More than 20% fall in the share price of HDFC AMC – the asset management arm of mortgage lender Housing Development Finance Corporation (HDFC) – has left investors to wonder as to what went wrong.
The slide in price appears more pronounced when compared to a 2.5% decline in broader market indices.
AMC stocks declined in the past two weeks as inflows, especially into equity, has fallen drastically in the month of November.
Also, the expectations of more stake sale from the promoters to comply with Sebi norms of minimum public holding applied pressure.
As on September 30, 2019, promoters held 82.50% of HDFC AMC. Standard Life Investments sold 2.23% last week for Rs 3,170 per share. Promoters will have to lower their stake to 75% by July 2021.
Another factor aiding to the fall in price is waning inflows into mutual funds.
The latest report on inflows in mutual funds showed a sharp decline in net inflows into equity schemes, including the tax-saving equity-linked savings schemes.
Equity schemes had witnessed net inflows of Rs 6,026 crore in October 2019, and the previous 6-month average net inflow was Rs 7,162 crore.
However, net inflows as on November had fallen to Rs 1,312 crore, a fall of 82% from the 6-month average.
The gross inflows were Rs 17,581 crore in November, against Rs 17,074 crore in October and the previous 6-month average of Rs 18,052 crore.
However, gross redemptions had rose to Rs 16,229 crore in November, against Rs 11,048 crore in October and a previous 6-month average of Rs 10,890 crore.
The fall in net inflows was due to an increase in the gross redemptions, touted as a profit-booking.
In the second quarter, HDFC AMC’s equity assets under management or AUM increased by just about 0.5% sequentially.
Note that the profitability of AMCs gets a boost with higher equity AUMs.
Finally, a tough regulatory environment posses a big risk to valuations. HDFC AMCs stretches valuations also led to the pullback in its share price. It currently values 17% of AUM compared to 10% of Nippon MF.
While HDFC AMC’s shares have dropped about 23% from their highs earlier in the year, valuations are still stretched.
Its current valuations imply an enthusiastic 26% annual growth in assets for the next 10 years. Analysts believe that heightened regulatory risks on fee structure and the outlook for equity market performance cap upside and present near-term risks for HDFC AMC.
The HDFC AMC stock more than doubled this year to touch its 52-week high of Rs.3,844 on November 22.
HDFC AMC enjoys No 1 market share of 15.8% in actively managed equity-oriented AUM (excluding index and arbitrage funds) as of September 2019
Another positive trend in the industry over the last few years has been the rise in the contribution of SIP to overall inflow, with HDFC MF possessing more than one-fourth of the unique investor base at around 5.5mn.
Also for HDFC AMC, customers signing of systematic accounts for the period of over 5 years were 79.5%, whereas customers signing a systematic transaction for the period over 10 years were 67.2% as of September 2019
Net we understand that in the near term there will be volatility in equity markets which will impact the valuations of HDFC AMC in the short term but on a longer-term basis, we expect a strong runaway for growth as equity as an asset class is still largely underpenetrated in India.
Also, HDFC AMC’s business model is asset-light so ROEs will continue to be strong ahead also and hence despite the short term fall in the stock price this stock will continue to remain in focus for shareholders and any major dip can be used as a long term buying opportunity.
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