AMC stocks turn vulnerable as SIP closure rises to 70% in March

Until a week ago, stocks of asset management companies (AMCs) seemed to be on course to reverse their stark underperformance since January.

But that came to an abrupt halt over the weekend as the data indicated that closure ratio of systematic investment plans (SIPs) rose to 70 per cent in March – above the 11-month average of 57.4 per cent.

What’s also of concern is the 25 per cent month-on-month decline in new customer registrations.

With this news, stocks of HDFC AMC and Nippon Life AMC came under pressure since Monday. Thanks to HDFC AMC stock managing to trade in green, decline over the week is contained to over 2 per cent, while Nippon Life AMC has shed over 10 per cent during this period.

Inflows through SIPs have accounted for 79 per cent of equity inflows in the past four years, according to analysts at Ambit Capital.

More significantly, SIP inflows had remained intact, giving a major leg-up to AMC stocks.

For HDFC AMC and Nippon Life AMC, monthly SIP inflows was ~1,280 crore and ~852 crore, respectively, according to a Prabhudas Lilladher report published in February.

While latest numbers aren’t available, the trend may have changed if the industry-level numbers show a plunge in March.

Analysts at Ambit Capital aren’t very bullish on a quick rebound in SIP flows either. “Our sensitivity analysis suggests even if markets run up by 20 per cent from current levels, return on SIPs across tenures will still be negative,” said the brokerage.

With nearly 79 per cent of equity inflows under pressure, it warrants caution on the overall market as well.

Analysts at HDFC Securities, who ran a sensitivity analysis after the market correction, said every 2-basis point (bps) change in equity yield can impact net operating profit adjusted for tax by 2.1 per cent for HDFC AMC and 3.1 per cent for Nippon Life AMC. In other words, even a small positive or negative swing in equity yields is enough to create an impact on profits.

A basis point is one-hundredth of a per cent.

For AMCs, yields are very important to absorb higher cost structure. The markets regulator imposed restrictions on total expense ratio in August 2018.

“HDFC AMC has been able to pass on about 81 per cent of cost revision. Commission payouts for Nippon Life AMC, however increased by 23.6 bps. As commissions have increased materially in March, we await future data points,” said HDFC Securities.

Another reason for the analysts to turn cautious on AMC stocks now is the underperformance of funds to benchmark returns.

According to HDFC Securities’ report data (from Value Research), performance has lagged for HDFC AMC and Nippon Life as underperforming schemes comprise 87.8 per cent and 77.6 per cent of their assets under management. “Since we last did our analysis in May 2019, outperforming schemes are down for HDFC AMC by a whopping 52.6 per cent and by 13.7 per cent for Nippon Life AMC,” the note added.

So, what should investors read from these numbers?

For one, the year-to-date underperformance of AMC stocks have rendered their valuations a bit more affordable. At 31x and 42x their 2020-21 estimated earnings, valuations have eased by 10 –15 per cent for Nippon Life AMC and HDFC AMC. That said, with market trajectory being extremely unpredictable and volatile, one could wait for better entry points.