HDFC Asset Management Company

I have come to a similar view regarding valuations looking at it from another angle. If I focus only on the equity component which I suspect is a key driver (as this is likely > 55% of HDFC AMC revenues – based on share of AUM x approx TER), there seem to be several arguments to support the valuation or at least steady compounding going forward

• Equity AUM should theoretically grow ~14-15% in the medium term in nominal terms (9-10% AUM growth through market growth + 5-6% of new net inflows). Just equity should result in an 8-9% revenue growth (excl debt, liquid and ETFs)
• The above assumes market share remains constant – if market share grows this revenue growth would improve. Due to poor performance over the last 3 years, they lost 3.5% in market share – although this seems to be stabilising or dare I say even increasing slightly. The decline in market share has had an impact on AUM growth
• The large amount of cash on their books (> Rs 5000 cr?) may have some optionality in terms of M&A – or they might just return this as dividend by increasing payout above 65% / doing a special dividend
• Short terms cost improvement as other expenses due to several NFOs may reduce. I suspect that if revenue growth is sub-10%, there may not be too much operating leverage left in the business after this cost improvement
• January AMFI / HDFC AMC numbers show that the equity market share growth remains intact (perhaps growth is too strong a word)

All the above optimism is yet to transfer into any meaningful improvement in financials though. One analyst put it very well in the conference call asking why the management is unable to grow AUM and margin.

Looking for whether the MF culture is broken is a key red flag – in addition to the SIP, January numbers showed a very healthy number for Equity (and a very poor number for ETFs) – but a month isn’t a data trend

I agree that a low revenue growth will result in a valuation downgrade

Disc: Invested so likely to be biased