HDFC Asset Management Company Ltd

Play on Financialisation of savings theme and buoyant equity markets

Company Profile

Incorporated in 1999, HDFC Asset Management Company Limited (HDFC AMC) is Investment Manager to HDFC Mutual Fund, one of the largest mutual funds in the country with closing AUM of Rs 7.69 trillion as on September 30, 2024. The Company offers a comprehensive suite of savings and investment products ranging from mutual funds, including both actively managed and passive options, to portfolio management services and alternative investment opportunities catering to the needs of a large and diverse customer base. HDFC AMC serves a mutual fund customer base of 11.8 million unique investors, with a total of 20.7 million live accounts. The Company has a vast network of 255 branches, over 90,000 distribution partners and modern digital platforms, enabling it to serve clients across India.

Investment Arguments

Strong investment performance supported by comprehensive investment philosophy and risk management

Equity-oriented schemes

HDFC AMC is one of India’s leading asset management companies driven by comprehensive investment philosophy and investment performance. Equity-oriented schemes constituted 67.7% of its total AUM as of September 30, 2024. The investments in this category are driven by fundamental research with a medium to long-term view. The research effort focuses on the assessment of medium to long-term fundamentals. The focus of research effort is on understanding the businesses, the key drivers, forming a view on the key drivers and understanding the risks. The research process emphasizes both quantitative and qualitative aspects. Quantitative aspects of research include key factors and growth prospects of the industry, the company’s competitive position in the industry, analysis of the company’s financial statements and performance, amongst other factors. Qualitative aspects of research focus on the company’s management quality and corporate governance, amongst other factors.

Debt schemes

The investment philosophy for fixed income investments is based on the objective of delivering optimal risk adjusted returns across its schemes, with a particular focus on safety, liquidity and returns. The fixed income schemes constitute 20.4% of our total AUM as of September 30, 2024. Fixed income schemes invest in securities including corporate bonds, municipal bonds, mortgage-backed securities, asset-backed securities, real estate investment trusts, infrastructure investment trusts and money market instruments. The risk management function is an integral part of investment process. The company continuously enhances the investment risk management capabilities to ensure regulatory and market compliance, and develop techniques to continue tracking portfolios.

Trusted brand and strong parentage

HDFC AMC has established strong brand image as evidenced by consistent leadership position in the Indian mutual fund industry. We believe that it has a strong brand recall among Indian consumers, which, it attributes to the strength of its brand and strong parentage. The HDFC group has a strong presence across financial products and services, especially in the retail sector. We believe that it benefits from HDFC’s brand name as it gives us a unique advantage of being a trusted provider of financial services, and SLI provides access to international best practices, for operations and risk management. HDFC is one of India’s leading housing finance companies. HDFC group has emerged as 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. We believe that strong parentage and trusted brand enhances appeal and provides confidence to their customers.

Superior and diversified product mix distributed through a multi-channel distribution network

HDFC AMC offers a wide range of investment schemes across asset classes catering to various risk return profiles, many of which have recorded strong and consistent performance compared to industry benchmarks. The diversified product mix enables them to operate through various market cycles, cater to specific customer requirements and reduce concentration risk. It offers equity-oriented schemes based on market capitalization and asset class mix, as well as thematic, tax saving, goal-based, arbitrage and index schemes. Schemes based on market capitalization include multi-cap, large-cap, midcap and small-cap schemes, while those based on asset classes include equity-oriented hybrid schemes with a mix of equity and debt instruments.

As of September 30, 2024, the proportion of equity-oriented AUM to total AUM of 67.7% was higher than the overall industry proportion of 59.4%. With respect to debt schemes, it offers schemes across the yield curve and with varied credit risks. The debt schemes cater to different risk return profiles of customers. They include liquid schemes, ultra-short term debt scheme, short and medium term schemes, income schemes, gilt schemes and FMPs. HDFC AMC offers customers access to products and services through an extensive multi-channel sales and distribution network comprising banks, national distributors and IFAs.

Invest in digital platforms to effectively leverage the growing digital space

Management believes that digital transformation is strategic and integral to business, as it redefines standards in terms of meeting customer expectations and reducing costs. The company aims to progress towards a digital model to meet customers’ requirements by personalizing offerings, facilitating easy onboarding, ease in transacting and access to other relevant data through digital platform. Through these initiatives, it expects customer’s user experience to improve, which will enable them to build customer loyalty. HDFC AMC believes that digital distribution will continue to be a growing trend in the Indian mutual fund industry, and that the use of smartphones and mobile devices will become a preferred medium for product, scheme subscription and information dissemination. Maintaining a superior digital infrastructure will therefore continue to be a key contributor to the growth of its business

Q2FY25 Result Highlights

HDFC AMC delivered robust earnings growth for the quarter ended Q2FY25. Strong equity markets (Nifty50 +7.5% QoQ) and robust inflows (industry active equity, hybrid inflows for Q2FY25 were Rs.1.35tn) aided HDFCAMC to deliver strong equity QAAUM growth of 64% YoY/14.7% QoQ. It posted 64.2% YoY/10.2% QoQ rise in closing equity AUM. Management said they realigned distributor payouts on 70–80% of equity AUM allowing equity yields to improve. Thus, blended yields fell 1.9bps YoY, but grew 0.9bps QoQ. Standalone net sales rose 38% YoY/ 14% QoQ to Rs.887 cr as compared to Rs.643 cr in the same quarter of preceding fiscal despite much stronger equity AUM growth (64% YoY). Operating leverage aided EBIT growth of 47% YoY/18.7% QoQ to Rs.690 cr. Operating profit margin grew 507 bps YoY/282 bps QoQ to 77.5%. Increased taxation on capital gains on fixed income treasury investments resulted in a deferred tax liability creation of Rs.70 cr resulting in a PAT rise of Rs.577 cr i.e. 32% YoY/(4.5)% QoQ. Adjusted for this onetime deferred tax liability creation, APAT grew 48.1% YoY/7.1% QoQ to Rs.646 cr.

