Can All Of Them Outperform?: Positive

BFSI POSITIVE ASSET MANAGEMENT

October 17, 2017

Can all of them outperform?

BFSI

AMCs are not only strongly benefiting from financialisation of savings but also rapidly gaining market share from substitutes in equity (MF equity AUM is up from 52% of ULIP AUM to 143%) and debt (MF debt AUM up from 6% to 10% of deposits) over FY12-17 on back of rising awareness and penetration. However, only outperforming AMCs strongly backed by large banks will capitalise on the key themes of: i) weakening IFA channel; ii) increasing importance of performance; and iii) rising share of direct plans, SIPs and ETFs & alternatives. I-Pru AMC is the strongest positioned AMC, but MOFS (45% of SOTP from AMC) and Geojit (proxy play via distribution in B-15) offer the best plays on the overall theme.

Low penetration of MF in India

40%

31%

29%

30% 20%

10%

10%

5%

2% Demat Accounts

Mutual Fund (retail)

Term Deposits

Savings Deposits

Life Insurance Policies

0%

Source: IRDA, RBI, AMFI, Ambit Capital research

Increasing market share of equity AUM as against ULIP AUM ULIP AUM

Equity AUM

100% 80% 60% 40% 20% FY15

FY13

FY11

FY09

FY07

FY05

0% FY03

Gaining share in a growing pie; 14-17% AUM CAGR achievable Positive real interest rates and muted returns from real estate would increasingly financialise savings, but share of MFs in the financial savings pie will also sharply increase. MF penetration (1/7th of insurance) will improve as deepening reach of larger distributors coincides with regulatory thrust (B-15 AUM up from 11% to 17%; FY11-17). Market share gain from substitutes in equities (ULIP AUM down from 193% to 70% of MF equity AUM; FY12-17) and fixed income (MF debt AUM up from 6% to 10% of deposits) will continue given rising awareness/penetration. Industry AUM could clock 14-17% CAGR over the next decade. Rising persistency, operating leverage will help profitability Higher share of equity AUM boosts profitability, but high upfront commissions imply investor persistency is key to higher profitability. But a comforting fact is that persistency in MFs has increased (2 year+ retail AUM is up from 46% to 52% over FY09-17) as mis-selling has reduced given regulatory clampdown (lower commissions, permanent mapping of agent etc.), supported by increased awareness, buoyant equity markets and low interest rates. With ~50% of costs being more or less fixed or semi-variable, operating leverage could meaningfully boost earnings of AMCs if high growth sustains. 5 key themes: Distribution and performance are crucial Information disintermediation, digitization and regulatory changes have driven 5 key themes we explore in this note: i) rising share of direct in HNI and debt segments; ii) underperforming AMCs losing equity market share (by 16ppt; FY1117); iii) IFAs losing market share (by 10ppt; FY13-17); iv) increased granular participation through SIPs (15% of retail folios to 27%; FY14-17); and v) market share gain of passives (ETFs) and alternatives (PMS, AIF). Bank-backed AMCs are architecturally better placed to profitably capitalize on these themes (15ppt market share gain; FY10-17) given capex-light access to large retail distribution channel and strong brand, further enhancing retail AUM and direct inflows. I-Pru AMC is best-placed as it combines the above-mentioned strengths with superior performance, which will enable it to pull highly profitable equity inflows. Not all AMCs deserve premium; plays are limited AMCs are best-valued on DCF and not the conventional ‘% of AUM’ as the latter ignores AMC’s profitability and cash generation. Whilst Indian AMCs enjoy superior profitability and growth prospects than global peers (valued at 16-18x 1year fwd P/E), they deserve higher multiples only if they have strong distribution and performance. We value ICICI AMC at 6% of AUM and 33x TTM , with enough headroom to improve. Reliance NL AMCs’ valuation (38x FY17 P/E) appears expensive in light of ongoing market share loss due to lack of bank backing and weaker schemes’ performance. MOFS, with ~45% of SOTP from the AMC, is the most direct play in our coverage but valuations fully reflect ~56% FY17-20E PAT CAGR of the AMC. Geojit is a proxy play with its MF distribution business focused on higher yielding B-15 centres that are now recording secularly higher growth.

Penetration (% of population)

FY17

THEMATIC

Source: IRDA, AMFI, Ambit Capital research

Competitive framework HDFC ICICI Rel AMC AMC AMC

Birla AMC

UTI AMC

Moti AMC

Growth prospects Higher margins Operating efficiency Blended rank

Source: Ambit Capital research Note: Average;

- Strong;

- Relatively Strong;

- Relatively weak

Research Analysts Aadesh Mehta, CFA +91 22 3043 3239 [email protected] Pankaj Agarwal, CFA +91 22 3043 3206 [email protected] Gaurav Kochar +91 22 3043 3246 [email protected]

may have a conflict ofitsinterest that affect objectivity of this report. Investors should considercovered this report the only factorAs in a result, investors should be aware that Ambit Capital Ambit Capital and / or affiliates docould and seek to the do business including investment banking with not companies in its as research reports. making their investment decisio may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.

-

BFSI - Asset Management

AMCs: Coming out of stagnation The asset management industry in India started in 1963 with the establishment of UTI (Unit Trust of India), which enjoyed monopoly for over 3 decades. After the opening up of the industry in 1996, many private and public players entered the market. Since 2000, the Indian mutual fund industry has seen 18% CAGR in AUM but the ride has been marked by a lot of volatility. Exhibit 1: Industry AUM has seen 18% CAGR, led by equity of late AUM of AMCs (` bn) Debt

Liquid

Equity

FY04

FY06

FY08

20,000

Others

15,000 10,000 5,000

FY17

FY16

FY15

FY14

FY13

FY12

FY11

FY10

FY09

FY07

FY05

FY03

FY02

FY01

FY00

0

Source: AMFI, Ambit Capital research

Exhibit 2: Evolution of the asset management industry in India Period

Mutual fund AUM as % of GDP)

Phase

Description

UTI’s monopoly

UTI, established in 1963, was set up by the RBI and launched its first scheme (US-64) in 1964. It was the sole mutual fund in this period. UTI had the monopoly.

2%

Entry of public sector sponsored mutual funds

SBI Mutual Fund was the first non-UTI Mutual Fund established in 1987 followed by other banksponsored mutual funds. Later, the first set of Mutual Fund Regulations was introduced in 1993, which were applicable to all but UTI.

6%

1993-2003

Entry of private sector sponsored mutual funds

Private sector players started setting up shops in this phase with many foreign mutual funds entering India. This period also saw lot of mergers and acquisitions. However, UTI continued its market leadership by a wide margin with market share of 56% in 2003.

5%

2003-07

Bull markets and missselling

A secular rally in equity markets increased the popularity of mutual funds as an investment product during this period. However, this period was also marked by heavy mis-selling of the product due to high distributor commissions (as high as ~6%).

8%

2007-14

Bear market & regulatory tightening

Weak equity markets coupled with regulator clamping down on distributor commissions led to muted growth of 9% CAGR in industry AUM during this period.

7%

2014 onwards

Strong equity markets coupled with customer-centric regulations (e.g. introduction of direct plans, Rising popularity again lower distributor commissions) revived the popularity of mutual funds, leading to 28% CAGR in industry AUM during this period.

1964-87

1987-93

12%

Source: AMFI, Ambit Capital research

16 October, 2017

Ambit Capital Pvt. Ltd.

Page 2

BFSI - Asset Management Exhibit 3: MF penetration in India has improved after stagnating over FY93-14 MF AUM/GDP

14%

12%

12% 10% 8%

8%

7%

FY07

FY14

6% 6%

5%

4% 2%

2% 0% 0% FY63

FY88

FY93

FY03

FY17

Source: AMFI, Ambit Capital research

Exhibit 4: Fixed income schemes dominate the AUM mix

Balanced, 5%

AUM mix Others, ETF, 3% 1%

Exhibit 5: Retail investors dominate the equity mix and corporates dominate fixed income Investor mix in various schemes

Liquid, 18%

2%

9%

100%

8%

80%

30%

53%

60% 90%

40%

Equity, 31%

32%

61% 20%

15%

0% Debt

Liquid Corporate

Debt, 42%

HNI

Equity Retail

Source: AMFI, Ambit Capital research

Source: AMFI, Ambit Capital research

Exhibit 6: Top 15 cities contribute most of the AUM

Exhibit 7: Concentrated industry with top 5 players having 58% market share

Share of Top 15 cities and others in overall AUM Share of T15 Share of Others 100%

16%

16%

16%

Market share ICICI, 13%

Others, 22%

17% HDFC, 13%

80% 60% 40%

DSP, 4% 84%

84%

84%

83% FT, 4%

20%

Rel, 12%

Kotak, 5% 0% FY14

FY15

Source: AMFI, Ambit Capital research

16 October, 2017

FY16

FY17

UTI, 7%

SBI, 9%

Birla, 11%

Source: AMFI, Ambit Capital research

Ambit Capital Pvt. Ltd.

Page 3

BFSI - Asset Management

Industry could grow at 14-17% CAGR Positive real interest rates and muted returns from real estate would increasingly financialise savings in India. Moreover, we expect that the share of mutual funds will significantly increase in the financial savings pie. MF penetration (which is 1/7th of insurance) will improve as the deepening reach of larger distributors coincides with regulatory thrust to increase mutual fund penetration; B-15 AUM has increased from 11% to 17% over FY11-17. Market share gain from other financial instruments (ULIPs in equities and bank deposits in fixed income) should drive 14-17% CAGR in industry AUM over the next decade. FY14-17 has seen a dream run for the mutual fund industry with AUM growing at 28% CAGR. Exhibit 8: Robust AUM 28% AUM CAGR for the industry over the last three years AUM of AMCs (` bn) 20,000

Debt

Liquid

Equity

Others

15,000 10,000 5,000

FY17

FY16

FY15

FY14

0

Source: AMFI, Ambit Capital research

Whilst 28% CAGR over FY14-17 from a low base of FY14 may not sustain, we believe that industry AUMs have the potential to grow at 14-17% CAGR over the next decade. This should be driven by: (i) penetration doubling to 11-12% over the next decade; (iii) ticket size per subscriber increasing at a CAGR of 5-8%; and iii) assuming ~9% annual returns on the equity AUM (versus ~16% returns by BSE-100 on rolling average).

