EQUITY RESEARCH: HDFC Asset Management Company Limited

HDFC Asset Management Company Limited is a publically owned funding supervisor. The organization launches and manages fixed income, equity and balanced mutual funds for its customers. It manages fixed income, equity, balanced, and real estate portfolios. The corporation invests in public equity and fixed income markets. The company employs essential analysis to make its investments. HDFC Asset Management Company was founded on December 10, 1999 and is based totally in Mumbai, Maharashtra. HDFC Asset Management Company Ltd operates as a subsidiary of Housing Development Finance Corporation Ltd.

HDFC Asset Management Company (HDFCAMC IN)

SHAREHOLDING PATTERN

INVESTMENT RATIONALE

• Strong quarter led by higher revenue:

QAAuM increased by 8.1% QoQ and was consistent at Rs5248bn (PLe Rs5256bn). Nevertheless, revenue increased by 4.1% to PLe at Rs6.43 billion (PLe Rs18 billion), driven by a solid rise in equity share QoQ and a fall in share of liquid. The annualized rates were therefore higher at 49 bps (PLe: 47 bps). Opex missed at Rs1.76 billion (PLe Rs1.69 billion) because of other opex. For Q2'24, ESOP costs were Rs131mn. Operating income was higher at Rs4.67bn (+4% ahead of PLe), which resulted in operating yields at 35.6bps (PLe 34.2bps), driven by revenue growth. At Rs1.22 billion (PLe Rs1.2 billion), other revenue was substantially in line. Tax expense decreased from 16.4% last quarter to 25.7% on average as a result of some investments switching from short-term to long-term status. Therefore, while core PAT was Rs3.47 billion (PLe Rs3.4 billion), core PAT yields decreased QoQ by 2bps but were consistent with PLe. PAT, at Rs4.38 billion, was 1.2% more than PLe.

• Equity market share continues to improve; retail contribution enhancing

Better returns were achieved as the equity mix (including balanced) rose from 51.8% to 55.1% QoQ while the liquid component dropped from 13.1% to 2.8%. Market share in equity+bal QAAuM has been growing since Q1FY23; it increased QoQ by 31bps to 12.3%, driven by higher equity performance that resulted in market share increases in net equity flows. According to the basis weighted average equity performance as of September 23, HDFC AMC is still the best-performing fund (rank 1) for the 1- and 3-year time periods. Retail AuM (stickier) is growing; in August 23 individual MAAuM represented 68% of the total, compared to 58% for the sector, and incremental market share in the unique investor base was robust at 38%.

• Pricing slightly improved; opex for FY24E may be 13bps:

Equity yields in Q2FY24 were 67 bps, debt yields were 27–28 bps, and liquid yields were 12 bps. While fresh flows in bigger schemes had yields between 50 and 60 bps, those on recently launched NFOs ranged from 90 to 100 bps. Even though the flow margins somewhat increased in Q2FY24, book margins still outweigh the flow margins. Payroll expenses increased by 10.9%. Increased manpower (116 workers hired in Q2'24) targeting a new vertical to reach HDFCB customers, marketing, and sales & distribution were the main drivers of QoQ. According to management, annual increases in staff costs might be between 8 and 12%.

STRONG DIGITAL PRESENCE

• Strong online presence - dedicated separate digital platforms distribution partners and customers.
• FY17 to FY23 CAGR of 28% in electronic transactions, and CAGR of 14% in total transactions.
• 37 users login in every minute on our portals and ~1 new user on onboarded every minute in the last Quarter.
• Connecting with a customer every 2 minutes via emails, chats, calls, etc.
• The mobile-to-web ratio has increased with every third of digital transactions being on mobile.

Key Q2FY24 Conference Call Highlights

 Financial Performance

• In Q2FY24, the blended yields for equities were 67 bps, debt was 27–28 bps, and liquid was 12 bps. While yields on fresh flows in larger schemes are in the region of 50–60bps, yields on recently launched NFOs ranged from 90–100bps. Although the flow margins have recently marginally increased in Q2FY24, management noted that book margins are still greater than flow margins.
• The increase in staff for the new vertical to reach HDFC bank clients, marketing, sales, and distribution departments was a major factor in the 10.9% QoQ increase in employee costs in Q2FY24. Since 60% of the cost was recognized in FY23, the ESOP non-cash component would decrease in FY24. The management predicted that staff costs would rise annually by 8–12%.
• A 15.6% YoY increase in other expenses was primarily attributable to general company costs including marketing, CSR spending, IT infrastructure, etc.
• The rationalized effective tax rate in Q2FY24 was 25.7%; it had been lower in Q1FY24, principally as a result of an increase in the deferred tax charge for the holding period of several investments that were switching from short-term to long-term investments.

FINANCIALS IN CHARTS:

Total AUM and Market Share

Total AUM and Market Share (Ex ETFs)

Actively Managed Equity-oriented AUM and Market Share

Debt AUM and Market Share

Liquid AUM and Market Share

AUM by Segment – HDFC AMC and Industry

Individual Investors – Accounts & MAAUM

Amongst preferred choice of Individual Investors

Unique Investors

Multi-channel Distribution Network

Geographic Spread

FUTURE OUTLOOK

• The management is excited about the chance to tap the distribution channel of HDFC Bank and would capitalize on the customer base with the change in ownership of the promoters from HDFC Ltd to HDFC bank. According to management's assertion, the bank's flow market share is higher than the book market share.
• In regards to debt funds, management claimed that short-end funds accounted for the majority of favorable industry flows. However, it thinks that should interest rates decline even further, more money may flow into longer-term funds.
• Given the growing investor knowledge, management stated that SIP books remain appealing and that the company would concentrate on expanding SIP books.
• On the subject of passive income, the company's main goal is to expand its current fund, which now consists of 20 index funds and 20 ETF funds.
• The company has increased its market share across all channels of distribution. Additionally, it anticipates a short-term increase in the bank's portion of distribution.

VALUATION

While QAAuM growth remained on track with an impressive 8.1% quarter-over-quarter increase, the revenue surpassed expectations by 4% relative to PLe, resulting in an enhanced blended yield of 49 basis points, up from 47bps in Q1'24. HDFC AMC delivered an exceptional quarter, primarily driven by superior yields due to an increased equity mix compared to the previous quarter and a reduced proportion of liquid shares. The company continues to excel in the 1- and 3-year equity segments, with a growing equity market share of 12.3%, up by 31 basis points QoQ.

The retail presence has strengthened, evident through a larger share of unique investor additions and individual MAAuM exceeding industry standards. Anticipated sales growth is expected once HDFB gains control after the merger, thanks to a more robust distribution focus. A 10% increase in HDFCB's share of HDFCAMC sales could potentially lead to a 4% to 5% growth in AAuM and core profits.

Looking ahead from FY23 to FY25E, we project a compound annual growth rate (CAGR) of 14% in core PAT. Our target price stands at Rs3,000, and we continue to recommend a BUY position.

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