Tough times to continue - Sector Update - Asset Management Companies - HDFC Securities

FY20 was a difficult year for asset managers as equity flows deteriorated (-50.9% YoY), commissions increased (although managably), and performance deteriorated- as listed AMCs outperforming AUMs declined. Lastly, we have also worked out sensitivity of FY21E earnings to equity AAUMs and yields. While we continue to hold our constructive view on the sector, we believe flows to mutual funds may improve only in 2HFY21 and earnings will remain under pressure in FY21E.

- Performance tracker. Value research indicates that with 90.3% of rated AUM in outperforming (4 star plus rated) schemes, MOAMC ranks the highest amongst the large mutual funds in the country. Performance has lagged for HDFCAMC/NAM as underperforming (1 to 3 star rated schemes) comprise 87.8/77.6% of their respective rated AUMs. Since our last update (May-19), outperforming AUM is down for HDFCAMC by a whopping 52.6%, while for NAM outperforming AUM is down by 13.7%.

- Flows. For the first time in the last 5 years, ETF net inflows at Rs 664.4bn surpassed equity (ex. arbitrage and ex. ETF) inflows. We believe that this is significant as any sustained shift towards ETFs (unlikely for now!) will have an adverse impact on the business model of asset managers. Given tepid market conditions, FY20 equity (ex. arb. and ETF) inflows at Rs 582.9bn were down 50.9% YoY. We expect flows and equity market sentiment to improve only in 2HFY21.

- Commissions and TER tracker. An analysis of the TERs of the top fund houses reveals that most large asset managers have been able to pass on the TER reduction to distributors. HDFC AMC has been able to pass on ~81%; commission payouts for NAM, however increased by ~23.6bps. This is despite reduction in TERs by ~10.9bps for NAM. As commissions have increased materially in Mar-20, we await future data points.

- Earnings sensitivity. Post the sharp correction in equity prices, we ran sensitivities on our earnings estimates on two parameters 1) equity AAUM FY21E growth and 2) equity yields (bps). For NAM, 10% change in AAUM results in a 13.2% change in NOPLAT, while 2bps change in equity yields moves NOPLAT by 3.1%.

Companies:

NAM: We rate Nippon Life India Asset Management (NAM) a BUY with a TP of Rs 349 (40x Mar-22E NOPLAT + cash & investments). We appreciate the recent ownership change with Nippon Life buying out stake, and believe that the current management team has the ability to regain market share, although the same will not be easy. At CMP of Rs 285 stock trades at a FY21E/22E P/E of 31.5/27.6x.

MOFS: We have a BUY rating on MOFS with TP of Rs 668. We like MOFS' differentiated business model and unique client franchise. There are headwinds in the near term in the form of a difficult fund raising environment due to regulatory changes and tough market conditions. We are also concerned of increased competition in broking. Lastly, MOHL too needs to display scalability. Having said the above valuations are compelling- at CMP of Rs 538 MOFS (ex. MOHL) trades at FY21E/22E P/E of 15.9/13.1x.

Source : Equity Bulls

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