HDFC AMC, Reliance Nippon Life plunge 8-11% as brokerages cut target sharply after MF fee cut by SEBI

54 percent of industry AUM is controlled by top 5 players and 75 percent of industry AUM is controlled by top 10 players.

HDFC Asset Management Company closed 8.5 percent lower and Reliance Nippon Life Asset Management ended lower by more than 11 percent to hit 52-week low of Rs 186.20 as brokerages slashed their target prices after SEBI cut expense ratio for these companies.

Global brokerage house Nomura has downgraded Reliance Nippon AMC share to Neutral from Buy and also slashed target price to Rs 210 from Rs 315 earlier after capital market regulator SEBI on Tuesday cut total expense ratio (TER) for mutual funds by 20-25 basis points.

TER cut is in addition to the recent 15 bps cut in lieu of exit loads, it said.

In last six months, SEBI cut TERs by 40 bps versus industry profitability of 25 bps. Nomura said AMCs will also have to absorb some part of the impact.

Morgan Stanley also cut target price on HDFC AMC stock to Rs 1,765 from Rs 2,050 per share while having Overweight call on the stock. "Lowering EPS/price target is materially on sharp TER cut by SEBI."

The global research firm cut estimates for equity & gross revenue / AAAUM by 20 bps & 11bps respectively and expects some further near-term weakness

Experts said this will have impact on earnings of these companies. Companies can pass on to distributors or have to absorb the cost by taking hit on earnings.

Aditya Birla Sun Life AMC told CNBC-TV18 that earnings will go down for both AMC & distributors.

54 percent of industry AUM is controlled by top 5 players and 75 percent of industry AUM is controlled by top 10 players.

Aditya Birla Sun Life said the reduction in cost is a positive for consumers and the market share might move from large to smaller players.

According to CLSA, the SEBI move of fee cut for MF could impact sector earnings by 25 percent as equity AUMs form 40 percent of total funds and could lead to a 15-25 bps reduction in equity fees.

"This will impact all funds & should be effective in 2-3 months. We see some knock-on impact for brokers & private banks. Risk arises for life insurers in the case IRDAI reviews ULIP fee," it said, adding companies will pass on majority of this to distributors.

Citi feels mutual funds could cushion lower TER impact by passing it to distributors and by lower promotional expenses.

"Banning upfront commissions will improve quality of flows. Lower charges will make mutual funds more attractive for investors and aid penetration," Citi said.

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