What’s Driving Jefferies’ Interest In India’s Asset Managers

Shares of HDFC Asset Management Co. and Nippon Life India Asset Management Ltd. gained after Jefferies initiated coverage on the stocks citing normalisation for Indian mutual funds after an eventful 2020.

Jefferies listed HDFC AMC as its top pick within the sector and recommended a ‘buy’ with a target price of Rs 3,500 apiece. For Nippon India, it suggested a ‘hold’ with a target of Rs 350, the research firm said in a note, terming India’s asset managers as a “structural play on the financialisation theme”.

The price targets imply potential upsides of 22% and 9% for HDFC AMC and Nippon Life India, respectively, from Tuesday’s closing.

“AMCs underperformed over the last one year but will be leveraged to higher market levels,” Jefferies said. “TER (total expense ratio) hit from revised norms should be manageable and concerns around ETFs seem overdone.”

The research firm expects the Indian mutual fund industry’s asset under management to grow at an annualised rate of 13% over FY22-24. Equity AUM is likely to see a 15% CAGR over the same period. “Equity outflows will likely abate and SIP should pick up as economy catches pace.”

Jefferies expects equity AUM market share gains of 150 basis points for HDFC AMC and 50 basis points for Nippon Life over FY22-24.

This comes at a time investors pulled out of equity mutual funds for the seventh straight month in January. The first 10 months of the financial year have seen a net outflow of Rs 30,546.6 crore compared with a net inflow of Rs 83,787.6 crore in the entire FY20.

Jefferies said the new ULIP taxation norms can drive some incremental flows towards mutual funds. It expects debt funds to see an abatement in the flows as interest rates harden, and anticipates a 9% AUM CAGR over FY22-24.

Still, the research firm highlighted market cyclicality, high competition and adverse regulations as some of the key risks to its projections.

Here’s what Jefferies have to say about the two asset management companies...

HDFC AMC

• Initiates coverage with a ‘buy’ rating and a price target of Rs 3,500 apiece.
• Should be one of the key beneficiaries of the expected turnaround in equity flows.
• One of the most profitable large AMCs; it is taking proactive steps to diversify its fund management style, which can further strengthen as it builds pipeline of new fund launches.
• Margin impact from TER norms likely to be contained owing to growth and new launches.
• Tight cost focus to remain.
• New CEO Navneet Munot comes with a strong track record.
• Expects 18% EPS CAGR and average RoE of 33% over FY22-24.
• Ascribes higher multiple owing to better margins, higher structural RoE and growth.

Nippon Life India AMC

• Initiates coverage with a ‘hold’ rating and price target of Rs 350 apiece.
• Evolved into a well-diversified, retailised AMC but has higher cost structure and lower profitability.
• Market share gains to be a key rerating catalyst.
• Pushing aggressively on building out its overseas business and AIF and PMS lines.
• Strong network makes it ready to tap into profitable equity segments.
• Ownership change holds potential for medium to long term.
• Margin impact of TER norms to be manageable.
• Operating leverage can help defray some lost yield, while higher volumes may drive higher absolute profits.

Shares of HDFC AMC gained as much as 2.7% in early trade on Wednesday to Rs 2,959.95 apiece, and are up for the second straight day. Of the 22 analysts tracking the company, 13 have a ‘buy’ rating, seven suggest a ‘hold’ and two recommend a ‘sell’, according to Bloomberg data. The average of 12-month consensus price target implies an upside of 9%.

Shares of Nippon Life India gained as much as 1.4% in early trade to Rs 333.5 apiece, and are also up for the second straight day. Of the 17 analysts tracking the company, 11 recommend a ‘buy’ and six suggest a ‘hold’, according to Bloomberg data. The average of 12-month consensus price target implies an upside of 4.7%.