HDFC Asset Management Company

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About the Company

HDFC Asset Management Company Limited (HDFC AMC) is Investment Manager to HDFC Mutual Fund, the largest mutual fund in the country. HDFC AMC has a diversified asset class mix across Equity and Fixed Income/Others. It also has a countrywide network of branches along with a diversified distribution network comprising Banks, Independent Financial Advisors, and National Distributors.

Q2FY23 Updates

Financial Results & Highlights

Detailed Results:

1. The company had a good quarter with revenues and profits up 21.77% and 15.89% QoQ respectively.
2. Revenue and PAT are higher by 6.25% and 5.42% on YoY basis.
3. HDFC AMC closed the quarter with an AUM of Rs.4,222 billion or Rs 4.22 lakh crore, which is 3% lower compared to 4.35 lakh crore in September 2021.
4. Market share in quarterly average AUM on an overall basis, and excluding ETF was 11% and 12.3%, respectively, almost similar to June 2022.
5. Market share of actively managed equity-oriented AUM stood at 11.5%, same as that of quarter-ended June 2022.
6. Quarterly average market share in debt and liquid category was more or less constant at 13.7% and 13.2%, respectively.
7. The company processed 3.91 million transactions, totaling to Rs.14.3 billion in month of September 2022, up from 3.73 million transactions, totaling up to Rs.12.8 billion in month of June 2022.

Investor Conference Call Highlights 

1. The company propose to launch a Thematic Fund, Business Cycle Fund sometime in November.
2. During the September quarter, the company launched six ETF, including a Silver ETF. In the current month, company closed two more Smart Beta ETFs.
3. The company will have enhanced level of activity in alternative space over the next several quarters. The company now have couple of strategies live on PMS side and also recently launched our CAT-II AIF fund-of-funds, which is investing across VC and PE funds. And in line with this, the company has launched India Ascent Strategy in addition to the All Cap Strategy that it launched last quarter. So, HDFC AMC has ambitious plan on the non-mutual fund business side, both PMS and alternatives.
4. Debt funds have seen outflows in recent quarters, but management stated they see a big opportunity in selling their debt products if interest rate stabilizes on this levels.
5. Company’s revenue yield has improved for last 2 quarter, which is mainly due to asset class mix. Revenue yields on debt fund and liquid side will be stable according to management.
6. Company’s book margins are at a substantial premium to the flow margin, and the new business is happening at lower margins. Management stated that the pace of dilution of yields may slow down going forward as the gross flows as a percentage of AUM may be lower as compared to the last year. Company always make sure that the loss in yield should get compensated by favorable asset mix.
7. Management stated with the improvement in scheme performance, they are seeing uptick in market share and flows, both in the SIP as well as in the lump sum flows, across all channels like, MFDs, large nation distributors, banks, fintechs.
8. Employee cost for the company have increased 21% in 2 quarters.
9. Company has got approvals to launch various debt index funds.
10. On a YoY basis, on debt AUM side, company’s market share was 14.6% on quarterly average, which is 13.7% this quarter.
11. Management gave the break-up of new SIP inflows of the first half on FY23
    Mutual fund distributor – 15%
    National distributors – 20%
    Direct – 10%
    Fintech – 33%
    Bank – rest ~22%
12. Management’s assumption is that persistency is lower on fintech channel relative to most of the other channels.
13. Industry Liquid and debt ETF adds up to 68,000 crores, of this 68,000 crores, Edelweiss Mutual fund which runs the Bharat Bond ETF, is about 50,000 crores. On the debt index fund side, the AUM stands at around Rs.57,500 crores.
14. HDFC AMC’s PMS AUM had sharp decline, which was due to one large institutional investor has taken money off the table.
15. Management stated the total ESOP cost of FY23 will be 40 crores.
16. The company will be launching Debt ETFs, which will have lower yields than the current blended yield on the overall open-ended debt schemes. On the industry level, yield is around 10-20 bps.

Analyst’s View

HDFC AMC is a leading mutual fund house in India. It is the market leader in actively managed equity funds space and a trusted mutual fund provider for individual investors which is evident in its high individual account numbers and AUM. The company had an ok quarter having constant market share in al segments. The major focus for HDFC AMC is to maintain & consolidate its position as one of the leading SIP book holders in India while launching new products cover its portfolio gaps. The management has admitted that although market share has been falling for HDFC AMC in the past few quarters, the company is working to introduce new funds to address gaps in its product portfolio and this should see it recapture lost market share. Company is entering into non-mutual fund business, launching new products on AI and PMS side. It remains to be seen whether the company will be successful in reversing its market share loss with its current set of actions and how will it maintain its hold over the industry given rising competition from tech-enabled players like Zerodha. However, given the company’s strong past track record and its leadership position in the industry, the medium and long-term outlook for HDFC AMC remains intact.

Q4FY22 Updates

Financial Results & Highlights

Detailed Results

1. The company had an ok quarter with revenues up 6.4% YoY. 
2. PBT in Q4 is up 4.4% YoY and PAT is up 8.5% YoY. 
3. FY22 figures were decent with 10.5% YoY revenue growth & 5.1% YoY PAT growth.
4. QAAUM for the company was at Rs 4321billion which was up 4% YoY. Closing AUM was also up 3% YoY at Rs 4076 billion. Market share in both was at 11.3 & 10.8% respectively.
5. The breakup of closing AUM for HDFC by segment is as follows: 
   1. Equity: 51.4% vs industry average of 48.1%
   2. Debt: 32.1% vs industry average of 25.3%
   3. Liquid: 13.5% vs industry average of 12%
   4. Others: 3% vs industry average of 14.6%
6. Market share in Actively Managed Equity Oriented AUM for HDFC was at 11.3%. Actively managed QAAUM saw a rise of 19% YoY while Closing AUM saw a rise of 21% YoY.
7. Market share in Debt QAAUM was at 14.1% and QAAUM & Closing AUM have fallen -9% and -14% YoY respectively.
8. Market share in liquid funds was at 13.3% by QAAUM which was down -11% YoY. Closing AUM for liquid funds was down -14% YoY.
9. The number of individual accounts grew 10% YoY while individual MAAUM grew 10% YoY. The company’s share of unique investors in the industry fell to 17% in Q4 vs 23% last year.
10. The company also maintained a long tenure SIP book with 86% of order book having flows over 5 years and 76% having flows over 10 years.
11. The distribution of total AUM across different channels saw the following changes: 
    1. Direct: 41.6% vs 46.5% a year ago
    2. HDFC Bank: 5.9% vs 5.6% a year ago
    3. Banks: 10.5% vs 10% a year ago
    4. MFDs: 27.8% vs 25.9% a year ago
    5. National Distributors: 20.1% vs 17.6% a year ago.
12. The company also maintained its position as 2nd biggest player in B-30 markets with an 11% market share. The company has a total of 228 branches with 150 in B30 cities and 75,000+ empanelled distribution partners. The company now has customers in 99% of pin codes in India
13. The company has seen 76% of transactions in FY22 by electronic means as compared to 82% in FY21.
14. Operating margin was at 35 bps of AUM in FY22 vs 36 bps in FY21.

Investor Conference Call Highlights

1. Industry equity net sales for the FY is INR 2.68 trillion. This includes INR 448 billion in index funds. AUM of all Debt index funds adds up to INR 276 billion. Liquid funds have grown by 11% and debt funds have lost INR 0.8 trillion. 
2. SIP flows were Rs 353 billion in Q4 vs Rs 328 billion in Q3.
3. The management states that its investment style has worked over long periods of time and has periods in between when it tests their patience. Their investing team stuck to this conviction and are now seeing rewards for the same.
4. The company is expanding its product range in thematic and sectoral funds. It has filed for 4 products with the regulator. These are MNC fund, Business cycle fund, Defence fund and non-technical consumption fund.
5. On back of the success of its Developed World Indexes fund of funds, the company has filed for a fund that would track the MSCI emerging markets index. These two funds shall give domestic investors an optimal solution to get global exposure.
6. The management plans to file a category to AI PPM with the regulator during this week. It would a fund of funds investing across the entire spectrum from early seed stage to late stage. 
7. The company is awaiting regulatory approvals for setting up a wholly owned subsidiary in GIFT city.
8. The company has 1.3 million users on its investor portal and have added 350,000 users in FY22.
9. Connect, a new-age digital marketing app for partners has grown 2x in its user base with 50% weekly engagement rate.
10. The company has 48,000+ registered partners on its website with engagement rate of 34%.
11. Employee costs for the company have increased by INR 294 million which is 13.4%.
12. Other expenses have seen an increase of 28% attributed to low base effect the previous FY.
13. The board has approved a dividend of Rs 42 per share vs Rs 34 per share last year. The dividend payout ratio will be 64%.
14. The management sees the merger of HDFC and HDFC Bank facilitating more efficient cross-selling of financial services products which includes mutual funds.
15. The balance advantage fund, which is the company’s largest product went up from 39,000 crores to 43,000 crores. Flexicap went up from 23,000 crores to 27,000 crores YoY. 
16. The management is working on having 12 ETFs in total after launching 9 new ETFs.

