The industry veteran and chief of India’s fourth largest AMC seems unfazed by competition, even as he takes in the early subscription numbers of the big Aditya Birla Sun Life AMC IPO.
Read on for A Balasubramanian’s insights on the growth drivers for the AMC business and his take on the markets.
To see the video, click here: https://youtu.be/8NWF6gIjFA0
Q1. Being one of the biggest AMCs in India, you are also one of the biggest contributors to growing investor participation in India. Can you give us a sense of how you have grown along with Bharat?
The journey has been a very interesting one. Starting off early in 1994, from a small size to a ₹3 Lakh Crore size, in fact, the numbers as reported by RHP for June quarter ending indicate about ₹2.97 Lakh Crore average assets. We have grown our equity assets from Zero in the year 1994 to about ₹1.77 Lakh Crore average assets as of June, 2021. We also have an equity asset and management of ₹1.27 Lakh Crore.
You spoke of Bharat, we do have a large customer base of 72 Lakh customers, of which our unique customer base is about 51 Lakh customers. In the last couple of years, we as an AMC, have been focusing on building our reach across the country by creating a physical presence in many parts of the country in order to help investors grow their investments in mutual funds. At the end of the day, we, as a fund house, have been pioneers in making people understand a simple SIP product as a way of building their future.
These kinds of assets are simple products, no rocket science, something that helps wealth creation over a long period of time. We, as a mutual fund, are committed towards expanding the market, building reach in terms of increasing the customer base, by offering products that are simpler and can have a huge impact on customer’s lives in terms of savings for the long term.
Q2. What is the company’s main competitive advantage and what will be your main growth drivers going forward?
Well, to start off take pride in the brand you are associated with. Aditya Birla Group is a household brand in the country and they have a huge commitment towards building the business. This ensures we are staying committed for generations to come, not just one generation. So, I believe, that is the first and foremost thing.
Secondly, we as a fund house, have been in the industry for a long time and have seen the various ups and downs, as well as the market scenario today, (the index is at 60,000), we have seen the lowest levels, we have seen many crises, now we have seen the high in the market as well. Having witnessed various cycles in the market, as a fund house, we are able to manage risk better while generating returns. We have done this for many years. We manage money effectively, taking into account the potential risk involved in every money management activity that we do.
And the third would be, the uniqueness we have in terms of the commitment towards expansion. As a fund house, that is something that we have done very clearly by taking our mutual funds to every nook and corner of the country, by creating emerging market channels, as we call it.
Although these things beyond a point cannot have a unique advantage, repeatedly doing things better and better which are simple in nature have a huge impact on the customer.
Lastly, we see huge potential and have invested heavily in growing technology platforms. To be agile and be informed about the growing needs of the customers, we have created a seamless transaction platform for customer onboarding as well as for selection of products. The platform handles customer needs by giving proper advice or insights.
That's something we have been building for the millenials and allocated all features that we have provided as Value Added Services, including the digital platform transactions and providing a seamless way of engagement. We, as a fund house have been the pioneers in providing this to the customers.
Q3. Which markets will drive growth for mutual funds and how are you positioned there?
The market is divided into three parts.
One is the top cities like Mumbai which will remain one of the largest contributors from an assets point of view as well as from a value point of view as Mumbai's per capita income is very high, population is also high.
Now we have a differential strategy with each of the markets, there are a set of people that focus on the T30 market, there are a set of people who only focus on the B30 market. Now as you go down in the B30 market, in order to reach out to the small markets, we should also have a channel called emerging market channels.
So, all the three channels are clearly focussing on building their market bigger in size with respect to their industry size. So, a Mumbai person will not worry about what's happening in Chandigarh, a Chandigarh person will not worry about what's happening in, say Chennai. So, in each of the markets we’re looking inward and building the business.
Secondly, in every branch location in which we operate, we work on a Hub and spoke model. Every branch manager as well as people at the branch location know very clearly the location which he/she has to cover, whether in terms of knowledge or product selling.
Now, that is how we have been going about building our distribution network using this strategy. Clearly, we have been seeing faster growth coming from smaller markets.
We will continue to compete in the bigger markets such as Mumbai but when we go to the smaller market, there is a space where 5-6 players compete. Therefore, our own objectives have to be carried out with specific focus, specific target, and a person who is driving this religiously has to drive it on a day-to-day basis while looking at the productivity of every branch location.
Q4. In the upcoming IPO, promoters are diluting 13.5% equity. It's an offer for sale, so the money raised won’t go to the company. What is the reason behind this?
