SEBI’s new total expense ratio proposal may hit HDFC AMC most

HDFC AMC’s revenue is likely to be hit more by SEBI’s new proposal to impose uniform total expense ratio (TER) for all asset management companies (AMCs) that aims to enhance transparency in the costs charged to unitholders. 

However, brokerages point out that though the new regime could result in larger listed AMCs such as HDFC AMC and those with higher hybrid mix getting impacted more, they also add that AMCs might pass through the cost impact. Besides, in the long-term AMCs will benefit to SEBI move. 

According to JM Financial, the near-term impact will be higher for larger AMCs like HDFC AMC (10-12 per cent EPS cut in case 50 per cent impact is passed on to distributors/brokers), while for mid-size AMCs like NAM impact is estimated at 5-6 per cent. For UTI AMC, the EPS impact will be negligible (even positive) given the equity AUM is on a lower side. 

“However, given the scale-based AUM slabs, TERs will continue to moderate as AUM of AMC,” a report from the brokerage said. 

ICICI Securities said that based on the TER for respective asset classes and using the AMC-level proportion, “we see possible revenue reduction for HDFC AMC, NAM and UTI in the range of 34 per cent/19 per cent/5 per cent, respectively. However, AMCs will achieve operational efficiencies like less churn in portfolios, reducing STT and brokerage, and some will be passed through sharing with other stakeholders like RTAs and distributors. This could make the ultimate impact less.” 

It added that AMCs with higher hybrid mix may be impacted more as new regime proposes bifurcation of hybrid TER between equity and debt. Amongst the listed AMCs, hybrid mix as percentage of equity mix is 36 per cent for HDFC AMC, while that for NAM and UTI it is in the range of 15-18 per cent.  

SEBI in its proposal had said that it is open to performance-linked TER for active open-ended equity schemes, wherein AMCs can charge higher management fees if scheme performance is more than an indicative return above the tracking difference adjusted benchmark. 

ICICI Securities raised a concern that though this is “optional as of now, this performance-based model can have deeper ramifications if implemented.“ 

TER is the revenue source for the entire asset management ecosystem, and it remains to be seen how the cut is managed between stakeholders, said brokerages.  

Kotak Institutional Equities shared its insights from interactions with AMCs and distributors. “High confidence from AMCs to pass on a very large share of TER hit; and impact on distributors to be shared with sub-brokers with greater push for other products (insurance and credit).” 

ICICI Securities pointed out historical data where distributors saw a cut in commission rates. “This move triggered a consolidation in the industry and also led to individual ARN registrations declining 51 per cent YoY in FY20 and 35 per cent in FY21. Based on AMFI data, industry’s overall commission payout reduced from 0.93 per cent in FY18 to 0.79 per cent in FY19 and 0.61 per cent in FY20,” it added.   

The industry will likely represent on issues such as impact on arbitrage funds, inclusion of statutory levies in TER and keeping switch transactions within the same asset class. With the regulatory overhang addressed, a high (75-100 per cent) pass-through of the impact could present upside possibilities for AMC stocks, said Kotak Institutional Equities. 

“AMCs under our coverage have corrected 15- 25 per cent over the last five months on fears of adverse changes to AMC TERs. However, the expected impact on earnings is lower than previously feared and we expect the stocks to see a bounce back once further clarity emerges on the proposed regulations and expected impact is further crystallised,” added JM Financial.   

COMMENT NOW