HDFC Asset Management Company

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Last thing in terms of the mandate that we have got obviously it is very good to see this. So, any color that you want to kind of give on this and any other pipelines or any other communication that will be possible on this?

Answer by management

No, I think it is a very significant win for us in this quarter. It is a $450 million mandate. As you expect in such large mandates we are bound by non-disclosure understanding with clients with regard to both client name as well as terms and conditions.

Nothing is disclose but positive development in new area
Thanks
Ashit

Can someone please help me understand why big investment banking like Morgan Stanley, Goldman Sachs,deutsche bank left indian mutual fund industry? This might give us some insight on some risk related to their profit in long run. And also vanguard is still a ticking timebomb for AMC business. Some day or other they might get into Indian market (though this is speculative) as they will get the chunk of investors

I think it was partly due to their inability to scale up. Bank sponsored AMCs had undue advantage in the infra deficit country like India and some others used excessive cuts to the distributors to grow. They were at disadvantage and after 2008 they sold these non-core or small biz to shore up their own capital.

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Have received some emails regarding increase in TER of my Funds in Direct Plan. I am told the increase is there across Fund houses.

A good demonstration of the pricing power (within regulations) of AMCs.

The customer in me is slightly disappointed that indirectly, the distributors demands are met from people who have opted for Direct Plans.

Beware it’s increase in expense of direct plans means the plans informed investors have chosen. It doesn’t take more than few clicks to move that money to some other AMC if cost vs performance doesn’t match. Proven performance is the only competitive advantage for direct plans. Motilal oswal has reduced expenses in past week

Seems to be the case with HDFC AMC as well… (copy paste from a twitter post)

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difference is 5 base points vs 14 base points in ICICI.

We need to compare all the funds to come to that conclusion as we have details of one fund only from ICICI.

In case of HDFC, there is one fund where the increase is 100 basis points and there is also a decrease in another fund.

So, perhaps the overall blended TER is what we need to see

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This is going to be a series of posts

Post I - Financial Savings in India and MF as an instrument

My views on financialization as a theme are captured here with some basic market sizing -
FINANCIALISATION: TSUNAMI expected in AMC & Insurance?

Data Set 1 - Combining data from RBI & AMFI

Household (Gross) Within Household Financial Savings Mutual Funds
Year Financial Savings Physical Savings Deposits Insurance PF Markets Deposits with SCB’s YoY % Deposits from Corporate Year MF AUM Change YoY % YOY Net Mobilization MTM Impact Net Mobilization as % of Inc Financial Savings Net Mobilization as % of Incremental Deposits MF AUM % of Deposits
2005 3,13,260 3,44,327 1,75,128 67,986 55,794 8,113 17,00,198 2005 1,49,650 2,788 8.80%
2006 3,27,956 4,35,729 2,66,238 83,494 61,950 33,857 21,09,048 24.05% 1,42,612 2006 2,31,862 82,212 54.94% 52,482 29,730 16.00% 19.71% 10.99%
2007 4,38,331 4,30,657 4,33,866 1,14,851 72,503 50,847 26,11,933 23.84% 69,019 2007 3,26,292 94,430 40.73% 94,062 368 21.46% 21.68% 12.49%
2008 5,80,210 5,38,137 3,90,294 1,69,848 71,544 74,308 31,96,939 22.40% 1,94,712 2008 5,05,152 1,78,860 54.82% 1,58,677 20,183 27.35% 40.66% 15.80%
2009 5,71,026 7,59,846 4,32,575 1,52,861 73,398 -2,333 38,34,109 19.93% 2,04,595 2009 4,17,300 -87,852 -17.39% -24,208 -63,644 -4.24% -5.60% 10.88%
2010 7,74,753 8,56,046 4,16,657 2,59,821 1,29,849 44,841 44,92,825 17.18% 2,42,059 2010 6,13,979 1,96,679 47.13% 78,347 1,18,332 10.11% 18.80% 13.67%
2011 7,73,859 10,26,315 5,53,398 2,10,102 1,41,139 1,729 52,07,969 15.92% 1,61,746 2011 5,92,250 -21,729 -3.54% -48,600 26,871 -6.28% -8.78% 11.37%
2012 9,32,729 13,89,322 5,35,991 1,95,673 95,680 16,522 59,09,082 13.46% 1,65,122 2012 5,87,217 -5,033 -0.85% -45,413 40,380 -4.87% -8.47% 9.94%
2013 10,64,041 14,65,013 6,02,921 1,79,949 1,56,479 17,027 67,50,453 14.24% 2,38,450 2013 7,01,443 1,14,226 19.45% 78,862 35,364 7.41% 13.08% 10.39%
2014 11,90,770 14,16,428 6,62,120 2,04,469 1,77,841 18,930 77,05,560 14.15% 2,92,987 2014 8,25,240 1,23,797 17.65% 54,579 69,218 4.58% 8.24% 10.71%
2015 12,57,247 15,13,127 6,08,187 2,99,322 1,90,883 20,364 85,33,285 10.74% 2,19,538 2015 10,82,757 2,57,517 31.21% 1,02,880 1,54,637 8.18% 16.92% 12.69%
2016 15,20,727 12,72,105 6,41,609 2,69,960 2,91,742 44,893 93,27,289 9.30% 1,52,395 2016 12,32,824 1,50,067 13.86% 1,31,758 18,309 8.66% 20.54% 13.22%
2017 14,04,847 13,98,462 9,66,935 3,49,198 3,02,010 36,265 107,57,656 15.34% 4,63,432 2017 17,54,619 5,21,795 42.33% 3,43,418 1,78,377 24.45% 35.52% 16.31%
2018 18,80,874 4,96,273 3,27,233 3,49,654 1,50,948 114,26,049 6.21% 1,72,120 2018 21,36,036 3,81,417 21.74% 2,72,225 1,09,192 14.47% 54.85% 18.69%

