HDFC Asset Management Company

(Yogesh Sane) #41

That’s a Sept 2020 price target or a CAGR of 10% from current price. Hardly exciting. Media is just stating the target price without the date by which it will be achieved (which makes all the difference). At this expected return, HDFC MF might give better returns than HDFC AMC. Can’t publish the report as it is not available for public distribution.


cyclical high earnings along with cyclical high multiples is recipe for trouble whenever the cycle turns. I would rather bet on other diversified asset managers like IIFL, Edelweiss or Motilal etc. This will be a good bet at IPO price or during small down cycles. Listen to Ramdeo when he describes the problem with India AMC industry during downturns. Market fall lowers AUMs and hence fees and even outflows start at the same time creating double whammy. There is too much of consensus that domestic money will keep flowing into the market.

(Yogesh Sane) #43

Following is an analysis I performed using AMFI data to get an idea about exactly how cyclical AUM is and at what stage in the cycle we are so that we can form rational expectations about future.

Table below shows Equity AUM and total AUM over last 19 years for which data is available.

Year Equity AUM Total AUM
FY 2000 30611 113005
FY 2001 13,483 90,587
FY 2002 13,852 100,594
FY 2003 9,887 79,464
FY 2004 23,613 139,616
FY 2005 36,711 149,554
FY 2006 92,867 231,862
FY 2007 113,386 326,388
FY 2008 156,722 505,152
FY 2009 95,817 417,300
FY 2010 174,054 613,979
FY 2011 169,754 592,250
FY 2012 158,432 587,217
FY 2013 149,777 701,443
FY 2014 165,560 825,240
FY 2015 305,669 1,082,757
FY 2016 344,707 1,232,824
FY 2017 482,138 1,754,619
FY 2018 669,207 2,136,036
FY 2019* 712,665 2,520,430
Long Term Trend Growth Rate 23% 20%

*FY 19 data is upto August 2018
Source: AMFI

Long term trend growth rate for Equity AUM is impressive 23% while long term trend growth rate for total AUM is also strong at 20%.

However, growth hasn’t been linear. If we divide this 19 year period into 4 separate periods of growth and stagnation, we get an idea about cyclicality in the business.

Period No of Years Equity AUM CAGR Total AUM CAGR
FY 2000 - FY 2003 3 -31% -11%
FY 2003 - FY 2008 5 74% 45%
FY 2008 - FY 2013 5 -1% 7%
FY 2013 - FY 2019 5.5 33% 26%

Source: AMFI, Author’s Calculations

As the table above shows, there have been periods of huge drawdown like 2000-2003 followed by massive growth during 2003-2008 which stagnated during 2008-2013, after which current growth phase has began. We are currently in the 6th year of growth that began in FY2014 and growth so far in this period has been running well above the long term average.

Long term trend growth is clearly impressive but MF industry was just getting started at that time. Now that early adopters have adopted the product, growth over next 20 years may not be as strong as growth over last 20 years but it should still be around 15% given the still low penetration levels of MF in India and MF giving good returns compared to other asset classes.

On the other hand, we are into 6th year of expansion and given the historical data, we could be entering a period of low growth (if not degrowth) as current growth rate running higher than long term trend growth rate.

Let’s not confuse AUM growth with revenue growth for AMCs. Over last 5 years, HDFC AMC AUM grew 25% but revenue grew 19% because expense ratios have been coming down. Same trend is likely to continue for foreseeable future given high level of expense ratios in India. If AUM growth is likely to moderate, revenue growth will be even slower. Operating efficiencies from scale will kick in but looking at limited historical data available about AMC financials, it will not be enough to completely offset deceleration in revenue growth. Annual PAT growth of 12-15% is likely as a conservative estimate for next 5 years.

And finally, the stock price growth (the only thing that actually matters). Assuming that growth of PAT will moderate from here on, it will be difficult to sustain current lofty valuations. A good amount of future growth is fully priced in at this valuation. Before you buy, make sure you are more optimistic than the seller.

Conclusion: Draw your own conclusion depending on whether you are bullish or bearish on this stock :slight_smile: . There is enough data here for anyone to draw any conclusion that suits them.


Thanks for putting this in context with relevant data. We also need to separate out two major factors in AUM growth a) market growth/return b) net inflows. AMCs can work on getting more inflows by increasing ground level presence etc but market performance is not in their hands.

(Hitesh Patel) #45

Agree largely with Yogesh’s thesis. Just went through Morgan Stanley report on HDFC AMC where they put up 3 kind of targets based on different scenarios. Base case target price 2050. Bull Case 3300. Bear case 1100. All these based on Sep 2020 earnings.

For practical purposes, two main variables to the business remain growth rate in AUM and expense ratio. Growth rate in AUM will be dependent upon market condition while expense ratio will be largely dictated by regulatory agencies. And we know how regulatory agencies can screw up a good business.