Analyst’s View

HDFC AMC is a leading mutual fund house in India. It is the market leader in actively managed equity funds space and a trusted mutual fund provider for individual investors which is evident in its high individual account numbers and AUM. The company had an ok quarter due to muted inflows as the rest of the industry saw good inflows due to many NFOs. The major focus for HDFC AMC is to maintain & consolidate its position as one of the leading SIP book holders in India while launching new products cover its portfolio gaps. The management has admitted that although market share has been falling for HDFC AMC in the past few quarters, the company is working to introduce new funds to address gaps in its product portfolio and this should see it recapture lost market share. It is looking to launch 4 new thematic funds and an AI PPM soon. It remains to be seen whether the company will be successful in reversing its market share loss with its current set of actions and how will it maintain its hold over the industry given rising competition from tech-enabled players like Zerodha. However, given the company’s strong past track record and its leadership position in the industry, the medium and long-term outlook for HDFC AMC remains intact.

Q2FY22 Updates

Financial Results & Highlights

Detailed Results

1. The company had a flat quarter with revenues up 6.67% YoY.
2. PBT in Q2 is down 0.43% YoY and PAT is up 2% YoY.
3. H1 figures were decent with 14.6% YoY revenue growth & 7.8% YoY PAT growth.
4. QAAUM for the company was at Rs 4389 billion which was up 17% YoY. Closing AUM was also up 23% YoY at Rs 4357 billion. Market share in both was at 12.1 & 11.9% respectively.
5. The breakup of closing AUM for HDFC by segment is as follows:
   1. Equity: 46.2% vs industry average of 45.6%
   2. Debt: 36.4% vs industry average of 29.2%
   3. Liquid: 14.5% vs industry average of 11.4%
   4. Others: 2.8% vs industry average of 13.8%
6. Market share in Actively Managed Equity Oriented AUM for HDFC was at 12.2%. Actively managed QAAUM saw a rise of 31% YoY while Closing AUM saw a rise of 39% YoY.
7. Market share in Debt QAAUM was at 14.6% and QAAUM & Closing AUM have risen 33% and 27% YoY respectively.
8. Market share in liquid funds was at 15.3% by QAAUM which was down 28% YoY. Closing AUM for liquid funds was down 18% YoY.
9. The number of individual accounts fell 1% YoY while individual MAAUM grew 28% YoY. The company’s share of unique investors in the industry fell to 20% in Q2 vs 26% last year.
10. The company also maintained a long tenure SIP book with 85% of order book having flows over 5 years and 74% having flows over 10 years.
11. The distribution of total AUM across different channels saw the following changes:
    1. Direct: 44.9% vs 47.4% a year ago
    2. HDFC Bank: 5.3% vs 5.4% a year ago
    3. Banks: 9.5% vs 10% a year ago
    4. MFDs: 26.4% vs 24.8% a year ago
    5. National Distributors: 19.2% vs 17.8% a year ago.
12. The company also maintained its position as 2^nd biggest player in B-30 markets with an 11.1% market share. The company has a total of 227 branches with 149 in B30 cities and 70,000+ empanelled distribution partners. The company now has customers in 98% of pin codes in India
13. The company has seen 81% of transactions in HY1FY22 by electronic means as compared to 82% in FY21.
14. Operating margin was at 35 bps of AUM in H1 vs 36 bps in FY21.

Investor Conference Call Highlights

1. Industry AUM crossed INR 36 trillion with INR 16.8 trillion in equity-oriented assets, INR 10.7 trillion in debt, and INR 4.2 trillion in liquids of overnight funds. Debt funds saw an outflow of Rs 45 billion and liquid funds saw an inflow of Rs 26 billion.
2. The industry saw 49% of the net new flows through new fund offers or NFOs.
3. SIP flow per month was at Rs 104 billion in Sep vs Rs 92 billion in June.
4. 8% of AUM for HDFC AMC is from individual investors vs an industry average of 54.5%.
5. Other income for the quarter ending Sep’21 is lower than the quarter ended Sep’20 since the comparative quarter had some amount of MTM gains on the Group NCDs.
6. HDFC AMC is also looking to launch its NIFTY Next50 Fund shortly.
7. The company concluded its 1st international fund: HDFC Developed World Index Fund of Funds. It has also allocated INR 1100 crores to international funds. This new fund is based on the MSCI world index.
8. The company resumed its practice of annual increments in employee remuneration this year after taking a break from the practice last year due to the COVID-19 pandemic.
9. The management states that the drop in market share is due to a lower share of gross inflows for HDFC AMC. Of the Rs 68,497 Cr of net new flows, Rs 42,591 Cr was from NFOs.
10. The company has also seen Rs 23000 Cr of inflows into sectoral or thematic funds out of the total Rs 41000 Cr of net new flows in equity in the past year.
11. The new BFSI fund is also seeing a good response.
12. The demand for international investment funds is also rising and its market size is estimated to be at Rs 35000 Cr currently according to the management.
13. The Management said that HDFC AMC is looking to expand into the ETF space, and it is gearing up to file for 9 ETFs.

15. The management admits that the unique customer addition in the industry has been driven by fintech platforms in H1 and it is looking to ramp up digital engagements and marketing.
16. The management states that fintechs may have seen good new customer additions but they are still accounting for only 2% of the industry equity AUM.
17. The company has also filed for a few index funds to offer a full range of products.
18. The management reiterated that they’re looking at filling up product gaps across other asset classes.
19. The management states that it doesn’t intend to chase market share at the cost of profitability.
20. HDFC AMC is looking to launch a new multi-cap fund.
21. The market share loss in the hybrid funds’ category is also due to the same reason as the overall market share decline that the company has seen lower net new flows in the category vs the competition due to the competition launching and collecting a big chunk through its NFO.
22. The cost to income ratio can rise to 4% higher than the current 24% given the company’s investments into technology, according to the management.
23. The management maintains that despite the push to expand into the passive space, the company remains a big believer in active fund management.
24. The management states that there has not been any noticeable rise in operating expenses due to the rise in ETFs.
25. The company is looking to make up for the loss in market share with its upcoming NFOs and the ETF strategy is mainly aimed at establishing HDFC AMC as a one-stop shop for all its customer requirements.
26. The management states that the operating profit growth has been less than the growth in AUM due to margin dilution from NFOs.
27. Despite rising competition in the AMC industry from distributors getting into the MF space, the management feels that the growth potential of the company remains intact as there is a lot of room for the entire industry to expand.
28. The management admits that there is indeed room for margin dilution due to rising competition.
29. The big fintechs like Zerodha and others are operating as an RIA offering direct investment into mutual funds.
30. The AMC industry in India has been primarily driven by retail customers as institutional customers like pension funds and insurance houses are not allowed to go to AMCs for investment according to regulations here.

Analyst’s View

HDFC AMC is a leading mutual fund house in India. It is the market leader in actively managed equity funds space and a trusted mutual fund provider for individual investors which is evident in its high individual account numbers and AUM. The company had a flat quarter due to muted inflows as the rest of the industry saw good inflows due to many NFOs. The major focus for HDFC AMC is to maintain & consolidate its position as one of the leading SIP book holders in India while launching new products in the passive space to cover its portfolio gaps. The management has admitted that although market share has been falling for HDFC AMC in the past few quarters, the company is working to introduce new funds to address gaps in its product portfolio and this should see it recapture lost market share. It has seen a good response to its first international fund and the BFSI sectoral fund. The company is looking to launch a total of 9 ETFs soon. It remains to be seen whether the company will be successful in reversing its market share loss with its current set of actions and how will it maintain its hold over the industry given rising competition from tech-enabled players like Zerodha. However, given the company’s strong past track record and its leadership position in the industry, the medium and long-term outlook for HDFC AMC remains intact.

