As AMC equity flows taper, investors urged to wait till situation improves

Analysts expect a YoY fall of 12-20% in revenue, and 7-10% in operating profit in the June quarter

The continuous decline in net equity inflows seen in the past three months, at a time when retail participation in equities is rising, is worrying investors about the prospects of asset management companies (AMCs) such as HDFC AMC and Nippon Life India AMC (Nippon AMC). 

According to data published by Association of Mutual Funds in India (AMFI), the industry saw net equity inflows hitting a 4-year low in June. Thus, in an otherwise bullish market, the stocks of these AMCs shed up to 3 per cent on Thursday. The BSE Sensex was up 1.1 per cent. 

In fact, shares of HDFC AMC, which is the market leader in the equity segment, and those of Nippon AMC, are down between 21-25 per cent since the start of March, as compared to a four per cent fall in the Sensex. 

AMFI’s data shows that net inflows from equity-oriented schemes declined by 97 per cent year-on-year (YoY) and 95 per cent month-on-month to Rs 240.6 crore in June. These are down about 34 per cent YoY to Rs 11,710 crore in the quarter ended June. Even inflows into systematic investment plans (SIPs) slowed, declining over 2 per cent YoY in June.

According to Binod Modi, analyst at Reliance Securities, “Given the higher share of equity funds in the overall AUM (assets under management), lower equity inflows would hurt AMCs’ growth and top line in the near term.” Also, equity being a high-margin segment, there would be some pressure on AMCs’ profitability, he added. Modi, however, is positive on AMCs from a long-term perspective.

The equity segment accounts for 42-43 per cent of AUM and 74-75 per cent of revenues of HDFC AMC and Nippon AMC, according to financial year 2019-20 (FY20) numbers. According to PhillipCapital, the management-fee margin for equity schemes is more than double that of debt schemes.

 

 

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.