AMCS: Surprise winners among financial stocks

Nippon Life, HDFC AMC have more than doubled in a year despite weak inflows

While the Nifty Financial Services sector, which largely comprises banks and nonbanking firms, has generated returns of 25 per cent over the past year, two stocks outside the index have done much better. The two are asset management companies HDFC AMC and Nippon Life India AMC (formerly Reliance Nippon Life), which have seen gains of over 100 per cent.

Despite the year gone by being rough, given the markdown that funds had to take on certain debt exposure and inflows turning choppy between May and October last year, HDFC AMC’S stock has zoomed 144 per cent, and Nippon Life has jumped 109 per cent.

What’s driving these stocks despite the headwinds is their ability to keep their financials lean. Even as their revenue streams are guided by management fees, other streams -- such as dividend and interest incomes — make up for the numbers. However, the biggest risk is that of regulatory actions. Though Sebi’s directive to cap the total expenses ratio in 2018 is now wellcaptured in the AMCS’ financials, the sector remains vulnerable to these unpredictable changes.

Among the two,

HDFC AMC at 42 times its FY21 earnings estimates trades at a 21 per cent premium to

Nippon Life (34 times on FY21 earnings).

HDFC AMC’S leadership position in the industry and size of its assets under management or AUM (~368,900 crore in December quarter or Q3) places it well-ahead of Nippon

Life (~204,400 crore).

With its erstwhile parent company (Reliance

Capital led by Anil Ambani) running into trouble for most of 2019, Nippon Life’s market share suffered and dipped to 7.6 per cent in Q3 from 10.2 per cent a year ago.

As the fall in the market share was more pronounced in the debt mutual funds segment (down 450 basis points year-on-year to 7.1 per cent in Q3), Nippon has indicated that it was seeing trend reversals with 170 institutional investors having restarted investment relationship with the company post its rebranding in October 2019.

As a result, analysts at Prabhudas Lilladher Research expect the valuation gap between the two AMCS to narrow, though HDFC AMC could retain its top position. “With Reliance Capital-related exposure fully written off, de-risking of Nippon’s balance sheet and Nippon Life being the sole promoter, renewed credibility will help recover the lost inflows,” they add. As for HDFC AMC, the brokerage believes its valuation is stretched, even if the sector presents a convincing story.