Q1FY22 Updates

Financial Results & Highlights

Detailed Results

1. Revenues for the quarter were up 24% YoY.
2. PBT in Q1 is up 23% YoY and PAT is up 14% YoY. PBT & PAT for FY21 are at 5.8% YoY and 5% YoY respectively.
3. QAAUM for the company was at Rs 4169 billion which was up 17% YoY. Closing AUM was also up 17% YoY at Rs 4187 Cr. Market share in both was at 12.6 & 12.4% respectively.
4. The breakup of closing AUM for HDFC by segment is as follows:
   1. Equity: 44.5% vs industry average of 43.3%
   2. Debt: 37% vs industry average of 31.3%
   3. Liquid: 16% vs industry average of 12.5%
   4. Others: 2.6% vs industry average of 12.9%
5. Market share in Actively Managed Equity Oriented AUM for HDFC is 12.9%. Actively managed QAAUM saw a rise of 33% YoY while Closing AUM saw a rise of 31% YoY.
6. Market share in Debt QAAUM was at 14.5% and QAAUM & Closing AUM have risen 58% and 47% YoY respectively.
7. Market share in liquid funds was at 15.5% by QAAUM which was down 39% YoY. Closing AUM for liquid funds was down 35% YoY.
8. The number of individual accounts fell 5% YoY while individual MAAUM grew 29% YoY.
9. The company also maintained a long tenure SIP book with 84% of order book having flows over 5 years and 73% having flows over 10 years.
10. The distribution of total AUM across different channels saw the following changes:
    1. Direct: 46.9% vs 49% a year ago
    2. HDFC Bank: 5.4% vs 5.2% a year ago
    3. Banks: 9.6% vs 9.9% a year ago
    4. MFDs: 25.6% vs 23.4% a year ago
    5. National Distributors: 17.8% vs 17.8% a year ago.
11. The company also maintained its position as 2^nd biggest player in B30 markets with an 11.4% market share. The company has a total of 227 branches with 149 in B30 cities and 70,000+ empanelled distribution partners. The company now has customers in 99% of pin codes in India
12. The company has seen 85% of transactions in Q1 by electronic means as compared to 82% in FY21.
13. Operating margin was at 49 bps of AUM in Q1 vs 48 bps in FY21.

Investor Conference Call Highlights

1. Q1 saw a net inflow of Rs 25100 Cr across the equity-oriented MF industry.
2. Debt funds saw an outflow of Rs 2000 Cr and liquid funds saw an inflow of Rs 9500 Cr.
3. The number of individual folios crossed the 100 million mark in Q1.
4. The company concluded an NFO recently for a BFSI fund.
5. 9% of AUM is from individual investors vs an industry average of 53.7%.
6. The company also refreshed its mobile app in Q1.
7. The company saw a dilution in margin due to a reduction in the total expense ratio in the equity scheme due to an increase in the size of the fund.
8. The management is not much concerned about the fall in market share in the past year as it is stating that the fall is mainly due to a decline in the ETF space for the company.
9. HDFC AMC has been concentrating on launching new products and addressing product portfolio gaps. The management believes that this should lead to a steady improvement in market share in the future.
10. The management believes that the next few quarters should see net inflow into the MF space.
11. The management has assured that HDFC AMC is focused on investing in digital assets and making the customer journey as seamless as possible.
12. The management also says that the pace of adding new SIPs had slowed down with the industry seeing net outflows in the past few quarters, but it should reverse as net inflows have started for the industry. The company’s focus is to maintain its leading position in the SIP space.
13. Although participation in direct stock investing has risen, the management is confident that people will recognize the benefits of professional management with time and flow back to mutual funds. This has already happened in the past in times of market euphoria.
14. The main draw to bring back more retail participation in MFs is to emphasize the power of SIPs over single lumpsum investments. The tipping point for this realization will be indicated when the number of new folios will exceed the number of new Demat accounts added in a quarter.
15. The asset allocator fundraised around Rs 1100 Cr while the BFSI fundraised Rs 1877 Cr in their respective NFOs.
16. The management states that the change in margin is dependent on the asset mix. Also, as the NFOs launched would have higher commissions, it caused the margin to shrink in Q1.
17. The major contributor to the rise in other income is mark-to-market gains on some of the portfolio and proceeds from the Essel Group NCD.
18. HDFC AMC is planning to launch many funds in FY22 including a multi-cap fund, an MSC fund, 2 passive funds, and 1 international fund.
19. The management maintains that the ETF space is still very small in India and any participation will be good for the MF industry.
20. The company is aiming to drive operating leverage benefits by expanding its market using new products, new technology, and investing in marketing.
21. The management admits that price-based competition will always stay in the industry but proper performance and alignment to financial goals is what enhances investor experience and become the preferred investment vehicle for an individual investor.
22. 20-25% of costs are variable for HDFC AMC.
23. The management reiterates that there is a limited threat from new entrants in the MF space as the addressable market is big enough for every potential player right now.

Analyst’s View

HDFC AMC is the leading mutual fund house in India. It is the market leader in actively managed equity funds space and a trusted mutual fund provider for individual investors which is evident in its high individual account numbers and AUM. The company had a good quarter due to healthy inflows overall for the Mutual Fund industry. The major focus for HDFC AMC is to maintain its return profile and consolidate its position as one of the leading SIP book holders in India. The management has admitted that although market share has been falling for HDFC AMC in the past few quarters, the company is working to introduce new funds to address gaps in its product portfolio and this should see it recapture lost market share. It remains to be seen how the economic situation will unravel given the certainty of a 3rd COVID wave shortly and whether the company will be successful in reversing its market share loss with its current set of actions. However, given the company’s strong past track record and its leadership position in the industry, the medium and long-term outlook for HDFC AMC remains intact.

Q4FY21 Updates

Financial Results & Highlights

Detailed Results

1. Revenues for the quarter were up 21% YoY. The same for FY21 were up only 2.75% YoY. 
2. PBT in Q4 is up 28% YoY and PAT is up 26% YoY. PBT & PAT for FY21 are at 5.8% YoY and 5% YoY respectively. 
3. QAAUM for the company was at Rs 4156 billion which was up 12% YoY. Closing AUM was up 24% YoY at Rs 3955 Cr. Market share in both was at 12.9%. 
4. The breakup of closing AUM for HDFC by segment is as follows:  
   1. Equity: 43% vs industry average of 41.4% 
   2. Debt: 38.5% vs industry average of 33.7% 
   3. Liquid: 16.1% vs industry average of 13% 
   4. Others: 2.3% vs industry average of 12% 
5. Market share in Actively Managed Equity Oriented AUM for HDFC is 13.3%. Actively managed QAAUM saw a rise of 6% YoY while Closing AUM saw a rise of 38% YoY. 
6. Market share in Debt QAAUM was at 14.4% and QAAUM & Closing AUM have risen 39% and 46% YoY respectively. 
7. Market share in liquid funds was at 16.7% by QAAUM which was down 14% YoY. Closing AUM for liquid funds was down 26% YoY. 
8. The number of individual accounts fell 5% YoY while individual MAAUM grew 22% YoY. 
9. The company also maintained a long tenure SIP book with 84% of order book having flows over 5 years and 73% having flows over 10 years. 
10. The distribution of total AUM across different channels saw the following changes:  
    1. Direct: 46.5% vs 47.8% a year ago 
    2. HDFC Bank: 5.6% vs 5.6% a year ago 
    3. Banks: 10% vs 10.7% a year ago 
    4. MFDs: 25.9% vs 23.4% a year ago 
    5. National Distributors: 17.6% vs 18.1% a year ago. 
11. The company also maintained its position as 2nd biggest player in B30 markets with an 11.7% market share. The company has a total of 227 branches with 147 in B30 cities and 65,000+ empanelled distribution partners. The company now has customers in 97% of pin codes in India 
12. The company has seen 82% of transactions in FY21 by electronic means as compared to 69% in FY20. 
13. Operating margin has come down to 36 bps of AUM in FY21 vs 41 bps in FY20. 
14. The company announced a final dividend of Rs 34 per share for FY21. 

Investor Conference Call Highlights

1. The MF industry saw equity-oriented net outflows of INR 84 billion in Q4. It also saw debt-oriented net outflows of INR 410 billion in Q4. Liquid funds witnessed outflows of INR 422 billion in the same period.  
2. Individual folios for the industry continue to rise and is now at INR 97.3 million.  
3. Equity AUM accounts for 66% of the total B-30 AUM.   
4. HDFC AMC added 6 new branches and 60 new employees in FY21.  
5. HDFC AMC continues to enjoy the highest market share in individual AUM which is 13.7%.  
6. The new CEO & MD, Mr. Navneet Munot, joined the company on 16th Feb 2021.  
7. The management sees many avenues for grasping opportunity and market share like in thematic and sector funds, international funds, etc.  
8. The company has lined up a set of NFOs in different segments which the management feel should help in recovering the lost market share in the equity segment.  
9. The management has identified providing superior service and experience, and market capture in B-30 cities as key priorities for HDFC AMC.  
10. The management has admitted that margins will indeed go down as passive funds & fixed income gain prominence but the overall opportunity for the industry lies in the massive under-penetration and scope for market expansion for the MF industry.  
11. The management reinforced that digital processes have become indispensable due to the transformation of the economy due to COVID-19 and HDFC AMC is no exception to it.  
12. The company is the market leader in the index funds space with around 30% market share.  
13. It has also filed for an NFO for the NIFTY NEXT 50 fund along with a few others indices.  
14. Almost 1/3rd of new investors added in FY21 were through fintech platforms like Paytm, Zerodha, or Groww. These platforms are also responsible for 29% of all industry SIPs and have a majority of the young population as their users.  
15. The company made a gain of Rs 85 Cr from the sale of the Essel stock at hand and this has been reflected under other income.  
16. The management has stated that the yield has gone down as more inflows have come in fixed income while equity has seen outflows thus moving to a lower margin product mix. But still, the company has a higher margin product mix with a higher ratio of equity than other industry players.  
17. The company’s main focus in the passive space is to expand and consolidate its hold in the index funds space and to establish a brand in this segment similar to the one that it has done in the active equity space.  
18. The management has stated that it will be looking for both performance-oriented growth where it delivers superior performance and distribution-led growth where it offers tailor-made products like children benefit fund or retirement fund.  
19. The 2 portfolio managers added last year are now managing 15% of active AUM.  
20. The costs for FY21 were down 8% YoY but these are expected to rise as normal business activity patterns resume after the pandemic.  
21. The management admits that the performance in the past few years has not been as good as expected but it has stated that investment strategies that have worked in the past may not work in the present and thus it is looking to expand and diversify its style and strategies as much as possible.  
22. The management also states that in 2017 and 2018, the majority of growth in the market was led by NIFTY50 and its top 5 stocks. Now that broad-based growth is going on, there will be a better opportunity for alpha generation.  
23. The management states that it does see some opportunities in the non-MF side of AMC business like PMS and alternative investments, the near-term focus shall remain on the traditional MF business. 

