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Value Judgement

Rajiv Bhuva | Print Edition: Apr 29, 2012

These are not the best of times for the Indian mutual fund industry. Its assets under management (AUM) have shrunk, and soon, it will lose one of its marquee names. On March 27, L&T Finance, a subsidiary of L&T Finance Holdings, announced the acquisition - pending regulatory approval - of FIL Fund Management and FIL Trustee Company. These companies have been handling the Indian operations of US-based Fidelity Worldwide Investment, a global leader in asset management. While the transaction's value has not been disclosed officially, people in the know put it at Rs 572 crore. That works out close to 6.5 per cent of Fidelity's AUM of Rs 8,880 crore, as of December 2011.

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SPECIAL: India's best mutual funds Some analysts believe the price tag is not justified, since Fidelity had accumulated losses of Rs 306 crore until March 2011. L&T Finance Holdings, however, does not see it that way. "The valuation is in line with transactions that have happened in the recent past," says Y. M . Deosthalee, Chairman and Managing Director of L&T Finance Holdings. "And, we have not acquired the losses on their books." The deal with Fidelity will certainly help L&T Mutual Fund take a big stride towards its goal of becoming one of the Top 5 fund houses in the next five to six years. Once Fidelity's AUM is clubbed to L&T Mutual Fund's AUM of Rs 4,616 crore (as of December 2011), the latter will jump up the rankings to the 13th spot, with a total AUM of Rs 13,497 crore.

"The combined AUM will bring us close to the Rs 15,000 crore mark, which will make breaking-even smoother," says N. Sivaraman, President and Director of L&T Finance Holdings.

"A simple analysis of the financials shows that no asset management company with AUM below Rs 10,000-12,000 crore makes profits," says K. Balakrishnan, Chairman and Managing Director of Lazard India, which advised L&T Finance. Fidelity has a strong portfolio of systematic investment plans, which will ensure steady investment flows and garner larger retail participation. However, the key question is how the transaction will affect the financial strength of L&T Investment Management, the asset management company (AMC) that manages L&T Mutual Fund. The AMC had racked up losses in excess of Rs 124 crore as of March 2011.

According to Balakrishnan, profitability in the industry is a function of three key factors: scale and asset mix, distribution strength, and employee cost structures. With close to 68 per cent of its assets in equities, Fidelity's Indian business has the best asset mix in the industry.

On the distribution front, Sivaraman says L&T Mutual has a strong thrust on independent financial advisors, while Fidelity has strong relationships with banks and national distributors. But employee costs would pose an integration challenge for L&T, given that Fidelity is known across the industry as a generous paymaster. "Those are the kind of challenges that almost all acquisitions pose," says Sivaraman.

In addition, L&T Mutual fund will not get the skills of Fidelity's 50-member equity fund management team, which has driven its funds to outperform most of their peers. Fidelity is retaining the team to focus on its offshore investment business. This is a key factor, as many equity investors look at the track record of fund managers. So L&T Mutual Fund, which is predominantly into debt funds, will face a challenge in retaining old investors and attracting new ones.

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