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India AMC -Initiating Coverage (+Nippon AMC BUY PO Rs350 & HDFC AM BUY PO Rs3100) – A long term structural story
Report Link: https://bit.ly/2CeYpDv
While the current market correction is likely to have a negative impact on equity AUM growth and profitability, the long‐term growth story is still intact. The sector will continue to benefit from migration of household savings towards mutual funds from physical assets and bank deposits.
Near term flows to be. Subdued : While flow is likely to remain volatile and lower than the last 4‐5 years’ average in near term, we don’t see significant redemptions based on 1)Historical evidence 2) Declining deposit rates 3) Resiliance in SIP
Not as cyclical as perceived Recurring revenue model and cost discipline in bad times provides a cushion to this cyclicality. In the last 12 years (since FY08) we had eight years where either there was net outflow or negative investment performance, however HDFCAMC’s PBT growth continues to remain stable
Brand and reputation is key during tough times Market share of top 5 players has increased by 6pp – in last 10 years. As players with strong brand equity and brand recall tend to gain market share in tougher times, consolidation of assets within top few players will continue for some time, we reckon.
HDFC Asset Management Company (HDFCAMC) Strong brand equity (strong parentage), a well‐diversified distribution channel, and focus on the high‐margin and sticky business of retail/equity will help HDFCAMC to capture the long‐term growth opportunity in India’s mutual fund industry, in our view. We see significant growth prospects from B30 cities; of a total 221 branches, c.65% are located in B30 markets, providing sufficient distribution network to tap opportunities from smaller cities.We initiate coverage for HDFCAMC with a BUY rating and a target of Rs 3,100
Nippon Life India Asset Management Limited’s: Historically, NAM has been trading at a discount to HDFCAMC, mainly due to its low RoE profile and asset mix. However, post rebranding, we see significant scope of an improvement in NAM’s ROE, as AUMs stabilise and operating leverage plays out. Additionally redemptions in decline in debt and liquid AUMs in FY20 has changed asset mix towards individual and equity. Hence, we believe discount to HDFCAMC may reduce going forward. We initiate NAM with a BUY rating and a TP of Rs 350
Regards
PhillipCapital
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