Primary Offer. HDFC Asset Management Company: A big draw

Strong investor inflows, growing awareness and an upbeat capital market have augured well for the mutual fund industry in the last three to four years. HDFC Asset Management Company — consistently among the top two players in terms of assets under management (AUM) in the last few years — has been able to capitalise on the good fortunes of the industry, registering strong growth in revenues and profit.

What particularly works in favour of HDFC AMC is its relatively higher proportion of equity-oriented AUM, which generates higher management fee. Between FY-14 and FY-18, the company’s revenues and profits clocked about 19 per cent compounded annual growth rate. Reliance Nippon Life Asset Management, the only other listed player and among the top three mutual funds, also reported about 18 per cent growth (CAGR) in profit during this period.

However, given a more favourable product mix, HDFC AMC scores over others across various profitability parameters. For instance, the company’s net profit as a per cent of annual average AUM (AAAUM), at 0.26 per cent in FY18, is better compared to Reliance AMC’s 0.21 per cent and ICICI Pru AMC’s 0.22 per cent. HDFC AMC also sports a strong return on equity of around 40 per cent, while Reliance AMC’s return on equity stood at 25 per cent in FY18.

Of course, any slowdown in flows, a lacklustre capital market and regulatory changes impacting management fees could play spoilsport. Against this backdrop, the asking price of the IPO issue is not inexpensive. At the upper price band of ₹1,100, the IPO values the business of HDFC Asset Management at a little over ₹23,000 crore, about 7.9 per cent of its AUM as of March 2018. Reliance AMC that listed last year, currently trades at about 6 per cent its March 2018 AUM.

That said, strong parentage and dominant position in the industry are likely to draw investor interest. While there are 41 AMCs in the market, the industry is concentrated, with the top five AMCs constituting about 57 per cent of the total AAAUM — HDFC and ICICI AMC together make up over a fourth of the industry.

A large AUM base driving economies of scale, dominant share in retail (individual) investor category and leadership in actively managed equity-oriented funds (that tend to be retained longer) can help weather challenges within the industry better.

Investors with a long-term perspective can subscribe to the issue. The IPO is an offer for sale of 2.54 crore shares by the promoters (Housing Development Finance Corporation and Standard Life Investments), totalling ₹2,800 crore.

Strong fundamentals

HDFC Asset Management had a total AUM of around ₹2.9 lakh crore as of March 2018. The company’s AUM has grown at a compounded annual growth of 25.5 per cent over the past five fiscals. Its relatively higher proportion of equity-oriented AUM (51.3 per cent) is a big draw. For Reliance AMC, in contrast, the equity portfolio is a lower 36 per cent of AUM (based on quarterly average AUM) as of March 2018.

HDFC AMC has a strong investment pipeline through systematic transactions, that is imperative for a steady flow to AUM. The company’s wide distribution network is also a key positive — as of March 2018, it has over 65,000 empanelled distribution partners, consisting of independent financial advisors, national distributors and banks.

Among the top five players, Reliance and HDFC AMC have consistently reported higher revenues as a percentage of average AUM in the past five financial years. Revenues as a per cent of AAUM stood at 0.67 per cent in FY-18 for HDFC AMC.

The company’s investment management fee, which forms a chunk of revenues, grew by 21.5 per cent y-o-y on the back of healthy growth in AUM.

Its profit grew by a strong 31 per cent y-o-y in FY-18.

Risks

While the industry’s AUM has grown at nearly 25 per cent CAGR since 2013, much of the growth (68 per cent of the incremental net flows) has happened in FY-17 and FY-18, bolstered by the excess flows, post-demonetisation. As the industry reverts to a steady state, there could be some slowdown in flows.

Several regulatory changes on the total expense ratio (TER) could also impact revenues and profits of AMCs. Mutual funds charge investors for managing their schemes. This is called the total expense ratio (TER). The maximum TER that a fund can charge its investors is prescribed by SEBI. Funds could earlier charge an additional 30 basis points above the prescribed limit, if the inflows come from beyond the top 15 cities; this has been altered to beyond 30 cities from this fiscal.

Also, until 2012, mutual funds pocketed the exit load — imposed on certain schemes on exit within a specified time period — charged by them. But in September 2012, mutual funds were asked to credit the amount collected as exit load back into the scheme. Instead, funds were allowed to charge an additional 20 basis points in their expense ratio in lieu of the amount credited. SEBI recently reduced the permissible charge to five basis points.

These regulatory changes could have an adverse impact on revenues. The impact of SEBI’s categorisation and rationalisation of MFs, also needs to be seen.

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