Brokerages raise ratings on Nippon, HDFC AMCs following better Q3 show

Among the four listed AMCs, two report profit growth in Q3, other two see a decline

Brokerages have raised their ratings on two of the top asset management companies (AMCs) in India — HDFC and Nippon Life India — after they managed to raise their profits in the third quarter of financial year 2022-23. While HDFC AMC's profit went up 2.7 per cent in the previous quarter, Nippon AMC's bottom line expanded 18 per cent.

Apart from the AMCs' individual performances, the brokerages' bullishness is also driven by the positive long-term outlook of the industry. "Long-term prospects of the Indian AMC industry remain intact given the low penetration levels in India vis-à-vis developed countries and is a play on the financialisation of savings in India," said Axis Securities.

Nippon reported a good quarter in Q3 on the back of superior fund performances and improved core profitability. In the previous quarter, B30 market share rose to 8.1 per cent, highlighting the firm's distribution strength despite the absence of an associate banking sales channel.

"With sustained growth in retail market share, increase in share of higher yielding equity mix and healthy growth in SIP inflows we believe NAM is in a better position to grow," Axis Securities stated.

"We are encouraged by the improvement in SIP market share at 7.3 per cent and argue this is key for long-term franchise strength and sustainability. Additionally, we expect Nippon to capitalise on its rising credibility to raise HNI/institutional capital," HDFC Securities said.

HDFC AMC's revenues remained flat but it scored well on other parameters. Brokerages expect upside of up to 15 per cent on the back of rising share of equity funds in AUM, improved fund performances and growth in market share in incremental flow of investments, according to brokerages. In the third quarter, the company has also been able to arrest the decline in market share. "HDFC AMC, the third largest player in the industry, has maintained 11 per cent average AUM market share for the past three quarters, after ceding ground to competitors over a prolonged period," BOB Capital noted. The brokerage firm has upgraded the stock from 'hold' to 'buy'. Geojit has raised the rating to 'hold'.

UTI AMC, which reported a weak quarter with over 50 per cent YoY drop in profit, has witnessed earnings downgrades despite a comparatively better valuation.

"UTI AMC reported a weak quarter across fronts, with three per cent sequentially lower core operating profits, owing to sharp compression in equity yields, coupled with elevated staff costs, loss in equity market share and mark-to-market losses on treasury book. Given its attractive valuation, we maintain 'buy', with a lower target price of Rs 950," HDFC Securities said in a report.

ICICI Securities has downgraded the stock to 'add' from 'buy'. BOB Capital has maintained a 'buy' rating considering "sizeable assets under management (AUM), five decades of experience, a differentiated non-MF business, growing market share and robust distribution channels".

Aditya Birla Sun Life (ABSL) AMC, which saw profits plunge 11 per cent in Q3, also witnessed cuts in rating outlooks. Brokerages have highlighted loss in market share as the key concern. "We are constructive on ABSL AMC’s strong and diversified distribution network; however, given the rising competitive intensity, we are concerned about its inability to arrest the equity market-share loss in the near term," HDFC Securities noted.

"Downgrade to 'hold' (from 'add') is on account of lower earnings growth outlook with a revised target price of Rs 445," ICICI Securities said.