HDFC AMC LIMITED – IPO NOTE

– Report by Apeksha Shetty

“Mutual Fund Sahi Hai” is the tagline of the Campaign that is launched by AMFI in order to create awareness about the Financial Product. It is been launched through different media platforms such as TV, Digital, radio, print, cinema outdoor hoardings and it also plays in our Mumbai Local.

A Balasubramian, chairman, AMFI, said, “There is a need to encourage households to shift from physical savings to financial avenues, especially mutual funds. With this objective in mind, under SEBI’s guidance, AMFI has launched this investor awareness outreach program. I am sure the public will find these simple but powerful messages very thought provoking and will be encouraged to start investing in mutual funds.”

Let us have a look at the Overall Industry Scenario and analyze the prospects of the most profitable asset management company in India in terms of net profits since Fiscal 2013.

OFFER DETAILS

Issue Size: Offer for Sale of 2.55 crore Equity Shares of Rs 5 aggregating up to Rs 2,800.33 crore.

  • Sale of up to 0.85 crore (33.75% ) equity shares by HDFC ltd.
  • Sale of up to 1.70 (66.25%) equity shares by Standard Life Investments ltd.

Issue Date:  July 25-28, 2018

Issue Price Range: Rs 1,095 – Rs 1,100 Per Equity Share

Lot Size:  13 equity shares

Face Value: Rs.5 per share

Merchant Banker: Kotak Mahindra Capital, Axis Capital, DSP Merrill Lynch, Citigroup Global, CLSA India, HDFC Bank, ICICI Securities, IIFL Holdings, JM Financial, J.P. Morgan India, Morgan Stanley India, Nomura Financial Advisory.

INDUSTRY OVERVIEW

The mutual fund industry’s AUM grew at a CAGR of 26.3% from Rs 7 trillion as of Mar-2013 to Rs 21.3 trillion as of Dec-2017. Between FY13 and FY18, the industry witnessed a net inflow of Rs 9.2 trillion. FY13-18 has been remarkable for the industry, attracting around 60% of the Rs 9.2 trillion net inflows, with equities leading the charge. Equity-oriented funds (including balanced and ETFs) attracted 57% of the total net inflows between FY17-18. Supported by these strong inflows, growing participation from individual investors and rising equities, the industry’s assets surged 42.3% in FY17 and 21.2% in the first nine months of FY18, catapulting above the milestone figure of Rs 21 trillion.

The AUM of equity-oriented funds grew at a CAGR of 40.1% from Rs 1.9 trillion as of March 2013 to Rs 9.4 trillion as of December 2017, faster than the debt segment’s 16.2% CAGR during the same period. The ETF segment also saw robust growth, because of recent move by the Employees’ Provident Fund Organisation (“EPFO”) to invest a portion (currently 15%) of the corpus in equities. The AUM of liquid / money-market funds too grew at a rapid pace of 26.6%, supported by corporate investments and stable returns.

A few graphs below will show us the overall scenario of the Industry:

CRISIL Research’s analysis shows that the industry’s AUM will grow from Rs 17.5 trillion (excluding gold ETFs and FOF) as of March 2017 to Rs 44.9 trillion by March 2022, clocking a robust CAGR of 21%.

GROWTH DRIVERS FOR THE SECTOR

  1. Equity mutual funds are perceived as long-term wealth creators.
  2. Giant investor pool in hand, given favorable demographics.
  3. Rising income and higher savings, along with increasing allocation to mutual funds, are huge positives for the industry. India has witnessed a steady growth in per-capita GDP (at constant FY12 prices) from Rs 71,609 in FY12 to Rs 93,840 in FY17, registering an absolute increase of 31%.
  4. Mutual fund penetration has improved since 2000 (12.9%), but it is lower than the global average of 62%.
  5. Under-penetration in smaller cities offers enormous potential for growth. The top 15 (“T-15”) cities held the majority of the mutual fund assets with a share of 81% as of December 2017. However, assets of beyond 15 (“B-15”) cities have grown faster at 34.2% CAGR compared with 26.7% for T-15 cities between March 2014 and December 2017. As of December 2017, the assets pertaining to B-15 cities stood at Rs 4.2 trillion.
  6. Tax benefits on equity-linked savings scheme (“ELSS”) a huge draw. AUMs for ELSS stood at Rs 810 billion as of December 2017, an increase of 94% over March 2016.

