Analyst Corner: Retain ‘reduce’ on HDFC AMC with unchanged FV of Rs 1,950

Profitability inches up qoq. HDFC AMC’s 2QFY21 performance was on expected lines. Even as QAAUM was flat yoy, 4 bps yoy decline in revenue yield due to unfavorable AUM mix was partially offset by expense controls, translating into 2 bps yoy decline in core PBT to 38 bps. On a qoq basis, QAAUM was up 5% (on the back of 12% growth in equity AUMs) leading to 3 bps rise in yield and 4 bps expansion in core PBT. We retain estimates; reiterate REDUCE with unchanged FV of `1,950.

HDFC AMC reported 7% yoy decline/16% qoq growth in core PBT (PBT before other income) to `3.5 bn. While quarterly average AUM (QAAUM) was flat yoy and up 5% qoq at Rs3.7 tn (closing AUMs down 3% yoy), revenue yield declined 4 bps yoy, up 2 bps qoq to 49 bps reflecting change in the composition of business. The company managed to cut expenses (down 12% yoy and down 3% qoq), largely due to transitory payouts (with respect to new business generated in the previous periods) in the base year. Overall core PBT was down 2 bps yoy, up 4 bps qoq to 38 bps for the quarter.

HDFC AMC reported QAAUM of Rs3.75 tn, flat yoy and up 5% qoq. Equity AUMs were up 12% qoq (though down 10% yoy), likely reflecting market movements. Consequently, the share of equity AUMs declined to 39% from 43% of total in 2QFY20, up from 37% in 1QFY21. Its overall market share in equity assets has moderated to 14.2% from 16.2% in 2QFY20 and 14.6% in 1QFY21. Overall market share was down 100 bps yoy and qoq to 13.6%
We retain our estimates, DCF-based FV of Rs 1,950 and REDUCE rating on HDFC AMC. Reiterating key arguments for our REDUCE rating sharp deceleration in nominal GDP growth to 8% over the medium term from 11% during FY2015-20. Passive funds will likely gain traction over the medium term, gaining share from the active fund management industry as the latter struggles to outperform indices. Distributor commissions (including 90% of MF expenses/fees) were slashed in FY2020 (down 29% yoy, near FY2017 levels), which, we believe will not sustain.

While HDFC AMC delivers superior growth and profitability, its rich valuations (34.8X FY2022E EPS) ignore the aforesaid industry-wide risks.