HDFC Asset Management Company IPO – SUBSCRIBE
Asset Management companies are new investment opportunities for equity investors. Huge growth opportunity, attractive economics, scalable business models makes AMC business a good investment opportunity for long term investors. The first AMC (Reliance Nippon AMC Ltd) came with an IPO in October 2017. It was followed by IPO of ICICI Prudential Mutual Fund. There is now another peer looking to list its business by launching IPO.
The IPO of HDFC AMC opens on July 25 and closes on July 27, 2018. The offering will entirely be an offer for sale (OFS) of 25.5 million shares by HDFC Ltd and Standard Life Investments Ltd. With the OFS, the selling shareholders aim to dilute their stake by 12% in the company.
HDFC AMC is a Joint Venture between HDFC and Standard Life Investments Ltd since 2002. Company has been most profitable Asset Management Company in India since Fiscal 2013 with a total AUM of INR 3058 billion as of June’18. It has been consistently been among the top asset management companies in India in terms of total average AUM since month of August 2008. AUM has grown at a CAGR of 27.1% between FY13 and December 31, 2017.
Furthermore, HDFC AMC has been largest asset management company in India in terms of equity oriented AUM which comprises 53% of total AUM v/s industry average of 44.1% as of December 31, 2017. Company has highest market share of 13.8% (in aggregate equity AUM) and 17.1% (in actively managed equity AUM) in India.
Macro variables are in favor of the business:
While physical assets such as real estate and gold have been the preferred avenues for household savings in India, the preference now has been shifting towards financial assets. Commensurately, the proportion of net financial assets in total household savings has seen a sharp rise from 31% in Fiscal 2012 to 42% in Fiscal 2017, which bodes well for the mutual fund industry.
The mutual fund industry in India is underpenetrated with mutual fund AUM as a percentage of GDP standing at 12.9% in the first half of FY18. This is much lower than the world average of 62%. Low penetration of mutual funds in India is also evident from the equity mutual fund AUM to market cap ratio of 4%, which compares with global peers. This relatively low penetration indicates strong growth potential going ahead.
Lastly, while the top 15 (T-15) cities hold majority of the mutual fund assets, the industry is also seeing assets of beyond 15 (B-15) cities growing faster at 32.3% CAGR compared with 24.9% for T-15 between March 2014-18. Regarding growth prospects, as per CRISIL, the mutual fund industry’s AUM is set to grow from Rs 17.5 trillion (excluding gold ETFs and FOF) as of March 2017 to Rs 44.9 trillion by March 2022, clocking a robust CAGR of 21%.
Factors such as favorable demographic profile with a young working population, rise in income levels, increasing financial literacy and retail participation and buoyancy in capital markets supporting equity AUM are expected to drive the growth of the mutual fund industry in the long term.
Key Investment Rationale:
HDFC is among the very few players best positioned to capture the high-growth potential of India’s mutual fund industry, which is underpenetrated in comparison with developed nations (11 per cent of GDP compared to a world average of 62 per cent).
Favorable perception of HDFC AMC’s brand, higher mix of high-margin equity assets than the industry average, consistent return on equity (ROE) of 40 per cent since the past five years, a wide distribution network, and increasing dividend payouts work in the company’s favour.
Strong Leadership Position:
HDFC AMC has consistently been among the top two asset management companies in India in terms of total average AUM since August 2008, according to CRISIL. The proportion of equity-oriented AUM to total AUM was at 51.3%, higher than the industry average of 43.2%, as on March 31, 2018, according to CRISIL.
The firm also has the highest market share (15.7%) in individual investor category, which predominantly invests in equity-oriented funds. Both the above factors complement each other and help the firm achieve higher profit margins than its peers.
Diversified product mix and multi-channel distribution network:
The company offers a wide range of investment schemes across asset classes catering to various risk-return profiles. Many of these schemes have recorded strong and consistent performance compared to industry benchmarks. As of March 31, 2018, its total AUMs stood at Rs. 2,91,985 crore, of which equity-oriented AUM and non-equity-oriented AUM constituted Rs. 1,49,713 crore and Rs. 1,42,273 crore, respectively.
The company offers its customers access to products and services through an extensive multi-channel sales and distribution network comprising banks, national distributors and IFAs. As on March 31, 2018, it served customers in over 200 cities through a pan-India network of 209 branches (and a representative office in Dubai), and service centers of RTAs. Customers also access products and services directly through branches and online channels. Further, as on March 31, 2018, the company has over 65,000 empaneled distributors across India marketing the entire range of schemes with its largest distribution partner, HDFC Bank Limited.
Consistent profitable growth:
HDFC AMC has also been the most profitable AMC in India in terms of net profits since FY13. The company’s profits have grown every year since the first full year of operations in FY02. Company’s total revenue doubled from INR 9.0 billion in FY14 to INR 18.7 billion in FY18 registering CAGR of 20% and net profit grew from INR 3,6 billion in FY14 to INR 7.2 billion in FY18 registering a CAGR of 19%. AMC has reported consistent return on average net worth (ROANW) above 40%. The ROANW for FY18 stood at 40.3%.
At a price band of Rs. 1,095-1,100 per share, the issue is priced at 31.4x FY18 EPS. Given that the company is the second-largest player by AUM in a high-growth industry, growing at 15-20 per cent per annum, with strong profitable ratios and leadership position premium valuations are justified. We advise long term investors to subscribe to the IPO.