CLSA upgrades HDFC, Nippon Life India AMCs from 'outperform' to 'buy'

CLSA has upgraded domestic asset management companies (AMCs) like HDFC AMC and Nippon Life India Asset Management from ‘outperform’ to ‘buy’, following sharp corrections in them over the past three months. The brokerage sees money managers benefiting from sectoral tailwinds, such as improvement in quantum and quality of flows and increasing penetration.

“The asset-management industry has had strong tailwinds in 2021-22 (FY22). Growth likely to beat expectations, helped by growing systematic investment plan (SIP) flows and strong market returns. The industry remains underpenetrated in India, with an attractive long-term story on financial savings," say CLSA analysts, led by Mohit Surana, in a note.

The inflows into mutual fund (MF) schemes in the first nine months (9M) of FY22 have surpassed expectations, helped by encouraging flows into SIPs, says the brokerage.

“FY22 has had healthy net inflows into equity schemes (ex-arbitrage) of Rs 1.6 trillion in 9M versus net outflows of Rs 50,000 crore-plus in 2020-21. Quantum of flows surprised positively and the underlying quality and granularity have improved too, with robust SIP flows, up month-on-month in April-December 2021, averaging 9 per cent of annualised equity assets under management (AUM),” mention the analysts.

CLSA believes domestic AMCs will have huge growth potential, given the huge underpenetration of MFs in the country.

“India has low MF penetration of 13-15 per cent AUM-to-gross domestic product (GDP), compared with a global average of around 75 per cent. Similarly, equity AUM-to-GDP is low at around 5 per cent, implying a long runway of growth for AMCs,” it says.

Despite strong tailwinds, shares of asset managers have underperformed the market in recent months. Shares of both HDFC AMC and Nippon AMC have tumbled close to 20 per cent each in the past three months. In comparison, the benchmark Sensex is down only 3 per cent during this period.

Part of the reason for the underperformance is the pressure on yields as regulatory headwinds. Markets regulator Securities and Exchange Board of India has enacted several changes with a focus on bringing down cost of investing and forcing AMCs to show more skin in the game by way of greater investments in their own schemes.

Given the yield compression, CLSA has cut HDFC AMC’s price target from Rs 3,100 to Rs 3,000 and 2022-23 (FY23) earnings growth estimate by 3 per cent. Meanwhile, it has kept the price target for Nippon AMC intact at Rs 475 per share and only marginally cut earnings growth estimates for FY23.

The price targets imply an upside of 33 per cent for Nippon AMC and 26 per cent for HDFC AMC.

Also, the growing popularity of low-cost exchange-traded funds and underperformance of active schemes have weighed on investor sentiment.

“Since 2018-19, HDFC AMC and Nippon AMC lost 250-400 basis points in equity market share with subpar scheme performance, among other issues. Of late, investment performance of equity/hybrid schemes of both AMCs has improved materially and this may help market share performance, albeit with a lag,” observes the CLSA note.