Ticket size CAGR

Exhibit 9: AUM of AMCs could grow by 14-17% CAGR over the next decade Penetration (% of pop)

8%

9%

10%

11%

12%

13%

14%

15%

-7%

4%

5%

7%

8%

9%

9%

10%

11%

-4%

6%

7%

8%

9%

10%

11%

12%

13%

-2%

7%

8%

9%

10%

11%

12%

13%

14%

0%

8%

9%

10%

12%

13%

13%

14%

15%

2%

9%

10%

12%

13%

14%

14%

15%

16%

4%

10%

11%

13%

14%

15%

15%

16%

17%

5%

11%

12%

13%

14%

15%

16%

17%

18%

7%

12%

13%

14%

15%

16%

17%

18%

19%

8%

13%

14%

15%

16%

17%

18%

19%

20%

10%

13%

15%

16%

17%

18%

19%

20%

21%

11%

14%

15%

16%

18%

19%

20%

20%

21%

Source: Ambit Capital research

16 October, 2017

Ambit Capital Pvt. Ltd.

Page 4

BFSI - Asset Management

Financialisation of savings to be the key growth driver India has the highest savings rate of 30% among developing nations with lower per capita income versus peers. However, the high inflation environment over the past decade (average inflation of 6-7%) and a large black economy (estimated to be `30tn) meant that physical savings (gold and real estate) dominated savings.

Whilst India has the highest savings rate of 30% high share of that has been channelized in real estate and gold.

Gross domestic savings (as % of GDP)

Exhibit 10: Higher savings rate despite low per capita income

30

India

Russia

25 Mexico

Bangladesh Sri Lanka

20

Philippines

15

South Africa Brazil Turkey

10 0

5000

10000

15000

20000

Per capita income (in current USD) Source: World Bank, Ambit Capital research. Note: Data pertains to CY15

Exhibit 11: Whilst gross savings have improved in India since FY2000… 40%

Exhibit 12: …most of those have been channelised into physical assets as a % of household savings Financial Savings Physical Savings

Gross savings as a % of GDP 100%

35% 35%

32%

34% 32%

32% 32%

80% 60%

30% 26%

40%

25% 24%

20%

Source: The RBI, Ambit Capital research

0% FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

20%

Source: The RBI, Ambit Capital research

We expect the share of financial savings in the savings pie to increase due to the following factors: Expectation of positive real interest rates: Given high inflation over FY09-13, the real interest rates were negative for savers. However, the RBI’s target to moderate inflation over the last three years has led to positive interest rates. With the RBI continuing with its agenda of targeting inflation of 5%, we expect the trajectory of real interest rates to remain positive. Hence, the trend of savings moving away from physical to financial savings should continue.

16 October, 2017

Ambit Capital Pvt. Ltd.

Page 5

BFSI - Asset Management Exhibit 13: Financial savings are improving now that real rates are positive Financial Savings

Real Interest rates (RHS)

55%

4.0%

50%

2.0%

45%

0.0% -2.0%

40%

-4.0%

35%

-6.0%

30%

-8.0%

25%

-10.0%

20%

-12.0% FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

Source: The RBI, Ambit Capital research; Real interest rates are calculated as the difference between CPI inflation and AAA bond yields

Exhibit 14: Moderating inflows in physical assets

Exhibit 15: Steadily rising inflows in financial assets 180%

YoY growth (%)

40%

Home loans

YoY growth (%)

160%

Gold sales

Deposits

140%

30%

1st yr insurance premiums

MF Inflows

120% 20%

100%

10%

80% 60%

0%

40% 20%

-10%

0%

-20%

-20% FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17

Source: The RBI, WGC, Ambit Capital research

Source: The RBI, IRDA, AMFI, Ambit Capital research

Real estate has lost its sheen as an asset class: Real estate as an asset class has underperformed in India over the last 2-3 years due to huge inventory pile-up and slowdown in demand. Exhibit 16: Stock markets have outperformed real estate as an investment avenue 25%

23%

20%

Real estate as an asset class will remain under pressure due to various regulatory changes.

17% 15%

15%

11%

10%

11%

7%

5% 0% RBI House Price Index FY11-13 CAGR

Sensex FY13-15 CAGR

FY15-17 CAGR

Source: The RBI, Bloomberg, Ambit Capital research

We expect real estate as an asset class to remain under pressure due to various regulatory changes, resulting in lower returns: 

Benami Transactions Act, 2016: With the amendments to the Benami Property law expected to be operational soon, we expect real estate holdings of individuals 16 October, 2017

Ambit Capital Pvt. Ltd.

Page 6

BFSI - Asset Management to come further under scrutiny to identify ‘Benami properties’ bought against unexplained income. This has reduced demand for real estate as a safe haven for black money. 

Capping tax deduction of home loan interest on 2nd properties: Prior to FY17, interest on home loans on 2nd property could be fully expensed, making it an efficient tax planning tool, especially for the salaried class, as this was the only loss (as rental yields are lower than interest on home loans) allowed to be set off against salary. Post the FY18 budget, loss from let-out house property is now restricted to `200,000 (versus no limits earlier). This could increase the interest burden (net of tax shield) and cost of holding for home loan investors whose ticket sizes are north of `2mn, thus reducing investor demand.



More regulatory headwinds can’t be ruled out: The RBI committee on savings issued in Aug’17 recommendations on various tax reforms to incentivize households to move away from physical assets to financial assets. The committee has recommend that: (i) interest expense be disallowed in income from house property to calculate taxable income; (ii) remove the need to reinvest in real estate to get tax exemption on capital gains from real estate; and (iii) removal of deduction of interest and principal payment on home loan from taxable income, barring first-time purchases, and (iv) cap deduction of interest paid on home loans from the taxable income. All these recommendations, if implemented, should have a negative impact on investment demand for real estate.

Increasing share of MFs in the financial savings pie Of all the financial savings products, mutual funds are the most under-penetrated in India. The level of mutual fund under-penetration in India can be gauged from the fact that the number of outstanding mutual fund folios is 1/7th the number of life insurance policies and 1/8th the number of savings accounts. At 1/7th the number of life insurance policies, mutual funds are the most under-penetrated savings product in India.

Exhibit 17: MFs are the most under-penetrated financial product 35%

Penetration (% of population) 31%

30%

29%

25% 20% 15% 10% 10% 5%

5%

2%

0% Savings Deposits Life Insurance Policies

Term Deposits

Mutual Fund (retail)

Demat Accounts

Source: IRDA, RBI, AMFI, Ambit Capital research

Moreover, most of mutual fund business comes from top-15 cities (~83% of total AUM and ~73% of AUM of individual investors). This is also validated by mutual funds having the least contribution of AUM from the financially most underpenetrated 5 states – the share of financially under-penetrated states like Punjab, Bihar, Odisha, Madhya Pradesh and Uttar Pradesh is ~7% for the mutual fund industry versus ~21% for insurance and ~36% for savings accounts.

16 October, 2017

Ambit Capital Pvt. Ltd.

Page 7

BFSI - Asset Management Exhibit 18: Top-15 cities account for 83% of individual AUM % of total AUM

Exhibit 19: Concentration of MFs is lowest amongst the bottom 5 states in terms of financial penetration 40%

Share of bottom 5 states in AUM

36%

35% 30%

Beyond top 15 cities, 17%

25%

21%

20% 15% 10%

7%

5%

Top 15 cities, 83%

0% Savings

Individual Insurance

Mutual Funds (retail)

Source: AMFI, IRDA, Ambit Capital research; Note: data for five states includes Punjab, Bihar, Odisha, Madhya Pradesh and Uttar Pradesh; Insurance premium also includes group premium to make it consistent with Bank and Mutual Fund data.

Source: AMFI, Ambit Capital research

However, we expect the share of mutual funds in the financial savings pie in India to increase, driven by:

#1 Equity: MFs substituting ULIPs Trends in the last 5-6 years show that mutual funds are gaining market share in the investment management business from insurance companies (primary product being ULIPs) both in terms of fresh sales as well as assets managed by the industries. Exhibit 20: Mutual funds are seeing higher fresh flows compared to ULIPs (` bn)

Exhibit 21: Market share of mutual funds in the asset management industry is rising

Inflows in ` bn ULIP Inflows

ULIP AUM

Source: AMFI, IRDA, Ambit Capital research

FY14 FY15 FY16 FY17

FY17

FY03 FY04 FY05 FY06

0% FY16

0 FY15

20%

FY14

200 FY13

40%

FY12

400

FY11

60%

FY10

600

FY09

80%

FY08

800

FY07 FY08 FY09 FY10 FY11 FY12 FY13

100%

1,000

-200

Equity AUM

MF Inflows

Source: AMFI, IRDA, Ambit Capital research; FY17 ULIP AUM is an estimate

Lower intermediation costs, greater awareness driving market share gain Lower intermediation costs versus their substitutes from insurance companies such as ULIPs are leading to such market share gain. This is due to lower origination cost and lower and simpler expense charges. Whilst insurance manufacturers recently significantly improved the product features of ULIPs to make them competitive with MFs, the latter still score over ULIPs in an investment horizon of less than 7-8 years. This results in mutual funds generating superior returns than ULIPs. Moreover, mutual funds are simpler to understand, which results in lower miss-selling vis-à-vis insurance products.

16 October, 2017

Ambit Capital Pvt. Ltd.

Lower intermediation costs versus their substitutes from insurance companies such as ULIPs are leading to such market share gain.

Page 8

BFSI - Asset Management Exhibit 22: Mutual funds score over ULIPs for investment horizons of less than 7-8 years ULIPs

Mutual Funds

Tax Benefit

All Unit Linked Plans offer tax benefits under section 80C.

Investments in tax saving funds are eligible for section 80C benefits.