Analyst’s View

HDFC AMC is the leading mutual fund house in India. It is the market leader in actively managed equity funds space and a trusted mutual fund provider for individual investors which is evident in its high individual account numbers and AUM. The company had a good quarter due to healthy inflows on the fixed income side and the resumption of inflows into equity from March. The new CEO has highlighted that customer-centricity shall remain the prime focus going forward. The company is also looking to grasp the opportunity in the passive space by establishing its brand in the index funds space where it enjoys a market-leading 30% share. The management has admitted that returns in the past few years have been less than desirable for the equity segment but the added diversity in style and strategy from the new portfolio managers and the broad-based market rise of recent times should see alpha generation rising. It remains to be seen how the economic situation will unravel during and after the 2nd wave of COVID-19 and how it will continue to affect the investment sentiments in India. However, given the company’s strong past track record and its leadership position in the industry, the medium and long-term outlook for HDFC AMC remains intact. 

Q3FY21 Updates

Financial Results & Highlights

Detailed Results

1. Revenues for the quarter were up 0.5% YoY only at Rs 592 Cr.
2. PBT in Q3 is up 3.6% YoY and PAT is up 4.5% YoY.
3. QAAUM for the company was at Rs 3895 billion which was up 2% YoY. Closing AUM was up 10% YoY at Rs 4068 Cr. Market share in both was at 13.1%.
4. The breakup of closing AUM for HDFC by segment is as follows:
   1. Equity: 40.4% vs industry average of 39.2%
   2. Debt: 38.4% vs industry average of 35.3%
   3. Liquid: 19.2% vs industry average of 14.4%
   4. Others: 2% vs industry average of 11%
5. Market share in Actively Managed Equity Oriented AUM for HDFC is 13.6%. Actively managed QAAUM saw a fall of 10% YoY while Closing AUM fell 5% YoY.
6. Market share in Debt QAAUM was at 13.8% and QAAUM & Closing AUM have risen 34% and 40% YoY respectively.
7. Market share in liquid funds was at 17.2% by QAAUM which was down 17% YoY. Closing AUM for liquid funds was flat YoY.
8. The number of individual accounts fell 4% YoY while individual MAAUM fell 2% YoY.
9. The company also maintained a long tenure SIP book with 83% of order book having flows over 5 years and 72% having flows over 10 years.
10. The distribution of total AUM across different channels saw the following changes:
    1. Direct: 49.2% vs 41.7% a year ago
    2. HDFC Bank: 5.3% vs 6.5% a year ago
    3. Banks: 9.6% vs 12.2% a year ago
    4. MFDs: 24.4% vs 26.4% a year ago
    5. National Distributors: 16.8% vs 19.8% a year ago.
11. The company also maintained its position as 2^ndbiggest player in B30 markets with an 11.8% market share. The company has a total of 224 branches with 146 in B30 cities and 65,000+ empanelled distribution partners. The company now has customers in 98% of pin codes in India
12. The company has seen 84% of transactions in 9MFY21 by electronic means as compared to 69% in FY20.

Investor Conference Call Highlights

1. Equity-oriented funds saw net outflows of INR 440 billion during the quarter, while debt-oriented funds from net inflows of INR 1,518 billion. Liquid funds saw net new flows of INR 131 billion during the quarter ended December 2020 for the MF industry.
2. Individual investors contributed to 52% of the industry’s total MAAUM and 91% of the equity MAAUM.
3. The management admits that competing with SBI MF is difficult in B30 regions due to the breadth of the reach of SBI itself which is a captive distributor for SBI MF. But HDFC AMC is content at the moment on maintaining the lead over the 3^rd ranked player and will continue to focus on brand building in B30 regions.
4. The management attributes the general industry outflows in equity funds in Dec to risk aversion which was evident from the fact that bank deposits grew 10% YoY despite interest rates being at historically low levels. This has also led to outstanding growth in debt funds in the same period.
5. The management expects this redemption behavior to taper off as the risk appetite of individual investors comes back to normal.
6. The management firmly believes that increased retail participation indirect equity is not a threat to mutual funds as the captive market is different in terms of their participation and size.
7. The company is looking to bring in diversification in style when looking for investment managers.
8. Although HDFC Equity Fund and HDFC Balanced Advantage Fund have lagged behind the benchmark significantly in the recent past, the management has stated that these funds have shown strong recovery in the last 3 months and should get back to normal levels soon.
9. Debt funds have indeed seen good growth in the past year but if interest rates and liquidity remain at current levels, debt fund returns will start getting moderated as yield remain down.
10. In SIPs, the predominant segment is equity with a very small % going to the non-equity segment.
11. The company saw cost savings of Rs 25 Cr in 9M most of which was from lockdown and cost savings initiatives taken by the company.
12. The management has assured that cost control shall be calibrated according to the business environment and if the company sees a chance for business growth it will be ready to spend money to do it.
13. The channels with the most influence in B30 regions are banks and IFAs. But the digital channel is also growing fast with widespread internet coverage and thus the dependence on specific channels is coming down.
14. The company is indeed looking at IFAs & MFD as one of the mainstays of the B30 regions. Around 41.2% of AUM in B30 comes from IFAs. The company also saw good participation of over 6500 IFAs at the recent launch of its HDFC Dividend Yield Fund which collected Rs 1500 Cr at its debut.
15. The other income growth was mainly driven by the fact that the company invested a large part of its investment book in debt funds. But the management admits that this growth is clearly not sustainable and will taper off going forward.
16. In Q3’s board meet, the management has gotten another fund launch approved which is to be registered for approval with the regulator in the next month.
17. The company has a pipeline of 3 new funds for launch.
18. The management states that since the participation in debt funds is more from HNIs, family offices, institutional investors, etc, these investors tend to invest more via the direct channel which may have led to the growth of the direct channel in the past 2 quarters. HDFC AMC has not made any conscious effort to grow the direct channel by themselves.
19. The company has not made any change in TER for debt funds in the last 2 quarters.
20. New fund collections should not be taken as a measure of the fund’s quality as these funds are open-ended and will need some time to deliver performance.

Analyst’s View

HDFC AMC is the leading mutual fund house in India. It is the market leader in actively managed equity funds space and a trusted mutual fund provider for individual investors which is evident in its high individual account numbers and AUM. The company had a muted quarter due to the continuing fall in Equity AUM and overall outflows for the MF industry. The company has done well to focus on cost savings and new product launches and was able to launch the HDFC Dividend Yield Fund with good reception and collections of Rs 1500 Cr. The management has admitted that some of the equity funds had fallen behind the benchmark but they have assured that the recovery in these funds has already started. It remains to be seen how the economic situation post-COVID-19 will unravel and how it will continue to affect the investment sentiments in India. However, given the company’s strong past track record and its leadership position in the industry, the medium and long-term outlook for HDFC AMC remains intact.

