Can Aditya Birla Sun Life AMC deliver growth at a reasonable price?
The mutual fund industry has been making headlines of late, with systematic investment plan (SIP) flows clocking new records every month. Consistent SIP inflows ensure high revenue predictability for asset management companies (AMC), which is why they are commanding a premium to the broader market (Nifty 500).
A recent report by Kotak Institutional Equities said AMCs are trading at a one-year forward price-to-earnings multiple of 35 times against the Nifty 500’s 22 times, based on Bloomberg consensus estimates. Thus, investors who wish to participate in the mutual fund growth story must make sure they do so at a reasonable price.
What do the profitability and valuations of the four listed AMCs tell us? Kotak analysts point out that HDFC Asset Management Co Ltd (HDFC AMC) has the highest core profit before tax as a percentage of average assets under management (AAUM) at 37 bps for FY24, and UTI Asset Management Co Ltd has the lowest at 15 bps. UTI’s low profitability could be attributed to its asset mix, which has less equity than debt.
However, HDFC AMC’s valuations are rich. Kotak’s analysts estimate it has the highest PE multiple of 43 times based on FY24 earnings, which is on the higher side despite its superior growth metrics.
Nippon Life India Asset Management and Aditya Birla Sun Life AMC (ABSL) have similar profitability at 26 bps, but their PE multiples are disparate. Nippon trades at 27 times earnings compared to 18 for ABSL, as investors have different perceptions of their future growth.
Still, it’s difficult to ignore that Aditya Birla’s valuation seems reasonable. The stock hit a peak of ₹536 on 28 February and has now dropped by 11% to about ₹480. While there is no apparent reason for this fall, it has also led to a drop in valuations.
Since the mutual fund industry is growing quickly, price-to-earnings-growth (PEG) is a better valuation metric than PE. PEG is arrived at by dividing the PE ratio with the expected earnings-per-share growth, and a PEG of less than 1 is generally considered attractive. Considering ABSL’s profit growth of 24% in 9MFY24, its PEG ratio works out to be less than 1.
As such, a favourable industry scenario translates to better earnings visibility for the company. Sure, the net yield or profitability of the industry has come under pressure with Sebi tightening norms around the total expense ratio, but volume growth and the asset base story are intact. Aditya Birla’s AUM from SIPs as a percentage of equity AUM has touched 37%, which indicates a stable base for fees. It will rise further, with fresh SIP flows at 30% of incremental flows.
The long-term outlook appears bright and the industry is likely to continue to grow in the double-digits, as it has in the past five years. This is because India’s mutual fund AUM as a percentage of GDP is only 14% compared to the global average of 60%.
The only threat for the industry could be the launch of new passively managed index funds, which are much less profitable for companies than active ones. Passive funds now account for 45% of the AUM in developed countries like the US, up from 21% in 2012.
For ABSL, the average passive AUM for the December quarter was ₹28,900 crore, which is only about 21% of the total average equity AUM of ₹1.36 trillion. ABSL and the wider industry will have to continue beating the benchmarks to prevent investors from switching to passive funds.
