Very good Q1 results… as if there was no reduction in TER…
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HDFC AMC- Q1 FY20 (Standalone - Unaudited)
Revenue from ops at 504.39 Crs
471.23 Crs YoY (7.01%) 486.50 Crs (3.70%) QoQ
Net Profit of 291.79 Cr
205.26 Cr YoY (41.92%) 276.17 Crs (5.34%) QoQ
EPS (in Rs.) 13.69
9.68 YoY | 12.97 QoQ
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The Headline Nos of Operating Profit & PAT growth are quite misleading.
If we dig a bit deeper you would realize the same is due to the recent SEBI guidelines - mutual funds can’t pay the the distributors upfront brokerage and same needs to be paid out over a period of time. So Operating costs have come down very drastically (drop by 40%) which is causing this huge jump in Operating Profit and PAT.
Once the initial uptick is over (1-2 years) the normalised profits would be much lower and then the growth in profits would be in line with growth in AUM (depending on the mix)
For somebody looking to invest in HDFC AMC the ideal time would be to invest once costs get normalized and market re rates the stock as EPS growth would be slightly more than the AUM growth (operating leverage).
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Time to put things into perspective and go back to the basics, though this is a simple business most people don’t find it easy to understand the nuances
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Yield on AUM - Even after the TER cut the yield (operating revenue/Quarterly AUM average) is more or less the same. What happens is that TER * AUM is the fee made by a scheme, then the scheme pays out brokerage and other expenses, then transfers the remainder to the AMC books. Though TER has fallen since April 2019, the commission to distributor has also come down to the same extent barring 1-2 bps. Hence if you do a YoY comparison scheme fee it would have come down but at the AMC P&L level the yield remains more or less the same. This has flummoxed most equity analysts as well, I almost got this wrong too in spite of running my numbers and having a better understanding of the business than most people. The AMC has ruthlessly passed on almost every single bps of the TER cut onto the distributors, I was buffering for a 5 bps fall in the yield to AUM but pleasantly surprised by the Q1 numbers
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Brokerage/Fee expense paid from the books of the AMC - Once again note SEBI circular says that all brokerage to be paid from scheme P&L and not AMC P&L. The brokerage expense line item you see in Q1 is much lower number from Q1 2019 for this very reason, till Oct 2018 part of the brokerage was being paid out of AMC P&L in addition to what scheme was paying. Long story short, this number will go much lower and stabilize post Q3/Q4 at that low number
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Other expenses - This is another discretionary component of the expenses, this includes branding/other marketing spend. This will once again stabilize at the lower level by Q3/Q4 and then stay there. As one knows the beauty about branding expense is that is does not scale linearly with revenue, operating leverage is present in this line item as well.
So what happens is that expenses run down (as explained in the call) will continue through Q2 and eventually stabilize at lower levels by end of the FY. The improvement in operating margin is not a one quarter thing, it is most likely here to stay. AMC can increase some discretionary expenses when needed but the key thing to note is that they have control on how much they spend on these line items
None of the expense items will scale at a pace greater than increase in revenue in my assessment.
One should not expect this 40% PAT growth to continue after Q2, but what might happen is that PAT grows at a faster pace than revenue (which is a function of AUM growth) over the next few years since the operating leverage can continue to play out for many more years.
Do your own due diligence on what valuation one wants to pay for this business - trust me, it is not an easy exercise. Everyone in the market is as confused as you are.
Disclosure: Invested for self and customers.
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If one focus on other income in Q1fy19 it was 299 ₹ million and in Q1 FY 20 it’s 484 ₹ million increase of 62%
In AR of HDFC AMC note no 21for other income
In March 18 it was 113 cr and at and of March 19 181.60 cr
Other income will be constantly increasing and if you see expenses catagery there are two major head
1 employees benefit 206 cr
2 other expenses 222 cr
Now other income which is income of retain earnings invested in there own fund can easily finance there one of major expense (beauty of such business)
Probably bottom line will be always benefited from such action for long time
The statement from Milind Barve(will pass on majority of cut in TER) was sufficient for me to understand that what people think it’s headwind may be tailwind in long-run (CEO was confident about his distribution channel and impact on busines )
Thanks
Ashit
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The Essel group debt seems to have been transferred to books at FMP. If that defaults it will hit the bs at some point of time. Also there could be more cockroaches if there was one.