Inferences -

Growth rate in deposits with banks has been 16% over the period depending on the starting and ending points, deposits have spiked after demon. One can calculate the rolling return, it is between a range of 13-17% with median being 15%

MF AUM over the same period has seen a growth of 22%. Intuitively one can see that MF AUM growth has typically been between the range of 1.2 - 1.8 times of the deposit growth rate, with the average number being 1.5X. This also makes logical sense given that the equity AUM grows at 1.6 times the deposit return over the same period

One can also triangulate this from other data points in the economy like growth in money supply, deposit rates and the real GDP growth rate.

Key message - Financial savings can be expected to grow between 12-16% over the medium to long term. There will obviously be interim spikes and dips but the average growth rate appears to be in that range.

Hence MF AUM can be expected to increase at 1.2-1.5 times the baseline financial savings rate over the next 7-10 years. This kind of sets the baseline expectation for the further posts to come

Data Set 2 - MF Industry AUM and market share

Category AUM 2010 2011 2012 2013 2014 2015 2016 2017 2018 Growth (%)
Liquid 80,354 93,392 1,33,280 1,62,562 1,99,404 3,14,086 3,35,525 29%
Debt 2,94,503 4,04,059 4,67,665 5,31,565 5,83,495 7,60,566 7,99,425 15%
Equity (exc ELSS) 1,58,433 1,49,777 1,65,560 3,05,669 3,44,707 4,82,138 6,69,207 35%
Equity - ELSS 23,644 22,731 25,547 39,470 41,696 61,403 80,583 29%
Hybrid 16,261 16,307 16,793 26,368 39,146 84,763 1,72,151 60%
ETF 11,493 13,124 13,204 14,715 22,409 49,916 77,694 43%
FoF 2,530 2,053 3,191 2,408 1,967 1,747 1,451 -7%
Total 5,87,218 7,01,443 8,25,240 10,82,757 12,32,824 17,54,619 21,36,036 25%
Market Share (%) 2010 2011 2012 2013 2014 2015 2016 2017 2018
ABSL 10% 11% 10% 11% 11% 11% 11% 11% 12%
Axis 1% 1% 2% 2% 2% 2% 3% 3% 4%
DSP 4% 5% 5% 5% 4% 4% 3% 4% 4%
FT 5% 6% 6% 6% 6% 7% 5% 5% 5%
HDFC 14% 15% 15% 15% 14% 15% 14% 14% 14%
ICICI Pru 13% 12% 12% 13% 13% 14% 14% 14% 14%
IDFC 4% 4% 4% 5% 5% 5% 4% 3% 3%
Kotak 6% 5% 4% 5% 4% 4% 5% 5% 6%
RMF 18% 17% 13% 13% 13% 13% 13% 12% 11%
SBI 6% 7% 7% 8% 8% 7% 9% 9% 10%
Tata 4% 4% 3% 3% 3% 2% 3% 2% 2%
UTI 13% 11% 10% 10% 9% 9% 9% 8% 7%
Total 98% 99% 92% 94% 90% 92% 93% 90% 93%

