MTM gains drive AUM growth: IIFL Capital Services

23 Jun 2023 , 12:12 PM

MTM gains (Nifty Index up 6.8% over April-May) supported Equity AUM growth, as net inflows have moderated in Q1. Analysts at IIFL Capital Services note that in Active Equity schemes (Equity + Hybrid) – of the 8% QoQ AUM growth – 95% is driven by MTM gains. Monthly run-rate of net inflows has halved to Rs. 58 billion in Q1FY24 versus Rs. 124 billion QoQ and Rs. 131 billion YoY. Higher redemptions (likely profit booking) and fewer NFOs impacted net inflows. In terms of listed AMCs, HDFCAMC continues to see faster-than-industry AUM growth. Consequently, it gained market share (backed by strong fund performance) in Active Equity segment; market share was up 84bps YoY and 20bps QoQ to 12.3% in Q1FY24. Strong AUM growth (Q1 equity AUM growth better than IIFL’s full-year assumption) poses upside risk to their estimates. The stock valuation would re-rate once AMCs establish that bulk of the TER cuts could be passed on to the value chain. IIFL’s preferred pick in the sector is HDFCAMC (valued at 25x 2YF EPS) given market share gains, driven by strong fund performance and expected benefits (in terms of higher AUM growth), post the HDFC Bank-HDFC Ltd merger.

Equity AUM up in Q1, despite moderation in net flows

Domestic MF AUM is up 12% YoY and 4% QoQ to Rs. 42.2 trillion in Q1FY24 (April-May), driven by equity segment. Active equity AUM (Equity + Hybrid) grew by 18% YoY and 4% QoQ to Rs. 20.5 trillion. On sequential basis, Equity AUM grew despite moderation in net inflows, driven by MTM gains (Nifty Index up 6.8% over March-May 2023). Net inflows in the active equity segment has slowed down to Rs. 75 billion in Q1FY24 till date (Rs. 38 billion/month) versus Rs. 515 billion QoQ (Rs. 172 billion/month) and Rs. 598 billion YoY (Rs. 199 billion/month). The decline is owing to higher redemptions, possibly due to profit booking in a rising market. Money raised through NFOs (active equity) too moderated in Q1FY24 till date (Rs. 10 billion/month) after seeing strong inflows in the last 10 quarters (Rs. 44 billion/month). Nonetheless, SIP gross flows continue to see new highs every month – Rs. 147 billion in May 2023. As such, share of active equity in total AUM stands at 48.5% in Q1FY24 versus 46.2% YoY.

Passive AUM grows faster; debt fund sees inflows

Passive AUM (Index + ETF), including debt and equity, continues to grow the fastest (up 40% YoY), albeit on small base. Its share in total AUM has increased by 320bps in last 12 months to 15.9%. Significant part of new flows is institutional money, but estimated retail AUM stands at Rs. 1.4 trillion or ~7% of active equity AUM. Separately, on the debt side (ex-liquid funds), despite changes in debt MF taxation (no indexation benefit from 1^st April 2023), the flows have remained positive in April-May 2023 – most of the flows are in shorter duration funds.

HDFCAMC gains market-share on strong fund performance

Amongst listed AMCs, HDFCAMC has seen market share gains on both YoY and QoQ basis. In the active equity segment (Equity + Hybrid), which accounts for bulk of AMC revenues, HDFCAMC and Nippon AMC have grown faster than the industry. Analysts at IIFL Capital Services note that as against industry AUM growth of 16% YoY – HDFCAMC and Nippon AMC’s AUM grew by 25% YoY and 18% YoY respectively. The other two listed AMCs – UTI AMC’ AUM grew by 9% YoY, while Birla AMC’ AUM was flat. Consequently, HDFCAMC saw the highest market share gains of 84bps YoY to 12.3%, while Birla AMC lost 88bps YoY to 5.4%. This ties up well with the fund performance where HDFCAMC’s equity schemes have outperformed the benchmark and peers over last 1yr and 3yr period, while Birla MF and UTI MF have relatively seen weak performance.

New regulations risk FY25 earnings

Although analysts at IIFL Capital Services remain positive on the AMC space from a long-term perspective considering the growth potential; uncertainty in earnings due to proposed new regulations have weighed on valuation. They estimate that in the worst case, new regulations would lead to 30-35% cut in FY25 EPS for both the AMCs (HDFCAMC and Birla AMC) in their coverage. However, actual impact should be much lower as AMCs are likely to pass-on the impact of TER cuts onto the value chain (distributors likely to take the biggest hit).

HDFCAMC has shared that it would see a minimum impact on its profitability as bulk of TER reduction would be passed on to distributors, brokers and MF RTA. Any dilution in the final regulations would further moderate earnings cut.

Earnings visibility to drive re-rating; HDFCAMC well placed

Analysts at IIFL Capital Services estimate MF equity AUM to grow by 11-12% YoY in FY24; however, given the strong equity market momentum (AUM up 18% YoY in Q1FY24) there could be upside risk to IIFL’s base case assumption. As far as valuations are concerned, the sector is trading at a discount to long-term average given uncertainty around AMC earnings due to proposed regulations and ability of the AMCs to pass-on the same. In this regard, (assuming no earnings cut), IIFL values HDFCAMC at 25x 2YF EPS (TP of Rs2,100, rolled over to June 2025 EPS) and ABSLAMC at 15x 2YF EPS (TP of Rs380, rolled over to June 2025 EPS). HDFCAMC is better placed given strong fund performance and likely benefits from HDFC Bank and HDFC Ltd merger.