Initiating Coverage: HDFC AMC Ltd
14-04-2023

HDFC Asset Management Company is India’s largest mutual fund manager, providing various savings and investment products across asset classes. Company also provides Portfolio Management & separately managed account services to HNIs, family offices, domestic corporates, trusts, provident funds, and institutions.

HDFC AMC commands a 11.0% market share in the mutual fund industry based on Asset Under Management (AUM).

Business Model

AMC works by providing Investment products to Individual and Institutions. These products are Passive (based on index) and Active (based on Research). Major expenses incurred are employee expense, technology costs, distribution & sales cost. AMC business is asset light business, where costs are generally fixed and margins grow as flow of funds into various schemes offered increases. AMC can use operating leverage to improve overall profitability as AUM goes up.

Management

Mr. Navneet Munot is the Managing Director & Chief Executive Officer since February, 2021. He has 28 years of rich experience in Financial Markets. Prior to HDFC AMC, he was the Executive Director and Chief Investment Officer of SBI Funds Management Private Limited, member of executive committee responsible for overseeing investments of over $150 billion across various asset classes in mutual funds and segregated accounts, as well SBI Pension Funds (P) Limited.

AUM Breakup

Company generates revenue based on AUM in different products; each segment fees charged are different. Equity segment provides schemes in both Active as well Passive funds. While Debt & Liquid oriented segment provide Fixed Income products.

Industry Comparison

HDFC AMC has greater share in equity segment over industry which generally has better margins. But intense industry competition, passive products use, and decrease in expense ratio charged as AUM increases make it difficult to maintain margins. An increase in AUM decrease expense ratio charged by 2-3bps generally.

Financials

Sales have grown by 7.4% over FY17-22 period. The sub-par growth was a result of intense competition in the industry leading to falling yields (expense ratio for customers), increasing traction of index funds and higher margins to distributors.

AMC being an asset light business model, Return ratios have remained solid. As AUM increase return ratios are further enhanced.

Future Outlook

As Indian households move towards financialisation of savings along with growing middle class, Mutual Industry is going to rise. This will increase Mutual Fund industry penetration from current 16% of GDP higher vs. Global average of 74% of GDP.

HDFC AMC with good track record and expertise can benefit from this tailwind by increasing flows and better operating leverage. Strength of franchise to withstand and gain market share in difficult and volatile times, places it above peers.

Positive decade projection towards Indian equities makes AMCs attractive with increase in amount of funds and schemes offered to various clienteles.

Risk

·         Underperformance of funds to other AMCs and benchmarks.

·         General negative sentiment towards equity and lower allocation.

·         Higher employee cost associated with Active funds.

·         Key fund manager leaving could create outflow from fund.