Personally speaking if I were to invest in any company after paying high valuations I would need a lot of chips loaded in my favour and very little uncertainty. I dont find either of these things in HDFC AMC currently but maybe on declines it could be looked at. Instead I think HDFC Bank itself could be a much more interesting business if there were to be declines. Always remains a no brainer during strong market corrections.

(rvetri) #46

HDFC AMC is being valued like another conventional Co which struggle to cross return ratios in 20s and which need loads of capital to grow their biz…
How would you value a Co with incremental return ratios at infinity…

How would you value it’s banking network and investment advisor network which they have built over 2 decades…

Honestly i have no method available to say HDFC AMC is overvalued…

(Dinesh Sairam) #47

Meaning, you also have no method available to say HDFC AMC is undervalued?

(Deepak Venkatesh) #48

Hi Yogesh

I feel the investments into capital market is still in its nascent stage for us and if I dare say we are still in early adoption phase. India as a country has a very low MF to GDP ratio.

Data is till 2015 only in this.

But our GDP per Capital is growing at a much better pace than even the higher income countries for quite sometime and I guess it is going to continue too.

Period No of Years Equity AUM CAGR Total AUM CAGR
FY 2000 - FY 2003 3 -31% -11%
FY 2003 - FY 2008 5 74% 45%
FY 2008 - FY 2013 5 -1% 7%
FY 2013 - FY 2019 5.5 33% 26%
Source: AMFI, Author’s Calculations

There is a different way to look at this. What fraction of investments as a percentage to the assets by households/individuals were being made in the capital market directly. In the given period 2000 to 2017 the average has been a mere 4%. And the average from 1977 to 2017 is also 4%! So we Indians have not been very keen to invest in capital markets. In the above periods CY 2000-2003 the average is 5%, 2003-2008 its 4%, and the other two (till 2017) it is 3%. So we are putting less in MFs/Stocks as of now as proportion to what we earn and save. These data points are from DBIE RBI. If we look at bank deposits as a percentage to total household assets in the same period its in an increasing trend. In the above periods CY 2000-2003 the average is 38%, 2003-2008 its 44%, and the other two (till 2017) it is 51%. We are earning more and stuffing it into FDs I believe!


(n.arvind2k) #49

Bullish on HDFC AMC - Indian household savings way off the developed countries at approx 4% - (Developed countries have in the range of 11%-17%) , Brand value is high, already profitable, valuations not much of an issue as it is primarily scarcity premium.

Huge potential market ahead !!

(pradip) #50

@hitesh2710 , @Yogesh_s,

Infact, Deepak Parikh mentioned that AUM for mutual fund industry is likely to double to nearly INR 50 trillion in the next five years ~ CAGR of 15%. This is much lower than the current 20-25% growth HDFC AMC is enjoying in the last few years.

Having said that, Deepak Parikh counted a large number of factors working in favor of MFI ~

• Large working population with better job opportunities

• Shifting of investors’ preference to such financial products.

• Mutual fund AUM penetration as a percentage of GDP is still very low at 11 per cent

• Shift in the saving habits of Indians from gold and real estate to financial savings and this trend is unlikely to reverse

• Growing middleclass

• Structural reforms like formalization of the Indian economy, financialization of savings, financial inclusion endeavors, rising share of EPFO funds being allocated to equities.

While he also admitted to certain challenges the industry needs to work on, I personally think that HFDC AMC has a clear visibility of earnings. Coupled with renowned & trustable management, they will command a premium valuation for at least 3-5 Yrs.

Disc. Invested.

(Yogesh Sane) #51

Here is a cheat sheet I use as a shortcut to a DCF valuation model. This is not a substitute for a DCF but a handy tool to get an idea what returns we should expect based on EPS growth, exit PE and a time horizon.



Bull Case
EPS growth 20%, Exit PE 40, Expected Returns 19%.

Base Case
EPS Growth 15%, Exit PE 35, Expected Returns 12%.

Bear Case
EPS Growth 10%, Exit PE 30, Expected Returns 6%.

You can play around the numbers using the attached sheet. Cells marked with yellow background are input cells.
Returns Calc.xls (19 KB)

(Dinesh Sairam) #52

I was about to post something similar. In investing, it’s not only the business per se that matters. It is the price at which it is selling Vs the value assignable to the business. You can buy the best-run business in the country and still end up with mediocre returns if you didn’t buy at a lenient price.

The tool shared by @Yogesh_s ji proves just that. The IPO was at 32 P/E, so if we assume that the ‘exit multiple’ slowly reverts to what the Investment Bankers had priced the company at, even at 20% CAGR in profits, the returns in 10 years would only be 15-16%. Again, this is assuming the business is able to sustain the momentum in profits. If the profit growth drops to anywhere between 15-20%, that would amount to a CAGR of 8-13% only.