Q2FY21 Updates

Financial Results & Highlights

Detailed Results

1. Revenues for the quarter were up 4% YoY at Rs 570 Cr.
2. PBT in Q2 is up 8% YoY and PAT is down 8% YoY.
3. QAAUM for the company was at Rs 3755 billion which was flat YoY. Closing AUM was down 3% YoY at Rs 3544 Cr. Market share in both was at 13.6% and 13.2% respectively.
4. The breakup of closing AUM for HDFC by segment is as follows:
   1. Equity: 40.5% vs industry average of 38.39%
   2. Debt: 35.4% vs industry average of 34.3%
   3. Liquid: 21.9% vs industry average of 16%
   4. Others: 2.2% vs industry average of 10.7%
5. Market share in Actively Managed Equity Oriented AUM for HDFC is 14.1%. Actively managed QAAUM saw a fall of 11% YoY while Closing AUM fell 14% YoY.
6. Market share in Debt QAAUM was at 13.4% and QAAUM & Closing AUM have risen 15% and 19% YoY respectively.
7. Market share in liquid funds was at 18.7% by QAAUM which was down 4% YoY. Closing AUM for liquid funds was down 13% YoY.
8. The number of individual accounts fell 2% YoY while individual MAAUM fell 6% YoY.
9. The company also maintained a long tenure SIP book with 83% of order book having flows over 5 years and 71% having flows over 10 years.
10. The distribution of total AUM across different channels saw the following changes:
    1. Direct: 47.4% vs 42.5% a year ago
    2. HDFC Bank: 5.4% vs 7.2% a year ago
    3. Banks: 10% vs 13% a year ago
    4. MFDs: 24.8% vs 27.3% a year ago
    5. National Distributors: 17.8% vs 17.3% a year ago.
11. The company also maintained its position as 2^ndbiggest player in B30 markets with an 11.7% market share. The company has a total of 223 branches with 145 in B30 cities and 65,000+ empanelled distribution partners. The company now has customers in 98% of pin codes in India
12. The company expects to see 87% of transactions in FY21 by electronic means as compared to 69% in FY20.

Investor Conference Call Highlights

1. The gain from MTM from the Essel exposure has been 5.7-5.8% net of tax.
2. The management admits that the fall in market share in actively managed equity space has been partly due to the fund’s performance but it still has enough gap with the 2^nd player to sustain and gain back the lost market share in the future.
3. The market share in debt has remained stable despite the redemptions in credit funds in Q1.
4. The market share in liquid funds has dipped as more and more alternatives have popped up but the company still holds a lead of more than Rs 15000 Cr over its nearest competitor which is a very dominant position in the market.
5. The management remains confident that the investment performance in the equity will bounce back and the company will regain lost market share in the medium term.
6. The company is also working on and looking to launch new products including thematic products and will fill existing product gaps. This is also expected to help gain lost market share and capture even more shares than before.
7. The sequential improvement in expenses is mainly due to the renegotiation of rent costs.
8. The total run rate of monthly SIPs in the industry has come down marginally even though more and more new SIPs are opened as existing SIPs are getting reduced due to the high volatility in markets. The management expects this to be temporary.
9. Equity yields have remained stable while debt yields have gone down due to a smaller share of credit risk funds which yielded higher management fees.
10. The management admits that there will certainly be a period of risk aversion to equities due to the overhang of the pandemic and it will difficult to predict how long this will last.
11. The company is looking to offer increased commission payouts for certain selected products as a festival kind of a promotion campaign. It will also be giving out higher commissions for its new launch products when they come out to engage the distributor fraternity and endorse its brand and new product range.
12. The company is looking to bring in 1-2 more fund managers and has not settled on any quantum on how much these new managers will be managing when they join up. It will be making allocations based on the approach and market cap category and other factors.
13. One of the new products which are expected to fill the gap is a dedicated dividend fund which will have companies that have high dividend yield.
14. The management believes that there is still a lot of untapped potential in equity as an investment class and it will take at least 10-15 years for every household to have equity exposure through a mandated retirement plan like 401K in the USA or any other govt program.
15. The company has been slow in launching ETFs as most of the money in ETFs is in index ETFs and the majority of the money is coming from sources like EPFO which have a mandate to invest only in government-owned asset management companies.
16. The largest challenge for the industry still remains customer reach in terms of total population size and distributors are instrumental in connecting this gap. And the financials of an ETF make it almost impossible for distributors to have much incentive to sell them to customers.
17. The company is indeed open to making thematic ETFs based on indexes representing those themes but this is still far away.
18. The management has admitted that hybrid funds are losing connect with investors and it is becoming more preferable for investors to divide allocation to separate equity and debt funds rather than go for a single hybrid fund.
19. The key lead indicator for investors’ interest in the equities for the management is absolute returns for the industry as compared to benchmark bank interest rates. As long as equity funds deliver superior performance to bank interest rates, people will be looking to invest in equities and equity MFs.
20. A major purpose of the branches for HDFC AMC is to service distributors in the region which is not possible through any outsourced means.

Analyst’s View

HDFC AMC is the leading mutual fund house in India. It is the market leader in actively managed equity funds space and a trusted mutual fund provider for individual investors which is evident in their high individual account numbers and AUM. The company had a muted quarter due to a fall in Equity AUM and a falling share of credit risk funds in the debt category. The company has done well to focus on cost savings and facilitating online registrations and transactions to cover for difficulties in physical transactions due to COVID-19. It is also good to see that the company is looking to launch new products in the near future which will help address current gaps in the addressable market and expand into the thematic equity investment space. It remains to be seen how the COVID-19 situation will unravel and how it will continue to affect the investment sentiments in India. However, given the company’s strong past track record and its leadership position in the industry, the medium and long term outlook for HDFC AMC remains intact.

Q1FY21 Updates

Financial Results & Highlights

Detailed Results

1. 1. 1. Revenues for the quarter were down 11% YoY at Rs 490 Cr.
      2. PBT in Q1 is down 11% YoY and PAT is up 3% YoY.
      3. QAAUM for the company was at Rs 3562 billion which was down 2% YoY. Closing AUM was flat YoY at Rs 3575 Cr. Market share in both was at 14.5% and 14% respectively.
      4. The breakup of closing AUM for HDFC by segment is as follows:
      1. 1. Equity: 39.4% vs industry average of 38.3%
         2. Debt: 29.5% vs industry average of 32%
         3. Liquid: 28.9% vs industry average of 19.4%
         4. Others: 2.2% vs industry average of 10.3%
      5. Market share in Actively Managed Equity Oriented AUM for HDFC is 14.5%. Actively managed QAAUM saw a fall of 21% YoY while Closing AUM fell 18% YoY.
      6. The number of individual accounts grew 2% YoY while individual MAAUM fell 12% YoY.
      7. The company also maintained a long tenure SIP book with 82% of order book having flows over 5 years and 70% having flows over 10 years.
      8. The distribution of total AUM across different channels saw the following changes:
      1. 1. Direct: 49% vs 39.2% a year ago
         2. HDFC Bank: 5.2% vs 7.7% a year ago
         3. Banks: 9.9% vs 13.3% a year ago
         4. IFAs: 23.4% vs 27.5% a year ago
         5. National Distributors: 17.8% vs 20% a year ago.
      9. The company also maintained its position as 2^ndbiggest player in B30 markets with an 11.7% market share. The company has a total of 221 branches with 145 in B30 cities and 65,000+ empanelled distribution partners.
      10. The company is now seeing 91.4% of transactions by electronic means.

Investor Conference Call Highlights

1. The company has enhanced its digital capabilities with Whatsapp transaction services and video KYC.
2. The management has stated that the reason for the fall in the share of equity AUM of total AUM is mainly the big mark to market fall which has affected equity AUM most severely.
3. The company has added 2 new fund managers into its roster.
4. The company already has products in most major categories and thus cannot introduce new products in these existing segments. But it is looking to expand into thematic funds and into the dividend yield category where it doesn’t have any offering yet.
5. Out of the 221 branches, only 140+ branches are open currently with very few employees performing critical functions only.
6. The great shift seen by the company is new registrations through HDFC MF Online which has seen new user addition doubling QoQ.
7. The management has admitted that SIP renewals and new SIPs have gone down for the company and the industry due to the ongoing pandemic.
8. The company has also seen a fall in employee costs with senior employees taking pay cuts of up to 25%. This has led to a saving of Rs 8.5-9 Cr as compared to last year.
9. The main reason for the decline in revenues despite the almost flat AUM is the deterioration of the product mix which has seen fall in equities which is the highest yielding segment.
10. The management is aiming for operating cost savings of Rs 35 to 40 Cr in FY21.
11. The company has invested the surplus profit after paying dividends into its own mutual funds and this figure (Rs 900 Cr) is at 33% of investment AUM currently. Thus other income has also gone up on this. The company’s exposure to Essel promoters has also gone up from Rs 36 Cr to Rs 77 Cr which is also another contributor to the rise in other income.
12. The company had seen goo inflows in April which tapered in May followed by outflows in June.
13. The management has stated that overall transaction turnover has been high since the start of COVID-19 but delivery has been low indicating a lot of short-term trading speculation. The management believes that at a time like this long term investment into equities is coming in the form of investment into mutual funds.
14. The company has seen a yield of around 6% in its debt investments in the past year.
15. The company did see redemptions in its credit risk funds book since the last week of April. The book has reduced from Rs 13,500 Cr at the time to Rs 6,300 Cr by the end of June. The company has turned conservative with this event and increased its AAA exposure in credit risk funds to 34-35% from 24-25% previously. Thus including cash, credit risk funds of the company now have close to 38-40% exposure to AAA assets and cash.
16. The yield gap between a AAA and credit risk fund with a 40% AAA is almost 400 bps. The management expects this gap to narrow as people come back to invest in normal credit risk funds.
17. The company doesn’t have an active strategy to reduce TR as it would end up impacting profitability for the company.
18. The margins on different product groups have remained broadly the same. Only the margins on the debt have fallen due to the depletion of the credit risk funds which was a high margin in the debt segment.
19. The management has admitted that it doesn’t have the capability to make a feeder fund for investing abroad directly and will partner with a global investment manager to tie up with for this product. The company will be approaching Standard Life with a proposal for this.

