Change in assets under management, a near-term challenge for AMCs

The equity segment attracts more than double management fee compared to debt funds and liquid funds
The stocks of two listed asset management companies (AMCs) – HDFC Asset Management Company (HDFC AMC) and Nippon Life India Asset Management Company (Nippon AMC) – have underperformed the broader market in the last one month. While the AMCs’ stocks shed upto 16 per cent over a last month, the BSE Sensex was up around 5 per cent during the same period. A negative impact of the change in assets under management or AUM mix on AMCs’ top-line and earnings is hurting investor interest in these stocks apart from lower equity inflows.

In the current Covid-19 scenario, investors are more conservative with a rising preference for less risky liquid funds compared to equity. This changed AMC’s AUM mix in the June 2020 quarter (Q1) with an increasing share of less-pricey liquid funds and a fall in shares of high-margin equity funds. This in turn impacted their overall performance.

Both the AMCs reported an 18-28 per cent year-on-year fall in revenue due to 400-870 basis point year-on-year contraction in the AUM share of equity and a similar level of expansion in the share of liquid funds (refer chart). While Nippon AMC’s profit before tax rose by 10.6 per cent to Rs 199.7 crore, mainly supported by higher other income and relatively lower employee cost, HDFC AMC’s pre-tax profit was down by 11.5 per cent year-on-year at Rs 380.4 crore.

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.

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