Morgan Stanley has upgraded HDFC AMC from 'even-weight' to 'over-weight' and raised the target price on the stock by 40% to Rs 3,130 from Rs 2,235 earlier. Shares of the asset management company rose 4.8% on Tuesday to an intraday high of Rs 2,842.
After a strong performance in 2019, the stock underperformed in 2020. It has declined 14% year-to-date when compared to 10% rally seen in Sensex so far this year.
Morgan Stanley attributes weak industry fundamentals and loss of market share for the underperformance of HDFC AMC shares.
"The asset management industry has seen continued outflows in equity ex ETF (more profitable business), despite systematic investment plan (SIP) inflows remaining fairly resilient. For the mutual fund industry, equity ex ETF funds have seen outflows for the past five consecutive months, and FYTD outflows have been Rs 18,700 crore. SIP inflows of Rs 55,600 crore have been offset by non-SIP outflows of Rs 74,300 crore," Morgan Stanley said in a note.
"Further, HDFC AMC has progressively lost market share in equity ex ETF. For Oct-20, its market share in equity ex-ETF funds was 13.5% (on a monthly average AUM basis) vs 15.3% as of Oct-19. In the past, on its Q3F20 post earnings conference call, management had attributed the loss of market share to underperformance of the mid-cap and small-cap categories, which were then 19% of AUM for HDFC MF vs. 11% for the industry," it added.
About changing its stance on the stock, the global brokerage said that strong markets and a broad market recovery will benefit HDFC AMC.
"This should benefit the asset management industry, and HDFC AMC should likely be a disproportionate gainer. We believe that, as the macro environment continues to improve, non-SIP domestic flows should come back strongly in FY22, and there could be a case of rise in contribution from SIP flows, too. This, along with mark-to-market gains, should drive AUM growth for the industry. HDFC MF should be a disproportionate gainer, if our assumption of a broad market recovery ensues," it said.
Changes to its price target are driven by expectations of valuation re-rating, it said adding that a key risk to their rating is weaker-than-expected markets, especially broad market weakness and continued market share loss at HDFC AMC.