AMCs - Impact Of Tax Rise On Sale Of Debt MFs Immaterial: Prabhudas Lilladher

Prabhudas Lilladher Report

Asset management company stocks corrected in the last session by 1-5% after government classified capital gains arising from sale of debt mutual funds as short-term capital gains.

Earlier this transaction was taxable as long term capital gains at 20%, but post this rule a normal tax rate would be applicable. Likely motive behind this move is to reduce arbitrage between fixed deposits and debt mutual funds.

However, stock reaction seems unwarranted as impact on net debt flows and overall earnings may not be significant given debt MFs-

1. are open ended providing more flexibility and

2. offer a compounded cash flow advantage.

We do not foresee significant shift in corporate debt flows, yet high networth individuals flows may see some impact.

For industry, debt contributes 21%/13% to assets under management/revenues. For listed AMCs, debt share ranges from 15-36% while revenue contribution is between 8-22%.

Basis our worst case scenario analysis of 20% debt flows, HNI portion would be ~7% and earnings impact for our coverage AMCs i.e. HDFC Asset Management Company Ltd. and UTI Asset Management Company Ltd. would only be ~2%/1%.

Our core earnings estimates remain unchanged and valuation is attractive at 20.5 times /9.8 times for HDFC AMC and UTI AMC.

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