Why L&T Mutual Fund's sale fetched low valuation

L&T Investment Management Limited, better known as L&T Mutual Fund, had a history of acquiring firms bigger than its size. This time around, the tables turned. Last week, the firm, ranked 12, with an asset under management (AUM) of ₹78,000 crore, was acquired by a much smaller player - HSBC Mutual Fund, with an AUM of ₹11,475 crore.

The striking part of the deal was the lower valuation fetched by L&T Mutual when compared to past deals in the sector. HSBC Mutual Fund will pay $425 million (roughly ₹3,200 crore) translating into approx. 4% of L&T's AUM.

Last year, Singapore-based Manulife invested ₹265 crore for 49% stake in Mahindra Mutual Fund, translating into approx. 10% of the AUM. In December 2013, HDFC Mutual Fund acquired Morgan Stanley Management at 5.2% of AUM. In 2012, L&T itself acquired Fidelity by paying over 6% of the international asset manager’s AUM.

When asked why his firm failed to get a higher valuation like Mahindra Mutual Fund, Kailash Kulkarni, CEO, L&T Mutual Fund, did not offer any reason. “I am not the right person to ask a question on valuation as it is decided by the parent company,” he said.

Though the company management refused to give any reasons behind the low valuation, market sources indicate stagnant AUM, poor performance in most of the equity schemes and an AUM composition tilting towards low-valuation fetching debt funds (approx 41% of total AUM) as major reasons.

Inspiring start that got lost in the middle

L&T had a big treasury desk that it hived off as an NBFC and then carved out an asset management company by acquiring DBS Chola in 2010. The newly formed asset management company tried to expand its footprint in the retail and equity segment by acquiring Fidelity Mutual Fund in 2012.

On the back of two acquisitions, it grew to a fund house, with an AUM of ₹12,000 crore and a rank of 14 in just three years. Continuing its stellar performance, it grew AUM to ₹65,000 crore by March 2018. Thereafter, it lost the momentum and stagnated in the range of ₹70,000 crore to ₹75,000 crore.

Even a decade post the Fidelity deal, L&T Mutual couldn’t move up the rank though much smaller players like Axis Mutual Fund and Mirae Asset Mutual Fund not only jumped ranks but also increased AUM by eye-popping numbers. From a tad over ₹-500-crore in 2012, Mirae today boasts AUM of over ₹90,000 crore, a whopping 180x growth. Similarly, Axis Mutual in the same period grew its AUM from ₹10,550 crore to ₹2.38 lakh crore, approx 20x, as per AMFI.

Beneath the surface: Performance at glance

At the time of Fidelity's acquisition in 2012, Y M Deosthalee, CMD, L&T Finance - parent company of L&T Mutual - said the fund house aspired to become one of the top 5 players in the next few years. On the surface, the performance appeared impressive as its AUM grew from ₹12,000 crore to approx. ₹78,000 crore but the inside story is different.

Between December 2012 and September 2021, as per AMFI, AUM of the mutual fund industry grew from ₹7.93 lakh crore to ₹36.57 lakh crore, a massive addition of ₹28.64 lakh crore. During the same period, L&T Mutual expanded its AUM by just ₹66,000 crore, 2.3% of the overall industry expansion.

In the same period, Axis Mutual added ₹2.28 lakh crore, HDFC (₹3.38 lakh crore), ICICI Prudential (₹3.66 lakh crore), SBI (₹5.25 lakh crore) and Mirae expanded its AUM by ₹89,500 crore, to name a few. Since 2013, AUM addition in all these companies exceeded what L&T Mutual could garner since its inception.

Similarly retail folios, the most sought after benchmark along with AUM for gauging a fund house's reach and distribution, was also not very favourable for L&T Mutual. Between September 2012 and September 2021, total retail customer folios in the industry grew from 4.35 crore to 10.11 crore, a rise of 5.76 crore folios. In the same period, L&T Mutual's retail folios grew from around 7 lakh to approx. 25 lakh, an addition of 18 lakh, or 3.1% of the total rise of retail folios in the Industry.

L&T lagged behind most of its peers in performance

Take for instance, the equity Midcap scheme where L&T Midcap fund was ranked 25th out of 26 schemes; Large and Midcap scheme (26 out of 28 schemes); Large Cap scheme (19 out of 32 schemes), and fifth from the bottom in both Focused and Flexi fund. The saving grace for the fund house was the L&T Emerging Business Fund in the Small Cap category, where it was second from top out of 24 schemes as on December 29.

L&T Mutual's failure to grab the expanding pie both in terms of AUM and retail folios when the industry was growing by leaps and bounds was a cause of concern for parent company officials who shared Deosthalee’s vision.

Management version

With nowhere near the target after a decade in the business, L&T Finance gave the mandate for joint venture or sale of the company. Speaking with Fortune India, Kailash Kulkarni, CEO, L&T Mutual Fund says that the company was never on the block but was engaged in serious negotiation with foreign companies that were looking to expand their footprint in the asset management business. He also believes absence of L&T Mutual from ETF schemes had adversely impacted its AUM growth. “In last few years, ETF schemes and liquid funds were the main driver of industry AUM and we consciously stayed away from the ETF segment that impacted our AUM growth,” he says.

Kulkarni admits that schemes from fund house lagged till the market was running on the back of just a few stocks. “As a fund house, our philosophy is to avoid concentration of bets on few stocks and we strongly believe in not chasing the momentum,” he says.

Kulkarni says the AUM complexion of his fund house is better than most of the peers, with 55% fund in equity schemes and 45% in debt schemes whereas most of the peers have reverse ratio. Fund houses with higher equity schemes attract higher valuation.