Shares of HDFC Asset Management Company rose on June 21 after brokerage firm Kotak Institutional Equities upgraded the stock to ‘add’ as it believes negatives for the company are now adequately represented in the stock price.
Shares of HDFC AMC have fallen more than 38 percent over the past one year on account of concerns over its loss of market share in the equity mutual fund schemes, and shrinking margins due to higher commissions for distributors.
Kotak Equities believes given the current stock price and valuation of the company investors should look beyond the near-term headwinds and a potential for turnaround in operations. “We see a positive few drivers which are likely to play out for HDFC AMC over the medium-term,” Kotak Equities said in a note on June 21.
The brokerage firm argued that HDFC AMC’s equity funds have seen a meaningful improvement in performance with 70 percent of its equity assets under management now in the first or second quartile of performance on a one-year basis.
“Consistent outperformance will likely drive improvement in flow market share over the medium-term. HDFC AMC’s more defensive equity AUM mix (higher share of balanced/flexi funds) will also provide support during market drawdowns,” Kotak Equities said.
Further, Kotak Equities believes HDFC’s impending merger with HDFC Bank could help sales going ahead as HDFC AMC has one of the lowest share of sales through bank channels among large mutual funds.
Following a sharp rise in commission rates alongside heightened new fund offer activity, Kotak Equities also sees early signs of distributor commissions normalising, which should aid recovery in the asset manager’s margins.
That said, Kotak Equities has cut its price target for the stock to Rs 1,900 from Rs 1,975 earlier as it has cut its earnings estimate for the company to reflect lower future assets under management growth of 13 percent over the next two years.
“While we recognize that turn-around in flows driven by performance is unlikely to be immediate, especially given the present state of the markets, we believe current valuations post the de-rating provide a balanced risk-reward,” Kotak Equities said.At 10:55 am, shares of HDFC AMC were up 3 percent at Rs 1,841 on the National Stock Exchange.
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