Several MF players give IDFC a miss on valuation concerns
Mirae AMC, Reliance MF opt out of race despite showing interest earlier
IDFC might have found a buyer for its ~650-billion mutual fund (MF) subsidiary in the form of KKR-backed Avendus Capital but most sectoral players have opted out of the race on valuation concerns.
According to sources, Mirae AMC and Reliance MF were among those which had earlier evinced interest but didn’t pursue the deal, as they felt IDFC was seeking a steep valuation. Sources say IDFC was holding out for ~35 billion in valuation for the MF arm. This put off buyers — at that valuation, IDFC was looking for an earnings multiple of 65 times its trailing 12-month earnings. It didn’t help that the MF had seen its profits shrink in the past three years and had a lower share of equity assets.
IDFC declined to comment for this report. From ~1.1 billion in FY16, profit after tax halved to ~540 million in FY18. Equity-oriented funds, which typically have a higher contribution to profitability, accounted for 30 per cent of the asset management company's (AMC's) total of assets under management (AUM) of ~650 bn as of end-March. According to people in the know, IDFC had also reached out to Mahindra MF but didn’t find any takers there due to the AMC’s institutional focus.
Debt-oriented schemes and money market schemes, a favourite among institutional investors, account for 44 per cent of IDFC MF’s overall AUM, shows data from Value Research. Unlike flow from individual investors, institutional money is not sticky and can move in and out at a swift pace.
In current market conditions, even leaders are not finding it easy to get the valuation multiple IDFC is seeking. HDFC MF, which eyeing a valuation of ~233 billion in its proposed Initial Public Offer (IPO) of equity, is available at a much lower price to earnings multiple. Sources say the country’s second-largest fund house has lowered the valuation below what it had earlier envisaged. Experts think it is difficult to justify such premium valuations, when one of the most profitable fund houses in the country has tempered its expectation.
Even at normalised earnings of ~900 million, IDFC MF is seeking an earnings multiple of 39 times, which analysts reckon is still on the higher side. “Most recent deals have happened at 20-30 times the trailing-12 month earnings. If an AMC has a higher share of equity assets and better profitability, only then are higher valuations justified. Debt schemes are typically less FY12 FY13 FY14 FY15 FY16 FY17 FY18
100 260 910 700 1,100 970 540
profitable,” said an analyst at Ambit Capital.
To be sure, in terms of price to AUM, IDFC is seeking a valuation that is five per cent of its total AUM. However, analysts tracking the MF sector say price to AUM is a flawed approach and earnings are a closer reflection of any AMC’s underlying value.
Valuing a fund house at this juncture could be tricky, as the assets of the sector have grown at a compounded annual rate of 25-30 per cent in the past three years. The profits of large-sized fund houses are expected to grow at a fast clip as assets swell and fixed costs remain the same.
“The deal might be suitable for an entity that is new to the MF space and is willing to write a big cheque,” said a senior fund official.
He added that while IDFC MF was historically seen as a debt fund house, it had added equity assets over the past few years. “The asset profile might not be of much concern. That said, the fund is weak in distribution and has a relatively new team at the helm,” he said.