PL Sector Report: Asset Management Companies - Jul-Sep’23 Earnings Preview – Healthy growth in equity to protect profitability
Prabhudas Lilladher Pvt Ltd
Asset Management Companies - Gaurav Jani - Research Analyst, Prabhudas Lilladher Pvt Ltd.
Jul-Sep’23 Earnings Preview – Healthy growth in equity to protect profitability
Industry MAAuM as at Aug’23 stood at Rs46.94trn of which equity/debt share was 39%/19%. Excluding NFOs, Jul’23 and Aug’23 combined, saw equity net flows of Rs276.35bn compared to Rs120.44bn in Q1FY23 as Q1 is usually soft partly due to fall in ELSS flows. Equity QAAuM growth is expected to be strong for FY24E as closing equity (incl. balanced) AuM has seen healthy YTD growth of 20.2% as at Aug’23. On the flipside, due to stronger AuM growth equity yields could fall more sharply owing to the TER structure.
As equity market has done well, we expect companies in our coverage to see better overall/equity QAAuM growth at 8.1%/12.5% QoQ (vs 6.6%/6.1% in Q1FY24). Equity QAAuM growth for HDFC AMC would be superior to UTI AMC owing to stronger equity performance, although both AMCs could see a similar QoQ growth in core income at ~9%.
§ Equity QAAuM set to grow by 12.5% QoQ led by HDFC AMC: Coverage AMCs would see QAAuM growth of 8.1% QoQ to Rs7.9trn with both AMCs likely to grow by ~8.0% QoQ. Owing to strong equity performance, equity QAAuM for HDFC AMC could grow by 14.3% to Rs2.88trn compared to 7.7% growth for UTI AMC.
§ Revenue yields to remain stable at ~46.5bps: Upmove in equity markets and sharp outflows in liquid should keep profitability intact for AMCs resulting flat yields for our companies 46.5bps. We envisage revenue for our coverage AMCs to slightly increase by 7.2% QoQ to Rs9.2bn. For HDFC AMC, yields remaining flat would not materially impact core profitability although UTI is more sensitive to yields.
§ Opex to increase QoQ: Better equity growth does provide some headroom to invest in the business and hence we expect opex to rise by 4.7% QoQ led by increase in employee cost and other opex. Both HDFC AMC and UTI AMC could see a mainly opex trajectory in Q2’24. ESOP charge and variable pay would key monitorables.
§ Core profitability to remain stable at ~28bps: Strong AuM growth and stable yields should keep overall pre-tax profitability intact for our AMCs at 28bps. On a post-tax basis, HDFC could see core income fall by 2.2bps QoQ to 26.3bps as tax rate will normalize. Last quarter tax rate was lower due to decrease in deferred tax expense as holding period of certain investments transitioned from short-term to long-term.