Analyst’s View

HDFC AMC is the leading mutual fund house in India. It is the market leader in actively managed equity funds space and a trusted mutual fund provider for individual investors which is evident in their high individual account numbers and AUM. The company had a muted quarter due to a fall Equity AUM and the massive redemptions in credit risk funds. The company has done well to focus on cost savings and facilitating online registrations and transactions to cover for difficulties in physical transactions due to COVID-19. It is also good to see that the management has added 2 new portfolio managers to its roster and is also planning to establish a feeder fund for international investments thus opening up a new and highly sought after product segment. It remains to be seen how the COVID-19 situation will unravel and how it will continue to affect the investment sentiments in India. However, given the company’s strong past track record and its leadership position in the industry, the medium and long term outlook for HDFC AMC remains intact.

Q4FY20 Updates

Financial Results & Highlights

Detailed Results

1. 1. Revenues for the quarter were down 18% YoY at Rs 450 Cr. After several quarters this is happening for the first time that revenue is down YoY. Full-year revenue is up 2% YoY.
   2. PBT in Q4 is down 20% YoY at Rs 330 Cr and PAT is down 9% at Rs 250 Cr.
   3. Fair Value loss on Essel Group exposure is Rs 120.4 Cr. This is the primary reason for the dip in other income and the profitability of the company.
   4. Industry Total Closing AUM at the end of FY20 was Rs 22.3 trillion (23.8 trillion in FY19). Equity AUM was 8.3 trillion for FY20 as against 10.2 trillion in FY19. Fall in equity AUM is almost entirely because of the fall in market price.
   5. SIP flows for the industry in the quarter was resilient at Rs 86 Bn.
   6. QAAUM for HDFC has grown 8% YoY.
   7. Closing AUM for HDFC has fallen from Rs 3439 Bn in FY19 to 3191 in FY20.
   8. QAAUM for actively managed equity-oriented schemes for HDFC saw a 2% growth in Q4.
   9. Closing AUM for actively managed equity-oriented schemes for HDFC saw 27% de-growth due to an acute fall in the stock market in the month of March 2020.
   10. The breakup of closing AUM for HDFC by segment is as follows:
       38. Equity: 38.3% vs industry average of 37.1%
       39. Debt: 32.8% vs industry average of 34.9%
       40. Liquid: 27.2% vs industry average of 18.6%
       41. Others: 1.7% vs industry average of 9.4%
   11. The market share in Total AUM for HDFC is 14.3%. Market share in Actively Managed Equity Oriented AUM for HDFC is 14.7%.
   12. Number of individual assets grew 3% YoY while market share if HDFC AMC in individual assets was at an industry leading 15%.
   13. The company also maintained a long tenure SIP book with 81% of order book having flows over 5 years and 69% having flows over 10 years.
   14. The distribution of total AUM across different channels saw the following changes in FY20:
       47. Direct: 47.8% vs 38.3% a year ago
       48. HDFC Bank: 5.6% vs 8.6% a year ago
       49. Banks: 10.7% vs 14.2% a year ago
       50. IFAs: 23.4% vs 27.5% a year ago
       51. National Distributors: 18.1% vs 20% a year ago.
   15. The company also maintained its position as 2^nd biggest player in B30 markets with an 11.9% market share.
   16. The company also announced a year-end dividend of Rs 28 per share.
   17. HDFC AMC now operated through 221 branches, 9.4 million live accounts and 70,000 plus empaneled distribution partners.

Investor Conference Call Highlights

1. About 75% of the revenue comes from Equity oriented funds. Hence fall in the level of the equity market will have a bearing on the revenue of the company in FY2021
2. A meaningful reduction in operating expenses is foreseen due to increased transactions on digital platforms.
3. When the AUM falls down, there is a scope of marginally increasing the TER as per the SEBI guidelines. While the distributor’s commission has no link with the TER, so it will remain constant. So there will be an improvement in the margin. However, it is not clear whether the improvement will be marginal or significant.
4. New SIP flows continue to be robust and it is still a material part of the equity funds.
5. Sharper fall in the company’s AUM is due to high exposure in the small and midcap sectors. The industry average is that small and midcap funds form 10% of AUM. In the case of HDFC, they form 20% of the AUM.
6. The company is open to inorganic and using the currency of shares for acquisition, however, at the moment there is no proposal under active consideration.
7. Trail fees paid on the book are less than the trail fees paid on the flows.
8. The company continues to maintain focus on high margin equity fund business and containing operating costs.
9. Due to the sharp fall in the equity market, the composition of the equity in the total AUM has fallen considerably in the Q4.
10. In the December quarter, the advisory mandate had registered a decent performance fee. Hence, the QoQ comparison of revenue is not comparable.
11. March SIP numbers were around 1100 Cr. Management would be happy if they manage to maintain the same level of flows every month for FY21
12. There is a shift from long term debt to liquid funds due to market volatility and a state of fear and panic in the equity and debt markets.
13. On a daily basis having conference calls to address the concerns of retail investors, distributors, and analysts.
14. Management says that equity book is primarily influenced by flows and market movement. Flow as a percentage of the book continued to be robust. The fall is predominantly due to market movements.
15. Rs. 100-125 Cr. out of about 4000 Cr of investments in the Balance Sheet is invested in equity. These investments in equity also include the mandatory portion as per SEBI regulations.
16. Management is looking to control all the discretionary costs and rationalize employee costs to some extent in order to save on operating costs.

Analyst’s View

HDFC AMC is the leading mutual fund house in India. It is the market leader in actively managed equity funds space and a trusted mutual fund provider for individual investors which is evident in their high individual account numbers and AUM. The company had a muted quarter due to an acute fall in the market. Moreover, the company had to take an MTM hit on the P/L due to their exposure to the Essel group. The company is planning to contain cost by controlling discretionary expenses to tide over the uncertain period ahead in the stock market. Given the high exposure in equity funds and more so in the case of midcap and small-cap funds, HDFC AMC may have to face a temporary hit in the revenues. It remains to be seen how the COVID-19 situation will unravel and how it will continue to affect the investment sentiments in India. However, given the company’s strong past track record and its leadership position in the industry, the medium and long term outlook for HDFC AMC remains intact.

Q3 2020 Updates

Financial Results & Highlights

Detailed Results

1. 1. The company had a good quarter with total AUM rising 14% YoY.
   2. The company recorded a total AUM market share of 14.3% which is right at the top of the industry.
   3. It also consolidated its position as the largest actively managed equity mutual fund AUM with a market share of 15.8%.
   4. The company recorded a 6% increase YoY in individual accounts.
   5. The ratio of equity to non-equity assets stood at 44:56.
   6. The total monthly average AUM contributed by individuals stood at 59.5% vs 53.4% for the industry.
   7. The current customer count stood at 5.5 million which is 28% of the 20.3 million customers in the entire industry according to the PAN database.
   8. The breakup of AUM by segment is as follows:
      • Equity: 44%          (43.1% in Q2)
      • Debt: 28.3%          (28.1% in Q2)
      • Liquid: 25.9%       (27.4% in Q2)
      • Others: 1.8%         (1.4% in Q2)
   9. The main cause for the big spurt in profits was the fall in operating expenses due to the reduction of TER and commissions along with the reduced tax regimen.
   10. SIP Flows were also stable at Rs 1220 Cr in Q3.
   11. 9% of total AUM was from B30 cities. HDFC MF secured the 2^nd highest market share by AUM in B30 cities at 12.6%. The company also boasts of a good branch network in B30 cities with 144 branches and more than 70000 distributors in total.

Investor Conference Call Highlights

1. The equity AUM for the industry rose 13% YoY.
2. The company has added 7 new branches in B30 cities in Q3.
3. The management believes that Indian investors are still underweight on equities and it sees a big room for growth in this sector. But it has also refrained from providing any specific guidance on AUM growth.
4. The management does not see much interest from retail investors in ETFs and passive funds and mentions that the majority of passive funds are owned by big bodies like EPFO and pension funds.
5. The management has mentioned that it is not using any algorithmic or tool-based method for portfolio construction and is mostly using traditional methods for their investment decisions.
6. The minute reduction in inflows in Q3 was attributed to the drop in limited time STP plans which expired.
7. The management has refrained from providing any guidance on the board’s position on dividend pay-outs in the near future.
8. The management has clarified that the big passive investments made by govt organizations like EPFO are probably mandated to be invested into govt owned mutual funds and thus no private players have been able to crack this yet.
9. The management has clarified that the company’s share of net redemptions is lower than the industry standard.
10. The management acknowledges that the opportunity is greater in B30 cities as compared to T30 cities and thus the company is concentrating on expanding mostly into B30 cities which now count for 65% of their total branch network.
11. The management has also observed that more and more investors are now investing in direct plans while investment through other intermediaries like IFAs and banks has more or less remained stable.
12. The management has clarified that effectively direct plan investments and all other investments earn more or less the same margins for the company.

