HDFC Mutual Fund to join IPO bandwagon

Second-biggest fund house begins talks to go public

HDFC Mutual Fund, the country’s second-largest money manager, has joined the list of probable asset management companies (AMCs) waiting to go public.

The AMC has begun preliminary discussions to list itself on the bourses but is yet to arrive at a time frame or appoint merchant bankers for the share sale, said two people familiar with the matter.

HDFC MF began operating as an AMC in July 2000 and is sponsored by the Housing Development Finance Corporation (HDFC) and Standard Life Investments. The former holds 59.9 per cent stake while the latter has 39.9 per cent share in the AMC. 

There aren’t any big pure-play mutual funds listed at this point in time and an initial public offering (IPO) will allow investors to directly participate in the growth of the industry, say experts. Reliance Nippon Life Asset Management and UTI MF are the two other AMCs in the race to go public. The former has set a March 2018 deadline for its share sale and has filed its offer document with the regulator.
 

“This is a good time for AMCs to go public,” said Manoj Nagpal, chief executive officer (CEO), Outlook Asia Capital. “The assets of the sector have grown at a CAGR (compound annual growth rate) of 25-30 per cent in the past three years, and the profits of large-sized fund houses are expected to grow at a fast clip as assets swell and fixed costs remain the same.”
 

“HDFC MF does not need the money to run the AMC business per se, but an IPO will help the promoters and key employees to monetise their investment,” said the chief executive of a fund house, who wished to remain of anonymous.
 

An email sent to HDFC MF and HDFC Ltd did not elicit a response.

 

If it decides to list, the fund house will command a premium on account of its brand name and its track record of consistently being one of the most profitable AMCs in the country, said experts. The AMC clocked a net profit of Rs 550 crore in FY17 and Rs 478 crore the year before. 
 

At the end of August, the fund house had assets of more than Rs 2.7 lakh crore, second only to that of ICICI Prudential AMC. A high percentage of these are equity assets, considered stickier than debt assets as the bulk of the equity money comes from retail and wealthy investors. HDFC MF’s equity assets totalled in excess of Rs 1 lakh crore as of August 31, forming nearly 40 per cent of its asset base.

Fund houses are typically valued at three per cent of their debt assets and six per cent of their equity assets. HDFC MF could get a valuation of at least six per cent of its overall assets. This could value the fund house at upwards of Rs 16,000 crore.

Reliance MF’s IPO size is reportedly pegged between Rs 1,800 crore and Rs 2,000 crore, valuing the AMC at about Rs 20,000 crore.

“The valuations for AMCs may not look cheap at present but it makes sense for investors to own these stocks from a long-term perspective. Indian MFs’ share as a percentage of financial savings is 3.5 per cent while the global average is around 40-50 per cent. That itself hints at the potential for growth,” said Feroze Azeez, deputy CEO, Anand Rathi Private Wealth Management. 

Azeez said a consolidation was likely in the MF sector in future and the larger players, once they get listed, can use some of the funds for strategic acquisition. The sector has more than 40 players right now.
 

Since it began operations, HDFC MF has taken the inorganic route twice to grow its asset base. In late 2013, HDFC MF had acquired the schemes of Morgan Stanley Mutual Fund, while in June 2003 it had acquired Zurich India MF.
 

The MF sector has got a boost in the recent past from record inflows in equity schemes through systematic investment plans. India’s mutual fund sector now manages about Rs 20 lakh crore worth of assets, of which nearly Rs 6 lakh crore is equity. This is more than double the Rs 10 lakh crore it managed three years ago.