IPO Analysis - HDFC Asset Management Company

HDFC Asset Management Company (HDFC AMC) Limited is coming out with Offer for sale (OFS) of 2.5 crore shares having face value of Rs. 5 each. The offer will open from June 25, 2018 and will close on July 27, 2018. The price band for the OFS issue is Rs. 1,095 to Rs. 1,100 and the minimum lot size is 13 shares, which implies a minimum investment in the range of Rs. 14,235 to Rs. 14,300.

The issue size is Rs. 2,800 crore of which the retail portion is 30 per cent, with 7,762,145 equity shares on offer.

As the offer is an OFS, company will not receive any proceeds from the same, but the company's brand will gain visibility. 

HDFC AMC is a JV between Housing Development Finance Corporation Limited (HDFC) and Standard Life Investments Limited (SLI). SLI is one of the world’s largest investment companies formed in 2017 from the merger of Standard Life plc and Aberdeen Asset Management plc and one of the largest active managers in Europe.

The company offers savings and investment products across various asset classes. It has a diversified mix of 127 schemes of which 91 are debt schemes (65 are fixed maturity plans) and 28 are equity-oriented schemes. Company also provides portfolio management and segregated account services and the AUM for the segment was Rs. 7,578 crore.

Company has a presence in 200 cities and operates through a pan-India network of 183 branches. It has strong distribution channel for its products and it generates 40 per cent of its revenue from the equity-oriented AUM from independent financial advisors, followed by 25 per cent from distributors and 20.1 per cent from banks. AUM of the company was Rs. 2,93,254 crore of which equity-oriented AUM was Rs. 1,55,282 crore as of December 31, 2017.

Under systematic transactions company has a steady monthly flow of over ₹10.7 billion. It enjoys a market share of 81.8 per cent in Top 15 cities and 18.2 per cent in B-15 cities in the monthly average AUM (MAAUM). 

Company has witnessed strong momentum in its revenue which grew at a CAGR of 19.3% from FY13-17 to touch Rs. 1,587.9 crore, while net profit has grown at a CAGR of 14.6% during the same period to reach Rs. 550cr. Company has good dividend payout ratio of 51% in FY17 which rose from 40% in FY13. With strong financial, the company boasted a RoNW of 42.75% in FY17.

Key growth drivers for the company - 

Company has been able to benefit from higher individual participation witnessed in Mutual fund industry. It has a greater proportion of individual AUM in comparison to the overall Indian mutual fund industry. As of December 31, 2017, MAAUM from individual customers accounted for 62.2% of MAAUM of HDFC AMC compared to 50.6% in the mutual fund industry in India. This will help the company as more investors opt for the SIP route of investments, following rising awareness about financial planning. This should benefit the company in the long run.

Also the equity-oriented schemes attract higher management fees and hence provide better margins to the company. The current mix of equity schemes in terms of AUM is higher and provides better profitability for the company. 

Company has been seeing higher growth in B-15 cities as its AUM has grown at a rate of 34.2% between March 2014 and December 2017. As financial inclusion initiative by government gains traction, we expect high growth in B-15 cities to sustain. 

We see higher usage of digital platforms to help the company scale up its business. With higher digital footprint, the company can reduce fixed costs incurred on branches and can serve a larger area. Company has witnessed growth of e-transactions, which now comprise 47.8% for 9-months of December 17 vs 41% for FY17. Also, 13.4% of the transactions were done through HDFC MFOnline and mobile applications.

As of December, HDFC Mutual Fund had the highest market share (16%) among individual investors’ assets, followed by ICICI Prudential Mutual Fund (14.7%) and Aditya Birla Sun Life Mutual Fund (9.9%). The top five AMCs together had a 58.6% share in individual investors’ AUM. Also its revenue share stands at 13.5% vs Reliance Nippon 11.9% and ICICI Pru at 11.5%.

5. Valuation 

HDFC AMC and Reliance Nippon are close competitors in the industry. We see that Reliance Nippon life had its IPO offer price as Rs. 252, but has corrected post listing. We see higher dependency on market movement as a key risk that deters subscribers from participating in an IPO. Also, HDFC AMC appears to be offered at a higher price when compared to Reliance Nippon Life on the basis of P/E ratio. However, we believe HDFC AMC has better brand visibility and trust, coupled with markets which are sentimentally expected to be better over the next couple of years.

We give a rating of 49 to the company which implies that investors can SUBSCRIBE with minimum exposure. We believe the company can do well, if there is stability in terms of government and if the company's earnings momentum continues in FY19. These will be the prime factors driving investors interest in the mutual fund industry.

*40 or lower – Avoid Investment, 41 to 45 – Risky, 46 to 50 – Invest with limited exposure, 51 to 55 – Investment recommended, 56 & above – Excellent Investment

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