Near-term positives priced in for HDFC Asset Management Company stock

HDFC Asset Management Company (HDFC AMC) reported a healthy profit after tax (PAT) of Rs 430 crore for the July-September quarter (Q2) of financial year 2023-24 (FY24). It rose 20.2 per cent year-on-year (Y-o-Y) and decreased 8.4 per cent quarter-on-quarter (Q-o-Q). This was driven by good equity returns, leading to a sequential improvement in revenue yields. The drop in treasury yields was responsible for the sequential decline.

The assets under management (AUM) growth was around 8.1 per cent Q-o-Q, and led to better blended yields at 49 bps (up 47bps in Q1FY24). The increase of equity in the mix, and a decline of share of liquid funds were drivers of superior yields. The market share of 12.3 per cent in equity mutual funds was up 31 bps Q-o-Q. The retail presence improved since individual average assets under management (AAuM) is higher than the industry average, and there was a larger share in investor additions.

The HDFC–HDFC Bank merger should be good for the AMC. Assuming new Total Expense Ratio (TER) norms are applicable from FY25, the FY24 earnings could rise by 25 per cent. After merger, sales would be boosted due to the stronger distribution focus of the bank. A rise of 10 per cent in share of HDFC AMC sales by HDFC Bank could lead to a 4 per cent or 5 per cent increase in AAuM. Core PAT compound annual growth rate (CAGR) could hit 13.6 per cent during FY23-25.

HDFC Bank works on open architecture and HDFC AMC’s share in the bank’s mutual fund business was only 24 per cent. Peers like ICICI Prudential and Axis Mutual Fund have a share of 50-60 per cent in their respective banks’ mutual fund businesses. Efforts towards increasing its share in HDFC Bank’s business have commenced after the merger. HDFC Bank garnered Rs 1 trillion of gross inflow in FY23 through mutual fund or mutual fund (MF) distribution and thus, assuming the MF distribution share of HDFC Bank could rise to 60 per cent (from 24 per cent), this may lead to higher inflow by Rs 15,000-20,000 crore.

While the share in equity fund AUM improved to 13.3 per cent in Q2 (from 12.1 per cent in Q1FY24), the share in debt funds witnessed a minor decline to 13.2 per cent against 13.3 per cent in Q1FY24. The Quarterly Average AUM (QA-AUM) grew 22.2 per cent Y-o-Y (8 per cent Q-o-Q) in Q2FY24. Equity funds grew 15 per cent Q-o-Q (up 35 per cent Y-o-Y), while the share of equity funds in total QA-AUM rose to 54.5 per cent, from 51.2 per cent in Q1FY24. The systematic investment plan (SIP) book also saw an improvement, with AUM at Rs 1.1 trillion, and a customer base of over 5.8 million.

Employee cost rose by 10.9 per cent Q-o-Q, led by an increase in headcount (116 employees added in Q2FY24) towards a new vertical, to tap HDFC Bank customers, as well as marketing, sales & distribution. Management guided annual increase in employee cost could range between 8-12 per cent.

On a sequential basis, profits may decline 14 per cent, given likely lower treasury income (down 30 per cent Q-o-Q in Q2FY24) and normalisation of effective tax rate (assumed to rise to 26 per cent vs 16 per cent in Q1FY24).

The key downside risks are lower growth and industry-related risks if the stock market turns bearish. Improved inflow and a relatively faster gain in market share could be key upside factors. The AMC is a market leader and could enhance its market share if the expected share of inflows from the bank increases after the merger. However, it also has a premium valuation, which may limit its upside. The stock gained 3.5 per cent on Friday, to close at Rs 2,854.30.

According to Bloomberg, 9 of the 19 analysts polled in the last two days (after Q2 results on Thursday) are positive on the stock, while 8 are neutral, and two have ‘sell’ or ‘reduce’ ratings. Their average target price is Rs 2,818.