Sample  write-ups  
 HDFC Asset Management Company   
Vol. No. : 17    Issue No. : 48                             Wednesday, May 08, 2019

Leader Indian mutual fund industry

Higher and increasing share of individual and equity AUM to support consistent growth in profitability

Related Tables
4HDFC Asset Management Company: Financials
4HDFC Asset Management Company: Results

Idea HDFC Asset Management Company
BSE Code 541729
BSE Group B
NSE Code HDFCAMC
ISIN Demat INE127D01025
Bloomberg HDFCAMC@IN
Reuters HDFA.BO
Par Value Rs 5
52-week High/Low Rs 1970/ Rs 1248
Current Price Rs 1631 on BSE and Rs 1634 on NSE
(as on 08 May 2019)

HDFC Asset Management Company (HDFC AMC) is the largest asset management company in India in terms of equity-oriented AUM since the last quarter of FY2011 and consistently remains among the top two asset management companies in India in terms of total average AUM since August 2008. It is the most profitable asset management company in India in terms of net profits since FY2013.

The company was incorporated on 10 December 1999 and was approved to act as an Asset Management Company for HDFC Mutual Fund by SEBI on 3 July 2000. It is a joint venture between Housing Development Finance Corporation (HDFC) and Standard Life Investments (SLI)

HDFC AMC has a diversified asset class mix across Equity and Fixed Income/Others. The company offers a large suite of savings and investment products across asset classes, which provide income and wealth creation opportunities to its customers. HDFC AMC also provide portfolio management and segregated account services, including discretionary, non-discretionary and advisory services, to high net worth individuals (HNIs), family offices, domestic corporates, trusts, provident funds and domestic and global institutions. It also has a countrywide network of branches along with a diversified distribution network comprising Banks, Independent Financial Advisors and National Distributors.

The company is the forefront of leveraging technology in the Indian asset management sector, with a focus on digitization to transform sales, customer on-boarding and internal processes. The focus on technology has enriched customers' experience and has enhanced the productivity of employees and distributors. It offers products and services through online portal, HDFC MFOnline and mobile applications, both of which have become increasingly relevant to business in recent years with 17.2% contribution to overall transaction in FY2019.

Strong brand and parentage

HDFC AMC has a strong brand that customers trust, as evidenced by consistent leadership position in the Indian mutual fund industry. The company has a strong brand recall among Indian customers, and benefit from the brand reputation of promoters, HDFC and SLI. The strong parentage and trusted brand enhances appeal and provides confidence to customers of the company. Among the promoters of the company, HDFC group is a recognized financial conglomerate in India, with presence in housing finance, banking, life and non-life insurance, asset management, real estate funds and education finance. SLI is an indirect subsidiary of Standard Life Aberdeen plc, one of the world's largest investment companies.

Diversified distribution network, direct business to continue to improve

The company offers their customers access to their products and services through an extensive multi-channel sales and distribution network comprising banks, national distributors and IFAs. Customers also access their products and services directly through their branches and online channels.

As of March 2019, the AMC had network of over 75,000 empanelled distribution partners across IFAs, National Distributors and Banks, serviced through a total of 210 branches of which 134 are in B-30 locations. The contribution of B-30 locations to total monthly average AUM is 14.9%. The company has network of 210 branches, while the company proposes to add 18 branches in FY2020.

In FY19, the direct business contribution to total AUM basis has gone up from 34% to 38%, which includes the liquid fund. The banks channel share is 14% down from 17%. HDFC Bank share has remained roughly around 8.6%. The company expects the share of direct business to continue to improve, which would support profitability.

Robust performance in FY2019

HDFC AMC has posted strong 61% growth in the net profit to Rs 276.17 crore in Q4FY2019 and 31% to Rs 930.60 crore in FY2019. The company has exhibited healthy improvement in operating profit margin to 63% in FY2019 from 54.3% in FY2018. The company has also fully provided for exposure in preference shares of IL&FS of Rs 40 crore in the books of the Asset Management Company. The company has posted 18% growth in its total AUM of Rs 343900 crore end March 2019 from Rs 292000 crore end March 2018, which is much ahead of the industry AUM growth of 11% for FY2019. The company has retained the top position with 14.5% market share in total AUM of the mutual fund industry, while showing improvement from 13.7% end March 2018. The company has reported its financial results for FY2019 in line with Ind AS and posted robust RoE of 35.0% in FY2019 despite increase in average net worth. The company has continued to raise the dividend payout ratio to 66% in FY2019 from 56% in FY2018.

Higher share of individual and equity AUM to support profitability

The company has consistently maintained the top position in the industry in terms of total revenue, driven by higher share in equity assets. Commensurate with the trend in revenue, the AMC also consistently maintained the top position in terms of profitability. Equity assets are considered to be sticky, as they are generally held for longer periods compared with debt and liquid/money market.

