JM Financial keeps target price unchanged at Rs 2,900 as asset manager beats estimates with 4% PAT surprise
JM Financial Institutional Securities has maintained its ADD rating on HDFC Asset Management Company (HDFC AMC) with an unchanged price target of Rs 2,900, following a robust third-quarter performance that saw the company beat profit estimates despite a challenging environment for the mutual fund industry.
The brokerage highlighted the company’s ability to maintain margins in the face of new SEBI regulations while delivering steady asset under management (AUM) growth across key categories.
Quarterly Results Beat Expectations
HDFC AMC reported a profit after tax (PAT) of Rs 770 cr (Rs 7,701 million) for 3QFY26, marking a 4% beat over JM Financial’s estimates. The result represented 7% sequential growth and an impressive 20% year-on-year increase.
Core revenue grew 5% sequentially to Rs 1,074 cr (Rs 10,743 million), led by a 1% beat on the revenue side. Calculated yield compression on a blended basis was limited to just 0.1 basis point, helping support the topline performance.
Operating profit before tax (PBT) stood at Rs 856 cr (Rs 8,556 million), 3% ahead of estimates and up nearly 10% quarter-on-quarter. The strong performance was supported by robust other income of Rs 159 cr (Rs 1,590 million), which came in 10% ahead of JM Financial’s expectations and marked a substantial 66% jump from the previous quarter.
Steady AUM Growth Amid Market Volatility
HDFC AMC’s total AUM witnessed healthy growth of 5% quarter-on-quarter, reaching Rs 9,206 bn on a closing basis. More importantly, equity AUM—the most profitable segment for asset managers—grew 6% sequentially.
The quarterly average AUM (QAAUM) increased 4.9% to Rs 9,249 bn, with equity QAAUM advancing 6.0% to Rs 5,929 bn. This growth came against the backdrop of broader markets returning 4.9% during the quarter, a sharp reversal from the 3.8% fall in the Nifty500 during 2Q.
According to the report, even as other schemes saw strong QAAUM growth, calculated yields dropped just 0.1 basis point quarter-on-quarter. Management disclosed during the earnings call that equity scheme yields (including passives) fell 1 basis point QoQ to 56-57 basis points, while blended yields also edged down by 1 basis point to 45 basis points of QAAUM.
Debt QAAUM remained largely flat with marginal 0.3% growth at Rs 1,254 bn, while liquid QAAUM declined slightly by 0.8% to Rs 1,293 bn. The ‘Others’ category, which includes newer product offerings, saw strong 15.7% sequential growth to Rs 774 bn.
Expense Management Better Than Expected
One of the key positives from the quarter was better-than-expected expense management. Total expenses fell 11% quarter-on-quarter to Rs 219 cr (Rs 2,186 million), significantly more than what analysts had estimated.
Management had previously flagged elevated Corporate Social Responsibility (CSR) and marketing expenses in 2Q. On that base, the sequential moderation was particularly impressive. Employee benefit expenses remained virtually flat at Rs 123 cr (Rs 1,233 million), while business development and other operating expenses declined 27% to Rs 77 cr (Rs 770 million).
The company maintained its guidance of Rs 68 cr (Rs 680 million) in ESOP expenses for FY26E. Of this, Rs 47 cr (Rs 470 million) has already been booked, including Rs 21 cr (Rs 210 million) in 3Q. Management guided for a similar ESOP expense of Rs 21 cr (Rs 210 million) in 4Q.
Looking ahead, the company maintained ESOP expense guidance of Rs 63 cr (Rs 630 million) for FY27E and Rs 33 cr (Rs 330 million) for FY28E.
SEBI Regulations Impact and Management Response
A key concern overhanging the sector has been SEBI’s recent relook at expense ratio structures. During the earnings call, management addressed how the new regulations would impact the business.
The new expense ratio norms, applicable from April 1, 2026, will benefit smaller schemes and largely offset the 5 basis point reduction in exit loads. However, larger schemes will see a reduction in Total Expense Ratio (TER) under the new framework.
