The IPO of ICICI Prudential AMC, the country's second largest mutual fund company, is open for subscription. This IPO worth more than Rs 10 thousand crore has been subscribed more than twice on the second day. Tuesday is the last day to apply for this. In such a situation, Jagran Business Editor Skanda Vivek Dhar spoke to Chintan Haria, Principal Investment Strategist of ICICI Prudential AMC. You can also watch this conversation in the video above.
For some time now we have been seeing that most of the IPOs are coming in the form of offer for sale. Your IPO is also 100% offer for sale. Don't you need money for business growth? How will you explain this?
The business of an asset management company is very capital light. There is no need for much capital here. Today we have assets under management worth around Rs 10 lakh crore. Operating profit is also quite good. We have also said in our RFP that we will give minimum 60% of the future profit as dividend because we do not need capital.
ICICI Prudential AMC has two promoters. ICICI Bank holds 51% stake in it and Prudential Corp holds 49%. Prudential has been an investor in this joint venture for more than 25 years and is now selling some of its stake through this IPO. Therefore this IPO is an offer for sale. ICICI Bank is not selling its stake in it, on the contrary the bank has bought 2% stake from Prudential at the IPO price.
So can we say that there was no need for you to launch an IPO and this IPO is coming only on the demand of Prudential Corp?
Of course, you are right that Prudential which is a shareholder, they decided internally that they have to sell some stake to them. After this, this IPO came with the consent of the board.
Talking about valuation, your IPO is in the upper price band at around 40 PE based on FY25 earnings. If we look at the big AMCs already listed in the market, the shares of HDFC AMC are trading at around PE of 44 and the shares of Nippon India are trading at around PE of 41. Don't you think you should have given investors some more scope in valuation?
The comparison you made was based on price to equity i.e. price to earnings ratio, but we consider the operating profit metric very important. ICICI Prudential Asset Management Company is the largest AMC in the country in terms of operating profit. Our share in the profits of the mutual fund industry is more than 20% and this is an important metric. If you compare it with other customer facing businesses in India, you may not find this IPO that expensive.
One thing that can be known from the way mutual funds, insurance companies and sovereign funds have participated in the pre-IPO and anchor investment rounds is that the confidence of India's mutual fund industry is quite strong for long-term growth.
Even after the IPO, the promoters' stake in ICICI Prudential AMC will remain around 90%. According to SEBI rules, you will have to reduce it to 75 percent in 3-5 years. That means 15% share and offload will have to be done. Can Icici Bank also sell its stake in this?
You are right, as per the current regulation of SEBI the minimum share holding has to be 75%. According to the regulations, it has to reach the minimum level in three or five years. You start at 10% and then move up to 25%. The stake that Prudential is currently selling is 12.5%, including 10% and 2.5% pre-IPO. The further 12.5% stake to be sold will also be from Prudential. ICICI Bank has said that it will retain its stake at 51% and will not sell shares in the market. ICICI Prudential AMC will remain a subsidiary of ICICI Bank.
The mutual fund industry has grown a lot in the last decade. Due to this many companies have come into the market. As of today, 50 companies are present in the industry. How will you save your market share in such a competitive market?
Our market share has remained around 13% for the last 10 years. Many new players came during this period. We have been able to maintain our market share because we have managed our products well. And we do not consider the new players who are coming as competition, we consider them as market creation. New people are joining the mutual fund industry because they see growth. If we can manage well then everyone will grow, because the entire market is expanding.
The expense ratio in the mutual fund industry has become so low that there is no scope for earning much anymore. Neither for the distributor nor for the companies. Is this a challenge for you or do you feel there is still a lot of space?
Active funds are highly controlled in India. We are able to charge expense ratio in a very controlled manner. That is telescopic pricing. As the AUM increases, the expense ratio of the fund also decreases. Lower expense ratio reduces the cost of the fund to the investor. This is very good for investors. But a low expense ratio is also good for an active fund manager, as it makes it easier for him to beat the benchmark.
See, any business in India should be seen on scale, should be seen on economy, should be seen on volume and not on margin. Because the volumes are so large the margins are managed automatically. Or even if the margins are low, the profits are big because your volume is so high. So scale game is important in India. If you are able to manage big money, then even if your margins are low, your profits increase and hence we are not worried at all if the expense ratios are also low.
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