AMC stocks face rough waters; Kotak sees selective opportunities in SBI, HDFC AMC

Indian asset management companies are facing a mixed setup. Retail flows, particularly through SIPs, have remained resilient despite weaker market performance. However, Kotak Institutional Equities believes the sector’s next leg of growth will depend on a recovery in markets and sustained fund performance.

In its latest sector report, Kotak said valuations across AMCs have corrected but remain elevated compared with the broader market. The brokerage sees selective opportunities, initiating coverage on SBI Funds Management with a BUY rating and a fair value of Rs 600, while upgrading HDFC AMC to BUY.

SIP flows offer some comfort

The biggest support for the sector has been the continued resilience of retail investors. Kotak noted that despite moderation in recent flows, the long-term trend remains supportive of high single-digit to low double-digit AUM growth from steady inflows.

SIPs have been particularly important. Over the past decade, SIP flows contributed nearly 40% of overall mutual fund AUM growth, according to Kotak. The brokerage also noted that net flows and mark-to-market gains have each contributed about half of the industry’s AUM growth over the period.

However, the flow picture is becoming more competitive. Smaller AMCs have been able to attract disproportionate inflows when a few of their funds deliver strong performance, putting pressure on larger players to maintain their track records. Kotak said performance reversals can quickly lead to a slowdown in flows or even outflows.

Fund performance is the key monitorable

For AMCs, strong distribution and scale can provide an advantage, but they cannot completely offset weak investment performance. Kotak said profit growth for large listed AMCs remains a function of sustained fund performance and flows, while weaker trailing equity returns remain a risk to retail sentiment.

This is particularly relevant for SBI AMC. Kotak expects its earnings to compound at around 15% over FY2027-29, supported by similar growth in revenue and mutual fund AUM, stable margins and disciplined costs. But the brokerage highlighted stability in fund performance as an important assumption behind its growth outlook.

Kotak also pointed to the need for AMCs to build newer growth engines such as alternatives, offshore offerings and distribution, while dealing with rising competition and pressure to retain talent. Sector valuations range from around 15x to 35x FY2028 earnings, underlining the wide gap between individual franchises.