AMC stocks underperform benchmarks since March

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Shares of HDFC AMC are up 44.8% from its March 2020 lows and 0.56% so far in 2021, while the 50-share benchmark Nifty is up by 96.93% and by 7.15%, respectively, in the same period.

By Urvashi Valecha

Benchmarks indices may have doubled from their lows in March 2020, but stocks of asset management companies (AMCs) have underperformed in this period. Shares of HDFC AMC are up 44.8% from its March 2020 lows and 0.56% so far in 2021, while the 50-share benchmark Nifty is up by 96.93% and by 7.15%, respectively, in the same period. Similarly, Nippon Life India AMC’s shares are up by 55.2% from last March till date and 12.16% so far this year followed by UTI AMC, which has risen by 5% since its listing in October 2020.

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Ideally shares of asset managers should boom when markets are rallying, but mutual funds have been witnessing outflows from equity schemes over the last seven months.

Market experts believe that this is the reason why these stocks have underperformed. According to Deepak Jasani, head – retail research, HDFC Securities, “Ideally when equity markets are booming the assets under management (AUM) of AMCs should go up and theoretically their business should go up but that has not been the case, there have been consistent outflows which is making them less attractive. If their AUM does not grow and redemptions in MFs continue then their profitability can remain stagnant and stocks may continue to underperform the markets.” He, however, added that the long term potential for AMC stocks remained intact given the AUM to GDP ratio in India was quite low compared to the global average.

Besides redemptions, actively managed mutual fund schemes have also not been able to beat the performance of benchmarks. Apart from investors buying into the equity markets directly rather than through mutual funds, passive investing has also picked up with investors shifting to ETFs. Experts have stated that HDFC AMC and Nippon Life India AMC have seen degrowth in revenue and operating profit for the past three quarters. Rusmik Oza, executive vice-president, head of fundamental research, Kotak Securities, said, “Yields have come under pressure as the share of flows to passive funds goes up. For example, the yields of HDFC AMC have come down from 77 bps in FY16 to 59 bps in FY20 and we expect this to further go down. Earnings are mainly driven by other income which may not be sustainable.”

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Shares of HDFC AMC are currently trading at 42.1 times its one year forward price-earnings multiple. Similarly, Nippon Life India AMC and UTI AMC are trading at a one year forward price earnings ratio of 34.2 times and 13 times. The Nifty is trading at a one year forward PE of 21.29 times.

According to Rusmik Oza of Kotak Securities, the AMC stocks are trading quite expensive in the context of muted earnings growth. “One can wait for valuations to turn reasonable before investing in AMC stocks,” he said.

Despite the near term challenges, the AMCs are attractive investment opportunities. This is because the industry is expected to clock double-digit growth going forward, with Indian MF AUM is expected to grow at 15% CAGR between FY20 and FY30. ICICI Securities, in its report said, “Strong double-digit growth outlook driven by under-penetration, nil capex or working capital requirement, high operating leverage and supernormal RoEs make the Indian asset management industry a very attractive business proposition.” The brokerage added that well- established business franchises with entrenched distribution, healthy AUM share and strong brand equity will capture these business opportunities.

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Analyst Corner: SBI best placed in current cycle; target price at Rs 600

SBI has much “option value,” both in earnings (1% RoA) and multiples. Our bull case (>100% upside) reflects this. Its retail franchise has improved, and the corporate cycle is turning – we see material upside risk. Raise price target to Rs 600; we now apply a 25% bull case weight to the core.