Change in assets mix a key near-term challenge for AMCS

Share of high-margin equity is coming down in favour of less profitable 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 over the past month. While the AMC stocks shed up to 16 per cent in the past month, the BSE Sensex rose around 5 per cent.

The negative impact of the change in assets under management (AUM) mix on the AMCS’ top line and earnings is hurting investor sentiment towards these stocks. There is also lower equity inflows.

In the current Covid-19 crises, investors have turned relatively conservative and prefer less risky liquid funds to equity. This changed the AMCS’ AUM mix in the June 2020 quarter (Q1), with an increased share of less-pricey liquid funds and a reduced percentage of highmargin equity funds.

Both AMCS reported an 18-28 per cent year-on-year (YOY) fall in their revenue due to 400-870-basis point YOY contraction in the AUM share of equity and a similar level of expansion in the share of liquid funds.

Nippon AMC’S profit before tax rose 10.6 per cent to ~199.7 crore, mainly due to higher other income and relatively low employee cost. HDFC AMC’S pre-tax profit was down 11.5 per cent YOY to ~380.4 crore.

The equity segment attracts more than twice the management fee than debt and liquid funds, where the fee is the lowest across categories. Moreover, even within the debt segment, credit funds — a high-margin debt product — saw a sharp redemption after the Franklin Templeton Mutual Fund (MF) episode.

This put further pressure on AMCS' overall performance in the June quarter.

The weaker AUM mix is likely to continue in the near term. According to some experts, equity MFS are witnessing redemption pressure as investors are preferring to book profits, following a rebound in the equity markets after a steep fall in March.

According to Binod Modi, analyst at Reliance Securities, “Amid the volatile investment scenario, the 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, however, said the long-term growth story of AMCS was intact.

On the bottom-line front, analysts expected some support from cost control as operating expenses, such as travelling, the opening of new branches, would remain low.

Analysts at Phillipcapital forecast the AMC revenue (core revenue to average AUM) to decline 7-12 per cent in FY21. 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 expected higher net profit growth for Nippon AMC is mainly due to a lower base. The company had reported a 15 per cent drop in net profit in FY20 because of mark-to-market losses.

Another concern, mainly for HDFC AMC, is that though the company remains the leader in the equity segment, it continues to lose market share. The management has been taking steps to recover its market share and appointed additional equity fund managers.

Further, analysts at JM Financial, who have a ‘sell’ rating on the HDFC AMC stock, said the current valuation (around 41x its FY21 estimated earnings) offered little comfort. The stock of Nippon AMC is currently trading at around 29x its FY21 estimated earnings.

While their long-term potential remains strong, how the two companies protect their top line and earnings growth in the coming quarters should decide the near-term stock price movement.