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@Zygo - I have a query - won’t the AMC consolidate all the expenses at the scheme level (what is the accounting treatment - thought all the revenue and expenses at scheme level were added and P&L was being made).
Also, right now HDFC AMC has been able to cut down on the incentives of the brokers but won’t that cause a loss in long run? (brokers may sell other schemes which pay better fees?)
Brokerage/Fee expense paid from the books of the AMC -
@deeos2884, One of my friend is financial advisor and his firm mainly sells HDFC AMC products. He has explained me how the application/link is much easier for them to move in different modes SWP, STP, SIP for the passive clients. There are lot of clients who needs advice and not yet going online. There are lot of hurdles in choosing direct plans - Don’t have time, fear of how to use the website, KYC hurdles etc
Still after TER changes and the market is in sideline, his firm is able to grow the HDFC MFs by 40%. [Before 1 year it was 63Cr and now ~100 Cr] So simple mantra for them is to play on volumes to make the reduction in TER.
HDFC AMC is still having good relation with their brokers/partners.
Yes, the stock is too much expensive at this point.
Disclosure: Got in IPO and still invested so my views can be biased
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Every scheme has a separate P&L which is mandated to be maintained, which is why SEBI is able to push the regulation that all commission is to be paid by scheme only and not by AMC.
I have covered earlier in this thread that every scheme needs to declare annual accounts, reproducing the 2018 account of one scheme here which should drill home this very important concept. Unless one gets how accounting works at a scheme level before part of the revenue is transferred to the AMC P&L, making sense of a lot of the recent developments is tough.
| 2018 - HDFC Top 200 Fund AUM | ||||
|---|---|---|---|---|
| Direct | Regular | |||
| AUM | 2160 | 12430 | ||
| Expense Ratio | 33.05 | 282.16 | 315.209 | |
| Management Fee | 175.28 | |||
| Service Tax | 30.2 | |||
| Transfer Agent Fee | 10.95 | |||
| Custodian Fee | 0.78 | |||
| Trustee Fee | 0.13 | |||
| Commission | 103 | |||
| Investor Education | 3.01 | |||
| Other Operating Exp | 1.57 |
All MF have done this, so HDFC AMC is not isolated in this regard, at least all large AMC’s which can be considered serious competitors for the Top 8 positions by AUM. Of course brokers/advisors may not try to push PMS/AIF but that can happen only in HNI+ category, for the retail category MF will become the mainstay at the current rate. Contrary to what people think the retail push into MF is only getting started and we are at the stage between early adoption and critical mass.
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@ zygo23554 - thanks for the clarification. I have a few more doubts.
So basically the Revenue of the AMC would be the management fees of the scheme? (or any other line items also added)
and also in the P&L of AMC what is then Fees & Commission Expenses (since brokerage is already paid by the scheme) and Other Expenses?
Yes, operating revenue of AMC is the sum of management fee of all the schemes being run. No other line item gets added to the operating income. This ratio of management fee to total fee (of all schemes) is another interesting ratio that I tried to estimate. For convenience I call this the conversion ratio - this is in the range of 53-56% which means of every 100 Rs that schemes charge as fee to investors, 53 Rs gets transferred to AMC P&L. One of my assumptions is that this conversion ratio will trend higher over time as the share of direct plan AUM increases, remember that there is no commission payable to anyone on direct plan AUM. If Direct plan and the advisory model for MF takes off, AMC profitability is set to only move higher for this very reason.
My understanding of brokerage charged on buy/sell transactions is that it gets reflected in the NAV to customer and shows up neither in fee nor in expense line item of any scheme. As per existing regulations brokerage is simple pass through, whatever scheme spends on brokerage gets passed to investors since it gets costed into the NAV calculation. For eg if scheme buys 100 Rs of securities and spends 0.02 Rs as brokerage, it gets adjusted in the NAV that gets reflected for the scheme where the market value gets adjusted downward to the extent of spend on brokerage.
If then what is the brokerage/fee/commission line item which accounts for 0.12% of the AUM as of March 2018 P&L? This is where it gets a bit fuzzy, this line item was 370 Cr for FY2018 and was 50% of the PAT… I do not know the exact answer to this but I know for sure that a good chunk of this is discretionary.