Source: AMFI data

Inferences

HDFC AMC, ICICI Pru AMC, ABSL AMC, RMF AMC and SBI AMC more or less define the market as the Top 5. All of them have grown AUM between 15-20% per annum since 2012 till date

HDFC and ICICI AMC’s appear to clearly derive some benefit from having a parent that is into the banking business and owns a captive wealth management arm. This is a massive advantage to have, one can see the spike in AUM’s of Axis and SBI AMC’s after their parents started focusing on the wealth management franchise.

I think RMF AUM dipped following a cap on how much parent or associated company can park in own MF, if you discount this dip in 2012, since then AUM growth has been healthy at 17% though it is not exactly industryleading

Key Message - Big getting bigger and preserving market share is likely to continue. Smaller players will find it very tough to scale and overtake any of the Top 5 any time soon. All these Top 5 players can be expected to grow AUM at the industry rate over the medium term. There can always be differences in their product mix but all of them appear to be well placed to benefit from the MF tailwind, assuming there is one

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Post II - Slicing and dicing the MF AUM by investor type

MF Equity AUM Proportion
2010 2011 2012 2013 2014 2015 2016 2017 2018 Sep-18
Corporates 10% 11% 11% 11% 11% 13% 14% 19% 19% 19%
Banks/FIs 3% 1% 1% 1% 1% 1% 1% 1% 0% 0%
FIIs 1% 1% 1% 2% 2% 2% 1% 1% 1% 0%
Affluent (> 5 lakh) 21% 22% 21% 21% 22% 31% 41% 33% 36% 36%
Retail 66% 65% 66% 66% 64% 54% 43% 47% 45% 45%
Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Incremental Equity AUM (Cr)
Category 2010 2011 2012 2013 2014 2015 2016 2017 2018 Sep-18
Corporates 2,832 -1,552 -1,965 1,898 26,690 23,355 53,872 60,897 15,441
Banks/FIs -4,285 593 -776 1,563 425 639 -411 -1,332 22
FIIs 711 -373 1,669 798 2,514 -3,843 1,092 2,899 -1,358
Affliuent (> 5 lakh) 3,784 -5,708 -2,152 6,615 69,912 93,865 8,673 1,34,979 26,078
Retail -460 -6,754 -6,186 8,791 67,135 15,857 99,528 1,23,202 34,525
Total 2,582 -13,795 -9,410 19,666 1,66,676 1,29,873 1,62,753 3,20,645 74,707
Non Equity AUM Proportion (%)
2010 2011 2012 2013 2014 2015 2016 2017 2018 Sep-18
Corporates 66% 63% 59% 59% 62% 64% 64% 66% 65% 61%
Banks/FIs 11% 6% 4% 3% 2% 1% 1% 2% 2% 3%
FIIs 1% 0% 1% 0% 1% 1% 1% 1% 0% 0%
Affluent (> 5 lakh) 17% 25% 30% 30% 29% 27% 27% 24% 25% 28%
Retail 5% 6% 7% 7% 6% 6% 7% 7% 8% 8%
Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Incremental non Equity AUM (Cr)
Category 2010 2011 2012 2013 2014 2015 2016 2017 2018 Sep-18
Corporates -22,847 -13,576 74,573 78,168 68,205 56,452 2,11,423 25,363 -50,689
Banks/FIs -21,151 -7,614 3,091 -5,094 -3,113 2,777 10,789 -2,349 15,569
FIIs -2,619 1,885 -499 1,370 4,745 -703 1,036 -3,408 -872
Affluent (> 5 lakh) 24,517 19,287 39,845 25,088 14,025 18,090 45,758 31,496 28,969
Retail 1,948 4,496 7,233 3,551 6,977 12,514 21,099 9,671 703
Total -20,153 4,478 1,24,244 1,03,083 90,839 89,129 2,90,106 60,772 -6,320
Corporate Equity AUM - Proportion (%)
2010 2011 2012 2013 2014 2015 2016 2017 2018 Sep-18
< 12 months 39.1 44.4 40.14 22.18 35.93 64.68 61.93 68.4 69.65 65.86
1 -2 years 7.57 16.45 26.3 19.13 13.86 9.51 23.18 16.04 17.42 21.53
2 years + 53.32 39.14 33.55 58.69 50.21 25.81 14.89 15.56 12.93 12.61
Affluent Equity AUM - Proportion (%)
2010 2011 2012 2013 2014 2015 2016 2017 2018 Sep-18
< 12 months 41.08 42.24 33.39 28.29 34.91 60.33 43.57 48.82 56.18 53.04
1 -2 years 10.09 21.87 26.66 22.99 18.01 13.44 32.47 20.98 21.14 24.52
2 years + 48.82 35.89 39.95 48.71 47.08 26.22 23.96 30.2 22.67 22.45
Retail Equity AUM Proportion (%)
2010 2011 2012 2013 2014 2015 2016 2017 2018 Sep-18
< 12 months 21.24 22.91 20.6 17.58 20.36 28.57 27.4 29.43 38.24 39.83
1 -2 years 16.19 14.74 17.82 19.38 17.53 12.98 19.66 18.81 17.87 20.3
2 years + 62.57 62.35 61.58 63.04 62.12 58.46 52.94 51.75 43.89 39.87

