Prabhudas Lilladher sees growth in AMC stocks; check its 2 top picks
2 min read . Updated: 10 Mar 2023, 07:37 AM IST
Premium- The brokerage is constructive on Indian AMC space driven by its heathy growth
The financial investment products like mutual funds and insurance are very less penetrated in the Indian society, In fact Indian mutual fund industry’s assets under management (AUMs) as a share of GDP have risen from 4.3% in FY02 to 16% in CY20. But that is much lower than world average of 63%. In US, the MF AUM as a share of GDP is at 140%.
Given the lower penetration, the scope for growth in this industry is higher. According to CRISIL, MF total/equity QAAUM is expected to see a CAGR of 13-15% over FY22-26E driven by growing investor base, higher disposable income levels resulting in better household and financial savings, increase in geographical penetration, ease of investing and digitalisation.
In a recent report, Prabhudas Lilladher said it has initiated coverage with a buy rating on HDFC Asset Management Company (target price: ₹2,100) and UTI Asset Management Company (target price: ₹830).
“Core profits would see a healthy CAGR of ~14% from FY23-25E driven by operating leverage. Valuation is at 10x on FY25E core EPS (discount of 56% to HDFCAMC). We assign 15x multiple to arrive at a TP of Rs830," said the brokerage.
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The brokerage is constructive on Indian AMC space driven by its heathy growth. It has listed the following factors as headwinds for the sector
1. financial assets make up for 41% of household savings, although MF allocation is only 2%
2. low penetration despite 435mn PAN card holders, while MF unique investors are even lesser at 34mn.
3. the industry is slated to expand by ~13-15% over FY22-26E
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“Post-merger, HDFCAMC could gain more share of gross MF sales by HDFCB, as currently it accounts for only 25% (peers at 70-98%). Better asset mix and cost control led to healthy profitability with operating yields at 36bps which should sustain. Valuation is at 22.5x FY25E core EPS; we assign a multiple of 27x to arrive at TP of Rs2100," said Prabhudas Lilladher report.
Risks to estimated growth
If the market regulator, SEBI cuts the total expense ratio further, asset management companies' earnings could take a hit.
Second, industry growth could be slower if equity market performance remains sluggish. This could impact the AAuM growth of HDFC AMC and UTI AMC. Underperformance on the equity and debt side could also affect net flows.
Higher variable staff expenses or fresh hiring would keep employee cost elevated resulting in lower profitability.
Lastly, Sharper yield correction each year is also another risk.