As a business, it is very clear that we already have a net worth of roughly ₹1,850 Crores roughly and every year we generate profits. These profits are accommodated to some extent into the balance sheet. It appears in the form of our net worth and becomes part of our treasury portfolio. Some portion of it, we give it in the form of dividends to shareholders. That is how we have been building our business. It doesn’t need any cash for building the business, in fact we keep giving back the cash and this cash actually becomes a dividend for the shareholders.
So from a Shareholder’s point of view, the 13.5%, that you mentioned about - 12.5% will come from Sun Life, 1% comes from Aditya Birla Capital. Once the company is in the listed space, it can help more people participate in the industry’s wealth creation platform by enabling people to become shareholders of our company.
At the same time, it can also create a currency to reward employees on one side. Today, employees can be rewarded not through the cash, employees can also be rewarded through ESOP plans.
At the same time, there is also an opportunity for us as a fund house, for buying opportunities of any other AMCs or buying opportunities of any other business that are relevant to us. Now we will have a currency of equity shares. We have a currency which can be used as an exchange for cash. So this is the way we have gone about building the whole model.
The company doesn't need money. On the contrary, whatever cash flow that we generate will be used for the purpose of dividend distribution subject to the board approval.
Q5. We have seen Indian markets outperform over the last one year. Your equity mix as a part of total AUM has also increased, so what has been your strategy here?
See, clearly from the customer point of view, I think as a fund house, our strategy involves planning and giving a product which is more suitable - a mix of equity and fixed income. We don’t want only one product versus other competitors. We believe in a portfolio approach, and within the portfolio approach, definitely the overweight that one has to build is on equity. That has been one of the big thought processes that we have.
Growth of equity assets is a key for building wealth for the customers and building SIP routes in a way of investing. Making people invest in equity has been another big point that we have been advocating. As a result of that, today we have 38% of our assets under management coming from equity. Clearly, given the fact that a large number of investors in India have not been equity investors and also given the fact that the longer term goals of any individual are met through investing in equity and mutual funds schemes, as a mutual fund, we have a clear strategy to build the size further. So, it has two advantages: It benefits customers as their long term goals are met because with equity, the power of compounding is very high.
Meanwhile, during volatility in equity markets, fixed income will come in handy in the overall portfolio construction.
And from a business point of view, from an AMC point of view, from a shareholders point of view, the profitability could come from both equity and fixed income. These will continue to drive the top line and bottom line. So that's how the profit gets generated. And given the fact that we don't need an incremental number of people to drive the business and therefore the cost is also kept under control, and then the size starts increasing.
This is a beautiful model, size keeps increasing, revenue keeps increasing, the cost remains flat, and the profitability starts improving. So that is the way we have built the whole model. Clearly equity will play a huge role. And while doing that in overall portfolio allocation, fixed income will also play a role.
Q6. We understand that the industry’s monthly SIP contribution is nearly ₹ 10,000 Crore. How are you building your company's SIP book?
See in fact, we have roughly ₹800 Crore SIP subscription that we have that comes in every month. It used to be about 9-9.5 %, which we used to have in the past (roughly). At the same time, if you look from 2016, till date, we used to have a monthly subscription coming in from SIP investors of about 8,60,000 in numbers. Today, we have 20 lakh customers for our SIPs every month. And we believe building SIP through equity asset management is key to building a successful and sustainable business model. And as a fund house, we've actually pioneered this. In fact, we also have been offering an SIP product, bundled with the benefits of an insurance policy.
Right now, of course, that product is on hold as post pandemic, the cost of insurance has gone up. But as the cost settles down, we will be able to offer investors a bundled product which can give them long-term, SIP-led competitive returns and some insurance cover. We have customers who are choosing this kind of product as well for saving their money for the long term.
Q7. If we talk about the fundamentals of the company here, the company has not seen revenue growing, despite growth in the profit and the profit margins. What do you think is the reason behind that?
The revenue has been growing. Without revenue growth, profit can't grow. Right?
So basically, the accounting methodology changed. About two years back, SEBI made it uniform for all mutual funds to recognize the revenue in a certain pattern. So all of us were recognizing the revenue differently earlier. Now, all the revenue from the mutual fund needs to come to the AMC. Earlier, all the spending used to happen from the AMC, but now with the accounting methodology change, only after meeting all the distribution and other expenses, the balance comes to the AMC in the form of revenue. Therefore there is no drop in the revenue. Without the increase in revenue or without increase in size. profitably can't go up.
Q8. Outside of mutual funds, your AMC also has other verticals. How are you planning to leverage those and build scale?