Inferences -

While retail SIP’s are getting maximum attention, needs to note that the contribution from Corporate (Super HNI) and Affluent (transaction size > 5 lakh) have actually moved the needle too. Proportions have clearly spiked over the period. Corporate category and Affluent category can be seen as hot money given that they have higher proportion in the < 1 year bucket - because they are more likely to track their portfolio return and take calls (as guided/misguided by wealth managers)

PMS and AIF category has spiked and grown by more than 35% during the period. My estimate is that pure PMS would be around 90,000 - 1,00,000 Cr and AIF would be between 30,000 to 50,00o Cr. This is more or less 4x growth in 5 years time

Retail investors are unlikely to track their portfolio return and are more likely to just stay as passive investors as long as they dont get too worried. This can be seen from the holding pattern where 1 year+ is clearly a higher proportion

Key Message - My take is that the super HNI and affluent categories have been the early movers, the retail movement is just getting started and we have not seen anything yet. This can end up being a secular 10 year+ trend one can ride. Over a period of time the HNI+ category will move more AUM out of MF to PMS and AIF but that should more than get compensated by the retail inflows.

As long as the number of retail folios keeps rising, we should not worry to much too soon

Number of Investor Accounts
2010 2011 2012 2013 2014 2015 2016 2017 2018 Sep-18
No of Accounts 4.8 4.72 4.65 4.28 3.95 4.17 4.77 5.54 7.13 7.79
AUM per account 1,28,031 1,26,478 1,26,378 1,64,134 2,08,922 2,59,654 2,72,906 3,16,718 2,99,584 2,82,981
Individual folios NA NA NA 4.23 3.92 4.14 4.72 5.48 6.61 NA
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Post III - Unit economics for an AMC (HDFC AMC in particular)

Expense Ratios (after knocking off GST)
HDFC AMC AAUM Oct 2017 Fee
Category Direct Regular Direct Regular Direct Regular
Liquid/Money Market 0.15% 0.30% 22,299 13,771 33.45 41.31
Gilt 0.30% 0.60% 1,494 1,287 4.48 7.72
FMP 0.25% 0.45% 8,745 6,791 21.86 30.56
Other Debt 0.70% 1.20% 38,309 50,391 268.16 604.69
ELSS 1.04% 1.79% 576 7,648 5.99 136.90
Non ELSS 1.25% 2.05% 15,816 58,811 197.70 1205.63
Balanced 1.00% 1.81% 4,704 46,879 47.04 848.51
FoF 0.10% 1% 39 223 0.04 2.23
91,982 1,85,801 579 2,878

