AMC stock prices reflect underlying momentum; HDFC and Nippon have stronger growth potential, says Kotak report

New fintech players have pushed SIP growth and contribute around 40 percent of volume and 15-20 percent of value of industry SIP creation.

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The stock price performance of listed AMC stocks over a 12-month period broadly reflects a strong momentum in the Indian equity markets, Kotak Institutional Equities’ (KIE) analysts said in their latest report. Currently, around 55 percent of retail equity AUM in mutual funds has been invested in just the past two years.

Rise in SIPs 

Currently SIP inflows and AUM for mutual funds has risen to around 35 percent, the report noted. While data on the stickiness of these investors is yet to be tested against low returns and sharp drawdowns, Kotak analysts say it is believed the SIP book could provide better stability to overall flows. Additionally, new fintech players have also pushed SIP growth and contribute around 40 percent of the volume and 15-20 percent of the value of industry SIP creation, the report said.

Also read: Equity fund inflows hold steady; mutual fund industry AUM nears Rs 50 trillion landmark

What works for Nippon and HDFC

Across AMCs, the report expresses expectation that earnings will upgrade by up to 9 percent for the FY2025-26E period. Amongst listed AMCs, Kotak prefers HDFC AMC and Nippon AMC due to stronger earnings growth potential  in the range of 17 to 18 percent CAGR over FY2024-26E. On the other hand, for Aditya Birla Sun Life and UTI, the report does not “anticipate a quick turnaround in market share loss” due to the current fund performance. KIE has a buy call on Nippon and HDFC AMC and a reduce call on Aditya Birla Sun Life AMC and UTI.

Nippon AMC’s turnaround in operating performance, the report says, has played out as expected, supported by strong markets and its positioning in the small-cap category. SIP growth is another factor that has benefited the company. “We believe the fund house has a good performance track-record in other large categories (large, flexi and multi-cap) that can help diversify AUM and flows,” the report said.

HDFC AMC’s higher multiples of 31X FY2026E assumes sustained growth outperformance over the next 3-5 years, the report says. This growth is led by tailwinds of top-tier fund performance and SIP book, distribution-related support from the parent bank (HDFC Bank) and a likely lower fee drag compared to its peers at higher levels of AUM.

AMC stocks at premium

Over the last six to nine months, analysts observed that AMC stocks have seen a sharp re-rating as a result of “strong momentum in equity returns, flows and abating of regulatory risks”.

Currently AMC stocks are at a 30-40 percent premium compared to the nearly zero percent premium in March 2023, reflecting key sectoral traits such as strong cash flow generation, high degree of predictability and low risks of negative surprises and well-aligned incentives across investors, distributors & asset managers, the report noted.

Also read: Mid-cap mania: These ULIPs deliver up to 26% returns in the last 5 years

However, a significant challenge for the sector remains the absence of distinctive offerings across fund managers in terms of their product or client segment. Limits in pricing powers and structural fee pressure due to passive investment trends or regulations are other concerns, the analysts said.

On January 3, stocks for HDFC, Nippon and Aditya Birla Sun Life AMCs were trading in the red with UTI AMC trading in the green.

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