Asset Management. SEBI notifies significant changes to TER structure. 18 September 2018 India Asset Management Sector Report

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18 September 2018 India Asset Management Sector Report Asset Management SEBI notifies significant changes to TER structure In its board meeting held today, SEBI has notified reductions in the maximum TER that can be charged to mutual fund schemes. The regulator has also notified that all commissions and expenses are to be expensed from the MF schemes alone and not through any other route (AMC/Trustee P&Ls a common industry practice). Moreover, AMCs will no longer be allowed to pay out upfront commissions (except for certain relaxations in the case of SIPs). While the move is a positive step towards increasing reach and reducing costs for retail MF investors and also improves transparency, it has a negative impact on profitability for AMCs. We believe there will be a period of growth/profitability reset as the industry reconfigures to the new cost structure. We expect the brunt of the impact to be borne in equity MF schemes (which are heavily dependent on distributors, with direct plan accounting for only 17% for the industry). Moreover, as shown in Exhibit 1 below, the cut in TER is larger for larger MF schemes. We have cut our PAT estimates for RNAM by 7% / 15% in FY19/FY20E, as a result of the fee yield compression from TER cut. Brunt of TER cut to be borne by larger schemes : As shown in Exhibit 1 below, larger TER cuts have been handed out for large MF schemes. This is expected to have a negative impact on AMCs which operate large MF schemes. Equity MF schemes with AUM above INR 20bn, will have to reduce their TER by 15-70bps. The brunt of the impact of TER reduction is expected to be borne by equity MF schemes, which largely operate close to the current TER cap of 2.1%. This is mainly because they are heavily dependent on commission payouts to distributors (83% of industry equity AUM is sourced through distributors as of Aug-18). Sameer Bhise sameer.bhise@jmfl.com Tel: (91 22) 6630 3489 S Parameswaran s.parameswaran@jmfl.com Tel: (91 22) 66303075 Karan Singh CFA FRM karan.uberoi@jmfl.com Tel: (91 22) 66303082 Nikhil Walecha nikhil.walecha@jmfl.com Tel: (91 22) 66303027 Bunny Babjee bunny.babjee@jmfl.com Tel: (91 22) 66303263 Company Reco. TP Previous TP RNAM BUY INR 275 INR 330 Blended TER for Equity MF schemes could reduce by 20-35bps : We have analysed the larger equity MF schemes, comprising 70-90% of Equity MF AUMs of HDFC AMC, Birla SL AMC and RNAM. Our analysis suggests that blended equity MF TER for RNAM/ Birla SL AMC could reduce by c.24bps / 28bps, whereas the impact would be higher for HDFC AMC (UNRATED), as it operates several large equity MF schemes (5 of its schemes are above INR 150bn in AUM forming 75% of equity AUM). AMCs with higher direct-plan AUM contribution to benefit : AMCs with stronger contribution of direct plan AUMs are expected to be better off, as they are less reliant on upfront commission payouts. Moreover, overall fee yields will be less detrimentally impacted from the TER cuts for AMCs with high direct-plan contribution. Direct plan as a % overall equity MF AUM was 19 % / 16% / 21% for HDFC AMC, RNAM and Birla SL AMC as of Aug- 18. Withdrawal of upfront commissions could lead to higher trail payouts? While management fee yields for AMCs will come under pressure as a result of the reductions in TER, we believe the withdrawal of upfront commissions could result in higher trail payouts as the AMCs could face backlash from distributors. Moreover, AMCs will have to expense all the trail commission payouts through the P&Ls of the schemes alone (and not through AMC P&Ls as was prevalent earlier). We believe, that the reduction in the allowable TERs, coupled with higher trail payouts could result in further compression in yields for AMCs. We expect management fee yields for RNAM to reduce by 9 / 19bps in FY19E/ FY20E (impact on FY19E is only for half year). Revision in earnings, target price : We expect management fee yields for RNAM to reduce by 9 / 19bps in FY19E/ FY20E (impact on FY19E is only for half year). As a result, we have cut our earnings estimates for RNAM by 7% / 15% for FY19E / FY20E arising from the compression in management fee yields. We cut our target price for RNAM to INR 275 (from INR 330 previously), valuing the company at 27x FY20E EPS. JM Financial Research is also available on: Bloomberg - JMFR <GO>, Thomson Publisher & Reuters S&P Capital IQ and FactSet Please see Appendix I at the end of this report for Important Disclosures and Disclaimers and Research Analyst Certification. JM Financial Institutional Securities Limited

