The equity segment attracts more than double management fee compared to debt funds and liquid funds, which earn the lowest management fee. Moreover, even within the debt segment, credit fund, which is a high-margin debt product, saw a sharp redemption due to the Franklin Templeton crisis. This put further pressure on AMCs' overall performance in Q1. Going ahead, the weaker AUM mix would continue in the near term. In fact, some experts also say equity mutual funds are also witnessing a redemption pressure as investors prefer to book profits with the rebound in equity market post its recent fall in March.
According to Binod Modi, analyst at Reliance Securities, “Due to a volatile investment scenario, AUM share of high-margin equity funds would remain low and that of low-margin liquid funds would see good traction. This would hurt AMCs’ overall revenue and earnings growth in the near term.” He added that the long-term growth story of AMCs remained intact and the bottom-line could expect support from cost control as some operating expenses like travelling, new branches, etc. would remain lower.
Analysts at PhillipCapital expect AMCs' revenues (core revenue to average AUM) to decline by 7-12 per cent in FY21. While the net profit growth of HDFC AMC
is estimated to grow by around 2.2 per cent and that of Nippon AMC
by 39.6 per cent, the higher net profit growth for Nippon AMC
is mainly due to lower base. The company had reported a nearly 15 per cent drop in net profit in FY20 amid mark-to-market losses.
Another concern, mainly for HDFC AMC
is that while the AMC remains the market leader in the equity segment, it continues to lose its market share. While, the management is making efforts to recover is market share like appointing two new equity fund manager, etc, analysts at JM Financial, who have ‘sell’ rating on HDFC AMC
stock believe that the stocks’ current valuation (around 41 times its FY21 estimated earnings) offers little comfort. The stock of Nippon AMC is currently trading at around 29 times its FY21 estimated earnings.
Overall, how the companies protect their top-line and earnings growth in the coming quarters would be crucial for the stocks, despite their long-term potential looking strong.