KEY CHALLANGES

  1. Low level of financial awareness.
  2. Competition from other financial instruments. In recent years, there has been a gradual movement away from physical savings to financial savings. However, within financial savings, the skew towards fixed deposits is very high at 62% of gross financial savings in Fiscal 2017.
  3. Retail expansion at a reasonable cost. Expansion into B-15 cities would require mutual funds to invest in marketing and distribution channels. The additional marketing expenses can put pressure on the profit margins of mutual fund houses.

ABOUT THE COMPANY

HDFC AMC Ltd.  been the largest asset management company in India in terms of equity-oriented AUM since the last quarter of Fiscal 2011 and have consistently been among the top two asset management companies in India in terms of total average AUM since the month of August 2008.  We operate as a joint venture between Housing Development Finance Corporation Limited (“HDFC”) and Standard Life Investments Limited (“SLI”). HDFC is one of India’s leading housing finance companies.

  • AUM has grown at a compounded annual growth rate (“CAGR”) of 27.1% between March 31, 2013 and December 31, 2017.
  • The proportion of equity-oriented AUM to total AUM was at 53.0%, which was higher than the industry average of 44.1%, as of December 31, 2017.

As equity-oriented schemes generally have a higher fee structure compared to non-equity-oriented schemes the product mix of AMC helps them achieve higher profits. As of December 31, 2017, the market share of total AUM was 13.8% and of actively managed equity-oriented AUM (which excludes index linked and arbitrage schemes) was 17.1% among all asset management companies in India.

As of December 31, 2017, the AMC offered 127 schemes that were classified into 28 equity-oriented schemes, 91 debt schemes (including 65 fixed maturity plans (“FMPs”)) and three liquid schemes, and five other schemes (including exchange-traded schemes and funds of fund schemes).

The AMC also provides portfolio management and segregated account services, including discretionary, non-discretionary and advisory services, to HNI’s, family offices, domestic corporate, trusts, provident funds and domestic and global institutions. As of December 31, 2017, they managed a total AUM of Rs 75.78 billion as part of portfolio management and segregated account services’ business.

The AMC had a total number of Live Accounts of 7.61 million as of December 31, 2017, and the Monthly Average AUM (“MAAUM”) from individual customers accounted for 62.2% of MAAUM, compared to the industry average of 50.6%, for the same period. The AMC had a monthly flow of over Rs 10.7 billion through approximately 2.85 million systematic transactions as of December 31, 2017.

As of December 31, 2017, AMC served customers in over 200 cities through pan-India network of 183 branches (and a representative office in Dubai) and service centres of the registrar and transfer agent (“RTA”), which is supported by a strong and diversified network of over 60,000 empaneled distribution partners across India, consisting of independent financial advisors (“IFAs”), national distributors and banks.

OBJECTIVES OF ISSUE

  1. To achieve the benefits of listing the Equity Shares on the Stock Exchanges and to carry out the sale of Equity Shares offered for sale by the Promoter Selling Shareholders.
  2. Further, the Company expects that the listing of its Equity Shares will enhance the visibility and brand image, and will provide a public market for Equity Shares in India.

Note: The Company will not receive any proceeds from the Offer and all the proceeds will go to the Selling Shareholders.

RISK FACTORS

  1. Decrease in AUM and investment management and advisory fees.

The revenue from investment management fees in Fiscal 2017 and for the nine months ended December 31, 2017 was Rs 14,284.53 million and Rs 12,724.68 million respectively, which constituted 89.96% and 96.64% of the total revenue, for the said periods, respectively.

  1. If the investment products underperform, the AUM could decline and adversely affect our revenues, reputation and brand.
  2. Failure to continue with the existing distribution relationships or to secure new distribution relationships may have a material adverse effect on the competitiveness, financial condition and results of operations.
  3. Any concentration in the investment portfolio could have a material adverse effect on the business, financial condition and results of operations.

