After a slew of low-valued deals after the Lehman crisis,
the domestic mutual fund (MF) industry is once again seeing deals at good
valuations.
Despite, short-term hiccups, untapped opportunity in asset
management business in India is attracting foreign players who are betting on
the long-term potential.
At a time when the fund industry has been crying foul over
regulatory tightening, bad market conditions and investors fleeing out, recent
transactions are being done in the range of six to seven per cent of assets
under management (AUM).
Japan’s Nippon picked up 26 per cent stake in Reliance AMC
in January, offering a valuation of 6.64 per cent of the fund house’s AUM. Last
week, Britain’s largest asset manager Schroders, bought 25 per cent stake in
Axis AMC, broadly in-line with recent valuations.
Independent industry experts say the debt-equity mix is one
of the main criterion for valuing a fund house. Dhirendra Kumar, chief
executive officer of Value Research, says, “Apart from equity assets,
profitability and distribution networks of fund houses are also being
considered for arriving at valuations.”
For that matter, acquisition of Fidelity’s MF business in
India by L&T AMC in March is also estimated to have happened at 6-6.5 per
cent of AUM. This was mainly on account of the substantial equity assets
Fidelity possessed. Compared with 2008-11, a stagnating period which saw deals
valued between 1.5 and four per cent of assets, current valuations have move
up. Industry experts had at that time blamed the entry load ban for lower
valuations of Indian fund houses.
Since expense ratio for managing equity assets is high
compared with debt, valuations tend to go up for deals involving higher equity
assets.
According to Lester Gray, chief executive officer, Schroders
(Asia Pacific), long-term prospects for the asset management industry in India
are very positive. “We are not short-term optimistic that things are going to
change immediately, but we do believe over the time India will become an
important asset management market in the region,” he adds. He says bad times
will change and when it happens, the growth opportunity will reassert itself.
“And unless you have established a strong presence, you are not going to
benefit by the next upswing in growth,” he says.
Since MFs as financial investment products have very less
penetration, a strong distribution channel is the biggest factor for high
valuations. Dhruva Chattterji, senior analyst at Morningstar India, notes, “If
a fund house has readily available distribution network, it will end up getting
a good valuation.”
This holds true. For instance, in case of the
Nippon-Reliance deal, the foreign entity could leverage on Reliance AMC’s
established distribution channel. Similarly, Schroders will get benefits from
Axis Bank’s branches across the country. Distribution channel has gained
importance as MFs still continue to be a push product.
Prior to these high-profile deals, Goldman Sachs had bought
out Benchmark AMC at a valuation of 4.1 per cent of assets in 2011. Similarly,
a deal between Bank of India and Axa Investment is estimated to have happened
at around four per cent of assets. Back in 2009, L&T Finance bought out DBS
Chola at a valuation of 1.55 per cent of assets, while Nomura had picked up
stake in LIC Mutual Fund at around 2.5 per cent of assets.
Source: http://business-standard.com/india/news/foreign-players-see-value-in-indian-mutual-fund-industry/473342/
Posts
