On June 21, shares of HDFC Asset Management Company surged when brokerage firm Kotak Institutional Equities upgraded the stock to ‘add’, indicating that the company’s negatives are now properly represented in the stock price.
HDFC AMC’s stock has dropped more than 38% in the last year owing to worries about the company’s loss of market share in equities mutual funds and diminishing profits due to rising distributor charges.
Given the present stock price and valuation of the firm, Kotak Equities feels that investors should look beyond the near-term challenges and the possibility of a turnaround in operations. In a note dated June 21, Kotak Equities wrote, “We see a few positive factors which are expected to play out for HDFC AMC over the medium-term.”
According to the brokerage business, HDFC AMC’s equity funds have experienced a significant increase in performance, with 70% of its equity assets under management currently performing in the first or second quartile over a one-year period.
“Over the medium term, consistent outperformance will likely generate an increase in flow market share.” “During market downturns, HDFC AMC’s more defensive equity AUM mix (greater percentage of balanced/flexi funds) would also give assistance,” Kotak Equities said.
Furthermore, Kotak Equities believes that HDFC’s forthcoming merger with HDFC Bank would aid sales in the future, as HDFC AMC has one of the lowest sales through bank channels among big mutual funds.
Following a significant increase in commission rates and increased new fund offer activity, Kotak Equities is seeing early signs of distributor commissions normalising, which could help the asset manager’s margins recover.
However, Kotak Equities has reduced its price target for the stock to Rs 1,900 from Rs 1,975 before, citing a reduction in the company’s profits projection to reflect lower potential assets under management growth of 13% over the next two years.
“While we acknowledge that a turnaround in performance-driven flows is unlikely to be fast, especially given the current situation of the markets,” Kotak Equities stated, “we feel current prices post-de-rating provide a balanced risk-reward.”
HDFC AMC’s stock was up 3% to Rs 1,841 on the National Stock Exchange at 10:55 a.m.