HDFC AMC offers Rs. 500 crore liquidity to FMP investors
The share price of the HDFC Asset Management Companies (HDFC AMC) is down by almost 6 per cent in Tuesday’s trade. The reason for such fall is attributed to the company’s decision to provide a liquidity arrangement to certain fixed maturity plans (FMPs) of HDFC Mutual Fund. This will entail a total outlay of not exceeding Rs. 500 crore. Nevertheless, HDFC AMC has lost almost Rs. 2,100 crore of market cap, during Tuesday's trade.
The company has make this liquidity arrangement to deal with the illiquidity faced by these FMP schemes due to their exposure to the Non-Convertible Debentures (NCDs) issued by Edisons Infrapower & Multiventures Private Limited and Sprit Infrapower & Multiventures Private Limited, companies promoted by the Essel Group, better known by Zee Group promoted by Subhash Chandra.
The above arrangement means that HDFC AMC proposes to buy out these debentures, which are not being purchased back by those companies when they mature. This will apply to two sets of NCDs first, that matured in the month of April 2019, and second till the standstill arrangement entered into by the company with Essel Group Companies is in force. This standstill arrangement is valid till September 2019. The money for this will come from company’s book. As a mutual fund house, the company has subscribed to these debentures under different FMPs on behalf of the unit holders. The NCDs will be acquired by HDFC AMC at the prevailing valuation as on respective maturity/purchase dates.
This move of the company will help many investors who had invested in these troubled FMPs. Although, this may help many investors to get their invested money back, the exact amount will depend upon which company purchases these NCDs. If it buys at a marked down price, the investor will not get the expected amount and returns will be lower. Therefore, this move by company may give investors some liquidity, but the returns are expected to be lower.
Since HDFC AMC is also listed, this fall looks exaggerated, if we see its impact of this event on valuation of the company. The company has yet to announce its Q4FY19 numbers; however, for the three quarters ending Q3FY19, total profit of the company was Rs. 654 crore. Annualising the last three quarter earnings per share (EPS) of Rs. 30.86, we get EPS of Rs. 41.14 and PE of 44x at current share price. This decision will atmost hit the company’s EPS by Rs. 23, which means the ideal fall in the market cap should have been Rs. 1,000 crore (PE*EPS impacted) assuming the Essel Group does not pay anything and the company takes the entire hit of Rs. 500 crore. Nonetheless, the fall in its makret cap is twice this amout. Hence, if everything remains same the share price of the company is likely to recover.