November flows a blip for AMCs, structural growth drivers remain intact

Analysts cite higher redemptions for 78% dip in equity flows, say lower penetration, rising preference of retail investors for equity market should help AMCs in the long-run

The stocks of listed asset management companies (AMCs) HDFC Asset Management Company (HDFC AMC) and Reliance Nippon Life Asset Management (RNAM) shed around 3 per cent on Tuesday, much more than the 0.6 per cent fall in the S&P BSE Sensex. A sharp month-on-month fall of 78 per cent in equity flows to Rs 1,311 crore in November, reported on Monday evening by Association of Mutual Funds in India (AMFI), negatively impacted investor sentiments.

As AMCs enjoy higher operating margin for managing equity funds, the fall in equity flows is a reason to worry. Both companies have around 40-45 per cent equity fund share in their total assets under management (AUM, indicates size of assets managed by a fund house). However, analysts believe there is nothing much to worry, at least for now.

According to Cyrus Dadabhoy, vice president at Centrum Broking, "The lower equity flows in November were largely due to increase in redemption (profit booking) taking place. The structural growth potential of AMCs is still intact.” With markets are all-time highs and earnings growth missing, some profit-booking isn’t a surprise. In fact, the weak trend in equity flow may continue in December too.

On the other hand, factors such as lower penetration, rising preference of retail investors for equity market, among others, should help AMCs in the long-run. According to latest available data, AUM to GDP ratio of India stands at 11 per cent as compared to global average of 59 per cent, says Dadabhoy.

A positive factor to highlight from the November data is that despite the overall sluggish equity flows, the SIP (systematic investment plan) monthly contribution remained steady at Rs 8,272 crore. Though there has been some volatility in SIP flows on a monthly basis, it has hovered over Rs 8,000 crore since December 2018, and experts believe that SIPs will remain the key driver of industry AUMs for a long time.

The listed fund houses, too, are focused on SIPs and have a sticky SIP profile. For instance, close to 80 per cent of HDFC AMC’s SIP book, as of September 2019, has more than 5 years of tenure. This takes care of the overall equity inflows even if the lumpy equity investments fall.

Further, companies like HDFC AMC and RNAM have strong and established distribution franchise.

In this backdrop, analysts say AMCs remain good long-term bets. However, in case of HDFC AMC, investors should await some correction given its rich valuation of 40 times FY21 estimated earnings verus RNAM’s 31 times.