HDFC AMC

Review & Analysis by Pawan, IIM Ahmedabad

When we first started writing the story we approached this company like any other. But soon, we realized that this one was slightly different. Everybody was talking about HDFC AMC even before any concrete details about the IPO started emerging and we couldn’t figure out why. Sure, HDFC is one of the biggest companies in India, it’s led by a highly professional team and they have been in the scene for quite some time now, but this level of hype was unprecedented. So why? That’s the question we are going to answer in this story. Why is HDFC AMC getting so much attention and is it justified ?

WHAT IS HDFC AMC?

HDFC Asset Management Company is a joint venture between Housing Development Finance Corporation Limited (“HDFC”) and Standard Life Investments Limited (“SLI”). They manage mutual funds and most of their revenue comes from the fee they charge their clients to manage these funds.

Why is this company so special in comparison to its peers?

The most profitable asset management company in India in terms of net profits since 2013
The largest asset management company in India in terms of equity-oriented AUM (Assets under Management ) since 2012
They have consistently been among the top two asset management companies in India in terms of total average AUM since 2008

HOW DID THEY DO IT?

India’s love affair with fixed deposits, gold and real estate has existed from time immemorial and this meant that HDFC AMC had to push mutual funds into people’s lives and this is how they did it.

1. They built a Pan India Network of distributors, Independent agents and collaborated with banks to get more people to invest in their mutual funds

Total Branches	209+1*
Distribution partners	65,000
Sales and Distribution team	633 people
Customer service team	319 people

* 1 Representative Dubai branch

2. They have really good fund managers. Prashant Jain, their star fund manager is stuff of legends. Even when his funds haven’t been performing well, people have flocked to invest in his funds because of the reputation that he has carved for himself in the Mutual Fund Industry

3. The fact that they are so big today and manage such a large fund pool means they can start leveraging economies of scale i.e. can keep costs low and maintain high levels of profitability.

You can clearly see that despite increasing revenues, expenses have not increased proportionately and that’s a good thing

HDFC AMC has also been a dividend declaring company. In FY 2017-2018 the company declared dividend worth 336 Crores.

So what happens if the markets crash ? Will HDFC AMC start making losses ?

Considering they are operating at such large scales, it is unlikely that the company will start making losses even if there is a recession. But it is fair to assume that the growth in AUM’s will suffer and their revenues might not increase at the same rate they used to historically. However, the mutual fund Industry in India is expected to grow and grow in a big way*

*CRISIL Report- As mentioned in Red Herring Prospectus

Financial savings are expected to increase with the government’s strong stance against black money and diminishing attractiveness of real estate and gold, along with improvement in financial education among households and measures taken towards financial inclusion
The mutual fund industry’s revenue is expected to grow at a CAGR of 24.2% over the next two financial years to around ₹181 billion by Fiscal 2019. Commensurately, net profit is expected to grow to around ₹45 billion at a CAGR of 23.6% by Fiscal 2019

What about the threat from other players in the market?

The industry is concentrated with the top 10 players accounting for an estimated 80% of the industry in terms of AUMs. While there are many small players operating, they have not been able to make significant inroads and have been facing the challenge of high operating costs.

Further, players operating between the 11th and 20th positions have a share of 15% in the industry AUM. Such players maybe potential targets for acquisition by the top ten players since they have meaningful AUM on their books. Infact, most foreign mutual fund houses have already exited the Indian Market by selling their business to other bigger fund houses and this trend is expected to continue. So the real competition here is between the top 5-6 mutual fund houses and how they manage to capture the ever increasing pie of the mutual fund industry in India.

Within the top 3, ICICI Prudential Mutual Fund and HDFC Mutual Fund together had over a fourth of the industry’s AUM as of December 2017 and that’s where HDFC’s biggest competition is. ICICI Prudential currently manages more funds than HDFC AMC.

But, there are other companies with good revenues and PAT margins.

Why are people excited about this issue in particular?

Because HDFC and its group companies have returned significant value back to its investors in the recent past.

If you had invested Rs. 10,000 in HDFC back in 1990, you would have made about 49 lakhs with that investment, as on October 2017.
If you had invested Rs. 10,000 in HDFC bank back in 1995, you would have made about 22 lakhs with that investment as on October 2017.

Although this exercise is largely meaningless, considering the fact that historical performance of HDFC and HDFC bank has very little to do with the future performance of HDFC AMC it still sheds some light on why investors have so much faith in the HDFC Brand.

Why should I pay more for HDFC AMC when I can get Reliance Nippon at a cheaper rate ?

In October, Reliance Nippon Life Asset Management Company Ltd., India’s fourth-largest asset manager, raised nearly Rs. 1,500 crore from its IPO. The offer, priced at an upper limit Rs 252 apiece, debuted on the National Stock Exchange Ltd. at a 17 percent premium. But then, the stock price started sliding and it is currently trading below its issue price at Rs. 221.20 apiece and is available at a PE multiple of 24.

HDFC AMC’s offer, in comparison, is priced between Rs 1,095 and Rs 1,100 apiece and that translates to a PE of about 32. So it is infact more expensive than Reliance Nippon. But here is what the Managing Director of HDFC AMC, Mr. Milind Barve had to say about the matter.

“We have almost Rs 65,000 crore higher AUM. More importantly, our equity business is significantly larger”
“We are almost Rs 56,000-60,000 crore ahead on the equity AUM. Our equity AUM is almost 50 percent or more.”
“Reliance Nippon is a great company but it is distinctly different from HDFC AMC. If we just compare the operating profit from the core asset management business, ours is almost 90 percent higher than what is being given by Reliance Nippon.”

SHOULD YOU BUY IT?

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