HDFC Asset Management Company

@sumi00 if one is looking at this as a long term theme. What is the right move in your view?

Many Im sure are betting the theme and going via HDFC AMC is definately not a bad idea. The opportunity size is simply too big to ignore. It will be hard for HDFC AMC to grow under 15% cagr for the next 5 years. In fact I think they can grow at 20% cagr for a long time while throwing out fat dividends.

My main concern is the valuation. But if one is looking very long term, 5 years at the least. At 30x it seems like a growth at reasonable price kind of a thing right?

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I have suggested few friends and family members to start equity SIP in HDFC AMC and HDFC Life. I will accumulate slowly over the full Cy19 if at all I decide to take a plunge. Buying @30 PE seems ok only due to high earning cycle of the last few years. I don’t think it will be right to anchor ourselves with a 5-10y CAGR view. We start tolerating nonperformance when we have a long term anchor. I consider it as a saving franchise for the masses with optional value. Let’s think if 2-3 yrs down the line they start a PMS or a wealth management products etc. So the growth could be even higher than 20% if things work out. At worse it could be in line with market return i.e. 12-14% over the longer term with great dividend payout. Also, returns won’t be consistent so PE can even go lower and could remain there for long in a bad market cycle.

If I make the following back of the envelope calculations

  1. EPS 35 March18
  2. 15% cagr for next 5 years
  3. 6% terminal growth rate post the 5 years of 15% cagr
  4. 10% Discount rate
    We get an value of 1330 per share
    Take a 20% MOS you get 1050 per share.

I think the above estimates are very consverative looking at the opportunity size available to these companies. Would like the views of senior members. Could this investment from this juncture out perform the index for 5 years?

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What if due to any regulatory changes, the fees they can charge goes to half?

This may be a possibility in the future due to disruption in fintech space that might offer similar portfolio creation at much lower cost by tie-up with brokerage houses (very basic analogy is https://www.smallcase.com/ and this is just the beginning I believe). Plus the industry is cyclical so people may reduce the exposure to MF and switch to some other asset class at the time of frenzy.

Block chain is another area which potentially can disrupt this space in a big way.

Interesting to see that longevity of such assumed full-proof businesses are at stake and would require them to evolve very fast for their survival.

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Wish things were always so simple and straightforward in investing! Appreciate your calculations though…

If you study profitability of Vanguard, black rock , Fidelity . You will get the answer (Larg AUM will compensate less fees)
As fees are reduced they will reduce commission and will sell more direct low cost product
Infact reduction in fees will increase total AUM flow in long run

Agreed industry is cyclical but surely they will come up with more attractive products than bank FD in downturn of market

Well blockchain also can be used by HDFC AMC as they may have more client data and no financial restraint

For me biggest risk is if India goes to big recession like JAPAN and index remain same practically for decades
(That’s what Charlie Munger says Risk for Index fund )
Another important risk I realised over few months. Like giving loans to companies like ILFS or ADAG group or DHFL or Zee group

Thanks
Ashit
Disclosure Invested and re-examine my investment

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Somehow if we see history of fidelity, even in times of recessions and depressions…the damage is not visible in charts which rather look like secular fmcg giants like P&G , Colgate, unilever etc. This was when I last checked an year back or so…i am curious how these AMCs which are considered so cyclical and market dependent managed such wonderful charts at times of exodus? Haven’t got my answer so far…would be happy to hear from experts…

I feel pension funds are also great business as at times of exodus, last fund a customer might touch is his pension fund that is if at all he can do that outside the lock in…is Hdfc pension fund a part of Hdfc amc?

It’s part of hdfc life insurance

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I think there are two major assumption numbers and key risks associated with those numbers

  1. Revenue growth :
    Why it’s should grow in high teens -
  • Financialization of saving
  • Still low penetrated market
  • Next 10 years , one of highest bucket of population will be earning population
  • Decreasing popularity of gold n real estate at least for time being
  • Strong distribution and brand name

So, what could hamper this growth -

  • Emergence of alternate equity management channels - Family office, quantitative algorithms, rise of reputed pms fund managers
  • Quitting of Star fund managers
  • Popularity of index funds

Fact is 54% of mutual funds can’t even beat index based on a rough analysis done. Going forward , it will be more and more difficult. On the other hand, with internet penetration , the retail junta is becoming more and more aware of informative decision making and market will give more options
How to analyze quantified numbers of all the pros and cons will need some good effort on a continuous basis. But the best we can do is do a guesstimates n take a conservative share on economy growth, savings grwoth, mutual fund share of that , hdfc share of that and see what is the conservative to aggressive AUM possible down the line

  1. Margin Risk : there are two kinds of margin risks:
  • Due to cyclic behavior of business which to some extent gets covered in the way they manage fund mix but still it remains a risk

  • Regulatory risk on margins. What if regulatory keeps coming heavily on asset mgmt firms unlike USA. Looks like AMCs will have better bargaining power than distributors but some margin of safety required here .

