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Reliance Nippon, HDFC AMC rally up to 29% in 2 months; what lies ahead?

Analysts at Centrum Broking said the Indian mutual fund industry has several structural factors in place which will lead to its multi-year growth.

Swati Verma  |  New Delhi 

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Asset management companies (AMCs), Reliance Nippon Life Asset Management and HDFC Asset Management Company (HDFC AMC), were trading in the positive territory in the morning deals on Monday. While Reliance Nippon surged as much as 2.54 per cent to Rs 364.80 apiece on the BSE, hit a high of Rs 2,990, up nearly a per cent.

In the past two months, shares of these two companies have outperformed the market. The stock of Reliance Nippon has surged around 29 per cent while that of has climbed over 15 per cent. In comparison, the broader Nifty50 index has gained around 10 per cent, ACE Equity data shows.


Initiating coverage on both Reliance Nippon and HDFC AMC, analysts at Centrum Broking said the Indian mutual fund industry has several structural factors in place which will lead to its multi-year growth. First of all, RBI data shows households are moving higher shares of their savings to financial assets. Household investments in financial assets have grown at 14.1 per cent CAGR (compound annual growth rate) from FY15-FY19. This shows that MFs are becoming a key investment vehicle as funds are moving from cash and deposits into investment products.

Secondly, retail investors' share in industry AUM has been rising and steady retail flows should, to an extent, shield the industry from cyclical fluctuations in the markets, wrote Cyrus Dadabhoy, analyst - Banks and Diversified Financials, at Centrum Broking in a co-authored note with Gaurav Jani and Rahul Nandwani.

Flows to Systematic Investment Plans (SIPs), which have doubled over the last five years, are poised to be a strong growth driver for equity mutual funds, the report added.

That apart, regulatory change to lower Total Expense Ratio (TER) on industry AUM will lower costs for mutual fund investors and hence, should aid in greater retail participation.

The report further notes that the Indian MF industry AUM as a share of GDP (11 per cent) remains significantly lower than the world average (62 per cent). Furthermore, unique mutual fund investor count in the industry is still only nearly 20 million. This low penetration provides scope for strong future growth.


As regards HDFC AMC, the brokerage believes the company is likely to see earnings compounding given high brand equity of the HDFC group, strong pan-India distribution network, operational efficiency, focus on the higher-yield equity segment, and consistent fund performance over the past. The brokerage has 'buy' rating on the stock.

"We value at 48.1x FY21E P/E resulting in a target price of Rs 3447 (15.1 per cent upside)," the analysts wrote.

For the quarter ended September 30, HDFC AMC reported a strong set of numbers with robust traction in AUM and profitability. AUM growth continued to outpace industry growth with 25 per cent YoY growth to Rs 3,66,200 crore led by higher traction in non-equity-oriented asset. Accordingly, the share of non-equity in AUM was at 55 per cent while equity was at 45 per cent.

With benefits of lower corporate tax rate kicking in, ICICI Securities has revised its PAT estimates up by 10 per cent, 9 per cent for FY20E, FY21E, respectively.

"Given HDFC AMC’s strong positioning and superior earnings profile, the business deserves a premium valuation. However, a recent price spike appears to factor in all positives. Factoring in tax cut benefits, we revise our Target higher to Rs 3,040." It has 'HOLD' rating on the stock.

For Reliance Nippon, analysts at HDFC Securities say they are concerned about the loss of investor confidence which debt schemes face given significant write-downs/offs on exposures to stressed corporates. Besides, "the macro environment remains challenging and thus despite our positive bias towards Nippon Life as sole promoter, increased credibility to raise HNI/institutional capital, and valuation discount (26.7% on FY21E P/E) to HDFCAMC, we retain NEUTRAL with a revised Sep-20E TP of Rs 260 (24x Sep-21E NOLPAT + cash)," it said.

Centrum Broking values Reliance Nippon (RNAM) at 40.8 FY21E P/E resulting in a target price of Rs 421 (16.3 per cent upside).

Risks for both companies, according to them, include reduction in financial savings rate, potential negative on the brands, and underperformance of schemes.

First Published: Mon, November 04 2019. 11:50 IST