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.

Q4FY20 Updates

Financial Results & Highlights

Standalone Financials (In Crs)
  Q4FY20 Q4FY19 YoY % Q3FY20 QoQ % FY20 FY19 YoY%
Sales 449.62 547.67 -17.90% 591.99 -24.05% 2143.43 2096.78 2.22%
PBT 329.57 414.55 -20.50% 466.03 -29.28% 1653.05 1374.7 20.25%
PAT 249.83 276.17 -9.54% 352.55 -29.14% 1262.41 930.6 35.66%

Detailed Results

    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:
      1. Equity: 38.3% vs industry average of 37.1%
      2. Debt: 32.8% vs industry average of 34.9%
      3. Liquid: 27.2% vs industry average of 18.6%
      4. 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:
      1. Direct: 47.8% vs 38.3% a year ago
      2. HDFC Bank: 5.6% vs 8.6% a year ago
      3. Banks: 10.7% vs 14.2% a year ago
      4. IFAs: 23.4% vs 27.5% a year ago
      5. National Distributors: 18.1% vs 20% a year ago.
    15. The company also maintained its position as 2nd 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

Standalone Financials (In Crs)
Q3FY20 Q3FY19 YoY % Q2FY20 QoQ % 9MFY20 9MFY19 YoY%
Sales 591.99 532.72 11.13% 549.07 7.82% 1693.81 1549.11 9.34%
PBT 466.03 368.3 26.54% 427.53 9.01% 1323.48 960.15 37.84%
PAT 352.55 243.26 44.93% 368.24 -4.26% 1012.58 654.43 54.73%

 

Detailed Results

    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 2nd 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

Standalone Financials (In Crs)
Q2FY20 Q2FY19 YoY % Q1FY20 QoQ % H1FY20 H1FY19 YoY%
Sales 549.07 515.2 6.57% 552.75 -0.67% 1101.82 1016.39 8.41%
PBT 427.53 297.21 43.85% 429.92 -0.56% 857.43 591.85 44.87%
PAT 368.24 205.91 78.84% 291.79 26.20% 660.03 411.17 60.52%

Detailed Results

    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

Standalone Financials (In Crs)
Q1FY20 Q1FY19 YoY % Q4FY19 QoQ %
Sales 552.75 501.19 10.29% 547.45 0.97%
PBT 429.92 294.64 45.91% 414.55 3.71%
PAT 291.79 205.26 42.16% 276.17 5.66%

 

Detailed Results

    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.

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