HDFC AMC: Playing a Stellar Role

HDFC Asset Management Company Limited (HDFC AMC) is a joint venture between HDFC and Standard Life Investments Ltd. It is one of India’s largest mutual fund managers in terms of AUM with around 210 branches across the country. 

Gaining a strong market share in debt and equity markets through its prudent strategies and active asset management, the company offers 22 equity-oriented schemes, 115 debt-oriented schemes, three liquid schemes, and seven other schemes, which also includes exchangetraded schemes and funds of fund schemes. Additionally, HDFC AMC provides portfolio management services to high net worth individuals (HNIs), domestic corporates, trusts, provident funds and domestic and global institutions. When the IL&FS crisis took place, HDFC AMC was a preferred choice for corporate investors as the asset manager gained market share and delivered positive margins. 

"For FY18-19 the asset H under managemnt of HDFC MF was Rs. 343,938 crore, thus increasing by 17.79 per cent compared to Rs. 291,985 crore for FY17-18"

Industry overview Global tensions over the US-China trade war still persist with a fear of slowdown. Foreign portfolio investors (FPIs) had bought Indian equities worth USD 0.2 billion in FY19 compared to USD 3.4 billion in FY18. On the domestic front, equity-oriented mutual funds inflows were Rs. 1.18 lakh crore for FY18-19 which were supported by improvement in investing via systematic investment plans (SIPs). With financial savings, flows into equity-oriented mutual funds grew at a rapid pace so that the mutual fund AUM grew by 11% in FY18-19. As for the debt markets, credit growth remained healthy with growth in deposits supported by sustained pickup in retail and services credit even though credit to industry remained muted. For the domestic market, the MF industry AUM grew by 24% CAGR for a period of over five years and equity AUM grew by 39% CAGR over the same period of time. Individual investors typically preferred to invest for longer time frames and had a higher preference for equity-oriented funds.

Operational performance

For FY18-19 the asset under managemnt (AUM) of HDFC MF was Rs. 343,938 crore, thus increasing by 17.79 per cent compared to Rs. 291,985 crore for FY17-18. At the close of FY18-19 the actively managed equity-oriented AUM of HDFC MF increased by 13.34 per cent to Rs. 164,263 crore from Rs. 144,925 crore in FY17-18. The company has the highest market share in assets from individual investors consisting of 15.4 per cent. From PAN identification, the company reported to have a total of 1.93 crore investors in mutual funds in India out of which close to 28 per cent i.e. 53 lakh investors are the company’s customers. HDFC has been able to regain its leadership position for the year by having the highest market share in total AUM and actively managed equity-oriented AUM.

"Phasing out of upfront commissions which has now been replaced by trail commissions and lower employee expenses has helped in improving the operating margins for the company."

Its total AUM market share for FY18-19 was 14.5 per cent and was 16.2 per cent for actively managed equity-oriented AUM when considering the market share of all asset management companies in India. Equity-oriented assetscontributed to 48 per cent of the company’s total AUM and non-equityoriented assets contributed to 52 per cent of the company’s total AUM. In the month of March 2019 alone, the company processed 33.8 lakh systematic transactions which equal Rs. 1,182 crore. These systematic investments are beneficial as they are a part of regular investing and allow the investors to periodically invest a particular amount, thus resulting in achieving rupee cost averaging while mitigating risk. The company states that its systematic book currently is of long-term type with around 78.4 per cent having tenure of more than five years and 66 per cent having tenure of more than 10 years since the time of registration.

Financial performance

For HDFC AMC, revenue from operations includes investment management fees from the mutual fund and portfolio management services and advisory fees. For Q1FY20, the company reported an increase of 7.04 per cent in revenue from operations to Rs. 504.39 crore compared to Rs. 471.23 crore for Q1FY19. In the first quarter of FY20, PBT expanded by 45.91 per cent to Rs. 429.92 crore from Rs. 294.64 crore recorded the same quarter of the previous fiscal year. The company gained net profit of Rs. 291.79 crore in Q1FY20, an increase of 42.16 per cent from Rs. 205.26 crore gained in Q1FY19.

In FY19, revenue from operations increased to Rs. 1,915.18 crore from Rs. 1,756.77 crore in FY18. The 9.34 per cent increase in investment management fees led to an increase of 9.02% in net sales. Due to increase in investment book in value and rise in yield on investments, other income for the company increased by 60.71% and was Rs. 181.6 crore in FY19 as against Rs. 113 crore in FY18. For FY19, profit before tax increased by 29.91 per cent to Rs. 1,374.70 crore from Rs. 1,058.23 crore in FY18. Compared to FY18, the AMC spent more on taxes in FY19 due to increase in current tax which was a result of higher profits. Hence, for FY19, HDFC AMC gained a net profit of Rs. 930.6 crore, which is 30.83 per cent more than the net profit of Rs. 711.29 crore gained in FY18. For FY19, the company declared a final dividend of Rs. 12 per equity share of Rs. 5 and also an interim dividend of Rs. 12. Thus, the total dividend for the fiscal year of FY18-19 was Rs. 24 and the dividend payout ratio for FY18-19 stood at 66.09 per cent.

Outlook

HDFC AMC is considered as a leader in the Indian mutual fund industry in terms of profitability, equity-oriented AUM size, and total average AUM. Through various expansion and acquisition strategies, including that of Zurich India and Morgan Stanley MF, the company has grown to be one of the top two AMCs in the country. The company offers a wide range of investment schemes across asset classes catering to various risk return profiles, thus giving it a growth booster. The AMC is able to provide a robust investment track record with investment schemes such as equity-oriented schemes based on market capitalisation and asset class mix, as well as thematic, tax-saving, goalbased, arbitrage and index schemes; schemes based on market capitalisation including multi-cap, large-cap, mid-cap and small-cap schemes; and also schemes based on asset classes that include equity-oriented hybrid schemes with a mix of equity and debt instruments.

Market-related risks such as adverse market fluctuations or economic conditions pose as threats towards HDFC AMC’s business operations by adversely impacting its volumes. Underperformance of investment products can lead to decline in AUM and adversely affect revenues, reputation and brand. To overcome these obstacles the asset management business has a good operational leverage. The credibility of the company and HDFC Group makes the AMC retain its customers’ confidence. For HDFC AMC, phasing out of upfront commissions which has now been replaced by trail commissions and lower employee expenses has helped in improving the operating margins for the company.

Conclusion

As regards the stock performance, recently the stock of HDFC AMC reached a new lifetime high as it surpassed its previous close of Rs. 2,412 and closed at Rs. 2,432.25 on August 29, 2019. The stock continued to gain for the next few days as well i.e. on September 3, 2019 also and reached the share price of Rs. 2649.75. In the last six months the stock price has gained by 88.48%. Expansion in its distribution networks and product portfolio by integrating various digital models will facilitate the growth of the company in future. The AMC’s strong growth drivers include a strong brand pull which is benefitting from parentage, comparatively higher proportion of equity assets, and continued delivery on fund performance that make it a reliable company to capitalise on the financial savings’ opportunity in the country. Hence, based on our analysis we recommend a BUY.