Switching Option

Unit Linked Plans (ULIP) allows you to switch your investment between the funds linked to the plan. This enables you to change the risk return.

No switching option is available. If you are not satisfied with the performance of the fund you can exit completely from the same by paying exit charges, if applicable.

Overall Charges

Charges in a unit linked plan include mortality charges for the life insurance provided. In addition, premium allocation charge, fund management charge and administration charges are applicable.

Mutual fund charges include the annual fund management charge, other charges (up to 2%) and an exit load, if applicable.

Charges

2.25% to 4% + mortality charges

Total expenses of 1.5% to 2.8%

Lock in period

5 years in case of ULIPs

3 years in case of ELSS funds. For other open ended products no lock in is there

Average Returns for investors

8.5% - 14%

8.5% - 18%

Source: IRDA, SEBI, Ambit Capital research

Moreover, increased awareness has also prevented mis-selling of ULIPs and created a pull demand for mutual funds and SIPs. Google trends indicate that SIP and searches for mutual funds are ~5x and ~2x higher than those of ULIPs. Moreover, searches for ULIPs have halved over FY12-17. Exhibit 23: Google search trends in the last 5 years

Google trends indicate that SIP and searches for mutual funds are ~5x and ~2x higher than those of ULIPs.

Google search trends 400 300 200 100 0 FY12

FY13

FY14 Mutual Fund

FY15 SIP

FY16 ULIP

FY17

Source: Google, Ambit Capital research

#2 Debt: Liquid/bond funds gaining from deposits Given that mutual funds have lower credit intermediation costs than banks, they have generally offered superior returns than bank deposits in the recent past. Exhibit 24: 1-year AAA bond yields have yielded more than 1-year FDs 11% 10% 9% 8% 7% 6% 5% 4% FY08

FY09

FY10

FY11

FY12

1yr bond yields

FY13

FY14

FY15

FY16

FY17

1yr deposit rates

Source: Bloomberg, Ambit Capital research

Higher yield compared to deposits has led to investors favouring debt mutual funds over deposits. Consequently, we have seen debt/liquid mutual funds gaining market share from banks; in FY17, debt AUM of mutual funds increased to 10% of bank deposits from 3% in FY08.

16 October, 2017

Ambit Capital Pvt. Ltd.

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BFSI - Asset Management Exhibit 25: Debt+liquid AUM is increasing as a percentage of total bank deposits 12%

Fixed income AUM (% of deposits)

10%

10%

7%

7%

7%

8%

FY15

8%

FY14

9% 7%

Debt AUM of mutual funds increased to 10% of bank deposits in FY17 from 3% in FY08.

8%

6%

3%

3%

3%

3%

FY06

FY07

FY08

4%

FY05

6%

2% FY17

FY16

FY13

FY12

FY11

FY10

FY09

0%

Source: AMFI, The RBI, Ambit Capital research

With the recent sharp fall in deposit rates post demonetization, debt mutual funds have sharply gained market share in FY17, with debt AUM (% of system deposits) increasing to 10% from 8% in FY16. With deposit rates expected to remain benign, we expect debt mutual funds to continue gaining market share from bank deposits. Moreover, mutual funds could increase their market share as the regulators strive to improve the acceptability of liquid funds as a substitute for deposits. This can happen as innovations like instant redemption facility further blur the gap between deposits and liquid funds and AMCs receive surplus funds through tie-ups with payment banks. Even the mutual fund industry is positioning debt/liquid mutual funds as substitutes for bank deposits. Exhibit 26: Mutual fund advertisement

Source: Media, Ambit Capital research

#3 Distribution: Improving reach of banks Banks and national distributors are among the largest distributors of mutual funds, accounting for ~40% of AUM. Since FY11, the top-5 private banks (HDFCB, ICICIBC, AXSB, IIB and KMB) have drastically ramped up their presence in the semi-urban and rural areas of the country, with their aggregate number of branches in this geography increasing by ~3x over FY11-17 and the share of such geographies increasing from 37% of branch mix in FY11 to 48% in FY17. With high focus of these private banks on cross-selling mutual funds and other financial products, deepening branch reach of these banks also implies more inflows for MFs from these geographies.

16 October, 2017

Ambit Capital Pvt. Ltd.

With high focus of private banks on cross-selling mutual funds and other financial products, deepening branch reach of these banks also implies more inflows for MFs from these geographies.

Page 10

BFSI - Asset Management Exhibit 27: Banks and national distributors account for a large part of AUM of the industry

Exhibit 28: Expanding branch network of top-5 private banks in semi-urban and rural areas

Composition of AUM - Distributor class wise

Branches in semi urban & rural areas 8000

Direct & Others, 13%

6000 4000 Banks + NDs, 46%

2000

FY17

FY16

FY15

FY14

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY06

FY05

IFA, 40%

FY04

FY03

0

Source: CAMs, AMFI, Ambit Capital research

Source: Company, RBI, Ambit Capital research; Top-5 private banks include AXSB, HDFCB, ICICIBC, KMB and IIB.

Exhibit 29: Rising share of semi-urban and rural branches in the network of top-5 private banks

Exhibit 30: Market share gain for larger distributors

Share of branch network

100%

Distributor mix (as % of non-direct AUM) IFA

80%

100%

60%

80%

Rural + Semi Urban

FY17

FY16

FY15

FY14

FY13

FY12

FY11

FY10

FY09

FY08

20%

FY07

0% FY06

40% FY05

20% FY04

60%

FY03

40%

49%

48%

50%

52%

53%

51%

52%

50%

48%

47%

FY13

FY14

FY15

FY16

FY17

0%

Urban + Metro

Source: Company, RBI, Ambit Capital research; Top-5 private banks include AXSB, HDFCB, ICICIBC, KMB and IIB.

Non IFA (Banks + ND)

Source: CAMS, AMFI, Ambit Capital research

#4 Regulations: Increasing thrust on smaller towns Stock market regulator SEBI and industry body AMFI are actively pushing for increasing the penetration of mutual funds in smaller towns, which should result in better growth trends for the industry. Mandated ad spends: In order to achieve greater and more focused investor education, SEBI has mandated AMCs to annually set apart at least 2bps of their daily NAV for investor education and awareness. Consequently, several AMCs have utilized this amount to create awareness about SIPs through print, electronic and digital media. Moreover, in many states this has been accomplished through marketing and investor education material in regional languages. Greater incentives for AMCs: AMCs have been allowed to charge additional total expense ratio of up to 30bps if 30% of inflows or 25% of AUM, whichever is higher, is from smaller towns (B-15 cities). Greater incentives for distributors: Distributors can earn more than 1% on upfront commission for sales in smaller towns (B-15 cities). Increasing penetration and regulatory thrust have actually led to a rise in the share of smaller cities (B-15 centers) in AUMs from 11% in FY11 to 17% as of Mar’17.

16 October, 2017

Ambit Capital Pvt. Ltd.

Increasing penetration and regulatory thrust have actually led to a rise in the share of smaller cities (B-15 centers) in AUMs from 11% in FY11 to 17% as of Mar’17.

Page 11

BFSI - Asset Management Exhibit 31: Share of B-15 in overall AUM is increasing B-15 to overall AUM 20% 18%

17% 16%

16% 14%

15%

15%

FY14

FY15

13% 12%

12%

11%

10% FY11

FY12

FY13

FY16

FY17

Source: AMFI, Ambit Capital research

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BFSI - Asset Management

Rising persistency, operating leverage will help profitability A higher share of equity AUM improves profitability but high upfront commissions imply that investor persistency is crucial. But the comforting fact is that persistency in MFs has increased (2-year+ retail AUM is up from 46% to 52% over FY09-17) due to reduced mis-selling given regulatory clampdown (lower commissions, permanent mapping of agents, etc.) supported by increased awareness, buoyant equity markets and low interest rates. With ~50% of the costs largely fixed or semi-variable, operating leverage could meaningfully boost earnings of AMCs if high growth sustains.

Equity’s higher net yields boost profitability Equity AUM has the highest asset management fee amongst various asset classes, at 190-250bps of AUM. ETFs have the lowest fee, at 10-40bps. However, equity mutual fund schemes also have higher distribution cost than other products, at 1.8-2% of AUM in the first year, a part of which is paid by the AMC from its own P&L. Nevertheless, equities still have higher net yields than other asset classes due to higher gross yields. Equity has highest yields across product schemes Product segment

Gross yields

Distribution costs

Net yields

Equity

1.9-2.5%

1.5-2% (year 1); ~1% later

0.2-1%

Debt

0.9-1.3%

0.9% (year 1); ~0.7% later

0.1-0.6%

Liquid

0.1-0.3%

~0.05-0.1%

0.05-0.2%

ETF

0.1-0.4%

NA

0.1-0.4%

Source: Ambit Capital research

Exhibit 32: Higher profitability is driven by higher share of equity in AUM R² = 42%

Equity mix in AUM

48% 43% 38%

Axis AMC

33%

UTI AMC

SBI AMC

28% 23%

Franklin AMC

DSP AMC

HDFC AMC ICICI AMC

Kotak AMC

Birla AMC

18% 13% 0.03%

Reliance AMC

0.08%

0.13%

0.18%

0.23%

0.28%

0.33%

Return on AUM Source: Ambit Capital research, Company

High upfront commissions mean persistency drives profitability AMCs don’t make money in the first year of an equity scheme as everything is passed to the distributor as commission. It is only from the second year that AMCs start making money on an equity scheme. Pro-forma yields of equity schemes Gross yields

Yr1

Yr2

Yr3

Yr4

Yr5

1.9%

1.9%

1.9%

1.9%

1.9%

Distribution costs -

Upfront

0.9%

-

-

-

-

-

Trailing

1.0%

1.0%

1.0%

1.0%

1.0%

0.0%

0.9%

0.9%

0.9%

0.9%

Net yields

Source: Ambit Capital research

16 October, 2017

Ambit Capital Pvt. Ltd.

