Aniket Pujari
However, with market corrections underway, mutual fund stocks have taken a back seat amid concerns over an earnings slowdown. This trend is evident from February data, which show that mutual fund AUMs declined 4% month-on-month to ₹64.26 trillion and overall net inflows plummeted 79%.
Amid these charging market dynamics, Mint’s Profit Pulse takes a deep dive into whether HDFC AMC, India’s third-largest asset management company, can ride the volatility.
AUM holds firm
HDFC AMC’s assets under management recorded strong growth momentum in the third quarter (October-December), with its quarterly AUM surging 43% year-on-year to ₹7.87 trillion, making for a market share of 11.5%. Mark-to-market gains and healthy inflows across categories drove this growth.
Strong distribution network
About 41.4% of HDFC AMC’s total AUM in the December quarter came from direct sales channels, while mutual fund distributors, national distributors, and banks contributed 26.6%, 21.3%, and 10.6%, respectively.
Equity schemes
HDFC AMC’s actively managed equity-oriented AUM rose strongly 51% on-year to ₹4.78 trillion. With this impressive growth, HDFC AMC also increased its market share in this segment to 12.8% from 12.6% in the year-earlier third quarter.
The share of equities in the company’s AUM mix has been rising due to the higher growth in equity AUM, driven by rising equity penetration and mark-to-market gains. This also helped increase equity contribution to AUM to 42%, up from 38% in the year-ago third quarter.
The company’s AUM in the debt segment grew 17% on-year to ₹1.58 trillion and its market share held steady at 13.2%. However, the market share in this segment fell marginally from 13.5% in Q3FY24 despite a 3% sequential rise in AUM.
However, HDFC AMC’s liquid AUM surged 35% to ₹0.84 trillion, boosting its market share from 1.4% to 12.9%.
Strong retail foothold
The company’s AUM growth across categories was driven by a sharp increase in active individual accounts, which increased 49% over the previous year to 22 million. As a result, the individual monthly average AUM grew 38% to ₹5.59 trillion.
The individual segment comprises 70.2% of HDFC AMC’s total AUM of ₹7.8 trillion, surpassing the industry average of 61.4%. HDFC leads the segment with a 13.2% market share.
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Strong SIP contribution
HDFC AMC dominated the unique investor segment with a 24% market share in the December quarter. This segment accounted for 12.6 million of the 52.6 million new accounts added by India’s mutual fund industry in the December quarter.
As a result, systematic investment plans (SIP) now make up 21.8% ( ₹1.7 trillion) of HDFC AMC’s total AUM, with 11 million SIP transactions currently active. The company added SIPs worth ₹3,820 crore in the third quarter, up 45% from the previous year.
HDFC AMC is the second-biggest player in the B-30 markets, which are locations beyond India’s top 30 markets and where mutual fund penetration is just starting to take off. This is evident from the fact that 19.2% of the company’s total monthly average AUM in the third quarter came from B-30 locations. Strong fund performance, new product launches, and a network of over 95,000 listed distributors helped it capture a large share of SIPs.
This strong retail presence reinforces HDFC AMC’s position in India’s mutual fund industry. Individual investors prefer equity-oriented schemes and stay invested longer, ensuring stable AUM growth.
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Yields and commissions
HDFC AMC’s yields have been declining because of a shift from legacy assets to new assets, declining total expense ratio (TER) due to rising AUM, and higher commissions associated with new fund offerings. The company earned a yield of 0.58% in the equity segment, 0.28% in the debt segment, and 0.12-0.13% in the liquid segment.
Consequently, HDFC AMC’s overall yield (as a percentage of quarterly AUM) fell to 0.47% in the December quarter from 0.49% a year earlier. However, its yield showed an improvement from 0.45% in the fourth quarter of FY24 (January-March 2024) as HDFC AMC had rationalized commissions to cushion the impact.
Profit boost
Despite its mark-to-market losses, HDFC AMC’s operating revenue grew 39% to ₹934 crore, driven primarily by robust AUM growth of 43%. Its operating profit from core business grew 51% to ₹747 crore despite a 7% rise in expenses.
The company is also benefitting from operating leverage as the network effect helps lower costs. This led to a 13% year-on-year decline in the company’s cost-to-operating ratio, which now stands at 20.7%.
Its robust operational efficiency also resulted in a 49% on-year growth in Ebitda to ₹760 crore, with margin improving to 81.7% (up 7.2% on-year).
HDFC AMC’s profit after tax grew 31% to ₹642 crore, despite a 35% decline in total income impacted by mark-to-market losses. These investments are due to the Securities and Exchange Board of India’s skin-in-the-game circular that requires AMCs to invest balance sheet capital in their funds.
The key question is whether HDFC AMC can sustain its growth. Historically, HDFC AMC’s quarterly AUM grew at a compound annual growth rate of 13% during FY20-24 to reach ₹6.1 trillion in FY24.
This robust growth was driven by a strong 29% CAGR in the equity segment, while the hybrid and debt segments witnessed modest growth of 13% and 1%, respectively, during this period.
According to Motilal Oswal Financial Services Ltd, HDFC AMC can maintain this growth rate. The brokerage expects the company’s AUM to grow at a 23% CAGR, and its revenue and profit at 21% and 23%, respectively, despite the short-term slowdown.
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Valuation drops but still premium
HDFC AMC’s valuation as measured by price-to-earnings (P/E) has declined to 34 from 44 in October as its share price fell 16% over the past six months. This valuation is also 17% below its 6-year median P/E of 41.
However, HDFC AMC continues to trade at a 36% premium to Nippon Life India AMC, its nearest listed peer. The valuation is undoubtedly rich, but it can be justified given the company’s strong parentage, high AUM equity mix, and robust return on equity of 30%.
What lies ahead
Unlike the broader trend in India’s mutual fund industry, HDFC AMC does not plan to launch new products. Instead, it aims to strengthen its position by improving its market share in existing products.
The company remains optimistic about growth. India’s low mutual fund penetration of 15% compared to the global average of 74% leaves a vast market for HDFC AMC to capture.
In addition, HDFC AMC is awaiting final regulations for a new asset class: special investment funds. It has also ventured into the fast-growing alternative assets and portfolio management segment. These businesses have high growth potential and scaling them will give HDFC AMC a new growth lever.
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However, concerns remain regarding a potential decline in yield as the company’s AUM increases or Sebi rationalises the total expense ratio. According to Motilal Oswal, if the company’s AUM grows at a rate of 20% CAGR, then an adjustment in TER could impact its overall yield by 0.06-0.07%.
Motilal Oswal expects HDFC AMC will be able to grow its equity AUM at a 30% CAGR, which will help it mitigate the decline in yield. Motilal Oswal has a target price of ₹5,200 on HDFC AMC, 40% higher than its current price of ₹3,724.
Note: Throughout this article, we have relied on data from www.Screener.in. Only in cases where the data was not available, have we used an alternate, but widely used and accepted source of information.
The purpose of this article is only to share interesting charts, data points, and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educative purposes only.
About the Author: Madhvendra is a passionate follower of the equity market and a seasoned financial content writer. He does not hold the stocks discussed in this article.