Analyst’s View

HDFC AMC is the leading mutual fund house in India. It is the market leader in actively managed equity funds space and a trusted mutual fund provider for individual investors which is evident in their high individual account numbers and AUM. The company continued its impressive growth and has cemented its status in the market by maintaining its market shares in different categories. The company has also been able to achieve good profit growth in both the Q3 and 9M periods. It remains to be seen how the Indian economy shapes up in the near future and what challenges the company will face going forward. Nonetheless, given the stellar market position of the company and its performance record, HDFC AMC remains one of the best investment options in the MF industry. Valuation is very stretched at more than 50 times trailing earnings for sure. However, due to the stability of the business, market leader profile and under-penetration of the MF industry in India, it would be hard to find the stock at attractive levels.

Q2 2020 Updates

Financial Results & Highlights

Detailed Results

1. 1. The company had a good quarter with total AUM rising 25% YoY.
   2. The company recorded a total AUM market share of 14.9% which is right at the top of the industry. The AUM market share has risen 160 bps YoY.
   3. It also consolidated its position as the largest actively managed equity mutual fund AUM with a market share of 15.8%.
   4. The company recorded a 9% increase YoY in individual accounts.
   5. The ratio of equity to non-equity assets stood at 45:55.
   6. The total monthly average AUM contributed by individuals stood at 57.4% vs 64.5% for the industry.
   7. The current customer count stood at 5.5 million which is 28% of the 20 million customers in the entire industry according to the PAN database.
   8. The breakup of AUM by segment is as follows:
      • Equity: 1%                    (47.7% in Q1)
      • Debt: 6%                    (27.1% in Q1)
      • Liquid: 6%                    (23.8% in Q1)
      • Others: 8%                      (1.4% in Q1)
   9. The main cause for the big spurt in profits was the fall in operating expenses due to a reduction of TER and commissions along with the reduced tax regimen.
   10. The company holds certain NCDs that are secured by a pledge of listed equity shares (Essel Group). Any unrealized profit and loss are reflected under Other Income. In the quarter, the company recognized unrealized losses of Rs 24.9 Cr.

Investor Conference Call Highlights

1. The Marked Down Value of the NCDs is around Rs 27.5 Cr. The company will retain the current margin levels for the foreseeable future.
2. The company has seen more and more individual investors moving into direct plans. Almost 24% of gross flows are coming directly and the direct plan AUM is around 18% of the total book.
3. The company will maintain industry-level TERs and will not make any proactive moves to change it significantly.
4. The total surplus on the book has gone up 33% and thus the company was able to increase the yield on their book which led to the high other income figures.
5. The company is focussed on growing the retail business and continues to maintain its position as the market leader in the retail mutual funds’ space.
6. The share of higher-margin equity funds has gone down as the product has evolved and thus the growth in AUM is not necessarily reflected in revenue growth.
7. The management reiterated the market opportunity for mutual fund investment and penetration and they maintain that financial advisors shall remain important despite the rise in direct mutual fund investments.
8. The management believes that passive funds and ETFs have become the norm in western countries as actively managed funds have not been able to outperform passive indices while in India active managers have been able to provide superior outperformance above benchmarks. Thus passive funds are not as attractive returns wise. The cost of the currently available passive funds is also high as only the headline indices like Sensex and Nifty50 are represented and smaller and more specific benchmarks done have passive funds tracking them.
9. The management has maintained that investor education and financial product literacy is the primary medium for penetration and growth for the entire mutual fund industry.
10. For the company, the management has identified maintaining and developing SIP experience for retail customers as one of the key drivers of growth for the company. More than 79% of SIPs are of >5 years’ duration and more than 67% SIPS are of >10 years’ duration.

Analyst’s View

HDFC AMC is the leading mutual fund house in India. It is the market leader in actively managed equity funds space and a trusted mutual fund provider for individual investors which is evident in their high individual account numbers and AUM. The company continued its impressive growth in the liquid funds’ space whose share in total AUM grew almost 3% QoQ. The company also opted for the lower corporate tax rate which saw the Q2 PAT rise substantially. The revenue growth for the company was not as high as the AUM growth and that was due to the evolving product mix which saw the share of equity funds fall. Nevertheless, HDFC AMC is a good stock to keep in mind, particularly given the immense market opportunity and the company’s pole position in the industry. However, good companies are seldom available at a discounted price. The current valuation of the company at more than 50 times earnings (TTM) is not cheap by any standards.

Notes from Annual Report FY18-19

Management Discussion Analysis

General Economic Overview

Global economic growth was stable and healthy in FY19 with world GDP coming in at 3.6% as compared to 3.8% a year ago. Stable growth in emerging markets has said to be the biggest contributing factor for this sustained growth. An escalation in trade tension between China and the US, reinstatement of sanctions on Iran by the US, uncertainty around Brexit deal with EU, etc were some of the events that were responsible for the moderation of growth in FY19. Global growth is likely to be moderated because of some of the above factors.

India’s macro-economic situation remained stable with parameters like fiscal deficit, inflation, current account deficit, FDI, GDP growth, etc. remaining within a comfortable range. Sharp volatility in crude oil prices, resolution of some large NPAs under Indian Bankruptcy Code (IBC), NBFCs liquidity concerns, change of guard at RBI, were key events that influenced the Indian economy in FY19.

With the new government re-elected with a sound majority, the company expects stability and policy continuity along with the focus on reforms. Thus, the focus on infrastructure, manufacturing and rural development should continue going forward.

In September 2018, due to default by a prominent infrastructure NBFC, liquidity for the NBFC sector tightened. The NBFCs with a significant asset-liability mismatch (ALM) were the worst hit. The sharp increase in the share of CPs in the borrowing mix of NBFCs – from 4.2% in FY14 to 12.6% in August 2018 was a key reason for ALM mismatch. Further, NBFCs that had higher exposure to the real estate sector experienced elevated stress. Consequent to liquidity strain spreads of NBFCs and non-AAA rated corporate bonds over government bond yields widened significantly. Further, growth in asset book of NBFCs moderated considerably as preserving liquidity became a priority to meet repayments.

The company remains optimistic regarding the growth prospects of the Indian economy. The major factors behind this are:

Equity Markets

A few sectoral indexes underperformed in FY19 showing signs of a slowdown in their respective industries. The table below shows the performance of the various indices:

Foreign Portfolio Investors (FPIs) bought Indian equities worth $0.2 billion in FY19 vs $3.4 billion in FY18. However, there was divergence with the first 3 quarters of FY19 witnessing outflows of US$8.2bn followed by a sharp recovery in 4QFY19 with inflows of US$ 8.4bn. This sharp resurgence in FII flows was possibly led by:

• Expectations of continuity of government
• Improving profit growth outlook
• Outflows in 2018
• Fall in yields in the US / Europe

On the domestic front, equity-oriented mutual funds inflow moderated compared to the previous year. Inflows in FY19 were Rs 1.18 Lakh Crore (FY18: Rs 2.4 lakh crore). Inflows were supported by steady improvement in Systematic Investment Plans (SIPs), which stood near Rs 8,000 crores per month in March 2019. Strong domestic inflows have helped the Indian equity market to hold up well despite weak FII flows.

The healthy inflows in mutual funds domestically are primarily driven by the following factors:

• increasing awareness of equities/mutual funds
• a rise in the younger workforce
• increasing reach of mutual funds

The household allocation to shares and debentures (including mutual funds) have risen drastically to 8% in FY18 as compared to 1.6% in FY14. There is huge scope for a rise in the above household allocation to shares (including mutual funds) when compared to the EU which has an average allocation >20% and the USA which has an allocation of >50%.

Mutual Fund AUM recorded a CAGR of 25% from FY13 to FY18, versus a 9% CAGR in bank deposits during the same period. In FY19, Mutual Fund AUM grew further by 11% YoY.

Debt Markets

 The fiscal year 2018-19 (FY19) was a mixed year for the Indian fixed income market. The yield on 10-year benchmark G-sec witnessed a rising trend in the first half of the year on back of sharp rise in crude oil prices, INR depreciation, increase in repo rates by 50 bps by RBI & change in stance to calibrated tightening, net FII outflows, healthy domestic growth, liquidity tightening by global central banks and elevated core inflation.

The trend reversed since October 2018 triggered by fall in crude oil prices, benign headline inflation, large purchases under open market operations (OMOs) by RBI, 25 bps rate cut by RBI (50 bps more in Q1 FY20) and change in stance to neutral, concerns over global growth, rise in trade tension between US and China and dovish comments by US Federal reserve & other major central banks.