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BFSI - Asset Management Consequently, investor persistency is crucial for the AMC to make positive net yields on equity AUM as longer duration assets eventually offset the impact of higher upfront commissions. Persistency in mutual funds has increased since FY09 owing to reduction in mis-selling, greater awareness amongst investors and regulatory changes like permanent mapping of agent through a code. Higher persistency has also been supported by buoyant equity markets and low interest rates.

Consequently, investor persistency is crucial for the AMC to make positive net yields on equity AUM as longer duration assets eventually offset the impact of higher upfront commissions.

As per AMFI, the proportion of MF AUM held by retail investors for more than 2 years increased from 46% in FY09 to 63% in FY13 before moderating to 52% of AUM in FY17. Such moderation has been more due to recently increased inflows. Moreover, in SIPs, 2-year persistency is also at a similar level of ~50%, implying greater profitability for AMCs that have a higher share of AUM under equity SIPs. Exhibit 33: Persistency over FY09-17 across retail and HNI % AUM held for > 2 years Retail 70%

50%

60%

HNI

49%

46%

40%

52%

30%

36%

40%

% of AUM held more than 2yrs

50%

63%

60%

Exhibit 34: Retail, SIPs have higher persistency than HNIs

30%

52%

30%

20%

20%

10%

50% 30%

10% 0%

0% FY09

FY13

Retail

FY17

Source: AMFI, Ambit Capital research

SIP

HNI

Source: AMFI, Ambit Capital research

Operating leverage – an added profitability kicker Distribution dominates operating costs of AMCs – this variable expense accounts for ~52% of overall costs of the top-4 AMCs. Excluding distribution, opex broadly pertains to employee and admin costs, which are more or less fixed or semi-variable. Hence, in periods of high growth, operating leverage also plays out meaningfully to boost earnings of AMCs. We see that for the top-5 AMCs opex (ex-distribution) as a percentage of AUM decreased from ~26bps in periods of low growth to ~23bps in periods of high growth, driving ~2bps improvement in profitability. Exhibit 35: Distribution dominates the opex of top 4 AMCs

Exhibit 36: Operating leverage is a significant driver of profitability Particulars – for the top 5 AMCs

Opex break-up

AUM CAGR

23% Distribution 52% 25%

Hence, in periods of high growth, operating leverage also plays out meaningfully to boost earnings of AMCs.

Downturn (FY11-14)

Upturn (FY15-17)

8%

28%

Opex Growth 4% 16% Opex (% of AUM) (ex0.26% 0.23% distribution) Source: Company, Ambit Capital research; Top 5 AMCs are ICICI AMC, HDFC AMC, UTI AMC, BS AMC & REL AMC.

Employees Admin & others

Source: Company, Ambit Capital research; Top 4 AMCs are ICICI AMC, HDFC AMC, BS AMC & REL AMC.

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BFSI - Asset Management

RoE is moderate despite low capital requirement Given its capital-light nature, the business can theoretically operate at high RoE. However, institutional investors have inherent expectation from AMCs that in an event of adverse situations (such as liquidity tightening or credit downgrade) AMC could support the scheme returns by taking the troubled exposure on its balance sheet (for e.g. JP Morgan AMC recently had to merge with Edelweiss AMC as one of their portfolio companies saw a sharp credit downgrade.

High networth is critical for comforting institutional investors in debt segments on the ability to fulfill commitments even in an adverse liquidity and credit downgrade situation.

However, we note that large bank-backed AMCs (like ICICI PRU AMC and HDFC AMC) have lower capital deployed in the business due to implied strong support from their sponsors, which gives them higher RoE compared to AMCs not backed by banks (e.g. Reliance AMC and UTI AMC). Exhibit 37: RoE of AMCs backed by banks is high Average RoE * % 80%

66%

60%

45%

40%

28%

27%

27%

20%

21%

19%

16%

16%

0% -20%

ICICI MF

HDFC SBI MF Birla MF Frank Rel MF Kotak DSP MF UTI MF Axis MF MF Temp MF -8% MF

Source: Company, Ambit Capital research; Red shaded AMCS are backed by banks; Average over FY11-17

Exhibit 38: RoAA tree of key AMCs FY17 #s

Birla AMC HDFC AMC Reliance AMC ICICI AMC UTI AMC

MOFSAMC

Total revenues

0.57%

0.72%

0.74%

0.62%

0.62%

2.23%

Distribution cost

0.18%

0.20%

0.15%

0.14%

0.06%

1.29%

Net revenues

0.38%

0.51%

0.59%

0.49%

0.57%

0.94%

Opex (ex-distribution)

0.21%

0.18%

0.33%

0.16%

0.32%

0.52%

PBT

0.20%

0.39%

0.34%

0.35%

0.33%

0.43%

Taxes

0.07%

0.12%

0.10%

0.12%

0.09%

0.11%

ROAUM

0.13%

0.27%

0.24%

0.23%

0.24%

0.32%

ROE

24%

43%

23%

70%

17%

37%

PAT margin

22%

35%

29%

36%

34%

14%

Source: Company, Ambit Capital research

-

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The emerging five themes Information disintermediation, digitization and regulatory changes will drive 5 key themes: i) rising share of direct in HNI and debt segments; ii) underperforming AMCs losing equity market share (by 16ppt over FY11-17); iii) IFAs losing market share (by 10ppt over FY13-17); iv) increased granular participation through SIPs (from 15% of retail folios to 27% over FY14-17); and v) market share gain of passives (ETFs) and alternatives (PMS, AIF).

#1: Rising share of direct in HNI and debt segment AMCs introduced direct schemes in 2013 after nudging from SEBI, wherein investors could directly invest in a scheme run by AMCs rather than investing through a distributor (i.e. regular scheme). Given that in the direct route the investor was directly buying from the AMC, investing through this channel is much cheaper (80100bps in equity funds and 50-70bps in debt funds) due to absence of distribution commissions of intermediaries. Cost advantage coupled with increased awareness and ease of transaction through digital channels have expedited the adoption of direct investing. Apart from digital platforms, larger AMCs have bolstered their sales teams to increase inflows through the direct mode, facilitating the increase in the share of direct inflows over the years. At the industry level, the direct mode of investing has increased its share from 35% of AUM in FY14 to 43% of AUM in FY17. Exhibit 39: Rising share of direct mode in total AUM…

Exhibit 40: …driven mostly by rising share of direct in debt Share of Direct as a % of Debt AUM

Direct Share (As a % of total AUM) 50%

50%

47%

43% 42%

39% 40%

35%

34%

40% 35%

30%

20%

37%

30% FY14

FY15

FY16

FY17

FY14

FY15

FY16

FY17

Source: AMFI, Ambit Capital research

Source: AMFI, Ambit Capital research

However, we notice that direct investing is more prevalent in debt schemes. The reason for this is that debt schemes are more popular amongst relatively wellinformed corporate treasuries who know the benefits of direct investing. Exhibit 41: Corporates have been mostly subscribing through the direct mode Share of direct as a % of corporate AUM 70%

65% 57%

60% 50%

51%

FY14

FY15

50%

40% FY16

FY17

Source: AMFI, Ambit Capital research

But the share of the direct investing has increased in equity as well (16% in FY17 from 8% in FY14) driven by the rising share of direct investing by HNIs (High Networth 16 October, 2017

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BFSI - Asset Management Investors). However, the share of direct remains low and stagnant at ~10% for the retail category. Exhibit 42: Direct share is increasing in HNI but stagnant in retail segment

Exhibit 43: The share of direct in equity is rising due to the HNI segment

Share of direct as a % of AUM

Direct (as a % of AUM)

20%

14%

15%

17%

20% 15% 11%

10% 10% 10%

16%

11%

10%

FY15

FY16

HNI

Retail

10%

8%

9%

0%

0% FY14

FY17

FY14

FY15

FY16

FY17

Equity

Source: AMFI, Ambit Capital research

Source: AMFI, Ambit Capital research

We reckon that as the distribution landscape will increasingly become more focused on advisory due to regulatory thrust (through SEBI’s Investment Advisor Regulations) as well as with the onset of independent robo-advisors (e.g. Scripbox) and increased financial literacy, the share of direct will increase. This will be more so in the HNI segment, wherein sensitivity to intermediation costs is higher. For the small-ticket retail segment, we expect the contribution of direct to not significantly increase in the near term as sensitivity of the customer to distribution costs is not very high. In the longer term, we expect the distribution advantage of AMCs in the HNI segment to broadly moderate and fund performance to become increasing critical for growth. But not all direct is profitable, only digital flows are

For the small-ticket retail segment, we expect the contribution of direct to not significantly increase in the near term as sensitivity of the customer to distribution costs is not very high.

However, profitability for AMCs from direct channel is not significantly higher than in the regular channel (barring the first year where AMC also pays upfront commission of ~1%) as lower distribution costs are also offset by regulatory mandated lower TER (total expense ratio) (by 70-90bps). Only direct flows through digital channels are more profitable vs regular flows due to lower overheads. Interestingly, online forms just 60% of the direct mode in investing. Channel checks suggest that AMCs are also increasing direct sourcing through offline channels, by ramping up their employee base which incurs significant operating costs. Herein scale is paramount for AMCs to be profitable. Exhibit 44: Offline mode accounts for 43% of direct mode of transactions (Jun’17) Mode of transactions in direct

43%

Offline Online

57%

Source: CAMS, Ambit Capital research

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BFSI - Asset Management

#2: Underperformance = market-share loss Information disintermediation by mutual fund research houses like CRISIL, Morningstar and Value Research has made comparing the performance of funds and schemes easier. This combined with investors (especially HNIs) preferring to invest through the direct route has led to performance becoming increasingly important to garner more inflows rather than distribution push. Data indicates that within the top10 AMCs, those having 60%+ of equity AUM in 3 star or higher rated schemes have gained market share from AMCs wherein such schemes contribute less than 60% of AUM. We expect high performing AMCs that deliver alpha to their investors to gain market share. Exhibit 45: Underperformers are losing market share Equity AUM Mkt share % 100% 80%

47%

47%

47%

49%

53%

59%

63%

53%

53%

53%

51%

47%

41%

37%

60% 40% 20% 0%

FY11 FY12 FY13 FY14 FY15 FY16 FY17 AMCs with underperforming schemes* AMCs with outperforming schemes* Source: Value Research, AMFI, Ambit Capital Research * AMCs with outperforming (underperforming) schemes are defined as those having more (less) than 60% of equity AUM in 3 star and above rated schemes by Value Research.

