Kotak Initiates Coverage On Three Indian AMCs Expecting Attractive Returns
Coverage initiated on Aditya Birla Sun Life AMC, UTI AMC, and Nippon Life India AMC.
Kotak Institutional Equities initiated coverage on Aditya Birla Sun Life Asset Management Co., UTI Asset Management Co., and Nippon Life India Asset Management Co. expecting attractive returns.
They would also benefit from the strong operating leverage, the brokerage said.
"Prevailing mutual fund regulations are much more balanced and well-aligned across the value chain and can spur market expansion in the next decade," the brokerage said in its investor note dated Dec. 9. Listed Indian asset management companies have, in recent years, turned unattractive amid regulations and market forces, Kotak said.
As a result, despite near-all-time high equity flows and market levels, valuations fell.
The brokerage believes that incremental value creation will be a function of company-specific growth or margin levers, while passive risks will be 'well contained' in India.
The threat to Indian active managers is much more manageable than that of global peers, it said.
Rationale For Initiating Coverage
The brokerage initiated coverage on Aditya Birla Sun Life AMC with an 'add' rating and a fair value of Rs 480.
Kotak marked Aditya Birla's track record, geographic penetration, and large systematic investment plan book as its 'key' strengths. However, near-term headwinds await.
Shares of the AMC was trading 0.25% lower at Rs 450.35 as of 10:16 a.m. Out of the 12 analysts tracking the stock, 11 maintained 'buy,' and one recommended a 'hold,' according to Bloomberg data. The average 12-month consensus price target implies an upside of 12.6%.
The brokerage initiated coverage on Nippon Life with an 'add' rating and a fair value of Rs 300, implying a 12% upside. It bet on the asset manager's "excellent" fund performance, diversified distribution, and a relatively strong passive product profile. Kotak added that the valuations are quite fair.
Shares of the AMC was trading 0.50% higher at Rs 270.4 as of 10:20 a.m. Out of the 17 analysts tracking the stock, 14 maintained a 'buy' and three suggested a 'hold,' according to Bloomberg data.
Kotak initiated coverage of UTI AMC with a 'buy' rating, as it offers the best risk-reward in the space, given healthy fund performance, strong reach, and ability to control costs. The fair value of Rs 940 on the AMC, implies an upside of 20%.
"UTI’s longstanding brand in mutual fund industry and deep reach are some of its core strengths," the brokerage said. It expects a 10% compounded annual growth rate in core earnings over FY23–25, led by about 15% growth in average assets under management, driving a 7% revenue growth.
UTI shares went up 1.27% to trade at Rs 774.45 a piece as of 10:20 a.m. Of the 15 analysts tracking the stock, 14 analysts suggested 'buy', while one recommended 'hold', according to Bloomberg data.
AMC Industry Outlook
The brokerage expects the Indian mutual fund industry's assets under management to compound at about 15% over the next decade, driven by a similar growth in active equity, 7-10% for debt and liquid funds, and 25% for passive AUM.
However, the translation to revenue growth is likely to be weaker, Kotak said. This will be due to a decline in yields for high-margin active equity books due to slab-based pricing and a continued rise in commissions shared with distributors, while penetration of passive products outpacing active equity AUM growth will also weigh, it said.
The asset management business also has much lower capital consumption compared to other financial sectors such as banking or insurance, Kotak said.