Mutual Funds: Begin SIP in this AMC, may give over 20% returns ahead

Systematic Investment Plan or SIP is considered one of the most easily understandable and the best choice for good returns for a first-time investor. HDFC Asset Management Company provides professional assistance to individuals who wish to invest through SIPs. Now, this company has become a money making machine if you invest with SIP, according to JM Financial.

HDFC Asset Management Company on Wednesday was trading at Rs 1541 per piece, down by  Rs. 3.15 or 0.20%. The stock has fallen by 0.2% with an intraday low of Rs 1540 on the Sensex.

JM Financial states that HDFCAMC’s strong brand pull (benefiting from parentage), relatively higher proportion of equity assets and continued delivery on fund performance make it one of the best plays to capitalize on the financial savings opportunity in the country. Further they add that they observe a momentum in AUM growth sustaining (10-year CAGR of 19% overall, 31% in equity AUMs) given that ‘sticky retail’ equity inflows (i.e. SIP) have remained healthy despite the correction in markets in 2018, reflective of behavioural shift in retail investors as well as muted returns in physical asset classes.

Based on the following grounds, JM financial states why you should invest in this SIP stock:

One of the best plays on financial savings opportunity: 

The under penetration of mutual funds in India’s savings pie is well known – MF AUM is just c.12% of GDP (vs the global average of 62%). Long term AUM growth rates have been healthy (18% CAGR over last 19 years). Importantly, share of individual investors in the AUM has been inching up and the uptick in “sticky retail flows’ should shield the industry from cyclical whipsaws in the market. HDFCAMC is one of the preferred plays on the financial savings opportunity.

Recent TER guidelines – impact should be manageable: 

The impact on HDFCAMC’s gross blended equity MF TER is expected to be c.24bps, of which management expects to pass on c.21bps, limiting the impact on profitability. Other TER cuts introduced in FY19 (15bps TER cut, B15 to B30) have been almost completely passed on to the distributors. At the same time, SEBI has also banned upfront commissions and commission-related expenses paid out through the AMC P&L, effective from Oct-18. This is expected to be positive to near-term profitability for the AMC, as now fresh inflows also become profitable, and could offset the TER cut to an extent. It is expected operating profits (PBT, ex-other income) to grow by 14% / 16% in FY20E / FY21E.

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Premium valuations should sustain; initiate with BUY:

HDFCAMC trades at c.29x FY21E P/E and 10% of FY19E AUM. While this optically appears rich in comparison to global AMCs, it is believed the structural tailwinds in India and industry leadership position of HDFCAMC should lead to the sustenance of these multiples. It is forecast that HDFCAMC will deliver 17% earnings CAGR over FY18-21E despite a reset of industry profitability in FY20 driven by new regulations. Structurally, this company is expected to deliver 20%+ earnings growth over a cycle. 

With these reasons, JM Financial puts a buy call on HDFC Asset Management Company, with a target price of Rs 1,850. Taking in consideration its current trading price, the company is set to rise by 20% in the near future.