10-15% impact expected on earnings; downgraded to ‘Neutral’ with TP cut to Rs 210
The Securities and Exchange Board of India (SEBI) has announced a further and a large TER (total expense ratio) cut for MFs by 20-25bps in addition to the recent 15bps cut in lieu of exit loads. Overall, in the past six months, SEBI has cut TERs by 40bps vs industry profitability (PAT/AUM) of 25bps. While a large part of the impact will be passed on, the AMCs will also have to absorb some part of the impact and, more importantly, operating leverage in the business is taken away to a large extent with lower TERs allowed now as AUMs grow in size.
While at this juncture it is difficult to assess what can be the eventual impact on profitability for RNAM and we will have to wait and see what will be passed on to the distributors, this TER cut clearly derails profitability for the AMCs and, hence, we cut our valuation multiple as PAT will lag AUM growth in the near-to-medium term. We cut our TP for RNAM to `210/share vs `315/share and assign 20x Sep-20F EPS multiple now vs. +30x earlier and downgrade to Neutral.
TER cuts just too large to be absorbed by distributor or manufacturer: We think the ability to absorb such large TER cuts is limited given core Ebit for RNAM at 23bps for FY18 and the ability to pass on the impact to distributor will also be limited. Even assuming +65% of the impact being passed on, this would mean 10-15% cumulative reduction in profits for RNAM and near-term PAT growth could lag AUM growth.