Why this asset management company is investment worthy

As record inflows via the SIP route continue and retail investor preference surges for mutual funds as long-term vehicles, asset management companies (AMCs) remain among the key beneficiaries.

In this regard, as a prominent fund house in the top 10 list, Aditya Birla Sun Life AMC (ABSL AMC) manages schemes across the spectrum – equity, debt and hybrid.  It also runs alternative asset portfolios. The AMC managed ₹3.68 lakh crore as of June 2024.

Improvement in the equity segment, a SIP book that is growing and stays put for long tenures, a rapidly-expanding passive business and steady traction in its large debt fund portfolio are positives for the company. The house is among the best in the industry on return performance as well as assets managed across debt fund categories.

At ₹731, the stock trades at 27 times its per share earnings for FY24 and about 21 times its expected EPS for FY25. This is at a discount to HDFC and Nippon Life AMCs that trade in excess of 35 times FY24 earnings, indicating that company’s valuations are at a much higher discount than it deserves. ABSL AMC’s valuation multiple is also marginally lower than UTI AMC’s despite the former’s better margin profile.

The company’s operating profit margins have always been more than 50 per cent, which is comparable with larger peers and much higher than UTI AMC’s margins. Net profit margin has also remained more than 50 per cent.

Investors can thus buy the stock of ABSL AMC with a two-three-year perspective.

Between FY21 and FY24, the AMC’s net profits rose at 14 per cent annually (CAGR) to ₹780 crore, while revenue from operations rose at 8 per cent to ₹1,353 crore, both as of FY24. The revenue and net profit growth figures year on year for FY24 stand at 10 per cent and 31 per cent, respectively.

The AMC’s return on equity was a robust at 27 per cent in FY24.

Presence across categories

Despite market regulator SEBI’s periodic announcements to fund houses to bring down their expense ratios, the top AMCs have demonstrated considerable revenues by growing their revenues and maintaining healthy margins.

As of FY24, ABSL AMC manages 35 equity (including equity-oriented hybrid) and as many as 43 debt funds, and two liquid schemes. It also has 11 ETFs and eight domestic fund of funds in its portfolio.  

The AMC managed ₹3,31,709 crore (up 21 per cent year on year) in mutual funds as of Q4FY24, with a market share of 6.9 per cent (excluding ETFs).

Its mutual fund SIP flows have risen sharply from ₹987 crore as of June 2023 to ₹1,367 crore in June 2024, an increase of 39 per cent as markets were on an upswing.

What is desirable for the company from the AMC’s perspective is that as much as 94 per cent of ABSL AMC’s systematic investment accounts tend to stay on for more than five years, while 87 per cent stick around for over 10 years indicating a resilient book.

ABSL AMC’s equity schemes had not been at their best and were relative underperformers in the rally that started during the Covid period. However, over the past 12-18 months, many of its older equity funds are slowly gaining traction and delivering reasonable returns.

Across debt fund categories, however, ABSL AMC has consistently been among the best in terms of returns and consistency over all timeframes – short, medium and long terms. Indeed, the fund house’s overall AUM mix has 54 per cent coming from debt and liquid funds.

And at a time when debt fund outflows are the norm, ABSL AMC has actually seen inflows into its bond schemes.

Despite the higher debt fund proportion in the asset mix, the AMC has a healthy yield (Revenue to  total AUM, including alternatives) of 39.1 basis points, which compares favourably with many other large fund houses and is higher than UTI AMC.

Passives, alternatives shine

As a section of investors shifts to passive schemes for participating in the market, the house has been able to bring out several funds tracking various indices. In the last three years leading to June 2024, the fund house’s passive AUM grew 14 times to ₹29,900 crore.

In the PMS/AIF space, ABSL AMC had quarterly assets under management of ₹3,400 crore. The AMC also has real estate funds to the tune of ₹500 crore and manages offshore funds of ₹11,200 crore, all as of June 2024.

These are high-growth category-II and -III AIFs, which hold potential for further expansion for the fund house.