Scepticism about a recovery in India Inc’s business, with likely sharp fall in its earnings, has led to volatility in equity markets.
Though the Sensex has seen a sharp recovery of 41 per cent since its catastrophic fall in March, it is still 13 per cent lower than its January high. This volatility is also impacting the existing AUM and, so, the overall performance of AMCs.
According to data compiled by the BS Research Bureau, the average market capitalisation of all companies listed on the BSE fell to Rs 127.18 trillion in the June quarter, compared with Rs 146.39 trillion in the March quarter and Rs 151.4 trillion a year ago.
According to Sunil Jain, head of research at Nirmal Bang, “While the incremental AUM is getting impacted with lower gross flows, market volatility is impacting AMCs’ existing AUMs, which would further hurt their earnings performance”. He believes that the June quarter results would have a higher impact than the March quarter.
According to PhillipCapital, the two companies could post an 11-20 per cent fall in revenue and 7-10 per cent decline in operating profit for the June quarter (see table).
What is also worrying, and more so for HDFC AMC, is the rising direct retail participation in the equity market. This indicates that retail investors are avoiding the mutual fund route and directly investing in equites.
As of March, HDFC AMC’s AUM sourced from individual investors contributed 57 per cent of total AUM, higher than the 52 per cent for the industry. This indicates a likely impact on HDFC AMC’s growth if the trend of direct retail participation continues going ahead. While HDFC AMC’s market share in the equity segment is around 14 per cent, its average AUM, as of March 2020, stood at Rs 3.7 trillion, almost double that of Nippon AMC.
What’s more, according to a report by Nomura, though HDFC AMC continues to lead in the equity segment, its market share reduced to less than 14 per cent in May, from around 16 per cent in June 2019. Nippon AMC’s share fell from 8.6 per cent to 6.9 per cent, over that period.
Although, some experts believe the June quarter performance is a temporary phenomenon and inflows will pick up once markets
see some correction, the jury is out on this.
For now, investors are recommended to wait till equity inflows see some improvement, as valuations, too, are not cheap. While HDFC AMC is trading at around 42 times its FY21 estimated earnings, the figure is around 34 times for Nippon AMC.