MUMBAI: Aditya Birla Sun Life Asset Management Company is hitting the primary market with an IPO on Wednesday. Unlike the initial public offerings of its peers that were met with much fanfare, the uncharacteristic lack of excitement around the IPO at this point is troubling.
The unofficial grey market, often seen as a proxy to the mood in the IPO mart, has been lukewarm in its response to the Birla IPO so far. The stock currently commands a premium of merely 6 percent to the top end of its price band of Rs 695-712.
And this has to do with more reasons than the sudden weakness that has seeped into the broader market over the past two days.
By all means, Birla AMC should be a solid bet for investors who want to ride the financialization wave in the Indian economy. Mutual funds have seen increased acceptance over the past decade and have grown their assets under management manifold, which suggests that the only way is – up.
“Further, sustained strong cash flow generation on the backdrop of the continued rise in penetration level and improvement in equity AUM is likely to ensure healthy payout, going forward,” Vikas Jain of Reliance Securities wrote in a pre-IPO note.
Investors’ shift to direct equity
Prior to the pandemic, the above narrative would have ensured that the asset manager’s IPO would sell like hotcakes. The industry, however, has undergone some meaningful changes over the past 18 months that have made the asset management space one of the least interesting places to be in.
Aditya Birla Sun Life AMC’s peers Nippon India AMC and HDFC AMC have both languished in a ferocious bull market, reflecting a gradual decline in investors’ outlook for the asset management industry.
HDFC AMC has risen merely 50 percent in the past 18 months whereas Nippon Life India AMC is up 75 percent in the same period. Both pale in comparison to the Nifty500’s 114 percent rise in this duration.
Part of the reason for such underperformance of mutual fund companies compared with the rest of the market is that this bull run had to do with the rapid change in retail investors’ behavior since the start of the pandemic. Gifted with the biggest crash in the market in over a decade in March 2020, retail investors jumped straight into direct equity instead of going through mutual funds, and they have tasted success.
The surge of inactive clients for stockbrokers across the board and the rise of a new trading cult have meant that individual investors are no longer reliant on mutual funds to meet their investment requirements.
The biggest risk to mutual funds is coming from the rise of platform companies seeking to provide universal investment solutions to investors.
In 2021, the Securities and Exchange Board of India (Sebi) gave approvals to the likes of Zerodha, Navi MF, Bajaj Finserv, Samco Group, White Oak Capital, and NJ India to start asset management businesses.
The likes of Zerodha, Groww, and PhonePe are seeking to create a one-stop-shop for investment and would try to disrupt the business by tweaking the current cost structures, which many consider being very high.
“Investors may find it convenient or reassuring to use one platform, or brand to meet all their financial services needs and may choose to give their businesses to our competitors on that basis,” Aditya Birla Sun Life AMC said in its prospectus.
In addition to that, Groww has received the nod to take over Indiabulls MF’s business, while payments platform PhonePe is mulling an entry.
Many of these companies are technology leaders looking to capitalize on the high-fee model of the incumbents, which will make profitability more challenging.
Consolidation, regulation & recent incidents
The Franklin Templeton episode, in which the fund house suddenly shut down seven debt funds after facing debt defaults, and other instances where select fund houses had to resort to various delaying tactics to halt redemption after some of their bets soured have badly dented MF investors’ confidence.
To tackle these issues, Sebi has brought in a series of changes to curtail fund houses’ tendency to go for misadventures with public money in trying to generate better alpha and to ensure better communication to investors about the risks involved with individual products. Sebi has also implemented a new role to ensure better skin in the game for the fund management professionals by linking their compensations to funds’ performance.
Industry watchers say while these steps will go a long way in ensuring investors’ safety, at the same time they will make alpha generation challenges, and thereby, take away the charm of the product for investors as a compounder of wealth.
Threat to profitability
On top of that, the relative underperformance of a large swathe of mutual funds compared with the broader market over the past few years has provided the right situation for low-cost index funds and ETFs to bloom.
The bright side
But the fund house sounds super bullish about the prospects that lie ahead. They see a saving grace for the mutual fund industry in the recent uptick in inflows to equity funds as well as the rise in flows to systematic investment plans.
“Investing in SIPs has become the way of life for most investors. Given the deep under-penetration, the AMC industry will be on a high growth path,” A Balasubramanian, Managing Director and Chief Executive Officer of Aditya Birla Sun Life AMC told ETNow in a recent interview.
What may work in the IPO’s favor is the cheapness of the offer compared with the valuation of peers like Nippon India Life AMC, HDFC AMC, and UTI AMC. In that regard, Aditya Birla AMC has left a lot on the table for investors, all that remains to be seen is if the latter is keen to pick it up.