HDFC AMC: Attracting Investor Confidence

HDFC AMC: Attracting Investor Confidence

HDFC AMC continues to keep its expenses in check and since the company is one of the lowest cost operators in the industry, recovery in cash flows will be very positive

HDFC AMC is considered to be one of the most profitable mutual fund managers in India, leading in actively managed equityoriented assets under management (AUM). Its total mutual fund AUM as on March 31, 2020 was around Rs 3.2 lakh crore and it currently spans across a comprehensive set of investment products covering various asset classes and scheme categories in order to meet the investment objectives of its continuously growing customer base of more than 56 lakh individuals and institutions. Gaining a strong market share in debt and equity markets through its prudent strategies and active asset management, the company currently operates in 200+ cities in India. 

HDFC AMC’s principal shareholders include Housing Development Finance Corporation Limited and Standard Life Investments Limited that own around 52.7 per cent and 26.9 per cent stake in the company, respectively, as of March 31, 2020, thus supporting the company with their own positive brand equity, goodwill and expertise. HDFC AMC has 23 equity-oriented schemes, 90 debt-oriented schemes, two liquid schemes and seven others.

Industry Overview

The mutual fund industry’s closing AUM fell by 6 per cent to Rs 22.3 lakh crore as of end of FY20 as against a closing AUM of Rs 23.8 lakh crore as of end of FY19. In FY20, the equity-oriented AUM decreased from Rs 10.2 lakh crore to Rs 8.3 lakh crore whereas the non-equity-oriented AUM increased from Rs 13.6 lakh crore to Rs 14 lakh crore. As the equity markets tumbled in the month of March 2020 due to the pandemic, equity-oriented AUM fell by around 19 per cent, leading to an overall fall in AUM. 

Recently, the equity markets have not only shown a strong recovery from the March crash but also touched new lifetime highs. As result, the equity-oriented schemes in the mutual fund industry have also benefitted, thus overall uplifting the industry’s performance. Average assets under management (AAUM) of the Indian mutual fund industry for the month of October 2020 stood at Rs 28,33,890 crore while AUM of the industry as on October 31, 2020 stood at Rs 28,22,941 crore. The AUM of the Indian MF industry grew from Rs 6.46 trillion to Rs 28.23 trillion in the last 10 years which indicates a four-fold increase. It has grown from Rs 13.24 trillion to Rs 28.23 trillion in the last five years, which is more than a two-fold increase. As of October 31, 2020, the total number of accounts or folios as per mutual fund parlance stood at 9.37 crore while the number of folios under equity, hybrid and solution-oriented schemes stood at about 8.05 crore. The equity, hybrid and solution-oriented schemes generally see maximum investment from retail segment. 

Operational Performance 

HDFC AMC’s AUM in FY20 fell by 7 per cent to Rs 3.19 lakh crore when compared to Rs 3.44 lakh crore in FY19. In the same fiscal year, actively managed equity-oriented AUM decreased from Rs 1.64 lakh crore to Rs 1.20 lakh crore as a result of fall in the markets during the month of March 2020. Other non-actively managed equity-oriented AUM increased from Rs 1.80 lakh crore to Rs 1.99 lakh crore. HDFC AMC continued to remain one of individual investors’ most preferred choices as the company reported having the highest market share in assets from individual investors at 15 per cent. 

In FY20, the company’s market share stood at 14.3 per cent in the total closing AUM and 14.7 per cent in actively managed equity-oriented funds. In spite of a few hindrances, the number of live accounts that it serves increased by 3 per cent YoY to reach 94 lakhs. While its systematic transactions remained stable during the year, it processed 32.9 lakh systematic transactions in the month of March 2020. For Q2FY21, its QAAUM stood at Rs 3,755 billion compared to Rs 3,766 billion in Q2FY20. 

The closing AUM of Q2FY21 was reported at Rs 3,544 billion compared to Rs 3,662 billion in Q2FY20, which is a decrease by 3 per cent YoY. In Q2FY21, actively managed equity-oriented AUM decreased by 14 per cent to Rs 1,403 billion compared to Rs 1,637 billion in Q2FY20. HDFC AMC’s closing total AUM market share at the end of September 2020 stood at 13.2 per cent as against 14.9 per cent in Q2FY20. Its equity AUM market share also declined from 15.8 per cent in Q2FY20 to 13.6 per cent in Q2FY21.

Financial Performance 

For FY20 the revenue from operations increased to Rs  2,003.25 crore from Rs 1,915.18 crore reported in FY19, thus increasing by 4.6 per cent. Revenue from operations includes investment management fees from the mutual fund and portfolio management services and advisory fees. Increase in investment management fee by 3.69 per cent was seen in FY20 to Rs 1,965.28 crore from Rs 1,895.39 crore in FY19. This increase was led by an increase in the annual average AUM of the mutual fund schemes. Total income for FY20 rose by 2.22 per cent to Rs 2,143.43 crore from Rs 2,096.78 crore in FY19. 

Its PBT for FY20 stood at Rs 1,653.05 crore, thus expanding by 20.25 per cent compared to Rs 1,374.70 crore reported in FY19. 

In FY20, HDFC AMC gained a net profit of Rs 1,262.41 crore, which is an increase by 35.66 per cent compared to the net profit of Rs 930.60 crore gained in FY19. For FY20 HDFC AMC recommended a final dividend of Rs 28 per equity share of face value of Rs 5 each. The dividend payout ratio for the FY20 thus stood at 47.20 per cent. For Q2FY21, HDFC AMC reported an 8 per cent decrease in revenue from operations to Rs 456.2 crore compared to Rs 498 crore in Q2FY20.

Increase in other income led to a rise in total income by 4 per cent to Rs 569.9 crore in Q2FY21 compared to Rs 549 crore in Q2FY20. The company reported PBT of Rs 462.8 crore for Q2FY21, increasing by 8 per cent from Rs 427.5 crore reported in Q2FY20. HDFC AMC gained a net profit of Rs 337.9 crore in Q2FY21, which is a contraction of 8 per cent compared to the net profit of Rs 368.3 crore gained in Q2FY20. Total expenses reduced by 12 per cent to Rs 107.1 crore in Q2FY21 from Rs 121.5 crore in Q2FY20. Thus, operating profit gained from core AM business stood at Rs 349.1 crore in Q2FY21, which is a decrease by 7 per cent from Rs 376.5 crore posted in Q2FY20. 

Outlook During Q2FY21, the company lost some of its market share. Its management is in the process of implementing an investment strategy aimed at diversifying styles under different equity funds so as to regain the lost market share in the coming quarters. The industry in general is expected to witness weak equity inflows but for the long-term sustained and better traction in retail equity flows will support growth. HDFC AMC continues to keep its expenses in check and since the company is one of the lowest cost operators in the industry, recovery in cash flows will be very positive for the company. 

In a situation of market uncertainty and growing peer competition, growing its market share would be the main focus point for the company’s long-term sustainability and growth. Launch of new products and appointment of new fund managers and diversification in investment style is surely expected to benefit the company. Moreover, strong brand image and operational efficiency will attract consumer confidence. Though the reduction in AUM and market share is a concern, going forward it is advisable to wait and see if the new launches and festive offers boost up growth as expected. Hence, we recommend our investor-readers to HOLD

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