The ratio of equity oriented assets and non-equity oriented assets is much favourable for the company at 48:52 compared to the industry ratio of 43:57. AUM in actively managed equity oriented funds i.e. equity oriented total AUM excluding arbitrage funds and index funds grew to Rs 164300 crore end with a market share of 16.2%. The HDFC AMC is the largest actively managed equity-oriented mutual fund manager in the country.

The position of the HDFC AMC in the equity category can also be partly attributable to its high market share in individual investor category, which predominantly invests in equity-oriented funds. A high market share in this category is considered a strong positive, as the AUM, especially equity, tends to have longer holding periods.

The company has maintained the position as most preferred choice of individual investors, with a market share of 15.4% of the individual monthly average AUM as of March 2019. The number of live individual accounts increased 12% from 8.05 million end March 2018 to 9.03 million end March 2019. As of March 2019, about 63.0% of the company’s total monthly average AUM is contributed by individual investors compared to 55.1% for the industry. Unique customers as identified by PAN or PEKRN now stands at 5.3 million end March 2019 compared to 19.3 million for the industry, a market share of 28%.

Strong SIP book setting tone for medium-term growth

The sustainability of the AUM growth is driven by the inflow from systematic transactions (SIPs and STPs). The company has processed 3.38 million systematic transactions with a value of Rs 1182 crore in the month of March 2019. Also, 78.4% of the SIP book has a tenure of over 5-years, and 66.0% has a tenure of over 10-years. SIP flows, which come from retail investors and HNIs, tend to be largely directed towards equity MFs. The current monthly flow rate of systematic transactions can support equity AUM growth of the company. SIP flows for the AMC industry have sustained despite the recent weakness in equity MF net inflows in FY19. The SIP book for the industry now stands at Rs 8000 crore in terms of monthly inflows.

Effectively managed impact of regulatory changes, changes positive for industry

The company has effectively managed various regulatory changes over recent period. The TER cut impact was about 25 bps, effective from 1 April 2019, of which close to about 21.5-22 bps is passed on, while the company would absorb an impact on the book of about 3.5-4 bps on the equity portion of the AUM with the support of improved operating profit margin. Other TER cuts introduced in FY19 have been almost completely passed on to the distributors. SEBI has also banned upfront commissions and commission-related expenses effective from October 2018, which is having positive impact on profitability for the AMC with fresh inflows becoming immediately profitable. The recent regulatory changes are expected to be positive towards increasing reach and reducing costs for retail MF investors and also to improve transparency.

Strong growth potential in Mutual fund industry

The AUM of the MF industry grew by over 11% in 2018-2019, despite challenging environment and large outflows from the debt fund. Equity oriented schemes saw net inflows to the tune of Rs 1.18 lakh crore in FY2019 and Rs 17800 crore in Q4FY2019. The SIP book for the industry now stands at Rs 8000 crore in terms of monthly inflows in March 2019.

Strong growth of the mutual fund industry can largely be attributed to higher financial savings combined with growing investor awareness of such products. The structural reforms, coupled with the formalisation of the economy and growing financial inclusion, would encourage more investors to have mutual funds in their financial savings basket.

A pick-up in economic growth, growing investor base, higher disposable income and investable surplus, increasing financial savings and government schemes focusing on increasing awareness, ease of investing, digitalisation, and perception of mutual funds as long-term wealth creators, and increasing geographical penetration will be key facilitators of growth.

Valuation

We expect the company to register EPS of Rs 49.9 in FY2020. The scrip trades around Rs 1631. P/E on projected FY2020 EPS works out to 33 times.

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HDFC Asset Management Company: Financials
 
  1803 (12) 1903 (12) 2003 (12P)
Sales 1756.77 1915.18 2049.24
OPM % 54.34% 62.97% 67.92%
OP 954.59 1205.95 1391.79
Other Income 113.00 181.60 196.13
PBDT 1067.59 1387.55 1587.92
Depreciation 9.36 12.85 16.06
PBT 1058.23 1374.70 1571.86
Tax 346.94 444.10 510.85
PAT 711.29 930.60 1061.00
EPS (Rs)* 33.5 43.8 49.9
*EPS is annualized on latest equity of Rs 106.29 crore, face value of Rs 5 each

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HDFC Asset Management Company: Results
 
  1903 (3) 1803 (3) Var % 1903 (12) 1803 (12) Var %
Sales 486.50 468.68 4 1915.18 1756.77 9
OPM % 73.4% 53.0%   63.0% 54.3%  
OP 357.07 248.17 44 1205.95 954.59 26
Other Income 60.95 31.24 95 181.60 113.00 61
PBDT 418.02 279.41 50 1387.55 1067.59 30
Depreciation 3.47 2.36 47 12.85 9.36 37
PBT 414.55 277.05 50 1374.70 1058.23 30
Tax 138.38 105.20 32 444.10 346.94 28
PAT 276.17 171.85 61 930.60 711.29 31
EPS (Rs)* 51.97 32.34   43.78 33.46  
*EPS is annualized on latest equity of Rs 106.29 crore, face value of Rs 5 each

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