By this logic, the total expense ratio charged over the total AUM should be 3400-3500 Cr but HDFC AMC’s top line for FY 2018 was only 1800 Cr. How does this translate? Answer below

Let us consider 3 funds of HDFC AMC - HDFC Top 200 fund, HDFC Short Term Opportunities fund and HDFC Corporate Debt opportunities fund

All numbers from the individual scheme annual filings (these are available on website)

2018 - HDFC Top 200 Fund AUM 2018 - HDFC Short Term Opportunities Fund 2018 - HDFC Corporate Debt Opportunties Fund
Direct Regular Direct Regular Direct Regular
AUM 2160 12430 AUM 6055 3533 AUM 2654 11128
0.22% 0.37% 0.92% 1.72%
Expense Ratio 33.05 282.16 315.209 2.23% Expense Ratio 13.321 13.0721 26.39 0.28% Expense Ratio 24.42 191.40 215.82 1.57%
Management Fee 175.28 1.20% 54% Management Fee 15.52 0.16% 59% Management Fee 102.96 0.75% 48%
Service Tax 30.2 Service Tax 2.69 Service Tax 18.03
Transfer Agent Fee 10.95 Transfer Agent Fee 2.99 Transfer Agent Fee 3.86
Custodian Fee 0.78 Custodian Fee 0.68 Custodian Fee 0.93
Trustee Fee 0.13 Trustee Fee 0.085 Trustee Fee 0.11
Commission 103 0.83% Commission 4.71 0.13% Commission 85.85 0.77%
Investor Education 3.01 Investor Education 2.01 Investor Education 2.58
Other Operating Exp 1.57 Other Operating Exp 0.08 Other Operating Exp 0.06

Direct Plan AUM * Direct plan expense ratio + Regular Plan AUM * Regular Plan expense ratio = total expense charged by scheme to all investors

Management Fee is what gets credited to HDFC Asset Management company as revenue, commission is distributors is charged off at scheme level.

Hence Management Fee ratio = Management Fee collected by HDFC AMC/Total expense ratio charged to customers

Working the numbers one can now understand how the top line reported by HDFC AMC is 1800 Cr and not 3400 Cr.

This commission paid to the distributors is discretionary - AMC can increase/lower this based on how they want to garner AUM and manage their financials. Key point is AMC can lower this to pass on the expense ratio cuts initiated by the regulator

This management fee conversion ratio appears to be on similar lines across AMC’s - this can be verified from ICICI Pru AMC and RMF AMC filings as well amongst others. Another key thing to understand is that direct plans do not have to pay commission to distributors from the scheme, as % of direct AUM increases, the management fee ratio will increase as well

Once one understands this, the P&L is very easy to understand and one can isolate the key variables there. Coming to the P&L, most important other expenses are these -

Other Expenses 2010 2011 2012 2013 2014 2015 2016 2017 2018
Brokerage/Incentive/Fee/MF Expenses 66.99 148.93 114.96 121.12 150.64 173.44 456.62 419.27 368.69
% of Sales 11.12% 22.12% 18.15% 16.92% 17.55% 16.96% 31.65% 28.33% 20.95%
% of AUM 0.08% 0.17% 0.13% 0.12% 0.13% 0.11% 0.26% 0.18% 0.12%
Business Promotion 17.04 10.31 8.83 11.64 17.71 25.76 37.92 52 78.48
% of Sales 2.83% 1.53% 1.39% 1.63% 2.06% 2.52% 2.63% 3.51% 4.46%

This is where one can understand why the regulator has been disciplining the AMC repeatedly. Brokerage charges when you manage this kind of AUM will hardly be 5 to 6 bps. Which means approx another 5-6 bps of AUM is going into “distributor friendly activities” in addition to the Business promotion line item which can be utilized for this purpose as well. A good chunk of this is discretionary as well and can be rationalized if the margins come under pressure.

