Here is my analysis of this stock.
AMC Sector Analysis
Financialization theme - India is a developing country and the per capita income & literacy rates are rising. The FD rates are on a decline. It was 4-6% in US for the FDs in the 1990s just similar to what we have in India now. The preference towards financial assets is mainly triggered by demonetization but the other triggers are difficulties in liquifying assets like land/real estate apart from safety. The education & healthcare costs are on an upward trajectory, mutual funds given a longer time frame can be of the most viable option for increasing wealth and securing the future mandatory needs given the ticket size and the returns compared to other asset classes. MF sector in India is at a nascent stage and equity funds are just 4% to GDP whereas for US, it is 63% to GDP. So, it is a sunrise sector with huge opportunity and underpenetrated.
Pros -
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Brand - Backing of one of the most reputed business groups in India.
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Longevity - Have deep experience in handling multiple crisis situations - 2000, 2003, 2008. Their PAT more or less remained the same even though there were fluctuations in AUM during the period 2008-2012 as mentioned in the latest earnings concall.
Q1FY21 Earnings Call - HDFC AMC Earnings Call for Q1FY21 - YouTube
- Distribution Network - 65K+ Empanelled distributors. HDFC Bank itself is expanding in B-30 cities and so does HDFC AMC. NJ India Invest is the third biggest MF distributor in India and they are with HDFC AMC. In the previous quarter earnings concall, Milind Barve(MD) said that the mutual fund commission of the distributors is tagged to the transaction. For example, if NJ is committed to some commission in 2010 for one customer, the commission amount changes for the same customer distributed by NJ in 2012 as it is a different transaction. In the early days of MF penetration, the commissions and perks were very high compared to the current regulation by SEBI. So, most probably the distributors will stick with the then mutual fund schemes as they get more commission amount. As per new terms, the amount that goes to distributor is less. HDFC AMC clearly understands how important is the distributor edge and so they even tried for pre-ipo placement to distributors for a discount.
Q4FY20 Earnings Call - HDFC Asset Management Company (AMC) Earnings Call - Q4FY20 and Full Year - YouTube
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- Trust factor - HDFC AMC has taken the losses in its books in the case of Essel group NCD fiasco whereas Franklin displayed the default MF risk disclosure statement concerning closing of 6 debt funds
Think about an average person who wants to keep some fixed savings aside as SIP till his retirement and bought the mutual fund story from a distributor. He/she looks for an MF he/she can trust.
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Asset Light & Zero Debt
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Stable SIP order book - 70% SIP Book from over 10 years. 960 crores is the SIP inflow in June-20. So, at least 672 cr is most probably coming as guaranteed inflow per month. In general, it is hovering above 1100 cr from March-18. 10 years of SIP of 672 cr will be approx. 80,000 cr AUM.
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Lower operating costs - 6 bps to revenue. One of the lowest in the industry as per latest earnings concall, they are planning to reduce it even further giving a ballpark estimate. Prashant Jain in his recent interview with Nirmal Bang also attributed this particular aspect to be one of the reasons for thriving during tough periods in the past.
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Experienced JV partner – Standard Life is the largest active asset manager in the UK, with investments in equities, multi-asset, fixed income, real estate and private markets as mentioned in the Wikipedia page.
Cons –
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Old school thinking/Complacent – When other mutual fund houses have done massive inroads into thematic MFs, there are almost nothing from HDFC AMC even though it was the leader in equity for the most part. SBI MF on the other hand understood the game well. Ex – SBI Healthcare Mutual Fund.
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Zero International Markets Exposure – FAANG+ stocks are the flavour of the season. The management is planning to discuss with Standard Life about entering this space. In the latest earnings concall, they mentioned about Multi-Asset scheme in which they are going to add exposure to foreign securities
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Not much product differentiation – The management agreed during the concall that most of their schemes were more or less on the same lines and so when the downtrend came, all the schemes started behaving in the same manner. Like they say in IT, selling the same box with a different name. This worked till SEBI did the reclassification exercise where a MF can have only one scheme per category. It means HDFC AMC cannot have two different Value Oriented schemes. They hired 3 new fund managers recently to correct the situation. It may take 2 to 3 quarters for the restructuring results to appear.
Based on my recent interaction with a financial planner, there are some MF investors who prefer only HDFC funds like HDFC Top 100 fund even though he wants to give other fund options. I asked him how can you convince a client looking at the performance of HDFC Top 100 fund. He mentioned that due to SEBI’s reclassification exercise HDFC Top 200 was changed to HDFC Top 100 and so the performance has affected. Based on his experience, returns for HDFC funds are better during normal/bull periods and ICICI funds perform better during turbulent times. Sankaran Naren, CIO of ICICI MF is a famous contrarian.
Like @zygo23554 mentioned in one of the earlier posts, if the scheme is not performing, it is HDFC AMC/Prashant Jain’s fault. In case, he recommends say Taurus or Quantum MF, it is the distributor’s fault.
The risk is less in the case of Prashanth Jain as he is still is in top 3 fund managers in terms of generating long term CAGR returns. The whole mutual fund story is based on investing for long term.
Apologies in case of repetitive content and lengthy writing.
Disclosure – Invested and biased. Even though I have multiple SIPs running, not one in any of the HDFC AMC funds.