Indian asset management companies (AMCs) show strong growth potential as “under-penetrated” mutual funds (MFs) continue to increase their share in household savings, Nomura said on Tuesday.
The brokerage firm said increased retail participation and resulting momentum in capital flows related to systematic investment plans (SIPs) are key tailwinds for the sector.
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It expects the funds’ assets under management (AUM) to grow at a compound annual growth rate (CAGR) of 18 percent over the next five years.
MF’s assets under management – as a percentage of nominal GDP – which is currently around 18 percent, is expected to increase to 26 percent by fiscal 2030, according to Nomura. Declining margins due to growth in assets under management are unlikely to impact profitability, he added.
“We expect the sector’s core operating profitability to remain healthy despite a gradual moderation, as lower revenue yields due to an increase in assets under management and faster growth in the passive segment are expected to be largely offset by operating leverage,” he said.
MFs follow a tranche-based fee model. As assets under management increase, plans must reduce fees.
The brokerage has assigned a ‘buy’ rating to HDFC AMC and Nippon India AMC, and a ‘neutral’ rating to UTI AMC.
He sees a rise of 21 per cent in HDFC AMC, 24 per cent in Nippon India AMC and 8 per cent in UTI AMC. The brokerage is yet to start covering the only other listed AMC Aditya Birla Sun Life (ABSL).
On its bullish outlook on HDFC and Nippon, the brokerage said both AMCs have increased their market share on the back of consistent performance in the equity segment.
“It (HDFC AMC) remains one of the most profitable AMCs, driven by strong assets under management and operational efficiency. The company leads with a retail market share of assets under management of 13.3 percent. We are seeing a steady improvement in market share in the equity segment,” Nomura said.
He added that AMC is poised to capture more market share and its assets under management are expected to grow at 19 per cent CAGR over the next five years.
“As the fourth largest asset manager in India, we believe Nippon India is well-positioned to benefit from rising industrial flows, particularly in the small and mid-cap segments. With a strong retail franchise, growing SIP market share and a 90 per cent dividend payout policy, we expect strong performance ahead. We expect AUM CAGR of 21% and core earnings CAGR of 21% over FY24-28F,” he said.
Following Nomura’s report, AMC shares posted strong gains Wednesday even as benchmark indices ended with losses.
Shares of HDFC AMC and UTI AMC rose over 4 per cent on the BSE, while ABSL AMC rose 2.8 per cent. Nippon India AMC rose almost 2 percent.
First publication: October 9, 2024 | 6:59 p.m. STI
