AMC stocks soar on record inflows, but analysts warn of overvaluation risks

Agencies Live Events as a Reliable and Trusted News Source Addas a Reliable and Trusted News Source Add Now! (You can now subscribe to our (You can now subscribe to our ETMarkets WhatsApp channel Mumbai: Listed asset management companies have been on a tear in this year's trading, riding on record inflows and growing expectations of a more relaxed regulatory environment. But analysts warn that gains may moderate as industry competition rises and valuations may be stretched.Shares of Nippon Life India AMC have surged 56%, while HDFC AMC has gained 54%, UTI AMC 38%, and Aditya Birla AMC 36% in the past six months compared with an 11.3% rise in the Nifty Financial Services Index.Investor appetite for these AMCs has been driven by resilient flows into their equity schemes despite sharp swings in the stock market. In July, equity mutual funds collected ₹42,702 crore - the highest ever in a month - led by appetite for midcap, smallcap, and sectoral fund offerings. SIP contributions hit a record ₹28,464 crore."The record-high inflows into AMCs are making them structural winners," said Prashanth Tapse, senior vice president - Research at Mehta Equities. As AUM grows, AMCs gain directly through fee income, which has driven a sharp rerating in the sector."The industry's average assets under management (AUM) stood at ₹76.74 lakh crore, while fund folios climbed to 24.57 crore by July-end, up from 10 crore in May 2021. The rapid growth in the 47-member-strong domestic mutual fund industry in the past five years is also drawing new entrants and intensifying competition. Jio BlackRock, Angel One Mutual, Unifi Capital and Pantomath Capital Advisors are among the firms that have launched their mutual fund business, while more are in the pipeline. ICICI Prudential AMC and Canara Robeco are looking to list, which could reduce the scarcity premium for existing AMC stocks."While AMC stocks used to trade at 20-25 times earnings, the recent rally has pushed some valuations to 35-40 times, with investors willing to pay a premium as the market increasingly treats them as long-term growth stories, similar to insurance companies," said Tapse.The pace of the rally in the AMC shares could slowdown in the face of the premium valuations. "Whatever the best could have happened has happened for these companies," said Siddarth Bhamre, head - Institutional Research, Asit C. Mehta . "The tide is going to shift. Newer and larger high potential players are entering the equity market, making it more competitive and markets are now looking more expensive than ever." AMC stocks could face near-term pressure, with prices expected to correct by 5% to 7%, he said.