#3: Distribution channel is consolidating To curb rampant mis-selling seen in the previous bull run (FY03-07), regulators have come out with various regulations, since FY06, that have meaningfully dented the profitability of the distribution business. Exhibit 46: Regulatory headwinds for distributor commissions Year

Regulation

2006

SEBI bans initial issues expenses on open ended funds, which used to be as high as 6% of the amount raised.

2008

SEBI bans initial issues expenses on close ended funds, which used to be as high as 6% of the amount raised.

2009

SEBI bans upfront load in mutual funds, which used to as high as ~2.25% of the invested amount in addition to the expense ratio of 2%.

2010

IRDAI regulation effectively leads to reduction in ULIPs commissions from ~15% to ~5-8%.

2015

SEBI caps up-fronting of trail commissions at 1% for investments of more than `10k.

2017 (expected)

SEBI issues draft paper on (Investment Advisers) Regulations – key regulation being separating advisory from distribution guidelines and disclosure of fees during the time of sale.

Source: IRDA, SEBI, Ambit Capital Research

Moreover, the additional pressure of declining flows in FY11-14 had also put additional pressure on the distribution business. This, along with value additions provided by larger distributors in the form of superior research capabilities, backoffice support etc., have actually led to exits of many smaller distributors (IFAs – independent financial advisors) resulting in market share gain for larger distributors like banks and national distributors. Over FY13-17, the share of IFAs in assets under advise (AUA) has declined from 50% to 40%. This helped AMCs backed by banks gain market share from those not backed by banks; the top-5 AMCs backed by banks gained market share from top-5 AMCs not backed by banks by 12-13ppt over the past decade.

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Ambit Capital Pvt. Ltd.

Over FY13-17, the share of IFAs in assets under advise has declined from 50% to 40%.

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BFSI - Asset Management Exhibit 47: Share of IFAs is declining in equity AUM 100% 80%

1%

4%

7%

50%

50%

46%

Exhibit 48: Larger distributors are gaining market share Top 15 distributors (% of dist. rev. pool)

11%

13%

61% 59%

43%

60%

59%

40%

40% 20%

55%

46%

46%

46%

46%

56%

54%

55% 48%

57%

57% 57%

53% 51% 51%

0% FY13

FY14

Banks & NDs

FY15 IFA

FY16

FY17

49% FY11

Direct & others

FY12

FY13

FY14

FY15

FY16

FY17

Source: AMFI, Ambit Capital research

Source: CAMs, AMFI, Ambit Capital research

Exhibit 49: Market share in equity AUM of bank-backed AMCs has increased

Exhibit 50: Market share in total AUM of bank-backed AMCs has increased

Equity AUM share

Total AUM share

100%

100%

80%

80%

60%

60%

40%

40%

20% 42% 39% 39%

52% 53% 55% 40% 43% 46% 47% 49%

20% 41% 40% 42% 44% 44% 47% 48% 49% 50%

52% 53%

Source: AMFI, Ambit Capital research

Top 5 non-bank backed AMCs

Top 5 bank backed AMCs

FY17

FY16

FY15

FY14

FY13

FY12

FY11

FY10

FY09

FY08

FY17

FY16

FY15

FY14

FY13

FY12

FY11

FY10

FY09

FY08

FY07

Top 5 bank backed AMCs

FY07

0%

0%

Top 5 non-bank backed AMCs

Source: AMFI, Ambit Capital research

With the cap on upfront fees at 1% continuing to exert pressure on the profitability of IFAs, which can get further accentuated by SEBI’s Investment Adviser Regulations that is expected, we expect the bank-backed AMCs to further gain market share.

#4: Rising SIPs imply more granular participation Given the volatility in equity markets, many investors prefer averaging their rupee cost while investing through SIPs instead of lumpsum. Moreover, in July’15, the AMFI, in a bid to incentivize distributors to market SIPs, permitted upfront commissions of 3 years on SIPs to distributors up to ticket size of `10,000 p.m. With lumpsum MF investments bearing lower commissions, distributors have been advising their investors to break up their investments into monthly installments and invest in markets through SIPs. Consequently, we see that the share of SIPs has also been rising, from 16% of retail investor base in FY13 to 27% of retail in FY17. Moreover, the ticket size of these schemes is small, at `3-4k p.m., indicating more granular investor participation.

16 October, 2017

Ambit Capital Pvt. Ltd.

Share of SIPs has increased from 16% of retail investor base in FY13 to 27% of retail in FY17.

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BFSI - Asset Management Exhibit 51: Investors are preferring to invest through SIPs

Exhibit 52: SIP inflows have increased

SIPs (% of retail accounts)

Monthly SIP book (` bn)

50 29%

27%

40 40

26%

24% 27

30

22%

23%

19

20

20% 17%

48

12 16%

10

15%

0

14% FY13

FY14

FY15

FY16

FY17

FY14

Source: AMFI, Ambit Capital research

FY15

FY16

FY17

1HFY18

Source: AMFI, Ambit Capital research

Given that SIPs have high persistency (50% of investors invest for more than 5 years and 50% of AUM invested for more than 2 years), overall industry churn should reduce and AMCs having higher share of SIP book should report higher profitability.

#5: Polarisation of fund management As highlighted by our strategy analyst, Prashant Mittal, in the note dated 9th March, 2017, The “alpha squeeze” in Indian large caps, alpha generated by large-cap funds diminished significantly after 2010. Exhibit 53: Large-cap MFs enjoyed significant alpha over BSE100 in pre-2010 era (analysis based on data from Jan’91-Dec’09) Rolling One year Equity BSE MFs 100

Rolling Three year Equity BSE MFs 100

Rolling Five year Equity BSE MFs 100

Rolling Ten year Equity BSE MFs 100

Average returns

21.8% 15.3%

17.4%

14.2%

17.4% 14.3%

17.4% 13.3%

Median returns

18.6%

17.3%

10.0%

14.5%

15.8% 14.7%

8.2%

9.8%

Standard deviation

46%

37%

23%

19%

14%

14%

7%

5%

Sharpe ratio (average) Sharpe ratio (median)

0.30

0.20

0.41

0.33

0.65

0.45

1.32

1.12

0.23

0.01

0.40

0.11

0.45

0.13

1.10

1.40

Source: www.mutualfundindia.com, Ambit Capital Research. There are 3635, 3133, 2659 and 1405 data points used to calculate the return parameters for 1,3,5 and 10 year holding horizons above

Exhibit 54: But this alpha diminished significantly in the post-2010 period (analysis based on data from Jan’10-Feb’17) Rolling One year Equity BSE MFs 100

Rolling Three year Equity BSE MFs 100

Rolling Five year Equity BSE MFs 100

Rolling Ten year Equity BSE MFs 100

Average returns

16.6% 13.4%

12.3%

9.7%

11.8% 10.3%

15.8% 15.8%

Median returns

10.9%

11.5%

9.3%

12.2%

17.0% 16.5%

9.2%

9.9%

Standard deviation

23%

23%

7%

7%

5%

6%

3%

4%

Sharpe ratio (average) Sharpe ratio (median)

0.38

0.24

0.60

0.25

0.69

0.39

2.25

2.16

0.13 0.05 0.48 0.19 0.76 0.31 2.57 2.34 Source: www.mutualfundindia.com, Ambit Capital Research. There are 1796 data points used to calculate the return parameters for 1,3,5 and 10 year holding horizons above

Consequently, given lower expense ratios that passive funds like ETFs enjoy (1020bps versus 170-200bpos for a traditional MF), ETFs are increasingly getting popular. Moreover, these funds are also gaining market share as the launch of new ETFs (PSU ETF) is supported by domestic provident funds and pension funds increasingly allotting more money. Consequently, the share of non-gold ETF has increased by 15x to 253bps of overall industry AUM from 16bps in FY09. 16 October, 2017

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BFSI - Asset Management Simultaneously, high conviction and concentrated strategies have caught the fancy of the HNI segment and there has been a rise of funds offering such alternative strategies in the form of PMS (Portfolio Management Services) or AIF (Alternative Investment Fund). The share of such alternatives has increased from 5% of AUM in FY11 to 7% of AUM in FY17. Exhibit 55: Share of passives/alternatives is increasing in the overall AUM 10%

Market share in industry AUM Non commodity ETF

8%

PMS + AIF

6%

7% 7%

4%

6% 5%

5%

2%

4%

4%

0% FY13

0%

1%

1%

FY14

FY15

FY16

2% 0%

0% FY11

0% FY12

FY17

Source: Ambit Capital research; AMFI

Overall, we see that the share of traditional mutual funds has decreased from 95% in FY11 to 91% in FY17. With alpha over the benchmark no longer expected to be high, this trend should continue and pose a threat to underperforming AMCs. AMCs that continue to generate alpha should continue to garner flows.

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BFSI - Asset Management

Distribution and performance are crucial In our framework, bank-backed AMCs are architecturally better placed to profitably capitalise on these themes owing to a capex-light access to large retail distribution channels. They have gained 15ppt market share over FY10-17. Moreover, strong brand and performance will also help garner higher retail AUM and direct inflows. I-Pru AMC is the best in our framework as it combines the above-mentioned strengths with a superior track record, which will enable it to pull highly profitable equity flows.

Growth = Performance + Distribution We believe that robust growth for any AMC will be a combination of its performance, distribution and brand strength: 

Performance: It plays a very critical role in garnering inflows as better performing funds will garner more inflows and thus gain market share. An example is ICICI AMC that delivered much higher growth in equity AUM, at 40% CAGR over FY12-17, on the back of strong performance (3 star plus rated schemes as a % of equity AUM is ~79%). This contrasts starkly to peer HDFC AMC that has delivered a much moderate 18% CAGR, having lost market share owing to underperformance (3star plus rated schemes at ~45%).



