CLSA India Pvt. downgraded HDFC Asset Management Co. on Tuesday, citing investment risks and limited reward potential after the recent rally in the stock.
HDFC AMC has rallied more than 20% after SEBI Chairperson Madhabi Puri Buch's recent remarks that the "second iteration of the TER (total expense ratio) consultation paper would have a loosening of regulations vs. the first draft," the brokerage said in a note.
CLSA is lowering its rating to 'underperform', but it upgraded the target price to Rs 2,540 from Rs 2,499.55, implying a potential upside of about 2.42% from the current levels.
The investment group has a positive outlook and increased its profit-after-tax estimates by 4–8% for the current fiscal to calendar year 2026, driven mainly by an increase in top-line momentum.
"Our estimates and DCF (discounted cash flow) model now imply some share gains over the next few years for HDFC AMC."
Shares of HDFC AMC are trading 0.75% higher at Rs 2,516.25 apiece, as compared with a 0.07% advance in the benchmark NSE Nifty 50 as of 1.10 p.m.
Of the 22 analysts tracking the stock, 11 maintain a 'buy' rating, eight recommend a 'hold,' and three suggest a 'sell,' according to Bloomberg data. The average 12-month consensus price target implies a potential downside of 4%.
Miss On Operating Profit
In the first quarter of the financial year 2024, the company's operating profit fell by 4% as compared with CLSA's estimates due to lower-than-expected revenue yields and higher operating expenses.
However, it managed to offset this shortfall by earning higher other income through gains on mark-to-market investments and a lower tax rate, resulting in a net profit beat.
The management mentioned that revenue yields on new equity asset under management flows are still lower versus those on stock, the note said. "Hence, we expect yield compression to continue for some more time."
Improved Scheme Performance
HDFC AMC has seen a marked improvement in its equity scheme performance in both the one-year and three-year buckets, which is being reflected in a 90 basis point year-on-year improvement in its equity AUM market share. This is partly aided by new fund offerings, according to CLSA.
The systematic investment plan's market share has also improved by 240 bps year-on-year, and the company mentioned that it is gaining share in all distribution channels now. It has largely maintained its market share in the fixed income segment on a year-on-year basis, the brokerage said.
Investment Risk
CLSA highlighted that the key investment risks were weak capital markets as they could hinder investor flows and adverse regulatory changes, such as tightened expense ratios and commissions.
Another potential challenge is a stronger pickup in passive funds, which can hinder average fees earned on assets and reduce profit. Phases of prolonged economic weakness can further hinder assumptions, it said.
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