HDFC Asset Management Company valuations ride on high growth expectations

Although a one-off tax provision negatively impacted the bottom line, HDFC Asset Management Company (HDFC AMC) posted an excellent operational performance in Q2FY25.

The equity quarterly average assets under management (QAAUM) growth was 14.7 per cent quarter-on-quarter (Q-o-Q). And, equity AUM market share rose 50 basis points (bps) year-on-year (Y-o-Y) to 12.9 per cent.

SIP flows were up 64.3 per cent Y-o-Y and the share of unique individual accounts up 400 bps to 24 per cent.

Strong equity markets and strong inflows have led to a higher share of equity in QAAUM to 65.7 per cent, up 810 bps Y-o-Y and 140 bps Q-o-Q.

This drove up revenue and earnings before interest and taxes (Ebit) by 38 per cent and 47.4 per cent, respectively, Y-o-Y. Adjusted net profit grew 48.1 per cent Y-o-Y, up 7.1 per cent Q-o-Q to Rs 646 crore.

The core earnings (up 48 per cent Y-o-Y) were slightly above consensus, while headline net profit growth was down 32 per cent Y-o-Y due to a one-time impact of the tax rule changes which means an additional Rs 70 crore in deferred tax. The company offset yield pressures via commission cuts (full impact will be seen in Q3).

The Q2FY25 operating revenue grew 38 per cent Y-o-Y (14 per cent Q-o-Q) to Rs 887 crore. QAAUM grew 45 per cent Y-o-Y (up 13 per cent Q-o-Q). There was slight yield improvement (0.6 bps Q-o-Q) at 46.8 bps. Operating expenses were marginally up 1.6 per cent Q-o-Q (up 14 per cent Y-o-Y).

Other opex increased by 28 per cent Y-o-Y (10 per cent Y-o-Y).

The core profit before tax grew 47 per cent Y-o-Y (19 per cent Y-o-Y) to Rs 688 crore. Reported net profit was at Rs 570 crore with strong other income of Rs 170 crore, up 40 per cent Y-o-Y. 

The tax rate was calibrated to 33 per cent versus 26 per cent a year ago, due to a change in calculation of long-term capital gains.

The management said the revenue yield is influenced by the total expense ratio (TER) charged by the fund. A higher TER usually leads to higher revenue yield.

Equity yields remained stable Q-o-Q at 58 bps. New fund offerings can temporarily affect revenue yield, if fees are waived or discounted.

Contribution of debt funds has remained constant at 26.1 per cent. Positive inflows were observed in debt and liquid funds after three years of negative flows. The trend is toward short-end products but there is some movement towards long-duration products. Debt yields are at 28 bps with liquid yields at 12-13 per cent. The expense ratio and payouts for the new asset class that was recently cleared by Sebi, is still awaiting regulatory clarity.

The company reported lower employee expenses sequentially due to a one-time employee engagement event in Q1FY24 which did not recur this quarter.

SIPs have contributed significantly to the overall flows with steady growth observed Q-o-Q. The SIP book is a critical driver of long-term business growth.

The strong AUM growth is clearly correlated to buoyant equity markets with all-time high equity shares of AUM.

But equity yield could be under pressure and bring down gross yield.

The stock trades at a PE of 39 times its expected FY25 earnings. This valuation implies expectations of close to 20 per cent AUM growth which, however, may be hard to sustain.