SEBI in the TER paper has also mandated that AMC move to total trail commission model and that all marketing expenses have to be charged to the scheme and not to the AMC. Hence creative ways of incentivising distributors will be forced to come down going forward

Key Message - One needs to understand that a good part of the marketing/distribution expenses are discretionary (though competitive forces will ensure some spends here) for an AMC. If push comes to shove they have enough means at their disposal to be able to preserve margins and keep financials healthy.

Read this in combination with HDFC AMC statement in their investor presentation that “most impact of the TER cut will be passed on”, they very well know what they are saying. As AMC’s garner more direct plan AUM, their ASP spends will go up somewhat while distribution expenses will come down.

In my view AMC’s have considerable pricing power due to the logic given above

Dependence on HDFC Bank

HDFC Bank is responsible for 10% of the AMC AUM but takes home a much bigger chunk of the commission paid out (this is a SEBI mandated disclosure on the site)

Commission to ARN 2014 2015 2016 2017 2018
HDFC Bank 52.93 114.17 90.65 167.89 278
ICICI Bank 6.38 13.54 10.33 10.43 20
Citibank 26.65 40.14 19.39 20.23 29.64
HSBC 13.52 21.63 14.08 13.95 19.97
StanC 7.5 6.87 4.18 3.8 14.09
IIFL Wealth 64.08 86.55 42.48 51.37 44.62
NJ Invest 26.82 52.08 51.94 68.99 128.48
Kotak Bank 7.95 42.87 16.54 16.4 31.04
Axis Bank 8.8 7.91 6.25 10.48 20
Karvy 5 6.29 5.32 6.88 18
ICICI Sec 14.84 27.37 18.25 28.61 51.72
Deustche Bank 4.48 12.69 6.74 9.41 11.65
HDFC Sec 0.55 1.03 1.77 5.28 18.36
Credit Suisse 24.2 26.46 64.36 17.6 10.33
Julius Baer 13.16 17.59 7.07 14.29 18.93
Anand Rathi 1.7 8 1.9 0.82 12.23
Total 741 584.98 1201.95

To some extent is is understandable since HDFC bank branches are mostly selling high margin funds to retail customers. Even then this dependence is reasonably high as of now, this number is in fact much higher in case of ICICI AMC towards ICICI Bank.

Summarizing the impact of all forces on the AMC business -

Threat due to investors moving away is average - based more on performance than on cost
Threat from replacement - HNI segment might move to PMS and AIF, this will get countered due to Retail inflows though
Threat from Suppliers - Minimal
Threat of new entrants - Not high since this is a leading player and has held onto market share. ETF threat not high right now
Competitive Intensity - High but brand name, credible track record and distribution are the moats involved
Regulatory threat - Very high and immediate, expense ratios will only trend down over time but I see pricing power

An AMC business has much more going for it than it appears at first look.

Some of these data points were a pleasant surprise to me as well though I have worked as a wealth manager for 7+ years.

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Post IV - How could the future unfold and how do I see valuation?

My take on a realistic scenario on the key variables -

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 TER Delta % Delta
Blended Expense Ratios
Liquid 0.19% 0.19% 0.18% 0.18% 0.16% 0.15% 0.15% 0.14% 0.14% 0.14% 0.13% -0.06% -33%
Other Debt 0.81% 0.78% 0.78% 0.78% 0.75% 0.75% 0.75% 0.72% 0.72% 0.72% 0.68% -0.13% -16%
Total Equity 1.88% 1.70% 1.70% 1.70% 1.60% 1.60% 1.60% 1.50% 1.50% 1.50% 1.40% -0.48% -26%
Balanced 1.73% 1.60% 1.60% 1.60% 1.50% 1.50% 1.50% 1.40% 1.40% 1.40% 1.30% -0.43% -25%
FOF 0.80% 0.78% 0.78% 0.78% 0.74% 0.74% 0.74% 0.70% 0.70% 0.70% 0.65% -0.15% -19%
Blended Expense Ratio 1.13% 1.06% 1.06% 1.07% 0.94% 0.96% 0.96% 0.96% 0.83% 0.85% 0.79% -0.34% -30%
Management Fee Ratio
Liquid 0.10% 0.10% 0.10% 0.10% 0.09% 0.08% 0.08% 0.08% 0.08% 0.08% 0.07%
Other Debt 0.43% 0.42% 0.42% 0.42% 0.41% 0.41% 0.41% 0.40% 0.40% 0.40% 0.39%
Total Equity 1.00% 0.92% 0.92% 0.92% 0.88% 0.88% 0.88% 0.84% 0.84% 0.84% 0.80%
Balanced 0.92% 0.86% 0.86% 0.86% 0.83% 0.83% 0.83% 0.78% 0.78% 0.78% 0.74%
FOF 0.42% 0.42% 0.42% 0.42% 0.41% 0.41% 0.41% 0.39% 0.39% 0.39% 0.37%
Total 0.60% 0.57% 0.57% 0.58% 0.51% 0.53% 0.53% 0.54% 0.47% 0.48% 0.45%