Valuations matter.

(Yatharth) #53

Sir, 11 years over, what should be exit PE /PBV of Page ? Or for that matter, Britannia, Titan, Kotak Mahindra, Gruh, HDFC Bank, Bajaj Finance? High valuation funda has robbed me and hundreds of investors by exiting many multi-baggers in early stages.

As articulated above, imho, MF AUM growth will surprise even Mr. Deepak Parekh. This is just a beginning. The large 3-4 players will continue to dominate. Just check growth of AUM from tier 4 cities.

(Yogesh Sane) #54

Businesses you mentioned were able to produce quality products and services and managed to get a higher and higher share of their customer’s wallet. They grew much faster than the industry because of that and have built a moat around them that is difficult to cross.

For something similar to happen in case of HDFC AMC, they will have to come up with funds that beat the benchmarks with a huge margin while rest of the AMCs struggle to beat the benchmark, or they have to offer their funds at dirt cheap prices by controlling costs while rest of the industry struggles with high costs. I don’t see how that can happen. Having said that, if it can happen with biscuits, inner wear or loans there is no reason why it cannot happen with mutual funds but making this assumption while pricing the stock is IMO, speculative.

(rvetri) #55

There is no scientific data that proves excel sheet valuation analysts have become dollar millionaires and billionaires. A stock will never behave in a way as modeled by may be a billion people who know how to use excel. If excel sheet valuations on DCF and exit multiples will decide the Dollar Billionaires out of investors - there will be not just a few tens of them in the world. There will be atleast a Billion billionaires in the world by now.

The simple and plain truth is - nobody - repeat - nobody can know the price at which HDFC AMC or any stock will trade 10 years later. If someone claims they know - congratulations and all the best to their self confidence.

(Dinesh Sairam) #56

As I’ve claimed several times over, Price is 100% in the past and Value is 100% in the future. But that shouldn’t discourage us from attempting to attach a Value based on our story and risk aversion for the company.

Going a bit with this, if nobody knows the future, why invest in stocks at all? Why not invest in government bonds and call it a day? If someone is willing to believe that a business might travel in a specific direction, then I find it hard to understand why they’d resist assigning a Value to what they believe.

(rvetri) #57

No problem in an individual assigning a value to what they believe in say 10 years from now. If they believe they can do it for all stocks, i will meet them in their own island bought in Hawaii, not in ten years, but in may be in just a few years.
What i am unable to comprehend is, how they can forcefully tie all others into their belief that they can assign a value of a stock ten years from now - all because they know to use excel. Which is known to a Billion people in the world.

Not sure about the example of bond, stocks etc and how this example holds good here. Everybody believes in the direction the profits of their stocks take in the future. Which in all probability will be the direction of the future stock price too.

(satz2007) #58

As @Yogesh_s specified, HDFC AMC may not have the moat like other companies specified here like Page, Titan, Britania, HDFC Bank etc. But it has the below advantages

  1. Strong brand name and management of HDFC
  2. Strong distribution network and wide reach to even tier 2 and tier 3 cities of India - Next growth engine for MF industry
  3. Higher percentage of Equity Funds

Due to these reasons, it will definitely have some premium pricing and command higher PE compared to other players like Reliance Nippon.

(Dinesh Sairam) #59

This is what I asked earlier. If one believes in the direction of cash flows, what’s stopping them from believing in the universal truth of the Time Value of Money? And the simple truth of Discounting of those cash flows? Are they averse to reality?

Are you telling me that you will be willing to pay ANY price for a stock, if you’re convinced that the profits are going to grow at a commensurate rate? How will you judge whether the market has already priced in the growth or worse, priced in growth that won’t probably be there?

(Yatharth) #60

A market exists today that pays high PE for DMart, Page, almost all consumer companies; high PBV for HDFC Bank, Kotak , Bajaj, and unimaginable PBV for Gruh.

People, including this novice, have made from 2 to 10 baggers in these.

There has been too much debate on these, especially since 2013 on these, on twitter of which I was a part.

We can debate or make money. Colour is green only. If one sees a trouble, quarterly results and daily exit options are always there.

Tell me 5 private companies with market cap > 10000 crores, that have continued to grow at 12-15% and Stock price has come down post 5 or 10 years?

i do remember bitter arguments on HDFC Bank with some super ( highly worshipped ) Gurus and prominent investors in 2012/ 2013 on PBV , only to realise that those folks bought it much later and now singing its praise. Analyse criticism of Page in 2015 and see what happened. No one talks bad about it at least now at 100+ PE.

Indian market will continue to pay high PE wherever it sees assured Growth of even 12% per Annum. Period. Rest is only giving Gyan to others while holding Bajaj Fin anticipating future appreciation.