We are upgrading the stock from EW to OW and raising our cost target by 40% to Rs 3,130 (from Rs 2,235). Our new target implies 22% upside from present levels. Stock has underperformed year to date and has considerably underperformed each Sensex and Bankex. The stock is down 20% YTD right after powerful efficiency in 2019 vs. +8% for Sensex and -8% for Bankex. Since Nov 19, the stock has considerably de-rated, with 1-year forward cost-to-earnings many declining from a peak of 57x to ~36x now. Since May 31, 2020, even though Sensex is up 38% and Bankex is up 52%, HDFC AMC stock is up only 2%.
Reasons for the below-efficiency. Weak market fundamentals, the asset management market has noticed continued outflows in equity ex ETF (far more lucrative small business), in spite of systematic investment program (SIP) inflows remaining pretty resilient.For the mutual fund market, equity ex ETF funds have noticed outflows for the previous 5 consecutive months, and FYTD outflows have been ~Rs 187bn. SIP inflows of ~Rs 556bn have been offset by non-SIP outflows of ~Rs 743bn. Loss of industry share: Further, HDFC AMC has progressively lost industry share in equity ex ETF. For Oct 20, its industry share in equity ex-ETF funds was 13.5% (on a month-to-month typical AUM basis) vs 15.3% as of Oct 19. In the previous, on its Q3FY20 post earnings conference get in touch with, management has attributed the loss of industry share to underperformance of the mid-cap and little-cap categories, which have been then ~19% of AUM for HDFC MFvs. ~11% for the market.
Why OW now? Stronger markets ahead, along with broad industry recovery. The Morgan Stanley India Equity Strategy group expects a broad-primarily based earnings recovery and double-digit returns in 2021, with little- and mid-cap stocks outperforming. The group expects BSE Sensex to be at 50,000 by December 2021, which implies ~12% upside from present levels. This should really advantage the asset management market, and HDFC AMC should really probably be a disproportionate gainer. We think that,as the macro atmosphere continues to increase, non-SIP domestic flows should really come back strongly in FY22, and there could be a case of rise in contribution from SIP flows, also.
This, along with mark-to-industry gains, should really drive AUM development for the market. HDFC MF should really be a disproportionate gainer, if our assumption of a broad industry recovery ensues.
We worth HDFC AMC stock working with our base case target P/E many. In the previous, we have discussed that our DCF computations assistance a base case P/E many of 30-35x. We have been valuing the stock at the reduced finish of this valuation variety (30x) this year for the reason that of uncertainty about the economy for the reason that of Covid-19 and resultant broad industry weakness. As described our DCF computations assistance a base case P/E many of 30-35x, we now worth the stock at 36x our March 2023 EPS estimate (we have rolled forward our valuation by 12 months from March 2022, which is primarily based on one particular-year-forward earnings and P/E many, i.e. FY23, typical P/E many due to the fact listing of 36x). This is driven by structural advantage to the mutual fund market and to players with bigger industry share on the back of adjust in investor sentiment and stronger equity markets could straight assistance earnings through larger AUM (mark to industry gains + larger equity inflows).
We forecast EPS development of 20% in FY22 and 18% in FY23. Thus, we arrive at our cost target of Rs 3,130, implying 22% upside from the present industry cost. Our bull case situation worth of Rs 5,215 implies 103% upside. It assumes an EPS CAGR of 24% (F20-23e) and a target P/E many of 45x (peak valuation many has been 57x). A essential danger to our rating is weaker-than-anticipated markets, particularly broad industry weakness and continued industry share loss at HDFC AMC.