PhillipCapital says that as equity markets stay strong, the performance of HDFC Asset Management Company and Nippon Life India Asset Management major equity funds has improved sharply. They have outperformed the benchmark over 3/6 months (better than peers), and for longer periods, the gap with the benchmark has narrowed significantly. HDFC Asset Management share price today is Rs 3155, down Rs 34 or 1.1%.

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On a 3‐month and YTD basis, most of their top funds are in the top quartile. One‐year rankings of both companies’ funds have also improved materially. Weak investment performance and market‐share losses have been key concerns for investors, so this improvement (if it sustains) should help both HDFC Asset Management Company and Nippon Life India Asset Management to regain some lost market share.

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Overall equity flows into funds have been in negative territory for the last seven months. While it is difficult to say when these situations will turnaround, PhillipCapital believes that a stable market will be the key because profit‐booking happens in rising markets.

It seems like we may be in the last leg of outflows based on these:

1)      The longest streak for equity outflows (9 months) was in FY13 and the current streak has already lasted 7 months
2)       SIP flows have started to stabilise and increase to above Rs 80bn in Jan 2021, first time since May 2020

Increased retail participation in direct equity has been one of the reasons for continued outflows from equity funds. Number of demat accounts increased by 22% YTD as of Dec 2020. While in the near term, this may result in outflows, we see this as a broadening of the investor base; more demat accounts should equal growth opportunities in the longer term.

Outlook and valuation:

HDFC Asset Management Company:

Improvement in fund performance should help arrest market‐share declines. As growth returns, strict cost discipline will provide operating leverage benefits. Strong brand equity and a well‐diversified distribution channel will help it to capture the long‐term growth opportunity in India’s mutual fund industry. The stock trades at a P/E of 43x/36x on FY22/23 earnings; we maintain a BUY with a target of Rs 3,600, valuing it at 41x March 2023 earnings.

Nippon Life India Asset Management:

AUM has seen strong recovery after rebranding. Operating leverage provides a significant scope for better RoE, as AUMs stabilise. NAM trades at a P/E of 28x on FY23 earnings; we maintain BUY, with a target of Rs 400, valuing it at 33x FY23 earnings.