AMC shares rally on Sebi’s TER call, analysts expect re-rating

Shares of domestic mutual funds rallied up to 14% on Friday after the capital markets regulator deferred its decision to cut the total expense ratio (TER)– the fee that these asset management companies charge unitholders. The reduction in the expense ratio as proposed by the Securities and Exchange Board of India earlier, would have hit the profitability of the mutual fund industry. Now the regulator plans to rework the TER plan

While shares of Nippon India gained 14% to close at Rs 286, HDFC AMC stock rose 12% to close at Rs 2,289. UTI AMC shares gained 8.4% to close at Rs 786. Aditya Birla AMC shares ended 1% higher at Rs 373 after rallying nearly 9% intraday.

Sebi on Wednesday said the regulator would soon come up with a second consultation paper around rationalising the TER. The regulator hinted that the new amendments would be less stringent compared to the ones proposed earlier.

“As for the total expense ratio issue, the fears were put to rest by the decision of the regulator, and our sense is that this will possibly also enable them to garner a larger market share over a longer period of time,” said Gaurang Shah, senior VP, Geojit Financial Services. “On the fundamental side, we have been positive on HDFC AMC.”

Valuations of these mutual funds have seen a derating in the last six months due to volatility in flows into equity assets and fall in margins. HDFC AMC shares declined 6% from January 1 till June 28, while UTI AMC and Aditya Birla AMC shares fell 16% and 19% during this period.

“From a short-term perspective, we remain positive on the AMCs stock as the industry is seeing a higher inflow of funds, especially in the small and mid-cap category, and the funds yield higher returns,” said Akshay Tiwari, analyst, Religare Broking.

Brokerages earlier expected the proposed review of the TER to impact listed asset managers’ FY 2025 net operating profits dropping by up to 27%.“We see a higher likelihood of regulatory stance easing versus market expectations toward the sector, even as there is some residual uncertainty around what comes out in the next consultation paper and the final regulations,” said Abhijeet Sakhare, analyst, Kotak Institutional Equities. “We reverse a part of the equity yield cuts that we have had pre-emptively built in the numbers, leading to an upgrade to earnings and targets.”