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Nippon India MF narrows valuation gap with HDFC AMC post correction

Both AMC stocks declined in the past two weeks as inflows into equity have fallen drastically.

, ET Bureau|
Updated: Dec 10, 2019, 10.32 AM IST
Shares of HDFC AMC corrected 21 per cent in the last twelve trading sessions, compared with a 10 per cent decline at Nippon MF.
In India’s financial services industry, the HDFC Group sets benchmarks that peers often struggle to emulate — let alone overhaul. The group’s money-management arm, HDFC AMC, had also set valuation standards that have hitherto remained largely aspirational for its rivals.

Of late, however, that valuation premium with Nippon India Mutual Fund appears to be narrowing. Shares of HDFC AMC corrected 21 per cent in the last twelve trading sessions, compared with a 10 per cent decline at Nippon MF.

“With HDFC AMC trading at an expensive valuation, investors are looking at other listed AMC stocks, such as Nippon India MF,” said Abhimanyu Sofat, head of research, IIFL Securities. “The change of guard at Nippon India MF has resulted in getting back corporate funds that had moved out… Investors also expect some Japanese funds in Nippon India MF over a period, strengthening its profile further.”

After the latest bout of price corrections, Nippon MF is available at 10 per cent of AUM, compared with 17 per cent for HDFC AMC. Both listed AMC stocks declined in the past two weeks as inflows, especially into equity, has fallen drastically in the month of November.

HDFC snip 1

Japan’s Nippon Life acquired a controlling stake of 75 per cent in the asset manager from erstwhile promoter Reliance Capital a few months ago.

“The HDFC AMC stock has fallen steeper than Nippon India shares due to more expensive valuations and on expectations of more stake sale from the promoters to comply with Sebi norms of minimum public holding,” said Pankaj Pandey, head of research, ICICI Securities. “Once the promoter sells stake at a certain price, that price is considered a reference price.”

As on September 30, 2019, promoters held 82.50 per cent of HDFC AMC. Standard Life Investments sold 2.23 per cent last week for Rs 3,170 per share. Promoters will have to lower their stake to 75 per cent by July 2021.

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Morgan Stanley maintains underweight on RBL Bank with a target price of Rs 240 per share. The brokerage cited the asset quality outlook behind the underweight rating on the stock. The brokerage suspects a build-in higher slippages and credit costs for the bank while rising share of unsecured loans is another key factor to watch.

“We believe valuations of HDFC AMC, heightened regulatory risks on fee structure and the outlook for equity market performance cap upside and present near-term risks” said Saurabh Kumar, analyst, JP Morgan, while setting a target price of Rs 2,700.

The HDFC AMC stock more than doubled this year to touch its 52-week high of Rs 3,844 on November 22. Similarly, Nippon Indian MF surged 143 per cent between January 1 and November 22. Nippon MF is currently trading at 38 times its FY21 estimated EPS while HDFC AMC’s forward PE is 50.

“RNAM is currently available at 24.2 times its FY22 estimated EPS, which we believe is reasonable,” said Lalitabh Shrivastawa, deputy VP – Research, Sharekhan. “We believe that with the resumption of growth and strengthening of the balance sheet, there is headroom for bridging the valuation gap between Nippon MF and HDFC AMC, which can be a trigger for re-rating of the Nippon MF stock.”
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