PL Stock Report: HDFC Asset Management Company (HDFCAMC IN) - Analyst Meet Update - Will remain a dominant player - BUY

HDFC Asset Management Company (HDFCAMC IN) - Gaurav Jani - Research Analyst, Prabhudas Lilladher Pvt Ltd.

Rating: BUY | CMP: Rs2,762 | TP: Rs3,000

Analyst Meet Update - Will remain a dominant player

Quick Pointers:

§ With aggressive focus, share of HDFCB in equity distribution should enhance.

§ Well entrenched distributor relationships should help preserve profitability.

HDFC AMC at its analyst meet sounded optimistic on growth potential of India’s AMC space, drawing parallels to journey of US markets from 1980s to 2000s. India has ~570mn PAN cards, while unique investors are 40.4mn suggesting only 7% penetration. HDFC AMC will be a dominant player in this growth journey. Superior performance over the last ~3 years (1-yr bucket) has led to gains in equity market share which further improved to 12.3% (+31bps QoQ). Net flows will be boosted due to stronger distribution focus, as engagement with HDFCB has materially increased post-merger. A rise of ~10% in share of HDFCAMC sales by HDFCB could lead to a ~5% increase in AAuM and core profits. We see a core PAT CAGR of 12.6% over FY23-26E. Stock is trading at 32.2x; we maintain our multiple at 35x on Sep’25E core EPS (5-yr avg. of 40x) and keep TP unchanged at Rs3,000. Retain ‘BUY’.

§ Risk of passives disrupting the industry, not material: As per the company, while growth in passive could supersede active management, active equities would continue to deliver superior returns which should attract healthy investor flows. For HDFC AMC, proportion of large-cap funds that have outperformed the benchmark are (1) 88% in 1-yr bucket (2) 72% in 3-yr segment (3) 96% in 5-yr bucket and (4) 95% in 10-yr segment. Moreover, while index funds seem easy to manage, risk management is tough. Active equity has underperformed passives in USA, since despite the AuM growing in size, fees have not been capped which range from 3-4%. In India, SEBI has capped TER.

§ Share of HDFCB in net flows is enhancing: Engagement with HDFCB has materially increased post-merger across segments like marketing, digital and tech departments and HDFC AMC has created a separate channel for HDFCB. All 230 branches of HDFC AMC are mapped to the bank and 9 HDFC AMC funds are on top priority for HDFCB. Payouts to the bank are competitive to other peer banks. While share of other channel partners has gone up over the last 5 years, incremental flows from HDFCB are growing well and hence share of HDFCB in equity distribution should enhance from 7.8%.

§ Strong distributor relationships to ensure pass-thru of TER fall: TER of several funds reduced from 2.25% to 1.25-1.75% with size increase. While TER fall translated to decline in distributor commissions, absolute commissions are materially higher. Company alluded to strong distributor relationships, which would help absorb any potential TER impact. After SEBI cut TER in 2019, 80-85% was passed on to distributors. However, between Q2FY20-24 TER decline for some funds (due to size) was not transmitted to distributors.

§ Fintechs giving tough competition to traditional channels: Fintech related AuM has crossed Rs1trn compared to Rs30bn in FY19. Fintech SIP has rapidly increased from 0.4mn in FY20 to 3.6mn in FY21 to 8.6mn now. In Sep’23, 3.7mn new SIPs were registered of which ~40% were from fintechs (60% of these from B-30). Fintechs profitably operate by (1) selling direct plans at low cost (2) selling MF schemes with superior performance (3) providing strong analytical capability and (4) interacting regularly with customers.

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