One can use these numbers to build a valuation model and see how the current price is stacked up.

One can assume that there will be a steady reduction in the brokerage/incentives/MF expenses and Business promotion line items in the P&L as SEBI gets tougher on norms and squeezes the freedom to keep distributors happy.

This was intended to be an exercise in using data to build hypothesis and to draw inferences on the quality of the business. I have some advantages since I understand both distribution (worked as a wealth manager) and understand fund management side of things as well.

Will not comment on valuation since that is mostly subjective. One can figure this part out pretty easily since the key assumptions and variables are pretty much there in this post :slight_smile:

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This is absolutely wonderful data collection and analysis @zygo23554! Superb work!

I need to spend some time with this data & inferences in detail to come up with questions.

Great contribution. Would have taken up lot of your time in compiling & analysing this.Really appreciated.

No wonder, Value Pickr is held in high esteem by lot of investors.

Regards

Great Insights , is the NPS AUM also captured here , with EEE being offered on NPS , this would see more inflows going forward .

This AUM is what HDFC AMC declares to AMFI and is managed by them within the HDFC schemes. Since NPS/EPFO are on the books of a different entity that would not count under this AUM. The portfolio management fee that AMC’s charge to NPS and EPFO would be part of the top line though.

NPS and EPFO AUM’s can potentially be huge and can add to the top line.

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NPS AUM and related annuity business (remember EEE is only for 60% of corpus) would reflect in HDFC Life Insurance and not HDFC AMC. HDFC Pension Management Company Ltd is a wholly owned subsidiary of HDFC Standard Life Insurance Company Ltd.

Currently the NPS fund management fee is 0.01% (was 0.001% earlier) and in the latest round of NPS fund manager auctions, ceiling was raised to 0.1% of AUM. Of course, there are differed and immediate annuity options available.

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Thanks for the info . So NPS part will need to be assessed under HDFC Life Insurance , with overall AUM under NPS crossing 2.5L Cr , (http://www.npstrust.org.in/monthly-asset-graph) & bound to increase further , its going to add to the topline as to HDFC Life Insurance as Zygo mentioned.

The ROE’s quoted for both HDFC AMC and RMF AMC are with cash on books. If you knock the cash off, the ROE looks even better.

ROE is expected to be high for a business that has minimum reinvestment needs and keeps paying a high dividend out. This is a feature of the industry itself. One can see businesses in other industries as well with similar characteristics that run at very high ROE’s - see some FMCG names as well.

RMF AMC on the face of it looks like a good theme as well. However one look at their annual report and you will see that the Reliance Nippon AMC entity is being used to provide ICD’s (inter corporate deposits) to other ADAG entities like Reliance Infra and Reliance Power. The quantum of money lent out to these other entities has never dipped below 500 Cr since 2011. By themselves, these companies will not get any loans from banks at the rate of 12.5% which Reliance Nippon AMC is lending at - please mind that this is not investor money, this is balance sheet capital of Reliance Nippon AMC. Chances are that as profits of RMF AMC grow, the money lent out this way will also increase, in case any of those companies get into trouble RMF AMC will be the last creditor to get their money back.

If you are comfortable with the above, you could consider looking at Reliance Nippon AMC as a play on financialization. One can argue that you could adjust for the money lent out, build a buffer into the valuation and say that at 20 P/E and high dividend yield the risk is taken care of - I am not sure if I am willing to take that bet.

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