personal finance

While you gain, asset management companies feel the pain


MUMBAI: Shares of HDFC Asset Management Company and Reliance Nippon Life Asset Management plunged on Wednesday — the most since their market debut — after brokerages cut their earnings estimates following the Securities and Exchange Board of India’s (Sebi) move to cut total expense ratio for mutual funds.

Total Expense Ratio or TER is the fee that funds collect from investors every year. This annual recurring expense includes selling and promoting expenditure, agent commissions and fund management fees.

Sebi’s decision to cut the TER for the second time in the past six months could potentially shave off 15-25 per cent of the earnings of the asset management companies (AMCs).

AMC snip 1

However, the exact quantum of the impact on the earnings will hinge upon how the reduction of the TER will be passed on the distributors.

It must be noted that in the last 15 basis point-cut in TER, distributors absorbed around 70-100 per cent of the total reduction and therefore, AMCs were able to defend their earnings.

The industry profitability of the AMC is around 25 basis points at the percentage of the AUM, while the in the past six months expense ratio has been slashed by 40 basis points.

The overhang of the earnings visibility in the medium term and compression in the margins of AMC could translate into to price-earnings compression of listed AMCs such as HDFC and Reliance Nippon. Currently, the market ascribes P/E multiple of 30-35 times for FY20 earnings, which could come down to levels of 20-25 times.

Shares of Reliance Nippon plunged 11.3 per cent to Rs 190 and those of HDFC AMC declined 8.55 per cent to Rs 1,408.55. Nomura even downgraded Reliance Nippon to ‘neutral’ from ‘buy’ besides slashing target price by 33 per cent to Rs 210. Reliance Nippon, which made its market debut in November last year, is trading nearly 25 per cent below its issue price of Rs 252 while HDFC AMC, which listed on the bourses last month, is 28 per cent above issue price of Rs 1,100.

Analysts at CLSA said equity AUMs form 40 per cent of total funds and this cut could lead to a 25 per cent earnings impact for the sector. CLSA said AMCs’ plan to pass on a majority of the reduction to distributors through a cut in brokerage and if they pass 50-70 per cent of the impact then the impact on earnings could moderate to 10 per cent.

“From an accounting perspective at the AMC level, reported revenue and brokerage costs could see sharper declines as all brokerage costs would be borne by the scheme itself and only net revenue and costs would flow onto AMC P&Ls (profit and loss statement),” said CLSA.

JM Financial believes AMCs will go through a period of growth reset as the industry adapts to the new cost structure. The brokerage believes equity mutual fund schemes will face the brunt of the impact. JM Financial has trimmed earnings estimates on Reliance Nippon by 7 per cent for the current financial year, and by 15 per cent for FY20, driving a 16.7 per cent cut in target price to Rs 275.

Morgan Stanley has lowered target price on HDFC AMC to Rs 1,765 from Rs 2,050, while maintaining an ‘outperform’ rating.

The impact of cut in the TER will be more accentuated in those AMCs where the share of equity assets under management (AUM) and large AUM schemes is higher.

The equity AUM is around 40 per cent of the total equity and contributes nearly 70 per cent of the total revenues. The equity AUM of large AMCs such as HDFC, ICICI, Aditya Birla and Reliance stood at 44 per cent, 43 per cent, 33 per cent and 35 per cent respectively in that order.

Furthermore, the large AUM means that more reduction in TER will take away operating leverage benefit of the AMCs as ability of payout will reduce as AUM grows in size. Therefore, distributors could be less incentivised to sell the scheme. This in turn, would make consolidation in the industry more challenging and could cap market share gains of large AMCs.





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