Mutual Fund Industry

AUM of the MF industry in India grew by 11.4% in FY19 to Rs 23.80 Lakh Crore, of which equity AUM constituted 43% and grew by 17.8% from a year earlier. The growth in equity AUM can be attributed primarily to healthy net new flows of Rs 1.18 Lakh Crore during the year. Debt AUM fell by 8.7% as the industry saw net outflows of Rs 1.24 Lakh Crore due to uncertain interest rate environment and a challenging credit cycle. Liquid AUM stands at Rs 4.36 Lakh Crore, a growth of 30% backed by net inflows of Rs 0.76 Lakh Crore. ETFs, FOFs and Arbitrage Funds now add up to Rs 1.93 Lakh Crore.

Individual investors’ contribution to the total AUM now stands at 55% vs 51% a year earlier. Monthly flows from SIPs were Rs 8,055 Crore in March 2019, a growth of 13.1% from the same month of the previous year. The industry processed 2.62 Cr SIP transactions during March 2019 as compared to 2.11 Crore in March 2018. AUM from beyond the top 30 cities (B30) stood at Rs 3.79 Lakh Crore and formed 15% of the total AUM in March 2019. Industry participants are ramping up their presence in these locations leading to further development of markets.

The regulators introduced some key measures which were beneficial to the industry and its customers. They are:

• Reclassification, rationalization and standardization of schemes, which has simplified the scheme selection process for investors as well as distributors.
• Additional TER under Regulation 52 (6A) (c) of SEBI (Mutual Funds) Regulations, 1996 to be reduced from 20 basis points to 5 basis points.
• Discontinuation of payment of upfront commission to distributors.
• Revision of AUM based slabs for computation of TER effective from April 1, 2019.
• Scheme related expenses not to be in AMC books as per circular dated October 22, 2018.

The industry has come a long way in the last 5 years. The MF industry AUM grew by 24% CAGR over the last 5 years, with equity AUM growing by 39% CAGR over the same time period. The individual investors AUM in the industry has grown nearly 4 times from Rs 3.93 Lakh Crore in March 2014 to Rs 13.54 Lakh Crore in March 2019, a growth of 28% CAGR. Over the same period, the number of individual folios have more than doubled from 3.92 Crore to 8.21 Crore.

The biggest factor behind this development has been the acceptance of the systematic investment plans or SIPs which have become the preferred investing mechanism for most individual investors. Monthly SIP flows grew 2.5 times from April 2016 to Rs 8,055 Crore in March 2019 while number of SIP transactions have risen to 2.62 Cr from 1.01 Cr in the same period. Currently SIPs form a mammoth 78% of total equity fund inflows in FY19 from only 41% in FY17.

Financial Performance in 2018-19

• The company’s revenue has increased by 12.14% YoY to Rs 2,096.78 Cr in FY19.

• The PAT stood at Rs 930.60 Crore and grew by 30.83% YoY over FY 17-18.

• The operating profit (PBT – Other income) for the company grew by 26.22% YoY to Rs 1,193.1 Cr in FY19.

• PAT as a percentage of Annual Average AUM increased from 0.26% in FY18 to 0.29% in FY19.

• The company’s Average Networth increased by 41.19% YoY to Rs 2,662.32 Crore in FY19.

• Other income rose 60.71% YoY primarily due to higher income from investments in the form of interest and dividend.

• The company’s fees and commission expenses decreased 26.52% YoY on account of a decrease in commission expenses.

• Due to the regulatory changes, no commission was paid by the company on sales from October 22, 2018. Savings on this account have resulted in a reduction of commission expenses.

• Other expenses decreased 22.97% YoY mainly due to a decrease in mutual fund expenses,

Operational Performance in 2018-19

• AUM for the HDFC MF grew 18% YoY to Rs 3.43 Lakh Cr in FY19.

• The actively managed equity-oriented AUM grew 13% YoY.

• The company maintained its dominant position in the industry with the highest market share in assets from individual investors at 15.4%.

• The company boasts of servicing 53 Lakh customers out of the 1.93 Cr unique investors into mutual funds (as identified by PAN) which brings their total market share by customer numbers to an industry-leading 28%.

• The company’s total market of AUM is at 14.5% while the market share in actively managed equity-oriented AUM is 16.2%.

• Equity oriented assets constitute 48% of the total assets for the company.

• The company’s systematic book is long-term in nature with 78.4% having a tenure of over five years and 66% of over 10 years at the time of registration.

• The company maintains a current ratio of 6.11 times and a net profit margin of 44% as compared to 38% in FY18. The rise in NPM is mainly due to the reduction in commission expenses.

Future Outlook

The company has listed the following strategic priorities for maintaining its leadership position in the mutual fund industry:

Analyst’s View

HDFC AMC is the leading mutual fund house in India. It is the market leader in actively managed equity funds space and a trusted mutual fund provider for individual investors which is evident in their high individual account numbers and AUM. The company is also going well in the liquid funds’ space where it is steadily gaining market share and rising to the top of this segment. But like any other mutual funds house, the company is vulnerable to volatile markets and general investment sentiments. Nevertheless, given the trust shown in the company’s products and the under penetration of mutual funds and general investment in the country as compared to other major economies, HDFC AMC seems like a solid bet for anyone looking to invest in the theme of increasing investment and mutual funds. However, the valuation of HDFC AMC at CMP appears to be very steep compared to their near term earnings.

Q1 2020 Updates

Financial Results & Highlights

Detailed Results

1. 1. The company had a good quarter with AUM rising 18% YoY.
   2. The company recorded a total AUM market share of 14.7% which is right at the top of the industry.
   3. It also consolidated its position as the largest actively managed equity mutual fund AUM with a market share of 16.2%.
   4. The company recorded a 10% increase YoY in individual accounts and an increase of 11% YoY in unique customer accounts.
   5. The ratio of equity to non-equity assets stood at 48:52.
   6. The total monthly average AUM contributed by individuals stood at 59.2% vs 54.3% for the industry.
   7. The current customer count stood at 5.4 million which is 28% of the 19.6 million customers in the entire industry according to the PAN database.
   8. The breakup of AUM by segment is as follows:
      • Equity: 7%
      • Debt: 1%
      • Liquid: 8%
      • Others: 4%
   9. The main cause for the spurt in profits was a fall of almost 40% in operating expenses.

Investor Conference Call Highlights

1. Mutual funds inflow slowed down in April and May due to election season. The inflows rose in June with Rs 57 billion coming in this month out of the Rs 96 billion in the whole quarter for the industry.
2. In the last 12 months, the company has added 840,000 live accounts.
3. The operating margin on the basis of AUM for the quarter stood at 42%.
4. The management has refrained from providing any guidance for the near future.
5. The company had taken Rs 415 Cr of NCDs for Essel Group into their books.
6. The management has acknowledged that a part of the growth has been from the market share growth in liquid funds space. The operating costs for the company have gone down mainly due to discontinuation of upfront commissions.
7. The benefit of abolishment of upfront commissions is here to stay and the impact is going to be permanent. But consequently, as the size of the business grows, the total expense ratio is also expected to fall and thus the company is expected to compensate for their distributors on this which may bring the margins down slightly.
8. The management anticipated an impact of 25bps on account of TER reduction and thus they charged off the 22 bps on this by reducing the commissions.
9. The company is welcoming on the new liquid fund guidelines which the management feel has made liquid funds safer for end customers. This is because they guide that liquid have to keep their exposure to NBFCs and housing finance companies to a certain level and keep at least 20% of AUM in liquid or near liquid assets.
10. The management has asserted that the effective operating margins depends the effective TER that they can charge and the level of new flows into their books which arrive with higher trailing costs.
11. The company believes that currently there isn’t much appetite for international equity fund products and this is expected to persist for the near future.
12. The impairment from ILFS has totally been absorbed and should not have any meaningful impact in the future quarters.
13. The cause for the abrupt rise in depreciation expenses is due to the change in accounting standards where some of the lease expenses are to be recognized as depreciation instead of other expenses as it was before the accounting standard change.
14. The commission reduction has been taken out uniformly for all distribution channels.
15. The debt funds space has indeed contracted right now but this should normalize slowly and the space should get back on track.

Analyst’s View

HDFC AMC is the leading mutual fund house in India. It is the market leader in actively managed equity funds space and a trusted mutual fund provider for individual investors which is evident in their high individual account numbers and AUM. The company is also going well in the liquid funds space where it is steadily gaining market share and rising to the top of this segment. But as any other mutual funds house, the company is vulnerable to volatile markets and general investment sentiments. Nevertheless, given the trust shown in the company’s products and the under penetration of mutual funds and general investment in the country as compared to other major economies, HDFC AMC seems like a solid bet for anyone looking to invest in the theme of increasing investment and mutual funds. However, valuation of HDFC AMC at CMP appears to be very steep.

Disclaimer

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