Distribution: Large distribution (through own or parent/associate branches) is also of immense value as it can offset mediocre performance to a certain extent. Despite HDFC AMC and UTI AMC having identical degree of underperformance (only 45-48% of equity AUM is rated 3 star and above by Value Research), HDFC AMC’s equity AUM CAGR over FY12-17 of 18% is far better than UTI AMC’s 12%.



Brand: Given low switching costs and transparency in performance benchmarking, the value of brand is lower in an AMC business compared to the life insurance business. That said, a good brand also helps an AMC generate a lot of direct inflows and walk-ins; so we see AMCs having a stronger brand such as HDFC AMC and ICICI AMC getting a higher share of direct inflows.

In our framework, ICICI AMC scores best given combination of strong performance (higher share of 3star and higher rated funds in equity AUM), ICICI Bank’s distribution and strong brand. This underpins robust 29% AUM CAGR over FY12-17.

Given low switching costs and transparency in performance benchmarking, the value of brand is lower in an AMC business compared to the life insurance business.

Exhibit 56: ICICI AMC best-placed to deliver strong growth HDFC AMC

ICICI AMC

Reliance AMC

Birla AMC

UTI AMC

Motilal AMC

45%

79%

54%

88%

48%

87%

4,837

4,970

215

84

149

2,227

1

1

3

5

4

6

FY12-17 Total AUM CAGR

21%

29%

21%

26%

18%

61%

FY12-17 Equity AUM CAGR

18%

40%

15%

35%

12%

NA

Direct as a % of Equity AUM

18%

16%

13%

19%

9%

35%

Performance (% of AUM*) Distribution (direct + associate branches) Brand strength Blended rank

Source: AMFI, Google, Value Research, Ambit Capital research, Performance implies % of equity AUM covered under 3star and higher rated equity schemes. Note:

- Strong;

16 October, 2017

- Relatively Strong;

- Average;

- Relatively weak.

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Net yields expansion: Higher retail, direct is key Higher net yields (gross yields less distribution costs) would depend on higher share of equity in the AUM mix. Even then AMCs having higher share of retail in the AUM mix will have higher net yields due to higher persistency from the second year. Moreover, a higher share of direct in equity AUM will also contain upfront distribution costs, enabling higher net yields. In our framework, HDFC comes across as bestplaced to expend its net yields given higher share of retail in its equity AUM. MOFS should also do well to sustain its net yields owing to high share of equity in its AUM. Exhibit 57: HDFC AMC is best-placed to improve net yields HDFC AMC

ICICI AMC

Reliance AMC

Birla AMC

UTI AMC

Motilal AMC

Equity (% of AUM)

27%

34%

25%

22%

26%

95%

Retail (% of equity AUM)

55%

38%

53%

47%

73%

30%

Direct as a % of AUM – equity

18%

16%

13%

19%

9%

35%

0.54%

0.50%

0.60%

0.35%

0.62%

0.94%

Blended rank Net yields (% of AUM)

Source: AMFI, Ambit Capital research, Note: weak.

- Strong;

- Relatively Strong;

- Average;

- Relatively

Operating efficiency – bank-backed AMCs are best Ex-distribution opex (% of AUM) is the least for HDFC AMC and ICICI AMC at ~15bps due to lesser need for branches given their presence through the banking channel. On the other hand, Reliance and UTI have higher operating costs due to higher branch presence compared to their bank-sponsored counterparts. Moreover, we note that UTI AMC’s inefficiency versus its peers is caused by higher employee costs owing to legacy labour union issues.

Reliance and UTI have higher operating costs due to higher branch presence compared to their bank-sponsored counterparts.

Exhibit 58: Bank-backed AMCs are more efficient due to lower investments in branches

Opex (% of AUM) Branches

HDFC AMC

ICICI AMC

Reliance AMC

Birla AMC

UTI AMC

Motilal AMC

0.15%

0.15%

0.26%

0.18%

0.29%

0.43%

122

120

215

84

149

10

Blended rank Source: AMFI, Ambit Capital research, Note: weak.

- Strong;

- Relatively Strong;

- Average;

- Relatively

Overall ranking – ICICI AMC ranks the best Overall, bank-backed AMCs are architecturally better placed owing to access to large distribution channels without the drag of high operating costs. Moreover, the strong brand associated with such AMCs also helps them garner higher retail participation and direct inflows. Consequently, ICICI AMC and HDFC AMC are the strongest plays in the asset management space. But we prefer ICICI AMC as its superior performance will also pull highly profitable equity flows. Exhibit 59: IPRU AMC and HDFC score the best HDFC AMC

ICICI AMC

Reliance AMC

Birla AMC

UTI AMC

Motilal AMC

PAT CAGR (FY13-17)

15%

38%

10%

28%

20%

76%*

FY17 RoEs

43%

70%

23%

24%

17%

37%

Growth prospects Higher margins

Overall, bank-backed AMCs are architecturally better placed owing to access to large distribution channels and brand without the drag of high operating costs.

Operating efficiency Blended rank

Source: AMFI, Ambit Capital research, Note: weak.

16 October, 2017

- Strong;

- Relatively Strong;

- Average;

Ambit Capital Pvt. Ltd.

- Relatively

Page 23

BFSI - Asset Management

Well-run AMCs deserve a large premium AMCs are best valued on DCF rather than the conventional ‘percentage of AUM’ approach since the latter ignores the profitability of AUM. Globally, AMCs are valued at 16-18x 1-year forward earnings for an expected 15-20% two-year earnings CAGR. Whilst Indian AMCs enjoy superior profitability and growth prospects, they should deserve much higher multiples only if they have strong distribution and performance track records.

Value AMCs on cash flows not AUM Conventionally, the street values AMCs mostly on assets under management. Since most of the deals have typically taken place between 3-6% of AUM, the street generally ascribes similar values while valuing AMCs. That said, on P/E basis, recent deals have typically taken place at 20x trailing P/E. Exhibit 60: AMC transactions have broadly ranged at 3-6% of AUM Price paid (` mn)

Stake bought

Valuation (` mn)

AUM (` mn)

P/AUM

Stan C AMC

8,310

100%

8,310

145,789

5.7%

LIC AMC

3,080

35%

8,800

324,150

2.7%

GS

Benchmark

1,300

100%

1,300

31,707

4.1%

2012

L&T Fin

Fidelity (India)

5,500

100%

5,500

88,810

6.2%

2012

Invesco

Religare

4,600

49%

9,388

146,000

6.4%

2012

Nippon Life

Reliance AMC

14,500

26%

55,769

839,898

6.6%

2015

Nippon Life

Reliance AMC

6,570

9%

73,000

1,272,475

5.7%

2015

Reliance AMC GSAM

2,430

100%

2,430

71,320

3.4%

2017

IDFC

2,442

25%

9,770

595,850

1.6%

Date

Investor

Investee

2008

IDFC

2009

Nomura

2011

IDFC-Natixis

Source: Ambit Capital Research; Media reports

We believe such a valuation method does not truly reflect the true profitability profile of the AMC as profitability as a percentage of AUM defers significantly across AMCs. Rather, we believe AMCs are best valued on discounted free cash flows given the high cash generation of the business. For e.g. whilst Nippon Life’s acquisition of Reliance AMC seemed expensive (6-7% of AUM on price/AUM basis), on trailing earnings valuations were very reasonable at 20x trailing P/E given the high profitability of Reliance AMC (then at ~30bps of AUM). Exhibit 61: AMC transactions on P/E basis Date Investor

Investee

Valuation (` mn)

Trailing PAT

Trailing PE

2012 Nippon Life 2015 Nippon Life

Reliance AMC

55,769

2,761

20.2

Reliance AMC

73,000

3,573

20.4

2017 IDFC

IDFC-Natixis

9,770

970

10.1

Source: Ambit Capital Research; Media reports

Globally, sector is valued at 16-18x 1-year forward P/E We see that, globally, AMCs are typically valued at 16-18x 1-year forward earnings for expected average earnings CAGR of 15-20%.

16 October, 2017

Ambit Capital Pvt. Ltd.

Page 24

BFSI - Asset Management Exhibit 62: Relative valuations of AMCs across the globe R² = 28%

Relative Valuation of global AMCs

PE Ratio FY18

35 30

SDR LN

25

BLK US

20

TROW US

15

BEN US

10 0%

EV USAPAM US

LM US 10%

AMG US

IVZ US

20%

30%

40%

50%

60%

EPS CAGR FY17-19 Source: Bloomberg, Ambit Capital research; size of the bubble indicates the AUM size; Note: BLK– Black Rock, BEN – Franklin Resources, TROW – T. Rowe Price, LM – Legg Mason, EV- Eaton Vance, IVZ – Invesco, APAM – Artisan Partners, AMG – Affiliated, SDR - Schroders.