So, whatever valuation model we build, I think may be we should have a range of values around these two items and create a cash flow distribution and see at what price the odds are in favor .
Disc : took a study position for deeper interest

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I agree that margin stability/predictability is a risk in this investment. We have already seen one round of expense ratio rationalisation from SEBI. This was implemented with immediate effect from 22nd Oct 18 (refer to the link). We will get to see impact of this in current year. Q3 FY19 was flat as compared to Q3 FY18 - some impact is already visible I guess.
https://www.sebi.gov.in/legal/circulars/oct-2018/total-expense-ratio-ter-and-performance-disclosure-for-mutual-funds_40766.html

Cyclical nature of industry is also another issue which impacts margin. The operating leverage should work in adverse manner in the slowdown scenario. The expenses will remain same where as income reduces significantly, which should take few quarters for the company to adjust to it.

Technological disruption - Risk is there but HDFC as a group has adopted well to the tech changes. They have best of technology platform for banking services. I have been using ‘PayZapp’ for last 6 months and has been a good experience so far.

The only hedge/comfort I can see against the risk associated with nature of industry is the promoter brand ‘HDFC’. They have been in the industry long enough to understand business/credit cycles and are better positioned to foresee their impacts on capital markets. They can’t escape the slowdowns, but are well positioned to prepare.

Disclosure - Initiated small position, plan to build it further in SIP like manner.

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Went through smallcase site and really excited about it. Can you share your or acquaintances’ experience with them.

Thanks

while the idea is innovative, i dont think it really disrupts the AMC space.

  1. Infact, it is something that helps brokerages to streamline and organise investments based on rationale and ideas for investors, especially novice and newbies.
  2. AMC target audience is normally that not-so-financially-literrate public who believes in “kitna deti hey” mindset. This mass doesnt belive in investing in ideas and themes.
  3. when one invests in AMC, he essentially bets on the wisdom of the fund and the fund manager to give him the returns expected.
    To bet on wisdom of smallcase research team wouldnt suit the risk appetite of the masses mentioned above.
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Folio count continues the rising trend…

Mar 2016 - 4.77 Cr
Mar 2017 - 5.54 Cr
Mar 2018 - 7.13 Cr
Dec 2018 - 8.03 Cr
Jan 2019 - 8.09 Cr

We’ve had a respectable bout of volatility in the market but there aren’t too many signs of retail investors pulling out money/stopping SIP/folios getting closed. Of course one can make a case that another 6-9 months of indifferent market performance may induce some of these but the current data makes a case that domestic retail inflows into the market might be more than a short term, performance driven seasonal trend

Disclosure - I am a SEBI registered Investment Adviser and hold HDFC AMC in my personal portfolio and other customer portfolios. I have added to my holdings in the past 30 days and am likely to add more in the coming months based on market conditions. This is only an expression of my views and not investment advice. Any investment advice I provide is specific to each customer and in light of the overall portfolio, it is not to be applied out of context or in isolation

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One account can have multiple folios in it but still increasing numbers are a positive for AMC’s and as you said in next few quarters if the market doesn’t perform, we will get a much clearer picture.

Growing folio count makes for good optics, but how many of these are active? Also do they report average inflow/outflow per folio?

Folio growth seems to have slowed down as well

Two interesting trends I notice:

  • Liquid fund TERs seem to be increasing however it is sticky since big institutions will not move to smaller AUM funds.
  • Large cap funds not beating index funds - again TER will be lower for index vs. large cap funds.

This industry is slowly becoming a volume play more than a performance play. Here the HDFC name will have an inherent advantage and hence I am looking to add more of this to my retirement portfolio, but the current valuation is too rich for me

Disclaimer: Invested a tracking amount in portfolio.

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HDFC AMC Dividend - I have query on the Year 2018 dividend

After the stock gets listed 16 Rs dividend per share has been declared. So anyone has received the dividend who got shares allotted in IPO.

Disclosure: I have allotted the IPO.

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The stock was listed on Aug 6, 2018. In the Corporate Announcements space, the only dividend currently shown is Rs 12 due for March 6, 2019. Could you please check when this dividend of Rs 16 was declared? Before or after IPO?

I am sure that the announcement was after IPO but unable to get the date reference. Below article shows Rs 16 reference but not date.

https://www.moneycontrol.com/company-facts/hdfcassetmanagementcompany/dividends/HAM02
Dividend Summary
For the year ending March 2018, HDFC Asset Management Company has declared an equity dividend of 320.00% amounting to Rs 16 per share. At the current share price of Rs 1353.20 this results in a dividend yield of 1.18%.