How do I infer this? See Q1 2020 results for yourself, Fee/Commission + Other expenses has come down to 52 Cr from 150 Cr in Q 2019. The reduction could essentially be the commission and incentives that were being paid out to distributors from AMC P&L over and above what was being paid at scheme level - this is the most logical inference
Also see results of IIFL Wealth and ICICI Sec (two of the largest listed distributors) for Q3 and Q4 after this upfront commission & commission from AMC P&L was stopped. Their MF revenue is down 25% YoY which tells you why SEBI went after this line item. It will be interesting to see how much their MF revenue falls in Q1 since the effect of TER cut and further reduced commissions will come into the P&L. Anyone who is very bullish on wealth management firms needs to understand this point very clearly.
Come to your own conclusions 
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@zygo23554 Thanks for taking time and clarifying.
Further if I understand your correctly this brokerage / fee / commission line item is essentially the brokerage fee paid to Distributors by the AMC instead of the scheme. This should then ideally become Nil going forward due to the SEBI order. I read the Annual Report for break up but unfortunately they have not provided any break up for Fees & Commission expense which is their largest expense item.
Even Other Costs have been broken down in detail
I am planning to write to the HDFC AMC IR team and take a clarification. (Actually surprising bad Corporate Governance on display that they are not giving break up of their largest expense item.)
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Got the following reply from HDFC AMC Investor Relations team:
The Fees and commissions represents the residual amortization of the upfront commissions/advance trail paid to distributors prior to October 22, 2018 on which date SEBI banned such payments. This amount will keep reducing over time.
So basically this would become Nil/almost zero going forward.
So the jump in profit is for real - only thing is base effect would kick in after 1-2 years.
.
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The conference call transcript provides all this info…just for reference… HDFC AMC publishes lot of information on their website (for customers and shareholders) - www.hdfcfund.com
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Would some one explain how this is related to HDFC AMC and how it is advantage to HDFC AMC ?
In its 31 January 2019 note following the fall in Zee Group companies’ share prices, Brickwork Ratings (BWR) had said that it “takes comfort from the reported agreement with lenders that there will not be any event of default declared due to steep fall in price. BWR further takes comfort from stated intent of speedy resolution through a strategic sale of ZEEL (Zee Entertainment Enterprises) in a time-bound manner. The proceeds of such stake sale are stated to be used for repayment of debt against pledge of shares at group Level… the operating and financial performance of ZEEL, the flagship company of the group, continues to remain satisfactory and the promoters have announced their plans to demonetize part of their stake for repayments of dues including those which have raised debt by pledge of shares.” So far, BWR has not received any intimation of default.
Just thinking out loud here, don’t have data to back it up-
- Earnings dependent solely on AUM size and the percentage fees.
3-5 years down the line, how would retail as well as HNIs be choosing their AMC/s? Technology disruption will make it very easy to opt for direct plans and manage them (We can see the trend now as well). Also it would be very easy to compare the different funds offered based on the below parameters and then select-
- Past Performance (More or less similar across different AMCs?)
- Management fees
HNIs may not sit and select themselves but such easy to have transparency will force their wealth managers to not fool around?
Most probably, this will make AMCs a commodity business (whoever gives best offers/lowest entry-exit loads, etc). Quite similar to maybe opening a bank account today?
So, isn’t it too optimistic to assume that earnings would grow in the same proportions as AUMs?
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Exit won’t be that easy after 10% LTCG => for few percentage points of outperformance atleast HNIs cannot keep hopping large some of money from one fund to another. After HDFC fund has given liquidity to FMP investors they have themselves set above other MF houses in terms of brand and reputation. This will be now key selling point for new investors by distributors. Recently they have started increasing management fees for most of the direct plan fund , keeping regular fund cost more or less similar. Some of the fund like (HDFC Hybrid) are now topping the chart of management fees compared to peers still having top position interms of AUM.
I believe management is competent and clever enough to understand and predict the market trends and place their products appropriately. So one should watch about overall AUM growth and leave operational details to HDFC AMC management.
1 Like
July AMFI data on SIP
Indian Mutual Funds have currently about 2.78 crore (27.8 million) SIP accounts
Total industry SIP collection 8324 cr in July
Happy to see consistent flow in volatile markets
https://www.amfiindia.com/mutual-fund
Thanks
Ashit