An Undervalued Stock In Mutual Fund Industry

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Stock market is roaring high and inflows in the mutual fund industry are very healthy. Have a look at below chart:

Equity SIP inflows are on a continuous rising trend and recently crossed a historic Rs 11,300 Cr mark on January 22.

But is this it? Well not really! The kind of under penetration of mutual funds in India where most of the states have per capita exposure to mutual funds of less than Rs 9,380; the scope of growth is immense!

Definitely it makes sense to invest in such a growth story, right? And a value pick in such a sector will be just cherry on the cake.

One stock to play such a growth story is Aditya Birla Sun Life AMC [ABSL AMC].

We know it had a weak listing and is currently trading at discount to its listing price. But since when listing premium became a parameter to evaluate a good company? Remember UTI AMC also had a weak listing, but since then it has almost doubled now. 😊

ABSL AMC is the 4th largest AMC in India with MF AUM (excluding ETF) of Rs 300,300 crore and as of September end, its market share stood at 9.15 percent.

Asset composition, geographical mix and customer profile are some of the key determinants of profit in the AMC business. Let’s break them down for ABSL AMC.

  • Asset composition: ABSL AMC proportion of equity-oriented assets in the total AUM has increased from 24.1 percent in September ’16 to 38.1 percent in June ’21. This is a very positive sign as equity schemes fetch higher revenues. Equity assets as a proportion to total AUM is still very less in comparison to industry average, thus leaving room for enough growth.
  • Geographical Mix: ABSL AMC presence in the B30 locations [which are the 30 locations beyond the top 30 locations [T30] of India] is less in comparison to industry average. These locations are expected to contribute to the growth of the mutual fund industry as mutual funds are highly underpenetrated in these locations. Also, what’s the interesting thing about these B30 locations? MF companies are allowed to charge extra 30 basis points for these locations, therefore extra revenue 😀
  • Customer Profile: ABSL AMC share of individual investors increased from 40.6 percent as of September’16 to 47 percent as of June ’21. Increasing individual participation will drive the growth as retail investors are stickier and tend to invest in equity schemes that generate high management fees. Also, when individual participation is compared to peers and industry average, it is still less thus leaving enough room for growth.

Further the ROE of the business has been consistently above the 30% mark, higher than the peers. Also, Business is quite safe and the balance sheet is healthy ensuring safety to investors. Having growth levers in place, valuation discount comparison to peers is what makes ABSL AMC a value pick.

Long term investors can have a look at this valuable stock to include in their portfolio.

Until then!

P.s. We are not SEBI Registered Investment advisors. This is not a stock recommendation. The article is written for educational purposes. Please do your own research before investing.

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