HDFC AMC’s Revenue Mix Boost Q3 Earnings – Valuations Remain High

HDFC AMC’s revenue mix boost Q3 earnings

HDFC Asset Management Company (HDFC AMC) continues to reap rich rewards from the combination of favorable revenue mix and steady growth in assets under management (AUM).

Its October-December quarter performance reflects the positive momentum witnessed across the Mutual Fund sector, which helped the HDFC’s asset management arm to meet the analyst’s expectations. However, the company’s higher valuations are cause of concern.

The company reported a 44.93% jump in profit after tax at Rs 352.55 crore during the quarter under review.

Total income rose by 11% to Rs 592 crore. The company’s AUM grew 12% on year to Rs 3.7 Lakh crore. As a result, AMC’s revenue and net profit have been rising at a healthy clip.

Actively managed equity AUM (assets under management) stood at Rs 1.67 Lakh crore in the quarter under review with a market share of nearly 15.8%, making the company the largest equity mutual fund manager.

In Q3, revenues from asset management rose a reasonable 10% on the year. But lower expenses and higher operating leverage resulted in the company’s earnings before interest, tax, depreciation, and amortization increased by 30% in Q3.

Aided by the corporate tax-rate cuts, HDFC AMC’s net profit increased by about 44% on the year.

The company has maintained its lead in equity AUM, which improves the revenue mix. However, the fund house saw its market share on closing the AUM basis decline to about 13.9% in Q3 from 14.9% in Q2.

During the October-December quarter, the company’s systematic investment plans (SIPs) rose at a slightly lower rate of about Rs 1,220 crore a month. In monthly SIPs, the fund has about a 14.3% market share.

For December 2019, the company has clocked a SIP run-rate of Rs12.2bn, slightly lower compared to September 2019. The management has stated that this is likely due to the stoppage of STPs which tend to be of higher value.

At the December 2019 run-rate, HDFC AMC’s market share in the monthly SIP flows stands at 14.3%. More than 80% of the company’s SIPs are over 5 years long.

We believe HDFC AMC has a highly profitable product mix given its share of individual equity + balanced schemes in total AUM. Individual flows tend to be sticky while equity segments enjoy higher margins

69.1% of the transactions are coming from some form of the digital channel, including website and app.

There is an increasing trend among clients dealing digitally. Also, there has been an increase in sales through direct channels.

HDFC AMC has been able to build a strong brand franchise due to strong parentage and consistent returns in the past with top funds witnessing continuous flows.

The company’s persistent focus on garnering high yielding retail AUM has led equity AUM growth to outpace overall AUM growth (27% CAGR vs. 24%) in FY14-19

Given HDFC AMC’s strong positioning & superior earnings profile, the business deserves a premium valuation and hence we believe that the company has a great future ahead but fresh buying is advisable only on declines.

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