Key Charts Exhibit 1. Reduction in TER for equity MF schemes Larger schemes to face the brunt Equity MF Scheme AUM (INR bn) Maximum TER allowed (old) Maximum TER allowed (new) TER Impact (bps) 0-1 2.50% 2.25% -25 1-4 2.25% 2.25% - 4-5 2.00% 2.25% 25 5-7 2.00% 2.00% - 7-7.5 1.75% 2.00% 25 7.5-20 1.75% 1.75% - 20-50 1.75% 1.60% -15 50-100 1.75% 1.50% -25 100-150 1.75% 1.45% -30 150-200 1.75% 1.40% -35 200-250 1.75% 1.35% -40 250-300 1.75% 1.30% -45 300-350 1.75% 1.25% -50 350-400 1.75% 1.20% -55 400-450 1.75% 1.15% -60 450-500 1.75% 1.10% -65 500- onwards 1.75% 1.05% -70 Source: Company, JM Financial # These figures exclude additional 5bps (in lieu of exit load) and additional 30bps (on meeting B30 criteria) Exhibit 2. RNAM : Revision in earnings estimates EPS (INR) Consol. PAT (INR mn) FY 19E FY 20E FY 19E FY 20E Revised Estimates 9.1 10.1 5,591 6,209 Previous Estimates 9.8 11.9 6,017 7,309 Change New vs old -7% -15% -7% -15% Source: Company, JM Financial JM Financial Institutional Securities Limited Page 2

Exhibit 3. RNAM : Impact of reduction in TER on major Equity MF schemes Reliance MF Major Equity MF Schemes Monthly avg AUM (INR mn) Existing TER (incl. tax) Existing TER - Net of tax (i.e. adjusting for 18% GST) New regime (without additional 35bps) New regime (net of tax) (with B30 adjustment and additional 5bps)* Reliance Vision Fund 32,135 2.17% 1.84% 1.60% 1.69% Reliance Growth Fund 69,264 2.10% 1.78% 1.50% 1.55% Reliance Focused Equity Fund 45,125 2.24% 1.90% 1.60% 1.75% Reliance Small Cap Fund 73,016 2.31% 1.96% 1.50% 1.71% Reliance Value Fund 33,197 2.22% 1.88% 1.60% 1.73% Reliance Multi Cap Fund 99,695 2.16% 1.83% 1.50% 1.58% Reliance Equity Hybrid Fund 1,42,760 2.26% 1.92% 1.45% 1.62% Reliance Equity Savings Fund 26,281 2.09% 1.77% 1.60% 1.65% Reliance Banking Fund 30,984 2.16% 1.83% 1.60% 1.68% Reliance Pharma Fund 24,143 2.42% 2.05% 1.60% 1.90% Reliance Tax Saver (ELSS) Fund 1,02,633 2.28% 1.93% 1.45% 1.63% Monthly avg AUM (of above schemes) 6,79,233 2.22% 1.89% 1.51% 1.65% Total Equity monthly avg. AUM (August) 9,34,915 % of equity AUM covered by above schemes 72.7% Source: Company, JM Financial * Additional 5 bps (in lieu of exit load) + upto 30bps on meeting B30 AUM / gross inflow criteria Exhibit 4. HDFC AMC : Impact of reduction in TER on major Equity MF schemes HDFC MF Major Equity MF Schemes Monthly avg AUM (INR mn) Existing TER (incl. tax) Existing TER - Net of tax (i.e. adjusting for 18% GST) New regime (without additional 35bps) New regime (net of tax) (with B30 adjustment and additional 5bps)* HDFC Balanced Advantage Fund 3,84,883 2.25% 1.91% 1.20% 1.36% HDFC Hybrid Equity Fund 2,28,866 1.95% 1.65% 1.35% 1.40% HDFC Equity Fund 2,21,684 2.06% 1.75% 1.35% 1.40% HDFC Mid Cap Opportunities Fund 2,15,573 2.11% 1.79% 1.35% 1.40% HDFC Top 100 Fund 1,54,820 2.02% 1.71% 1.40% 1.45% HDFC Equity Savings Fund 74,990 1.94% 1.64% 1.50% 1.55% HDFC TaxSaver 71,072 2.11% 1.79% 1.50% 1.55% HDFC Small Cap Fund 48,161 2.14% 1.81% 1.60% 1.66% HDFC Capital Builder Value Fund 37,090 2.31% 1.96% 1.60% 1.81% HDFC Children s Gift Fund 23,843 2.22% 1.88% 1.60% 1.73% Monthly avg AUM (of above schemes) 14,60,982 2.10% 1.78% 1.35% 1.43% Total Equity monthly avg. AUM (August) 16,09,300 % of equity AUM covered by above schemes 90.8% Source: Company, JM Financial * Additional 5 bps (in lieu of exit load) + upto 30bps on meeting B30 AUM / gross inflow criteria JM Financial Institutional Securities Limited Page 3

