AMC stocks find support from analysts despite tax blow to debt MFs

Recent correction factors in most negatives, valuations attractive, say brokerages

Despite the tax blow to debt schemes, brokerages remain sanguine over the prospects of asset management companies (AMCs). The sharp correction in the shares of AMCs over the past three months factors in most of the negatives and has turned valuations attractive, say analysts.

In its latest report, Kotak Institutional Equities (KIE) has upgraded HDFC AMC from 'reduce' to 'add' and reiterated 'add' and 'buy' ratings for the rest of the listed AMCs — Nippon, UTI and Aditya Birla Sun Life. JM Financial also has a 'buy' rating for most of the AMCs.

The brokerage says the MF industry may register a five per cent drop in assets under management (AUM) under debt schemes in the next financial year (FY24), as against earlier expectations of a 12 per cent growth in AUM. But it expects investors to divert money to other fixed income investment options, now that debt MFs have been stripped off the long-term capital gains (LTCG) benefits.

In another note, Prabhudas Lilladher has said it sees minimal impact on the bottomline of AMCs even if debt inflows fall by 20 per cent.

AMC shares have corrected 3.5 per cent to 12 per cent in the last two trading sessions and are down 20-30 per cent in the three-month period. This has led to significant improvements in their valuations. Analysts say AMC shares now trade at price-to-earnings (P/E) multiples of 15-22 times of their estimated earnings for FY25.

The drop in the shares of AMC in recent months is being attributed to fears of regulatory tightening. Market regulator Securities and Exchange Board of India (Sebi) is likely to rationalise expenses charged by AMCs to bring down the costs for investors. Any such move will bring down AMC margins. The tax blow announced in the Finance Bill for debt funds further soured investor sentiment.

Brokerages see limited impact of the tax change in AMCs' revenues. They expect a part of the flows that debt funds might lose finding its way into hybrid funds like balanced advantage and equity savings schemes, which are comparatively safer than equity funds but are taxed as equity schemes (leading to LTCG benefits for investors).

"Based on discussion with various AMCs, fund houses might benefit from these regulations as debt money may move to hybrid funds (wherein a higher TER, or total expense ratio, is charged)," JM Financials said in a note.

In addition, the tax change affects only select debt schemes as funds like liquid, overnight and money market funds are used for parking money for the short-term and hence their investors never really benefited from the LTCG.

Of the industry’s total debt assets under management (AUM) of Rs 13.4 trillion, about Rs 8.6 trillion or 62 per cent of the total debt AUM was in cash and shorter-duration debt schemes in February.

On the total expense ratio (TER) rationalisation front, KIE has done an analysis to understand how it can impact the earnings of AMCs in FY 2024. The brokerage has illustrated three different scenarios of TER cuts (severe, moderate and benign) in the study and found the earnings declining by as much as 79 per cent to as low as six per cent. In the first scenario (severe), the brokerage assumes Sebi asking fund houses to bring GST on management fee, trading costs and lower their TERs. In the moderate scenario, it does not consider lowering of TER and in the benign scenario, it assumes only the trading cost to be brought under the TER.

The regulator has undertaken an extensive study of the expenses charged by AMCs. Reports suggest that Sebi may ask fund houses to either lower their fees to include costs like GST on management fees and transaction costs incurred while buying and selling of stocks within the TER.

Investment advisors say they prefer plain-vanilla debt and equity schemes over hybrid ones for designing their clients' portfolios but the change in taxation has forced them to rethink.

"We have not been suggesting hybrid funds a lot. But considering the situation today, we may have to start looking at it," said Suresh Sadagopan, Founder, Ladder 7 Financial Advisory.

Disclosure: Entities controlled by the Kotak family have a significant holding in Business Standard Pvt Ltd