Other Key Highlights for the quarter

• Amongst India’s largest mutual fund managers with QAAUM market share of 11.5% for the quarter ended September 30, 2024.
• Amongst India’s largest Actively Managed Equity Mutual Fund managers with QAAUM market share of 12.9% for the quarter ended September 30, 2024.
• One of the most preferred choices of individual investors, with a market share of 13.2% of the individual monthly average AUM for September 2024.
• QAAUM of Rs.7,588 billion for the quarter ended September 30,2024 compared to Rs.5,247 billion for the quarter ended September 30,2023, 11.5% market share in QAAUM of the mutual fund industry.
• QAAUM in actively managed equity-oriented funds i.e. equity oriented QAAUM excluding index funds stood at Rs.4,676 billion for the quarter ended September 30,2024 with a market share of 12.9%. The AMC is amongst the largest actively managed equity-oriented mutual fund managers in the country.
• The ratio of equity and non-equity oriented QAAUM is 66:34, compared to the industry ratio of 57:43 for the quarter ended September 30,2024.
• 10.31 million Systematic transactions with a value of Rs.36.8 billion processed during the month of September 2024.
• Over 90,000 empanelled distribution partners across MFDs, National Distributors and Banks, serviced through a total of 255 branches of which 175 are in B-30 locations. The contribution of B-30 locations to our total monthly average AUM for September 2024 is 19.5%.
• 71% of the company’s total monthly average AUM is contributed by individual investors compared to 62% for the industry.
• Market share of 13.2% of the individual monthly average AUM for September 2024, making the company one of the most preferred choices of individual investors.
• Total Live Accounts stood at 20.7 million as on September 30,2024. Unique customers as identified by PAN or PEKRN now stands at 11.8 million as on September 30,2024 compared to 50.1 million for the industry, a penetration of 24%.

Key Conference call takeaways

Revenue Yield - The revenue yield is influenced by the total expense ratio (TER) charged by the fund. A higher TER usually leads to higher revenue yield. Equity yields remained stable QoQ at 58bps. New fund offerings can temporarily affect revenue yield, especially if fees are waived or discounted in the initial stages.

Debt Funds: Contribution has remained constant at 26.1%. Positive inflows were observed in debt and liquid funds after three years of negative flows. The trend is toward short-end products but there is also some movement toward locking in long-duration products.

New Asset Class: A new asset class is expected to be introduced, but the final structure regarding its expense ratios and payouts is still awaiting regulatory clarity.

Operating Expense: The Company reported lower employee expenses sequentially due to a one-time employee engagement event in Q1 of last year which did not recur this quarter.

Flow Trend: The management confirmed that its flow market share on the active equity side remains higher than its AUM market share. SIPs have contributed significantly to the company's overall flows with steady growth observed quarter-on-quarter. The SIP book is seen as a critical driver of long-term business growth.

Key Risks & Concerns

Adverse Market fluctuations - Adverse market fluctuations and/or adverse economic conditions could impact company’s business in many ways, including by reducing the value of our AUM, causing a decline in investment management fees, portfolio management fees or fees from advisory services, reducing systematic transactions, and causing customers to withdraw their investments, each of which could materially reduce and adversely affect the revenue, business prospects, financial condition and results of operations.

Underperformance of investment products - The performance of schemes launched by the company is critical to retaining existing customers as well as attracting new customers, which is also an important factor in the growth of AUM. If investment products underperform, the company’s AUM could decline and adversely affect revenues, reputation and brand.

Intense competition – HDFC AMC faces competition from other asset management companies, alternate investment funds and other companies providing portfolio management and segregated accounts services and from alternate investments products available in the market. Other financial companies are subject to different regulations in India, which may permit them to compete more effectively in the market for investment products.

Regulatory changes - The legislative and regulatory environment in which it operates has undergone significant changes in the recent past. We believe that significant regulatory changes in the industry are likely to continue on a scale that exceeds the historical pace of regulatory change, which is likely to subject industry participants to additional, generally more stringent regulation.

Outlook & Valuation

HDFC AMC delivered better than expected earnings growth driven by strong equity markets and robust inflows. The capital market optimism and increasing SIP inflows have bolstered the overall AUM for the Company, with a continued focus on equity-oriented products. HDFCAMC remains committed to innovation and new product launches to align with customer preferences. Sequential improvement in yields has led to core revenue growth, reflecting the company's positive trajectory. With the mutual fund industry set for expansion due to factors such as the rising significance of financial savings among Indian households, untapped potential in mutual funds, growing investor awareness and education, strong distribution platforms, and the ease of digital transactions, HDFCAMC aims to capitalize on the opportunities within India's asset management sector. HDFC AMC's extensive distribution network, consistent inflow from systematic investment plans, strong performance in larger schemes, and superior profit after tax yields are highly regarded by us. At CMP of Rs.4540, the stock is trading at 29x FY26E. We recommend BUY rating on the stock.