Correction in stock prices of AMCs turns risk-reward more favourable

A 20-25 per cent correction in the stock prices of asset management companies (AMCs) has made the sector’s risk-reward profile more favourable, even as earnings growth slowed in the third quarter of the current financial year (Q3FY25) and equity market volatility threatens to disrupt the strong inflows into mutual fund (MF) schemes.

 

The Q3 results for AMCs were mixed. HDFC AMC reported a 31 per cent year-on-year (Y-o-Y) growth in profit at Rs 642 crore, marking an 11 per cent increase from the previous quarter. Nippon India AMC registered a modest 4 per cent Y-o-Y growth, while UTI AMC saw a 19 per cent decline in profit. Aditya Birla Sun Life (ABSL) AMC, on the other hand, posted a 7 per cent Y-o-Y rise in profit to Rs 224 crore.

 

The recent correction in AMC stocks follows a sharp rally driven by record gains in assets under management (AUMs), fuelled by the equity market surge, particularly among leading AMCs.

 

“AMC stocks have corrected across the board in recent weeks, reflecting concerns over the earnings impact of AUM declines and potential uncertainty in inflows. However, we find the risk-reward more balanced on both absolute basis and relative basis, leading to a more constructive stance," said Kotak Institutional Equities (KIE) in a note.

 

Despite the market’s heightened volatility since September 2024, analysts remain optimistic, citing resilient inflows. In its post-results commentary, Nippon India AMC indicated that net inflows in January 2025 showed no signs of distortion. 

 

The company plans to adopt a wait-and-watch approach to assess the behaviour of high net worth individuals (HNIs) and systematic investment plan (SIP) flows, according to a report by Axis Securities.

 

SIP inflows have continued to hit new highs, even as equity market volatility has weighed on returns. In December, SIP contributions exceeded Rs 26,000 crore, and overall inflows in January likely remained robust despite one-year SIP returns for most equity schemes turning negative, as per the latest AUM data.

 

Brokerages have also highlighted positive developments, such as the realignment of distributor commissions by HDFC AMC and Nippon India AMC. These adjustments are expected to cushion the decline in yields caused by growing fund sizes. As MF scheme AUMs increase, AMCs are mandated to reduce their charges.

 

KIE’s report also stated: “While revenue yield dilution is a reality for AMCs, there is evidence of AMCs pushing for commission cuts in equity funds. Starting with broadbased cuts by HDFC in Q2, we have seen selective cuts on large funds by Nippon India in Q4. A sustained industry-wide effort to regain pricing power could be a long-term positive.”

 

The brokerage has upgraded HDFC and Nippon India to “Add” and UTI to “Buy”, while maintaining an “Add” rating for ABSL.