HDFC Asset Management Company’s (AMC) Rs 2,800 crore initial public offering (IPO) opens for subscription today. The issue consists of an offer for sale from promoters: HDFC and Standard Life Investment. The primary market offering comes at a time when the fortune of the mutual industry is on an uptrend as it is witnessing strong growth in assets under management (AUM).
Being a leading player in the mutual fund industry, the company will continue to be one of the key beneficiaries of the enduring growth. With its strong retail brand and well–diversified asset mix, we expect HDFC AMC to continue to grow its AUM and profitability.Brief about the company
Incorporated in 1999, HDFC AMC, a joint venture between Housing Development Finance Corporation (HDFC) and Standard Life Investments, is India’s second largest AMC in terms of total assets managed. Total AUM stood at Rs 2,98,459 crore as at March-end. The company has a diversified product portfolio across different asset classes: equity, debt and liquid. It also provides portfolio management services (PMS) and segregated account services (includes discretionary, non-discretionary and advisory services) which had a total AUM of Rs 6,474 crore as at March-end.
What are the key moats? Consistent profitable growth
The company’s performance has been as consistent as many of its group companies. Its assets and profits has grown at a compounded annual growth rate of more than 30 percent since FY02. According to CRISIL, the AMC has consistently been among the top 2 in India in terms of total average AUM since August 2008. HDFC AMC enjoys market share of 13.7 percent in terms of total AUM and 16.8 percent in terms of actively managed equity-oriented AUM, which excludes index linked and arbitrage schemes.
Focus on individual investors
HDFC AMC has the highest share of individual customers. As of March 31, individual customers accounted for 62.2 percent of its monthly average AUM compared to the industry average of 51.4 percent. This is very encouraging as flows from individual customers is relatively steadier. Also, individual investors favour equity schemes which generate higher investment management fees compared to debt schemes. Thanks to its customer mix and large number of number of live accounts (around 8.10 million), the AMC had a monthly flow of over Rs 1,150 crore through systematic transactions as at end March. Systematic flows are relatively more steady and predictable.Favourable asset mix
We are enthused by the fact that high revenue earnings equity-oriented AUM constitutes 51.3 percent of HDFC’s total AUM. In terms of asset mix, the AMC stands out far better than the industry, which has 43.2 percent share of total AUM in equity assets. This makes it the most profitable AMC in India.
Multi-channel distribution network
HDFC AMC serves customers in over 200 cities through extensive multi-channel sales and distribution network comprising of banks, national distributors and independent financial advisors (IFAs). At present, 60 branches in top 15 cities (T15) contribute the giant share of AUM. It is well placed with 149 branches located in beyond top 15 cities, or B15. The latter is expected to drive future growth as mutual funds as an asset class is largely underrepresented in these locations.Strong parentage
Performance and trust are key pillars of the investment management business. Thanks to strong branding of the HDFC group as well as experienced and stable investment team, the company scores well on both these parameters, which will be key future assets growth drivers.What will drive future profitability of asset managers?
The asset management industry is on a sustained growth path driven by India’s long-term economic growth prospects and buoyant equity markets. The current low penetration of mutual funds will continue to improve with gradual but steady shift of household savings away from physical to financial assets. The trend, referred to as ‘financialisation of savings’, received a fillip after demonetisation, resulting in a sharp uptick in inflows for the mutual fund industry.
Various initiatives by Association of Mutual Funds of India (AMFI) such as investor awareness campaigns has improved retail participation through systematic investment plans (SIPs). Moreover, progressive reforms and regulations by the Securities and Exchange Board of India (SEBI) such as introduction of direct plans and capping of expense ratio is expected to further popularise mutual funds, drawing in more retail investors.
Overall, we expect robust AUM growth of the past decade to continue going forward, with the deepening and widening of the investor base and aid earnings growth of asset managers. Investors should be cognizant of the fact that the mutual fund industry is vulnerable to weakness in equity markets and adverse regulatory changes, both of which can negatively impact inflows and profits of asset managers.Valuation and outlook
HDFC AMC is best positioned in the investment management space with its strong and trusted brand recall, favourable asset mix with pole position in the equity business, expanding distribution network and experienced management. At the upper end of the price band (Rs 1,100 per share), the company will have a market capitalisation of around Rs 23,000 crore, which is 7.7 percent of its FY18 AUM. Given the return on equity (RoE) of 40 percent and future growth levers in place, the issue seems fairly valued.
In terms of price-to-earnings (P/E), the issue is priced at 32 times trailing earnings. Thanks to earnings visibility, valuation seems reasonable and more in line with that of retail companies. On a relative basis, HDFC AMC is being valued at 30 percent premium to its closest peer. This doesn’t come as a surprise. Akin to many of HDFC group companies, it will also command relative premium valuation purely stemming from its brand and consistency in performance.
Given the sectoral tailwinds and HDFC AMC’s vantage positioning, we expect the stock to be a long-term compounder. Given the current preference for quality names, we see a strong demand for its shares. Hence, we advise investors to subscribe to the IPO for listing as well as long term gains.
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