Sundaram Mutual Fund has got CII and Sebi approval to acquire Principal AMC. Can you tell us what this means? What would be the status of AUMs when all the synergy benefits would start to show in the company?
We have received all the approvals. We expect to close the transaction by the end of the month. So some of the synergies like real estate piece will come and sweat away. Some of this will be on the employees. We will be taking a very fair approach to the overall scenario and I would give six months to a year to get the full operational synergies in place.
The other thing is the advantage in terms of the addition of half a million customers from Principal to Sundaram’s table which will take our total customer base to 2 million. Second, it will improve our ranking within the equity and hybrid space which has been a key focus area for Sundaram from 2017 to 2015 and it will add 40 bps to our overall market share. It brings three funds of ours into the top 10 in the industry — the midcap, the large and midcap and the multicap funds — will now be among top 10 funds in their respective categories, holding 5% market share each. These are the big economies of scale which we expect to emerge.
In terms of M&A, do you expect activity to pick up because the SIP numbers are not dropping and the flow is continuing?
Yes, M&A activity will pick up now. A lot of foreign AMCs have been exiting India in the past for various reasons and there could be interesting opportunities in the revenue space because what the industry players have built in terms of scale, for others to take advantage of the existing infrastructure makes sense.
Where do you think the mutual fund industry is heading?
The industry is in a very sweet spot. What is happened thanks partly to the pandemic and thanks also to the fact that consumer surpluses have been increasing but interest rates have been dropping. Today, a three-year fixed deposit is fetching just 5-6% and post tax it would be 4.5% in hand.
So the bar for the mutual fund industry to beat, to get customers to switch from their traditional banking, post office kind of savings to the mutual fund industry, has never been better.
Number two, the fact is that the Indian economy is poised to bounce back very strongly. Domestic economic growth translates to EPS growth of the stock market which translates to mutual fund returns which then makes it the only asset class capable of consistently beating inflation.
These four factors are coming together and over the next half a dozen years, one can expect high single digit growth for the economy translating into low double digit growth for the broad stock market. Mutual funds should be able to beat that comfortably over the period. The second is investors who come in will be very happy. The third is the Mutual Fund Sahi Hai campaign.
The AMFI campaign allowed the industry two things; to pool together money, so that one could do big ticket advertising. Second, it allowed us to get celebrities like Dhoni and Sachin Tendulkar and others to come in because individual AMCs are not allowed to use celebrities. It helped cut the clutter and today the whole campaign has also shifted to making sure that the right kind of investments have to be made. One ad says that we are not a magic funds, but are mutual funds; the risk and reward goes together. Overall, the industry has done a very good job in terms of making sure the investors come with the right mindset and the results are being seen in two places; one is the SIP book that has shown almost a 40% rise over the same period last year. Number two, is the kind of support that the new NFOs from the mutual fund industry are getting.
For the first time this year, we saw five-digit NFO collections historically from two of the AMCs. So the shift from physical assets to financial assets and within financial assets, from guaranteed interest bank deposits to the stock market is well established now and the mutual fund industry is poised for a strong double digit growth over the next decade.
India’s penetration of the stock market as a percentage of the GDP, mutual funds as a percentage of the GDP is very low compared to even comparable countries like Korea and Taiwan and other geographies, forget the US and Europe. The industry is poised for very high growth and our acquisition principal is not so much from the synergies as the desire to scale up. Today we are at about Rs 43,000 crore principal for Sundaram. Reaching Rs 50,000 crores and then Rs 100,000 crore is a matter of time.
Scale is very important for this industry because the fixed cost industry has a high operating leverage with branch networks, sales people and distribution force. So the greater the scale, the better the economies of scale. True synergy will come from scale which we will achieve in a few years from now.
