Why HDFC AMC stock is falling?

Reasons behind recent fall in HDFC AMC stock | What should investors do?

Introduction

HDFC AMC stock has corrected 45% from its life time high of INR 3844 to current levels of ~INR 2100. In this blog, we will discuss the reasons for the downtrend in HDFC AMC stock and what action should HDFC AMC investor take.

Why HDFC AMC stock is falling?

HDFC AMC Price trend

• As seen the stock reached its highest price INR 3844 in November’19 and had a steep fall in March’20.
• Currently the stock is trading at INR 2117 (as on September’20) which is 45% below its 52-week high. Let us take a look at the reasons for this fall in the stock price.

1. Recent Market fall

• Company’s income is linked to the Assets under Management (AUM). Also, HDFC AMC has the highest equity AUM in overall AUM mix.
• As the Average AUM came down 30%-40% due to recent market fall, company’s income also declined.
• This is because for Asset Management Companies, income is mainly the expense ratio they charge which is directly linked to the assets under management (AUM).

2. Growing Concern over Expense Ratio

• Investors are getting conscious regarding the expense ratio, AMCs are charging. There are lot of discussions happening on various social media forums regarding this.
• If any scheme is charging high expense ratio but the performance is not up to the mark, then investors become more cautious about it.

3. Increasing competition from ETFs

• Exchange Traded Funded (ETFs) is like hybrid product of stocks and mutual funds. They are traded like shares and have considerably lower expense ratio.
• ETFs are very common in developed countries and are gaining traction in developing countries like India.
• Passive investing via ETFs is a big threat to actively managed funds and overall mutual fund industry.
• This will definitely impact the pricing power of mutual fund companies, resulting in decline in overall revenue growth.

4. Emergence of Discount brokers

• Due to emergence of discount brokers, it is easier to invest directly in stock markets with lesser charges.
• Investors, particularly millennials prefer direct investing in equities at a lower cost instead of investing through mutual funds and paying high expense ratios.
• Thus, there is a stiff competition from discount brokers to the actively managed funds.

5. New IPOs from AMCs

• Currently there are only two listed AMC players in India- UTI AMC and Nippon India AMC.
• However, many AMC businesses are planning to come out with IPOs. For example, UTI AMC IPO is expected to hit the markets soon.
• With more number of companies coming out with IPOs, there will be more opportunities to invest.
• This will result in competition among the listed companies, eventually leading to consolidation of the sector.

6. PE Re-rating

• Company was trading at a PE of 65-66 in Nov’19 and now trading at PE of 35-36 x, thus indicating PE Re-rating. This PE is more sustainable.
• From long term investor’s perspective, this is a good news because PE is now matching the profit and AUM growth rates.

What should HDFC AMC investors do?

• Although there is an emergence of ETFs and other passive investment instruments, the transition from active to passive investing is not easy. It will take at least 8-10 years and hence there is earnings visibility intact for AMCs.
• Compared to other AMCs, HDFC AMC has an edge over others because of its strong brand equity.
• As compared to developed nations, Mutual fund industry is quite under-penetrated in India. This gives a huge potential for mutual fund industry to expand.
• Thus, definitely some headwinds are present in AMC sector but it can give healthy returns if invested at proper valuations.