scorecardresearchHere's why Kotak Equities upgraded HDFC AMC from 'sell' to 'add'

Here's why Kotak Equities upgraded HDFC AMC from 'sell' to 'add'

Updated: 22 Jun 2022, 12:50 PM IST
TL;DR.

The brokerage believes that the stock price adequately reflects the negatives against the company. After the recent fall, the valuation of HDFC AMC makes the risk-reward attractive, it added.

The brokerage believes that the stock price adequately reflects the negatives against the company. After the recent fall, the valuation of HDFC AMC makes the risk-reward attractive, it added.

The brokerage believes that the stock price adequately reflects the negatives against the company. After the recent fall, the valuation of HDFC AMC makes the risk-reward attractive, it added.

After a 30 percent decline in HDFC Asset Management in 2022 so far, brokerage firm Kotak Institutional Equities has upgraded the stock to 'add' from its earlier 'sell' recommendation. The brokrage believes that the stock price adequately reflects the negatives against the company. After the recent fall, the valuation of HDFC AMC makes the risk-reward attractive, it added.

"We upgrade HDFC AMC to ADD on potential reversal of some of the specific factors driving stock underperformance such as performance-led market share loss in equity along with pressure on margins due to rising distributor payout. The turnaround is unlikely to be quick and weak equity markets would imply a difficult operating environment, but these risks are fairly captured at current valuations, in our view," the brokerage said in its note. It has a target price of 1,900 for the stock.

Article
HDFC AMC stock price trend

The brokerage stated that its earlier negative view of the firm was based on specific concerns on equity market share loss driven by past performance issues and pressure on underlying profitability partly driven by higher distributor commissions. However, not it sees a positive few drivers which are likely to play out for HDFC AMC over the medium-term.

Let's take a look at those factors:

Improved fund performance to augur well for future flows: As per the brokerage, HDFC AMC’s equity funds have seen a meaningful improvement in performance. It added that consistent outperformance will likely drive improvement in flow market share over the medium-term. HDFC AMC’s more defensive equity AUM mix will also provide support during market drawdowns, noted Kotak.

Additional levers to growth: The brokerage also stated that amongst the large peers, HDFC AMC has one of the lowest shares of sales through banca/associate channels. Post the merger, a new ownership structure is likely to better align the incentives with the bank to increase AMC’s share, and additionally, HDFC AMC is also likely to increase its share of alternatives through new product launches over the coming years, it said.

Distributor commissions are likely to cool off: Kotak also pointed out that following a sharp rise in commission rates alongside heightened NFO activity, it sees early signs of distributor commissions normalizing, even as HDFC AMC itself remains competitive in its payout policy. This will help absorb the pressure from the general decline in TERs and churn from the back-book, it added.

The brokerage values the stock at ~25X FY2024E for an earnings CAGR of 10 percent over FY2023-25E. However, it cut earnings sharply - by 9 percent over FY2023-25E to reflect lower AUM growth.

"While we recognize that turn-around inflows driven by performance is unlikely to be immediate, especially given the present state of the markets, we believe current valuations post the de-rating provide a balanced risk-reward," it said.

The reversal in fund performance or a strong shift in trend towards passive are some of the key downside risks, added Kotak.

 

Article
We explain why timing the stock market is not a good idea.
First Published: 22 Jun 2022, 12:50 PM IST