MF margins to face pressure; volumes to compensate: ICICI Pru AMC

Synopsis

ICICI Prudential AMC's IPO is open for subscription, with Nimesh Shah expecting profitability pressures from growing AUM to be offset by falling unitholder fees. He highlighted operating profit growth as the key valuation metric for asset management businesses, which have historically required minimal capital for expansion.

Mumbai: Mutual fund profitability could come under pressure with the size of assets under management growing, but a fall in unitholders' fees could compensate for this squeeze, said Nimesh Shah, MD and CEO of ICICI Prudential Asset Management Company, whose ₹10,600 crore Initial Public Offer (IPO) is open for subscription. The issue, which will close on December 16 (Tuesday), was subscribed 2.11 times on Monday-- the second day of the offer.

"As the size of the fund grows, margins are coming down, but with TER (total expense ratio) coming down, volumes will grow, and volumes will compensate for margins," said Shah in an interview. "Lower charges will increase the probability of beating the index and will make your business more sustainable."

According to Shah, the most important financial parameter is operating profit. "Valuation in this industry is best viewed through the lens of operating profit growth," he said. "We have diversified across mutual funds, portfolio management services, alternative investment funds and offshore advisory, each with a different margin profile. The final margin is a mix of these."

ICICI Prudential AMC, the country's second mutual fund with assets under management of ₹10.87 lakh crore, is the sixth in the 50-member strong industry to tap the IPO market. HDFC Mutual, Aditya Birla AMC, UTI, Nippon and Canara Robeco are among the fund houses that have made their stock market debut in recent years

The IPO values ICICI Prudential at ₹1.07 lakh crore. The market cap of HDFC Mutual Fund, the third largest with AUM of ₹8.8 lakh crore, stood at ₹1.11 lakh crore

"Over the past several years, asset management businesses have grown at healthy rates while requiring minimal incremental capital," said Shah. "Businesses that deliver consistent growth without heavy capital deployment tend to command higher valuation multiples."

Prudential Corporation Holdings, the joint venture partner in the company, will offload up to 14.41% of ICICI Prudential AMC's equity.

Since the issue is entirely an offer for sale (OFS) by Prudential, the company will not receive any proceeds from the IPO.

Shah said Prudential's decision to sell a stake in the AMC in the IPO has come after remaining invested in the business since 1998.

"They are monetising a part of their investment after 27 years and are selling only a portion," he said. ICICI Bank will continue to be the majority shareholder of the firm with a 53% stake in the joint venture, said Shah.

Business Strategy

ICICI Prudential's focus on hybrid products has made it one of the biggest asset managers in the category. Its market share in the hybrid category is around 25% compared to 13.6% in equity assets and 13.6% overall. "Our strength in hybrid and asset allocation-oriented strategies has been built over multiple market cycles by focusing on risk-adjusted returns," said Shah.

It is also sharpening its focus on the alternative investment business including equity-focused Portfolio Management Services (PMS), Alternative Investment Funds (AIFs), private credit, and office yield funds.

Shah said between FY23 and FY25, alternative AUM has registered a compounded annual growth rate of 43.3%. Currently, mutual funds account for 93% of its assets while alternatives account for the balance 7%.