Thanks Chandragupta for sharing your insights.
I believe that the stock has limited but steady growth potential of 10%+ compounding returns.
Following are my reasons:
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Slower PAT growth: 3 years (FY20-23) has seen PAT growth of 19%, which might be difficult to replicate going forward as the levers that helped have weakened - (a) Rapid growth in new retail investors post pandemic will taper from its peak, (b) rally in asset prices due to lower interest rates will be difficult to replicate in higher interest rate environment, and (c) non-MF business which is growing faster will put downward pressure on margins until they hit the required scale to become margin accretive.
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Case for PE de-rating: Due to slower PAT growth, we may see PE multiple de-rate from current 45x.
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I expect 10% minimum return basis following back of the envelop calculation - over the long term (Mar 2010-Mar 2019), MF AUM has grown at 16% CAGR and NIFTY delivered 9% CAGR. This implies that the volume growth has been around 7% (16%-9%). This in a way reflects new investors coming in, higher investment per investor, etc. Going forward, the growth will be slower given a higher base, hence we can assume a 1% reduction in this secular growth, implying 6%. And the NIFTY CAGR can also be assumed to be 1% lower over a long term, thus 8% CAGR. Thus, we can expect MF AUM to grow at 14% CAGR. As management highlighted, that typically revenue grows at 4-5% lower than MF AUM growth due to tiered pricing structure (lower pricing for higher AUM). Thus we can expect revenue growth to be around 9-10% growth. On this we can expect some additional growth by non-MF business which is growing at 20%+, thus overall revenue growth can be higher than 10%. On this, we can expect operating leverage (although weaker than before). Hence, EBITDA and PAT can grow at 10%+ too. Thus, we have sufficient margin of safety to absorb any PE derating.
On top of these, as Chandragupta highlighted, the company can increase its TAM by serving foreign currency funds. Also, earnings predictability is immensely high in this business. And with good business models and good management, neither investors nor management can fully foresee all the amazing opportunities that might open up in the long term because we don’t have the crystal ball to predict the future
Hence, I find totally worth it to hold on to wonderful businesses and ride both the strong and not so strong periods.
Disclosure: slowly building position in the stock
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