Exhibit 63: Relative valuations of AMCs - global Company Name

Market Cap

P/E (x)

P/B (x)

ROE (%)

EPS CAGR

(US$ bn)

17E

18E

17E

18E

17E

18E

19E

FY17E-19E

Black Rock

73.1

19.9

18.0

2.11

2.27

11.0%

13.3%

13.8%

20%

Franklin Resources

24.9

12.3

15.4

1.70

1.84

14.4%

12.3%

11.6%

1%

T. Rowe Price

21.8

15.8

16.3

3.68

3.91

24.3%

24.2%

31.7%

10%

Invesco

14.5

14.9

12.7

1.63

1.67

11.1%

13.3%

14.2%

23%

Affiliated

10.8

17.0

11.8

2.35

2.64

14.6%

20.4%

24.4%

43%

Eaton Vance

5.8

17.2

16.9

5.68

NA

36.5%

65.6%

NA

21%

Legg Mason

3.7

19.7

13.1

0.87

0.87

5.4%

6.2%

6.4%

21%

Janus Henderson Group

7.1

NA

13.7

NA

1.72

12.5%

12.7%

12.1%

25%

Alliance Bernstein

2.2

10.5

10.8

1.47

NA

13.8%

18.7%

NA

4%

Artisan Partners

2.5

18.9

13.4

16.79

NA

45.8%

69.3%

NA

26%

Waddell & Reed

1.7

9.8

13.0

1.92

2.02

17.4%

15.1%

13.9%

-7%

Wisdom Tree

1.4

47.5

30.2

7.55

7.44

12.0%

NA

NA

57%

Cohen & Steers

1.8

17.4

18.0

5.80

NA

37.4%

32.4%

NA

9%

Gamco Investors

0.9

7.9

NA

NA

NA

NA

NA

NA

NA

Pzena Investment

0.8

29.6

16.3

26.44

NA

69.0%

NA

NA

-12%

Manning & Napier

0.4

12.2

11.5

0.69

NA

5.3%

NA

NA

-30%

17.9

15.4

5.35

2.71

21.2%

24.1%

15.2%

13.9%

United States

Average Europe Schroders

12.1

16.8

15.6

2.70

2.59

16.5%

17.2%

16.8%

14%

Investec

7.0

11.8

10.2

1.25

1.20

11.0%

12.9%

13.2%

11%

Aberdeen

NA

25.4

NA

2.54

NA

9.3%

13.3%

15.3%

38%

Ashmore Group

3.2

14.1

17.7

3.45

3.17

23.9%

18.6%

DNA

-8%

Henderson Group

NA

NA

NA

NA

NA

12.5%

12.7%

DNA

26%

Jupiter Fund

3.4

14.6

15.3

3.33

3.75

22.5%

24.6%

24.8%

14%

GAM Holdings

2.5

13.9

15.0

1.01

1.30

7.2%

8.5%

9.4%

19%

Rathbone Bros.

1.8

25.1

18.4

3.07

3.32

12.2%

20.4%

20.5%

41%

17.4

15.4

2.48

2.56

14.4%

16.0%

16.7%

19.5%

Average Australia Magellan

3.3

24.7

18.9

11.09

9.21

48.9%

48.4%

50.6%

12%

BT Investments

2.8

16.3

17.6

3.16

4.47

18.9%

25.6%

27.9%

15%

Platinum

2.8

14.6

21.9

8.11

10.99

55.5%

49.6%

49.6%

-4%

Perpetual

1.9

18.6

17.2

4.04

3.70

22.1%

21.5%

22.3%

3%

18.6

18.9

6.60

7.09

31.6%

31.5%

32.5%

NA

Average Source: Bloomberg, Ambit Capital research

16 October, 2017

Ambit Capital Pvt. Ltd.

Page 25

BFSI - Asset Management

High growth and profitability justify premium As discussed earlier, Indian AMCs not only enjoy superior growth prospects but also superior profitability. Over FY15-17, most of the top Indian AMCs grew by 10-38% CAGR versus a broad range of 10-23% PAT CAGR expected to be delivered by their global peers over FY17-19E. Exhibit 64: PAT (% of AUM) is higher for Indian AMCS PAT (% of AUM) 0.24% 0.22% 0.21%

Schroders

Invesco

Birla

T Rowe Price

ICICI MF

Franklin Resources

Reliance MF

UTI MF

0.15% 0.14% 0.12% 0.11%

10%

10%

0.07%

Blackrock

0.28% 0.27%

HDFC

0.30% 0.25% 0.20% 0.15% 0.10% 0.05% 0.00%

Source: Company, Ambit Capital research

Exhibit 65: PAT growth is also higher for Indian AMCs

60%

2-year PAT CAGR*

57%

50%

38%

40%

28%

30%

23%

20%

20%

20%

15%

10%

1% Franklin Resources

T Rowe Price

Reliance MF

HDFC

UTI MF

Blackrock

Invesco

Birla

ICICI MF

Schroders

0%

Source: Company, Ambit Capital research; PAT CAGR of Indian AMCs is based on historical 2yr (FY15-17) and for global AMCs is based on 2yrs forward estimates provided by Bloomberg.

Only a party for a few Whilst industry growth prospects are high, not all AMCs in India will benefit. Only those that are well-positioned in terms of distribution, performance and profitability should translate the strong growth prospects to earnings growth. ICICI Prudential AMC/ICICI Bank: ICICIBC’s asset management subsidiary is the best placed in our framework as it combines the strengths of its parent’s support (low capex access to ICICIBC’s large and deep reach to the retail and strong brand) with a superior track record which will enable it to pull highly profitable equity flows. The strengths are also validated by superlative earnings profile of 38% PAT CAGR over FY13-17 versus 10-28% for comparable peers. Currently we are valuing ICICI AMC at 6% of AUM and ~30x times trailing earnings but there is enough headroom to further increase valuation. MOFS AMC: Whilst MOFS AMC figures in the middle rung of our framework, its superlative track record and exclusive focus on equity have led to a robust 61% AUM CAGR from a small base. This combined with playing out of operating leverage has led to 76% PAT CAGR over FY13-17. Moreover, we expect AUM growth to continue as larger banks recently empaneled MOFS MF now that it has an established 3-year track record in 1QFY18. This combined with benefits of heavy investments in branding and operating leverage should lead to 56% PAT CAGR over FY17-20E 16 October, 2017

Ambit Capital Pvt. Ltd.

Page 26

BFSI - Asset Management (refer our note dated 2nd May’ 2017: An idea whose time has come). With ~45% of SOTP from the AMC, MOFS is the most direct play in our coverage. Reliance Nippon Life AMC: Pricing band of the Reliance Nippon Life AMC’s IPO suggests market capitalization of `154bn, which implies a valuation of 38x FY17 EPS. Assuming that exit multiples after two years will converge to 25x, earnings will have to grow by 40% CAGR over the next two years for investors to make 15% IRR. Expectations of 40% PAT CAGR over FY17-19E are in stark contrast with a much moderate 13% FY15-17 PBT CAGR, which is at the lower range of the peer band (1538% PAT CAGR) due to market-share loss (equity market share fell from 16% in FY10 to 9% in FY17). The market-share loss could be attributed to weakening of the IFA distribution channel for the industry due to regulatory headwinds, lack of backing of a bank with a strong branch reach, and under-performance (~46% of equity AUM is rated 2star and below by MF research houses). We are cautious on the valuations. We consider the IPO valuation to be expensive for this asset management franchise. Geojit Financial Services: Geojit is a proxy play on the asset management space given that this largest retail stock broker in South India is scaling up its mutual fund distribution business. It is focusing on SIPs, wherein its market share has more than doubled to ~2% (monthly SIP inflows are up 4.6x YoY). Geojit is in a sweet spot to gain market share profitably due to: i) strong positioning in B-15 centres (~65% of branches, ~75% of distribution revenues), where it earns higher commissions (up to 100-120bps higher) as the regulators push for deeper penetration in these geographies; ii) focus on small-ticket SIP business, which is more or less moated from the threat of direct channel as customer sensitivity to distributor commissions herein is very low given miniscule absolute fee amount earned; and iii) market share gains arising from consolidation of smaller IFAs. As highlighted in our visit note dated 29 May 2017, Geojit’s guidance that distribution fees would reach ~50% of FY21E revenues vs 8% currently seems possible given strong positioning in under-penetrated B-15 locations in South India. Moreover, given it is scaling up through investing in branches/employees rather than franchises, operating leverage can also kick in meaningfully. This will structurally improve: (i) revenue growth prospects; distribution fees are ~30bps of rapidly growing industry AUM; (ii) RoE, given higher yields in distribution; and (iii) earnings sustainability, due to trail-based commission income. Consensus estimates imply 35% EPS CAGR over FY17-20, suggesting an inexpensive 23x FY20E EPS which are reasonable due to superior earnings growth and cash generation (negligible lending book, dividend payout of 65%).

Risks 1) Regulatory risks: Indian AMCs enjoy the highest fees globally (total expense ratio of 1.9 – 2.2% for equities versus 0.7-1.3% for global peers). If the regulator pushes this down further to lower intermediation costs for retail investors, it could meaningfully hit the profitability of the AMCs. Moreover, currently, the regulator allows complete fungibility of the expense, which gives room to the AMC to pay upfront fees to the distributor. If this fungibility is removed, growth of the sector could be hit albeit momentarily. 2) Rise in interest rate: Most retail and HNI inflows in MFs are led by lower opportunity cost of capital due to lower deposit rates. Should banks increase their deposit rates, it can meaningfully impact flows to the AMC industry. 3) Prolonged market correction: Whilst a short-term correction would attract investors, prolonged weakness can scare off existing HNI/retail investors (redemptions).

16 October, 2017

Ambit Capital Pvt. Ltd.

Page 27

BFSI - Asset Management

Institutional Equities Team Saurabh Mukherjea, CFA Pramod Gubbi, CFA

CEO, Ambit Capital Private Limited Head of Equities

(022) 30433174 (022) 30433124

[email protected] [email protected]

Research Analysts Name

Industry Sectors

Nitin Bhasin - Head of Research Aadesh Mehta, CFA

E&C / Infra / Cement / Home Building Banking / Financial Services

(022) 30433241 (022) 30433239

Desk-Phone

E-mail [email protected] [email protected]

Abhishek Ranganathan, CFA Anuj Bansal Aditi Singh Ashvin Shetty, CFA Bhargav Buddhadev

Retail / Consumer Discretionary Consumer Economy / Strategy Automobiles / Auto Ancillaries Power Utilities / Capital Goods / Small Caps

(022) 30433085 (022) 30433122 (022) 30433284 (022) 30433285 (022) 30433252

[email protected] [email protected] [email protected] [email protected] [email protected]

Deepesh Agarwal, CFA Dhiraj Mistry, CFA Gaurav Khandelwal, CFA

Power Utilities / Capital Goods Consumer Automobiles / Auto Ancillaries

(022) 30433275 (022) 30433264 (022) 30433132

[email protected] [email protected] [email protected]

Girisha Saraf Karan Khanna, CFA Nikhil Mathur Mayank Porwal Pankaj Agarwal, CFA Prateek Maheshwari

Home Building Strategy / Small Caps Small Caps Retail / Consumer Discretionary Banking / Financial Services Cement / E&C / Infrastructure

