya Birla Sun Life (ABSL) Asset Management Company (AMC)

** I will be creating an equity research report for ABSL AMC. For now, I am sharing the summary of my analysis and valuation (long-term return expectations) of ABSL AMC **

** Analysis and Valuation dated 29/7/2022 **

2 months ago, I had put out an equity research report on HDFC AMC, in which I had valued the firm at 28x earnings. In this post, I will present my valuation summary of another AMC, Aditya Birla Sun Life

ABSL is the 5th largest AMC in India by overall AUM. HDFC is 2nd. SBI leads, followed by ICICI
ABSL and HDFC AMC are the only two listed companies in the top 5

As of F23-Q1, ABSL has an overall and active equity AUM of ~₹3000B and ~₹1200B (i.e. 40% equity mix) with a market share of 8% and 6.5% resp, while HDFC has an overall and active equity AUM of ~₹4000B and ₹2000B (i.e. 50% equity mix) with a market share of 11%

ABSL reported a PAT of 46% and EBTDA of 65%, well behind that of HDFC (PAT 57%, EBTDA 78%).

Why is ABSL less profitable than HDFC AMC?
1. Active equity is the most profitable asset class (do remember that pressure on equity yields continues owing to low priced NFOs and material gross flows), but HDFC’s higher mix of equity is a key but not the only reason for its higher profitability
2. Both ABSL and HDFC incurred ~200 Cr in other expenses – BD, new fund offering, marketing and tech expense. This is 14% of ABSL and 8% of HDFC’s revenue
3. HDFC incurred 13% employee expense, ABSL 18%
This industry has economies of scale. HDFC seems to be getting the scale benefit. It certainly is maintaining a tight ship.

ABSL IPOed last year in Oct. From a high of ₹20,000 Cr, it has fallen to ₹12,000 Cr. HDFC has not done well either. Market seems to have priced in the low present and future yields and the continual debt outflows with these listed players trading near their lows

Now, I will use some rounded numbers to derive the return expectation of ABSL –
1.    Ind active equity AUM is expected to grow to ₹ 40,000 B from ₹ 18,000 B today
2.    ABSL AMC derives ~70% revenue from active equity. They reported a quar. avg. active equity AUM of ~₹1200 B. If they can slow the active equity market share decline to 5.5% by FY27 (from 6.5% today), they will reach an active equity AUM of ₹ 2,300 B (i.e., ABSL active equity continues to grow slower than ind)
3.    ABSL derived an active equity yield of ~72 bp in FY22. With ongoing equity yield pressure, this may drop to mid-60s
4.    ABSL revenue in FY27 = ₹ 2,300 B * 0.65% / 70% = ~₹ 2,100Cr
@ same 46% PAT in FY27 = 46% * ~2,100 = ~980 Cr
5.   Using 1-4, my base case DCF valuation of the company is ~₹ 13,500 Cr i.e., 20x FY22 earnings

** valuation with underlying excel models and assumptions will be present in the equity research report **

Considering ABSL trades at this PE 5 years out:
MCap by FY27 = 20 * 980 Cr = ₹ 19,600 Cr (from 12,200 Cr as of 29/7/2022); Adding 2.5% div yield (based on hist. payout), the ann. return over the next 5 years is est. at 13% (after accounting other income and using actuals)
i.e., if ABSL AMC continues to grow below the industry amid a declining overall and equity yield environment coupled with higher interest rates, you could still expect 13% return over 5 years

Disclaimer: Invested. Please do your own analysis before investing.