I think that’s number I heard in the previous AMC acquisitions in India in last few years. May be you can add numbers about AMC transactions done by IDFC MF and L&T in the recent past.
If fund is generating 25 bps net profit per year, then 5% rate gives PE ratio of 20 for such a business. That might be rough calculation driving that number. (AUM:10,000, Profit:25, Stock price:500)
As you have rightly said valuation will depend on the product mix which drives profit margin to AUM ratio. That ratio will also depend on growing competition in the MF sector, regulator imposing limits on fees, rise of passive funds and general rising awareness and savvy from investors. I have seen index funds with expense ratio of 6-30 bps for essentially same product such as NIFTY 50 Index fund. Not sure if such difference will continue in the future but HDFC MF is charging on the higher end of such ratio. With new fund houses such as Zerodha and Reliance Jio there will definitely pressure on index fund TER. There are some new active fund managers as well. Parag Parikh Fund house has garnered good AUM with lower TER and better performance than HDFC MF.
Then as the equity market gets more efficient active funds might start generating lesser alpha to justify higher fees so product mix could change more towards passive/index funds. There could only be 2-4 viable player if large part of the AUM will starts going passive route.
So there are many ways how AMC business will pan out over next 5-10 years. So in that light HDFC MF valuation seems stretched.
The growth in the AMC business is likely to be very high given the rising awareness about MF investing. HDFC MF is a top brand and has good performance. Thus they are most likely to gain market share.
Also, the delta in this business is likely to be very high. If the AUMs grow by 100% (a very likely scenario with market gains+ inflows) in the next five years, the profits will grow at a much faster rate as most expenses are fixed. The industry already has an SIP book of over 20k Cr pm, this itself can bring in decent growth
To add:
Hdfc Amc also declares most of it’s profits as dividends which is a good thing. MF industry has a long way to go and probably why many new companies are entering. So, the question really is why should Hdfc Amc deserve a premium / high valuation. They already lost market share. Moved to 3rd position from being no. 1 till early 2020 in total AUM and I don’t see them catch up with SBI anytime soon in terms of AUM, however lesser profitable ETF AUM is for SBI
Another point which is the most important is the Saving rate of large population, which has dropped from 23% to about 19% in the past decade. It is one of the lowest in 30+ years which gives an impression that, people at large are not earning enough to save & invest.
If this issue is addressed, people will start saving more and also investing more in Mutual Funds.
India can grow at more than 8% to 9% in terms of Real GDP, and that should enhance people’s income, savings and huge money will flow into Equity MF(s).
I do not see this happening in near future, which is a negative for any AMC not only HDFC AMC.
SBI AMC is growing because large portion of EPF (About 10% to 15% every year) is being invested in Nifty based ETFs, through SBI MF if I know correctly. This does not reflect their efficiency or fund management excellece.
I am also concerned about restricted growth of HDFC AMC AUM and PAT, but just highlighting other parts which also need to fall into place for AUM and AMC growth in India.
I may be biased as invested in HDFC AMC, but my expectations are moderate.