(022) 30433211 (022) 30433251 (022) 30433220 (022) 30433214 (022) 30433206 (022) 30433234

[email protected] [email protected] [email protected] [email protected] [email protected] [email protected]

Prashant Mittal, CFA Rahil Shah Ravi Singh Ritesh Gupta, CFA

Strategy / Derivatives Banking / Financial Services Banking / Financial Services Oil & Gas / Chemicals / Agri Inputs

(022) 30433218 (022) 30433217 (022) 30433181 (022) 30433242

[email protected] [email protected] [email protected] [email protected]

Ritika Mankar Mukherjee, CFA Sudheer Guntupalli Sumit Shekhar

Economy / Strategy Technology Economy / Strategy

(022) 30433175 (022) 30433203 (022) 30433229

[email protected] [email protected] [email protected]

Utsav Mehta, CFA Vivekanand Subbaraman, CFA

E&C / Infrastructure Media / Telecom

(022) 30433209 (022) 30433261

[email protected] [email protected]

Sales Name

Regions

Sarojini Ramachandran - Head of Sales Anmol Arya Dharmen Shah

UK India India / Asia

+44 (0) 20 7886 2740 (022) 30433079 (022) 30433289

Desk-Phone

E-mail

Dipti Mehta Krishnan V Nityam Shah, CFA

India India / Asia Europe

(022) 30433053 (022) 30433295 (022) 30433259

[email protected] [email protected] [email protected]

Punitraj Mehra, CFA Shaleen Silori

India / Asia India

(022) 30433198 (022) 30433256

[email protected] [email protected]

Singapore Singapore

+65 6536 0481 +65 6536 1935

[email protected] [email protected]

[email protected] [email protected] [email protected]

Singapore Praveena Pattabiraman Shashank Abhisheik USA / Canada Ravilochan Pola – CEO Hitakshi Mehra Achint Bhagat, CFA

Americas Americas Americas

+1(646) 793 6001 +1(646) 793 6751 +1(646) 793 6752

[email protected] [email protected] [email protected]

Production Sajid Merchant

Production

(022) 30433247

[email protected]

Sharoz G Hussain

Production

(022) 30433183

[email protected]

Jestin George Richard Mugutmal Nikhil Pillai

Editor Editor Database

(022) 30433272 (022) 30433273 (022) 30433265

[email protected] [email protected] [email protected]

16 October, 2017

Ambit Capital Pvt. Ltd.

Page 28

BFSI - Asset Management Explanation of Investment Rating Investment Rating

Expected return (over 12-month)

BUY

>10%

SELL NO STANCE

<10% We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation

UNDER REVIEW NOT RATED

We will revisit our recommendation, valuation and estimates on the stock following recent events We do not have any forward looking estimates, valuation or recommendation for the stock

POSITIVE

We have a positive view on the sector and most of stocks under our coverage in the sector are BUYs

NEGATIVE

We have a negative view on the sector and most of stocks under our coverage in the sector are SELLs

* In case the recommendation given by the Research Analyst becomes inconsistent with the rating legend, the Research Analyst shall within 28 days of the inconsistency, take appropriate measures (like change in stance/estimates) to make the recommendation consistent with the rating legend.

Disclaimer This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Ambit Capital. AMBIT Capital Research is disseminated and available primarily electronically, and, in some cases, in printed form. Additional information on recommended securities is available on request. Disclaimer 1. AMBIT Capital Private Limited (“AMBIT Capital”) and its affiliates are a full service, integrated investment banking, investment advisory and brokerage group. AMBIT Capital is a Stock Broker, Portfolio Manager, Merchant Banker and Depository Participant registered with Securities and Exchange Board of India Limited (SEBI) and is regulated by SEBI. 2. AMBIT Capital makes best endeavours to ensure that the research analyst(s) use current, reliable, comprehensive information and obtain such information from sources which the analyst(s) believes to be reliable. 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In the UK, this report is directed at and is for distribution only to persons who (i) fall within Article 19(1) (persons who have professional experience in matters relating to investments) or Article 49(2)(a) to (d) (high net worth companies, unincorporated associations etc) of the Financial Services and Markets Act 2000 (Financial Promotions) Order 2005 (as amended) or (ii) are professional customers or eligible counterparties of ACUK (all such persons together being referred to as "relevant persons"). This report must not be acted on or relied upon by persons in the UK who are not relevant persons. 21. Neither Ambit nor ACUK is a US registered broker-dealer. Transactions undertaken in the US in any security mentioned herein must be effected through a US-registered broker-dealer, in conformity with SEC Rule 15a-6. 22. Neither this report nor any copy or part thereof may be distributed in any other jurisdictions where its distribution may be restricted by law and persons into whose possession this report comes should inform themselves about, and observe, any such restrictions. Distribution of this report in any such other jurisdictions may constitute a violation of UK or US securities laws, or the law of any such other jurisdictions. 23. This report does not constitute an offer or solicitation to buy or sell any securities referred to herein. It should not be so construed, nor should it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. The information in this report, or on which this report is based, has been obtained from publicly available sources that Ambit believes to be reliable and accurate. However, it has not been prepared in accordance with legal requirements designed to promote the independence of investment research. It has also not been independently verified and no representation or warranty, express or implied, is made as to the accuracy or completeness of any information obtained from third parties. 24. The information or opinions are provided as at the date of this report and are subject to change without notice. The information and opinions provided in this report take no account of the investors’ individual circumstances and should not be taken as specific advice on the merits of any investment decision. Investors should consider this report as only a single factor in making any investment decisions. Further information is available upon request. No member or employee of Ambit or ACUK accepts any liability whatsoever for any direct or consequential loss howsoever arising, directly or indirectly, from any use of this report or its contents.

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BFSI - Asset Management 25. The value of any investment made at your discretion based on this Report, or income therefrom, maybe affected by changes in economic, financial and/or political factors and may go down as well as go up and you may not get back the original amount invested. Some securities and/or investments involve substantial risk and are not suitable for all investors. 26. Ambit and its affiliates and their respective officers directors and employees may hold positions in any securities mentioned in this Report (or in any related investment) and may from time to time add to or dispose of any such securities (or investment). Ambit and ACUK may from time to time render advisory and other services to companies referred to in this Report and may receive compensation for the same. 27. Ambit and its affiliates may act as a market maker or risk arbitrator or liquidity provider or may have assumed an underwriting commitment in the securities of companies discussed in this Report (or in related investments) or may sell them or buy them from clients on a principal to principal basis or may be involved in proprietary trading and may also perform or seek to perform investment banking or underwriting services for or relating to those companies. 28. Ambit and ACUK may sell or buy any securities or make any investment which may be contrary to or inconsistent with this Report and are not subject to any prohibition on dealing. By accepting this report you agree to be bound by the foregoing limitations. In the normal course of Ambit and its affiliates’ business, circumstances may arise that could result in the interests of Ambit conflicting with the interests of clients or one client’s interests conflicting with the interest of another client. Ambit makes best efforts to ensure that conflicts are identified, managed and clients’ interests are protected. However, clients/potential clients of Ambit should be aware of these possible conflicts of interests and should make informed decisions in relation to Ambit services. Additional Disclaimer for U.S. Persons 29. 30. 31. 32. 33.

The research report is solely a product of AMBIT Capital AMBIT Capital is the employer of the research analyst(s) who has prepared the research report Any subsequent transactions in securities discussed in the research reports should be effected through Enclave Capital LLC. (“Enclave”). Enclave does not accept or receive any compensation of any kind for the dissemination of the AMBIT Capital research reports. The research analyst(s) preparing the email / Research Report/ attachment is resident outside the United States and is/are not associated persons of any U.S. regulated broker-dealer and that therefore the analyst(s) is/are not subject to supervision by a U.S. broker-dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account.

34. This report is prepared, approved, published and distributed by the Ambit Capital located outside of the United States (a non-US Group Company”). This report is distributed in the U.S.by Enclave Capital LLC, a U.S. registered broker dealer, on behalf of Ambit Capital only to major U.S. institutional investors (as defined in Rule 15a-6 under the U.S. Securities Exchange Act of 1934 (the “Exchange Act”)) pursuant to the exemption in Rule 15a-6 and any transaction effected by a U.S. customer in the securities described in this report must be effected through Enclave Capital LLC (19 West 44th Street, suite 1700, New York, NY 10036). In order to receive any additional information about or to effect a transaction in any security or financial instrument mentioned herein, please contact a registered representative of Enclave Capital LLC. 35. As of the publication of this report Enclave Capital LLC, does not make a market in the subject securities. 36. This document does not constitute an offer of, or an invitation by or on behalf of Ambit Capital or its affiliates or any other company to any person, to buy or sell any security. The information contained herein has been obtained from published information and other sources, which Ambit Capital or its Affiliates consider to be reliable. None of Ambit Capital accepts any liability or responsibility whatsoever for the accuracy or completeness of any such information. All estimates, expressions of opinion and other subjective judgments contained herein are made as of the date of this document. Emerging securities markets may be subject to risks significantly higher than more established markets. In particular, the political and economic environment, company practices and market prices and volumes may be subject to significant variations. The ability to assess such risks may also be limited due to significantly lower information quantity and quality. By accepting this document, you agree to be bound by all the foregoing provisions. Disclosures 37. The analyst (s) has/have not served as an officer, director or employee of the subject company. 38. There is no material disciplinary action that has been taken by any regulatory authority impacting equity research analysis activities. 39. All market data included in this report are dated as at the previous stock market closing day from the date of this report. Analyst Certification Each of the analysts identified in this report certifies, with respect to the companies or securities that the individual analyses, that (1) the views expressed in this report reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly dependent on the specific recommendations or views expressed in this report. © Copyright 2017 AMBIT Capital Private Limited. All rights reserved. Ambit Capital Pvt. Ltd. Ambit House, 3rd Floor. 449, Senapati Bapat Marg, Lower Parel, Mumbai 400 013, India. Phone: +91-22-3043 3000 | Fax: +91-22-3043 3100 CIN: U74140MH1997PTC107598 www.ambitcapital.com

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