AMC: Don’t view AMC’s short-term decline too negatively: Sunil Subramaniam
The general opinion in the market is that AMC is an excellent company, it generates rent income, it is a company that does not require too much capital to grow. But the honeymoon period is behind us as spreads are under pressure, PMS are eating into market share and in general, as the market expands, ETFs will start to grow where commissions are low?
True, it is not a financially highly leveraged business, but it is an operationally highly leveraged business. The rent must be recovered, the penetration being so weak. With the expansion of rural and urban India, there are a lot of investments to be made and what the industry is doing, so the fixed costs are increasing.
So, in a business with high operating leverage, the fixed cost increases initially, after which your incremental margins increase once the scale expands. So I think the industry is investing for the future in terms of expansion. Secondly, the point about ETFs you mentioned is not just about ETFs, it’s also about institutional gambling, contingency money, because the government has allowed wiggle room either in ETFs or funds indices, either in large direct plans CMA where the margins are naturally lower.
The industry is expanding but with lower margins, that’s also okay. The third thing to keep in mind is that since 2018, second half, SEBI had removed the initial commission and shifted the industry to an off-road model.
So to that extent the historical assets where advances were paid and were at a lower level because you have a higher initial amount offset by lower income. Thus, new industry-accredited assets are all naturally in full-track model.
So you look at margins on incremental assets versus margins on a historical basis, they’re naturally lower and that’s the phase we’re going through. But as the scale increases, all the investments you’ve made will pay off, and ultimately I think the industry will evolve into this rent-based business, but it’s still in mode expansion of growth and the cost of growth must be absorbed by the AMCs. It is therefore a forward-looking instrument and we would say not to look too negatively at the short-term decline.
Let’s look at the SIP number, the number increases. You pretty much know where the flywheel moves for AMCs. If SIPs are increasing, if equity investing is increasing, if millennials are investing more in mutual funds, why isn’t that translating into some kind of excitement? All I’m saying is, if the highway to wealth creation via stocks seems so strong and if it’s a megatrend, why are stock markets rejecting it?
I think the reason is that when these AMCs were listed, the type of projections made are not up to par. Strong growth is in terms of turnover, but strong growth in terms of profit has not translated. The industry is growing and investing heavily, revenue is increasing, but a significant portion of revenue is coming from liabilities, that is, lower margins, and the historical cushion that we aircraft from a high departure but from a lower runway fade.
So to that extent the industry is a growing industry, but is it a growing industry of EPS because turnover is growing. So give it time, the market still doesn’t recognize it. They were expecting very high growth in revenue and net income, but that didn’t translate for the reasons I mentioned. But it’s fixed, which is engaged in about two years, three years, I think all this will begin to bear fruit.
So yes, the industry hasn’t lived up to the hype that occurred when AMC signed up the initial set, but that doesn’t mean the industry is losing ground. I mean the PMS are there i.e. for the HNI segment, the AIFs and the PMS, the provident funds that invest directly but there are a lot of provident funds that invest and recently SEBI has just open it up to public sector companies. Provident funds can also invest in non-public sector AMCs, which was a major barrier as only a few public sector AMCs benefited, now the whole sector will benefit.
So I would say that the outlook for growth as well as the outlook for stocks that are so promising for the country are very good. The industry doesn’t need to invest much once it gets critical coverage, so you’ll see later that the profit pool will catch up with the revenue growth as well. I think it’s a phase and it’s a matter of time before it happens.
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