One of the growing needs that we have seen in the country is the pie of savings keeps increasing. There are many people who are becoming richer and many of the rich HNIs, medium HNIs have family offices. Most of these people have built a business but do not have the strong advisory capability. We, as a fund house, have a separate vertical for offering alternate solutions, in the form of PMS, Real estate fund offering, and also the ETF and Passive as a product. That is also a category that we're building simultaneously.
So we have an alternate vertical to cater to the growing needs of the HNIs, medium HNIs, family offices and pension funds. The same team caters to the needs of the people who have got higher wallet cheques and at the same time, helps increase the revenue and the bottom line without increasing the cost.
In addition to that, we also have a separate vertical to cater to the growing needs of NRIs in the country, in the global market. We have done this by creating our own presence in Singapore and Dubai for offshore business units. In fact, as I speak, we are evaluating the options of having our presence in GIFT city in Gujarat. And that can actually cater to the growing needs of Indian investors who want to invest overseas and global investors who want to invest in India by creating the route of a transaction platform in GIFT city.
Q9. How do you plan to tackle the growing competition in the market? Also, of late, many new retail investors have tasted success with direct equity investing as well. How will you address this shifting trend in customer behaviour?
Sure Thing. Interestingly, when we started our business in 1994, there were 3 AMCs, there are 45 AMCs today. So the competition has always been growing all these years. Now, of course, the competition is further increasing, with SEBI relaxing some of the registration norms, which is causing more and more people to come in without making a profit but by putting capital. You can have ₹100 Crores in capital, and not make a profit, but you can still run the business. Earlier, the condition was that mutual funds would have to bring in capital, and would also make profit. After relaxation, more and more players are coming in, but as per my own belief and the base of my past experience says that more the players, the merrier for the industry. The more expansion happens, the more the pie will increase. Definitely existing players like us have a huge track record of managing money for the investors and would have some added advantage and get the increased share of pie coming into us as well.
On the other point, definitely a lot of people have come into the equity market. We have seen a one-sided bull market in the last one and a half years. People have used their excess time in hand, during the lockdown period, to try their luck in the equity market. It's a good sign. I think, in a way people have actually understood the equity market, awareness levels have gone up.
For those who are coming to the equity market directly, my own belief is that they will have to create an alternate investment route by investing in mutual funds as well. The mutual fund will give them a boring, longer term, wealth creation solution. Direct equity will give them the pleasure of seeing the trading gains. There is of course, some kind of glamour there in buying and selling on your own gut feelings. But while that'll be there, the larger portfolio for the longer term goal needs will be met out of the mutual funds, from SIP or investing the lump sum in equity or alternate portfolio for the longer term for various goals that individuals may have.
Q10. Do give us your take on the markets. The big question here, will the bull run continue?
I think every bull market goes through a bad phase as well. We must remember, the market is never one sided, it goes up, it goes down. So today's index is at 60,000, but tomorrow the market may go through some downfall as well. What I've realized over a period of my years of experience is when I put it onto a chart and looked at the market every three years. How does it behave?
I have realised that every three years, when the market forms a new high, it also forms a bottom within the same period. That bottom is higher than the previous bottom. In the next three years, the bottom will be higher than the previous three year’s bottom. That's why I think that every investor has to understand that in the long run, the market will give an upward trend in terms of growth; but in the short term the market will go through fluctuations. But having said that, I definitely think, fundamentally, while the market has gone up quite substantially, the valuation will always remain a question mark. At the same time, liquidity in the system is very, very large.
The third is the China factor, which I think has recently developed. Increasingly, global investors are starting to look for alternatives to China. Therefore, India became one of the prominent investment destinations for overseas investors. And hence, the one simple advice I always give to the customers, is that if you come into the equity market, you look at investment from a longer term point of view, market fluctuations will make your blood pressure go up and down. Sometimes joy will go up, sometimes pressure will go up. That's something that is part and parcel of the game, but I have a belief that the equity market in the long run will actually continue to keep the uptrend.
Q11. What advice would you give retail investors?
So, this is to the people who have just entered the market market, whatever money you have made, be happy with that. I think, from a platform like yours has been increasing the awareness about investing in equity, which is a great service that you are all doing to the large pool of growing investors in the country.
While doing that, investors should build their portfolio in a manner that they can actually make the money over a period of next 3 or 5 or 10 year period, based on the compounding that they get. In the same way, don't ignore mutual funds. You have direct equity, no doubt. You also have the SIP kind of portfolio that can go simultaneously along with your direct equity or trading portfolio. And these two going hand in hand, is something that will give greater success, learning and better outcomes.