The general view in the market is that AMC is a great business, it generates annuity income, it is a business which does not require too much of capital to grow. But the honeymoon period is behind us as the spreads are coming under pressure, PMSs are eating into market share and in general as the market will expand ETFs will start growing where commissions are low?
That’s right, this is not a financially high leverage business but it is an operationally high leverage business. The annuity has to be recollected with penetration being so low. With the rural India and urban India expanding there are lot of investments that needs to be done and which the industry is doing so the fixed costs are going up.
So in a high operating leverage business initially the fixed cost goes up after which your incremental margins go up once the scale builds up. So I think the industry is investing for the future in terms of expansion. Number two, the point about the ETFs you mentioned it is not just about ETFs, it is also about the institutional play, the provident money as the government has allowed a leeway to come in either in ETFs or index funds or in the direct plans of large size AMCs where the margins are naturally lower.
The industry is expanding but at lower margins, that is also correct. The third thing which has to be borne in mind is that since 2018, second half, SEBI had taken away upfront commission and moved the industry into an all trail model.
So to that extent the historic assets where the up-fronts were paid and were at lower trail because you have higher upfront compensated by lower trail income. So newer assets being accredited by the industry are all in full trail model naturally.
So you look at the margins on incremental assets versus margins on historic base naturally they are lower and that is the phase through which we are passing. But as scale builds up all the investments you have made will pay off and ultimately I think the industry will mature into that annuity based business but they are now still in the growth expansion mode and the cost of growth has to be absorbed by the AMCs. So it is an instrument for the future and we will say do not look at the short term drop too negatively.
Let us look at the SIP number, the number is increasing. You pretty much know where the flywheel is moving for AMCs. If SIPs are increasing, if equity investments are increasing, if millennials are investing more into mutual funds why is that not translating into some kind of a gusto? All I am saying is that if the highway for wealth creation via equities is looking so strong and if this is a megatrend why are stock markets dismissing it?
I think the reason is that when these AMCs were listed the kind of projections made are not being lived up to. High growth is in terms of top line but high growth in terms of bottom line has not translated. The industry is building scale and they are investing heavily, the top line is growing but a significant part of the top line comes from passive which is lower margins and the historic cushion that we had of upfront based high upfront but lower trail is withering away.
So to that extent the industry is a growth industry but is it an EPS growth industry because the top line is growing. So give it time, the market is still not yet recognising that. They expected a very high growth in the top line and in bottom line but that is not translating for the reasons I said. But it is fixed which is getting incurred in about two years, three years time I think those will all begin to pay off.
So yes, the industry has not lived up to the hype that came during listing of the initial set of AMCs but that does not mean that the industry is losing ground. I mean, PMSs are there, that is for the HNI segment, AIFs and PMSs, provident funds who directly invest but there are lots of provident funds which invest and recently SEBI has just opened it up public sector companies. Provident funds can invest in non public sector AMCs too which was a big hindrance as only a few public sector AMCs were benefitting, now the entire industry will benefit.
So I would say the growth prospects along with the equity outlook being so promising for the country are very good. The industry does not need to invest that much more once they have got some critical coverage so you will see later that the profit pool will also catch up with the top line growth. I think it is a phase and it is a matter of time before that happens.
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