AMCs get a revenue boost from strong retail inflows via mutual funds

Assuming 10% incremental annual inflows and market appreciation of 5-7%, AUM could continue to grow 15% in the medium term

One effect of a sustained market rally is the movement of household savings into the stock market. Coupled with a well-directed “Mutual funds sahi hai” campaign, this meant strong retail inflows being funnelled into the market via mutual funds. And, as the assets under management (AUM) has swelled, meaning more revenues for asset management companies (AMCs), that in turn has meant investment attention for listed AMCs.

Mutual fund AUM crossed Rs 49 trillion in November, up from Rs39 trillion in March with equity AUM at 55 per cent (versus 51 per cent in March). Debt AUM is around 23 per cent of total AUM, down from 29 per cent owing to volatile interest rates, new tax legislation that restricts long-term capital gain benefits on debt funds, and higher deposit rates from banks.

The rest of the AUM is divided more or less equally between ETFs and Money Market/ Liquid funds. In equity funds, the proportion of systematic investment plans (SIPs) have grown steadily and inflows have remained strong through FY24.

Assuming 10 per cent incremental annual inflows and market appreciation of 5-7 per cent, AUM could continue to grow 15 per cent in the medium term. AMCs are also targeting lucrative products, such as portfolio management services and AIFs (alternative investment funds).

SEBI’s intent to further regulate fees charged to mutual fund investors remains an overhang which could reduce revenues and yields. Also, while retail investors have offered stable support to mutual funds (MFs) through the last three years, a bear market could lead to a switch in sentiment.

India is an outlier among large markets in that more than half of active mutual funds outperform their benchmarks whereas in most large markets, the benchmark index tends to beat most active funds. Of course, this is partly a cyclical phenomenon but it has happened over long periods in India.

The top 11 AMCs hold over 80 per cent market share in total Mutual Fund AUM with the top 4 - SBI AMC (18 per cent), ICICI Prudential AMC (12 per cent), HDFC AMC (11 per cent) and Nippon Life India AMC (8 per cent) holding almost 50 per cent. Based on growth, all listed AMCs would receive target valuation upgrades though HDFC AMC has lost around 250 basis points of share in FY24, mostly to SBI. In the equity funds segment, ICICI Prudential, SBI and HDFC are all at near 13 per cent share of Equity AUM.

HDFC AMC has strong brand equity, and a large AUM base as well as good quarter-on-quarter (QoQ) growth. AUM was up 8 per cent QoQ in Q2FY24 and revenue surprised on the upside with better blended yields at 49bps (47bps in Q1’FY24). Equity increased in the QoQ AUM-mix while the share of liquid funds dropped.

Equity market share was up 31 bps QoQ. Post-merger, sales may be boosted by stronger distribution. A rise of 10 per cent in share of HDFC AMC sales by HDFC Bank could lead to a 4-5 per cent increase in AUM and core profits.

Nippon AMC has been able to attract higher inflows, particularly in equity, over the H1FY24. Moreover, it has delivered top-quartile scheme performance. The company's equity AUM has improved, from 6.3 per cent at the end of FY22 to 6.7 per cent at end-H1FY24. This should give an upside for the share price.

UTI AMC has lost market share in equity AUM (from 4.8 per cent at end FY22 to 4.3 per cent at end-H1FY24) and total AUM (from 5.9 per cent to 5.6 per cent). The company reported net outflows of Rs3,700 crore in Q2FY24 as against net inflows of Rs10,200 crore in Q1FY24 and inflows of Rs6,600 crore in Q2FY23.

Management says it has a detailed strategy to regain ground including repositioning high-performing equity schemes. UTI AMC stock is up sharply, however. It gained 6.26 per cent on Monday. Aditya Birla Sun Life AMC stock, too, gained 3.4 per cent to close at Rs 475.65 on Monday, the day it hit a 52-week high of Rs 478.75 in intra-day trade. All four listed AMC stocks have hit 52-week highs this month or are close to yearly high.