IDFC might have found a buyer for its Rs 650-billion mutual fund (MF) subsidiary in the form of KKR-backed Avendus Capital but most industry participants 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 Rs 35 billion in valuation for the MF arm. This put off buyers as 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 Rs 1.1 billion in FY16, profit after tax halved to Rs 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 assets under management (AUM) of Rs 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 retail flows, institutional money is not sticky and can move in and out at a swift pace.
Illustration by Ajay Mohanty
In current market conditions, even industry leaders are not finding it easy to get the valuation multiple IDFC is seeking. HDFC MF, which is eyeing a valuation of Rs 233 billion in its proposed Initial Public Offer (IPO) is available at a much lower price to earnings multiple. Sources say the country’s second-largest fund house has lowered the valuation from 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 Rs 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 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 industry say price to AUM is a flawed approach as earnings are a closer reflection of any AMC’s underlying value.
Valuing a fund house at this juncture could be tricky, as industry assets 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 may not be of much concern. That said, the AMC is weak in distribution and has a relatively new team at the helm,” he said.