Exhibit 5. Birla SL AMC : Impact of reduction in TER on major Equity MF schemes ABSL MF Major Equity MF Schemes Monthly avg AUM (INR mn) Existing TER (incl. tax) Existing TER - Net of tax (i.e. adjusting for 18% GST) New regime (without additional 35bps) New regime (net of tax) (with B30 adjustment and additional 5bps)* Aditya Birla Sun Life Tax Relief 96 67,427 2.26% 1.92% 1.50% 1.67% Aditya Birla Sun Life Balanced Advantage Fund 32,429 2.38% 2.02% 1.60% 1.87% Aditya Birla Sun Life Equity Hybrid 95 Fund 1,48,738 2.29% 1.94% 1.45% 1.64% Aditya Birla Sun Life Frontline Equity Fund 2,15,350 2.18% 1.85% 1.35% 1.45% Aditya Birla Sun Life Focused Equity Fund 42,431 2.36% 2.00% 1.60% 1.85% Aditya Birla Sun Life Equity Fund 99,984 2.24% 1.90% 1.50% 1.65% Aditya Birla Sun Life Equity Advantage Fund 64,304 2.35% 1.99% 1.50% 1.74% Aditya Birla Sun Life MNC Fund 35,435 2.29% 1.94% 1.60% 1.79% Aditya Birla Sun Life Midcap Fund 23,563 2.40% 2.03% 1.60% 1.88% Aditya Birla Sun Life Small Cap Fund 22,751 2.42% 2.05% 1.60% 1.90% Aditya Birla Sun Life Pure Value Fund 41,463 2.35% 1.99% 1.60% 1.84% Monthly avg AUM (of above schemes) 7,93,874 2.27% 1.93% 1.47% 1.65% Total Equity monthly avg. AUM (August) 9,35,314 % of equity AUM covered by above schemes 84.9% Source: Company, JM Financial * Additional 5 bps (in lieu of exit load) + upto 30bps on meeting B30 AUM / gross inflow criteria JM Financial Institutional Securities Limited Page 4

APPENDIX I JM Financial Institutional Securities Limited (formerly known as JM Financial Securities Limi te d) Corporate Identity Number: U67100MH2017PLC296081 Member of BSE Ltd., National Stock Exchange of India Ltd. and Metropolitan Stock Exchange of India Ltd. SEBI Registration Nos.: Stock Broker - INZ000163434, Research Analyst INH000000610 Registered Office: 7th Floor, Cnergy, Appasaheb Marathe Marg, Prabhadevi, Mumbai 400 025, India. Board: +9122 6630 3030 Fax: +91 22 6630 3488 Email: jmfinancial.research@jmfl.com www.jmfl.com Compliance Officer: Mr. Sunny Shah Tel: +91 22 6630 3383 Email: sunny.shah@jmfl.com Definition of ratings Rating Meaning Buy Total expected returns of more than 15%. Total expected return includes dividend yields. Hold Price expected to move in the range of 10% downside to 15% upside from the current market price. 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