A large portion of the AUM is concentrated in a few schemes. For example, as on December 31, 2017, the top six equity-oriented schemes constituted 79.8% of the total equity-oriented AUM and the top six debt schemes constituted 66.1% of our total debt AUM.

  1. Impact of changes to the regulations on the Total Expenses Ratio (“TER”) for Schemes, could adversely impact the revenue, results of operations, business and prospects.
  2. The outstanding civil litigations involving the AMC wherein the aggregate amount involved exceeds ₹186.72 million individually.

QUALITATIVE FACTORS

  1. Consistent market leadership position in the Indian mutual fund industry.

HDFC AMC Ltd. have been the most profitable AMC in India in terms of net profits since FY13, and had a total AUM of Rs 2,932.54 billion as of December 31, 2017. The AUM has grown at a CAGR of 34.5% since FY01. It had the highest share of net profits and total revenue of 18.8% and 13.5%, respectively, among asset management companies in India in FY17.

  1. Trusted brand and strong parentage.

HDFC AMC Ltd. benefits from the brand reputation of promoters, HDFC and SLI. The HDFC group has a strong presence across financial products and services, especially in the retail sector

  1. Superior and diversified product mix distributed through a multi-channel distribution network.

The diversified product mix, which includes 28 equity-oriented schemes, 91 debt schemes (including 65 FMPs), three liquid schemes, and five other schemes (including ETF and FOF schemes), enables the AMC to operate through various market cycles, cater to specific customer requirements and reduce concentration risk.

  1. Focus on individual customers and customer centric approach

The percentage of gross financial household savings in India in shares and debentures, including mutual funds, has increased from 2.0% in FY15 to 10.0% in FY17. Moreover, an investment by individual customers in the mutual fund industry has grown from 43.9% of total industry MAAUM as of March 31, 2014 to 50.6% of total industry MAAUM as of December 31, 2017.

STRATEGIES

  1. Maintain strong investment performance
  2. Enhance product portfolio
  3. Invest in digital platforms to effectively leverage the growing digital space
  4. Customers and Distribution Channels

FINANCIAL STATEMENT ANALYSIS

Consistent top line growth: The total revenue increased from Rs 784 crore in FY13 to Rs 1,867 crore in FY18, with a CAGR of 19% due to The AUM has grown at a CAGR of 27.1% between March 31, 2013, and December 31, 2017.

  1. High Proportion of Equity-Oriented AUM Helps To Achieve Higher Profits:

More importantly, equity-oriented AUM formed around 51.3% of HDFC AMC’s total AUM and was higher than the industry average of 43.2% as per RHP documents. “Equity-oriented schemes generally have a higher fee structure with around 2x margins compared to non-equity-oriented schemes, which helps HDFC AMC to achieve higher profits. We may see improvement in them if the AMC manages to expand the reach in B15 cities wherein they can charge an additional TER.

  1. PAT (Rs. in crore)

  1. Price to Equity

  1. Book Value

Peer Comparison

AUTHORS NOTE

The Mutual Fund Industry is booming and HDFC AMC Ltd. has hit the market at the right point of time to cash in the opportunity. Considering, the financials the company has been growing consistently over the period of last 5 years. But, the company is launching the IPO at a higher valuation compared to the peer.

Favorable perception of HDFC AMC’s brand, higher mix of high-margin equity assets than the industry average, consistent return on equity (ROE) of 40% since the past five years, a wide distribution network, and increasing dividend payouts work in the company’s favor.

At the upper price band, HDFC AMC is valued at 32 times FY18 EPS (20% premium to its only listed peer Reliance Nippon AMC), which is justified given the strong parentage, consistent market leadership and superior growth. Not a single company in HDFC group where investors have lost money so far

At a global front the penetration of Indian Market will be increasing with the awareness created by regulatory agencies. The AUM is planning to expand its reach in B15 cities and based on the historical statistics individual investors stay invested for long term horizon compared to that of Corporates, FIIs, Banks. Not a single company in HDFC group where investors have lost money so far; therefore based on above argument you can apply in this ipo with long term horizon.