Mismatch between valuations and fundamentals glaring for AMCs: Analysts

March historically a good month for savings products across categories, for reasons such as tax incentives

Substantial outflows, particularly in the equity portfolio, caused huge volatility in average assets under management (AAUM) of asset management companies (AMCs), during the nine months from June 2020 to February 2021.

The Street, however, was unfazed. This is because stocks of AMCs have always enjoyed much of the Street’s optimism, given that they are viewed as the best proxies to capture the country’s financialisation theme, which refers to people preferring investments in financial products vis-à-vis traditional instruments (gold or real estate).

HDFC AMC and Nippon Life AMC have gained 20-23 per cent in a year, while UTI AMC has recorded 23 per cent gains after its listing in October. However, year-to-date in 2021, AMC stocks (excluding Nippon) have struggled to hold on to gains.

The recent data for March, however, comes as a respite to investors. There was a net inflow of Rs 11,485 crore into equity schemes, though the MF industry, as a whole, witnessed net outflows of Rs 2.13 trillion, across all segments.

According to the Association of Mutual Fund Industry (Amfi), this was caused by withdrawal from the liquid or money market category. 

Analysts at Nomura say AUM drags for fund houses have reduced considerably, thanks to the sharp run-up in equity markets. Though equity flows are turning positive, they remain watchful of the environment.

Further, in the context of expensive valuations (see table), this approach is warranted. For this, the sustainability of March’s inflows needs to be tested for a couple of quarters. How well the financials rebound in FY22 also hold key. Data on turnover of domestic institutional investors (DIIs including MFs), according to the BSE, doesn’t indicate any trend of them have convincingly become ‘net buyers’. From April 1-9, DIIs have bought (net) Rs 858 crore of Indian equities, whereas they were net buyers to the tune of Rs 2,082 crore, on March 31.

Sebi data on MFs (as of April 6) suggests AMCs remain net sellers of equities, with Rs 403 crore of shares sold. Further, marred by the second Covid wave, outlook for equities has turned shaky in the near term. Consequently, sustenance of the March equity inflows is critical for sentiment regarding AMC stocks to remain positive.

In addition, March has historically been a good month for savings products across categories, for reasons such as tax incentives. Given the tax relief that MFs enjoy, March could be an isolated month of a rebound in net buying of equities. Therefore, it may be too early to say that the worst in terms of redemption pressure is behind.

Further, experts and industry are cautious, despite SIP data showing an improvement over previous months.

With redemptions taking centre-stage for the majority of FY21, financials for 9MFY21 aren’t very comforting, with the disappointment particularly visible during Q3. For instance, HDFC AMC, now the second-largest player, has ceded market share to SBI AMC. During Q3, HDFC AMC and Nippon AMC witnessed an 8 per cent and 11 per cent year-on-year reduction in revenue from operations, respectively.

While HDFC AMC’s net profit growth, at 5 per cent, was a multi-quarter low, Nippon Life’s net profit (adjusted for other income) grew 10 per cent YoY. Nippon Life is still in consolidation phase following its split from Reliance Capital. This explains its relatively muted show.

The performance of HDFC AMC, however, was disappointing. Given the constant slide in its market share — with overall AAUM market share falling to 14.2 per cent in Q3 (down 40 bps sequentially) — defending valuations may soon be a task.

For UTI AMC, which ranks fifth in the pecking order, the Q3 showing was a tad better than peers. Substantial revaluation of assets bumped up its earnings (up 40 per cent YoY), even as the core income stream (revenue from sale of services) rose only 7 per cent YoY. In this context, valuation isn’t cheap. The March quarter results, thus, will be critical for gauging the company’s financial strength.

Given the doubts over the sustainability of equity inflows, the share of which forms 35-39 per cent of total AAUM (down from 37-45 per cent a year ago) for listed AMCs, and given that it is a meatier revenue-generating product, investors should tread carefully with these stocks.

Booking profits may be wise, considering the near-term outlook for equities.