Nippon, UTI mutual funds top picks of brokerage. Here’s why

In its research note, BOB CAP said, “After a robust 18% CAGR in QAAUM over FY15-FY22 to ₹38 trillion, we expect the Indian mutual fund (MF) industry to end-FY27 at ~ ₹64 trillion, logging an 11% CAGR over FY22-FY27.”

Among key growth, catalysts are higher financial savings, broader regional penetration, ease of investing online, and rising awareness of mutual funds.

In 2022, total net flows into all mutual funds came in at ₹71,443 crore, with positive inflows into equity schemes ( ₹1.61 lakh crore), Index funds & ETFs (Rs1.65 lakh crore), and negative inflows into debt schemes ( ₹2.5 lakh crore) collectively from the open and closed-ended categories. Inflow in SIPs stood around ₹1,49,437 crore during the year.

As per BOB CAP, the rapid growth in mutual funds has been headlined by a steady rise in equity QAAUM – from 30% of the total in FY12 to 46% in FY22 and further to 48% in H1FY23. Barring FY21, net equity flows have remained positive since FY15, hitting a peak of ₹2.7tn in FY22. Systematic investment plans (SIP) have played an instrumental role in bolstering growth.

Also, it explained that the share of individual (retail + HNI) investors in MF industry MAAUM has swelled from 46% in FY17 to 55% in FY22 and 57% in H1FY23. Whereas institutional AUM logged an 11% CAGR over the past five years, individual investors grew at a brisk 20% led by equity funds and HNI demand.

The brokerage has initiated coverage on Nippon AMC and UTI AMC following the above.

Nippon AMC:

According to BOBCAP, Nippon AMC, the #4 fund house in India by monthly average AUM (MAAUM), has successfully leveraged its first-mover advantage in exchange-traded funds (ETF) to command 71%/60% of volumes/folios in the segment.

Nippon AMC has maintained a 7% MAAUM market share over FY21-H1FY23, especially after Nippon Life took over in Sep’19. Also, despite being a non-bank affiliated entity (no captive clients), the company has built a strong retail franchise at 29% of MAAUM vs. a 25% industry average at end-H1FY23, backed by top-quartile scheme performance in the equity large- and small-cap categories.

That being said, BOBCAP note said, “We expect quarterly average AUM (QAAUM) to log a 10% CAGR over FY22-FY25 from ₹2.8 trillion to ₹3.7 trillion, with the proportion of equity rising to 45% and ETFs at 26% at endFY25. The stock is currently trading at 17x FY25E EPS. We initiate coverage with BUY and a TP of ₹347, assigning the stock a P/E multiple of 24x on FY25E EPS – one standard deviation below the long-term mean multiple.”

UTI AMC:

This mutual fund is the eighth largest fund house in India with QAAUM of ₹2.3 trillion —- on the back of consistently generated positive net flows since FY21.

As per the brokerage’s note, UTI AMC has yielded market share over FY17-FY20 from 7.5% to 5.4% but has since partly retraced to 6% levels (+60bps) at end-H1FY23 as against steep declines for listed peers ABSL AMC (-190bps) and HDFC AMC (-270bps) since FY20.

In the non-mutual fund business (offshore, pension, private equity, and venture funds), the brokerage believes that UTI AMC has a key advantage as one of only two fund houses appointed to manage India’s Employee Provident Fund corpus.

Thereby, BOBCAP’s note said, “We model for a 10% CAGR in QAAUM over FY22-FY25 to ₹3tn, with the proportion of equity rising to 43% and ETFs at 33% at end-FY25. The stock is currently trading at 15x FY25E earnings. We initiate coverage with BUY and a TP of ₹983, set at 18x FY25E EPS –between the stock’s long-term mean multiple and one standard deviation below the mean.”

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.