Management expressed confidence that the company would try to minimize the impact on profitability, similar to how it managed during the previous round of TER cuts in FY19. The brokerage noted that the TER cut in this round is lower than what was implemented in FY19, providing some comfort.
JM Financial estimates a 2-4% impact from the new SEBI regulations, but anticipates only a gradual pass-through of this impact on the company’s profitability.
Industry Inflows Remain Range-Bound
A broader concern for the sector has been the tepid pace of industry inflows. After a strong 2Q, industry equity (plus hybrid-arbitrage) inflows have remained range-bound at under Rs 40,000 cr (Rs 400 billion) in 3Q, even as SIP inflows picked up to over Rs 31,000 cr (Rs 310 billion).
The weak pickup in industry flows post-2Q has prompted JM Financial to cut its industry inflow estimates for FY27E. This weaker outlook, alongside some impact of the TER relook, led to EPS estimate cuts of 1% for FY27E and 3% for FY28E.
However, the firm raised FY26E EPS estimates by 1%, reflecting the better-than-expected quarterly performance and expense management.
Alternatives Business Gaining Traction
On a positive note, HDFC AMC is making steady progress in building out its alternatives business. The company has fully raised commitments of Rs 1,300 cr (Rs 13 billion) in its Credit Fund, with the International Finance Corporation (IFC) coming in as an anchor investor.
Management indicated it is working on launching a second Private Equity fund and a Venture Capital fund, diversifying beyond traditional mutual fund products.
Estimate Revisions and Valuation
Based on the quarterly results and revised outlook, JM Financial has tweaked its earnings estimates across the forecast period. For FY26E, the firm now estimates EPS of Rs 70.2, up 1% from its previous estimate. However, FY27E and FY28E EPS estimates have been cut by 1.5% and 3.0% respectively to Rs 79.8 and Rs 93.7.
Despite the cuts to outer-year estimates, the company is still expected to deliver strong profit growth. JM Financial projects a 22% PAT growth in FY26E, followed by 14% growth in FY27E and 18% in FY28E, translating to a healthy 16% earnings CAGR over FY26-FY28E.
Valuation Metrics:
- Current Market Price: Rs 2,554
- Target Price: Rs 2,900
- Upside Potential: 13.5%
- Target Multiple: 31x FY28E EPS
- Current P/E (FY26E): 36.4x
- Current P/B: 12.1x
- Return on Equity (FY26E): 35.0%
- Dividend Yield (FY26E): 1.9%
The brokerage continues to value HDFC AMC at 31x FY28E EPS of Rs 93.7, reflecting confidence in the franchise’s ability to maintain profitability despite regulatory headwinds.
Key Risks to Monitor
Investors should be aware of several risks that could impact the stock’s performance:
Regulatory pressure on yields: The full impact of SEBI’s TER regulations will play out over the next 2-3 quarters starting April 1, 2026. While management is working to minimize margin impact, there remains execution risk in maintaining profitability if yield compression accelerates beyond expectations.
Weak industry inflows: Industry-wide equity inflows have remained disappointingly range-bound below Rs 40,000 cr per quarter despite rising SIP contributions. If this trend persists or worsens, AUM growth could slow significantly, directly impacting revenue generation.
Market volatility: With equity AUM now comprising 69% of total AUM (on a closing basis), the company’s fortunes are closely tied to equity market performance. A sustained market correction could lead to AUM shrinkage and lower mark-to-market gains on investments.
Competition intensifying: The mutual fund industry continues to see intense competition, particularly from passive products which carry lower fees. HDFC AMC’s ability to maintain market share in this environment remains critical.
ESOP expense burden: With Rs 68 cr in ESOP expenses guided for FY26E and Rs 63 cr for FY27E, these costs will continue to pressure margins. Any expansion in employee stock compensation could further impact profitability.
