HDFC Asset Management Company

Stock Opportunities
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In M&A world deals happen at 5-6%. Also, the AUM is underlining AUM which won’t get any new customers due to the old brand. Only growth of the portfolio… say around 7-8% is there.

So, HDFC’s customer stickiness and brand deserve a premium. Also, there is a premium for future growth (An increase in the number of customers).

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  • I have assumed 13% increase in sales in H2 and around Rs 3800 Billion AUM

AUM can increase in 2 ways.

  1. New Customers
  2. Increase in value of old investments (increase in old customers money)

So, assuming an 8-9% increase in old investment value (debt is around 55%) and even with a 10-12% (9% y-o-y as per presentation) increase in new customers, I have assumed around 20% AUM growth going forward (which is again on a higher side considering recent trends).

Historically also, HDFC AMC’s AUM Growth is around 22% CAGR and net sales (excl. other income) are growing at a lesser pace. Even if we assume that there won’t be a further reduction on expenses charged to unitholders, the %age increase in the sales should be around the same as the %age increase in AUM.

With current profit/EBITDA ratios, I hardly see any swift upside in margins. The expenses won’t rise much, so the addition of say Rs 200 cr of sale, should see PAT rise by Rs 130 cr. In the overall scheme of things, this should improve the PAT margin by around 0.6% for a few years.

Now, coming to EPS, this increase in PAT margin can be ignored as ESOPs will dilute the EPS to around this extent. With a 20% increase in sales, the expected CAGR of EPS should be around 20% assuming all get well with the markets.

I am not very comfortable holding a company at PEG of 3, mcap to sales of 35 etc as the margin of safety is just not there and the margin of error is huge. I think better alternatives may be available as per one’s assumptions of growth, risk and investment horizon.

Basically I concur with zygo23554

That is one way to look at valuations. Comparative valuations look good during up-moves, but when the whole market corrects… which happens during every market cycle… only fundamentals related to your own company can give comfort.

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411

Valuation indeed looks high.

I was just looking at Bajaj Finance & Page Industries and would like opinion on valuation comparison with those 2 companies. The three companies are in different business segments but just want to compare as they are leaders in their business sector and getting very high valuations in the stock market and hence wanted to compare.

Bajaj Finance - Total AUM is 1.35L crores but market cap is 2.3L crores (Price to book is above 12 times). Returns on the AUM is quite high and they generate very healthy profits with good asset quality and have been consistent performer in their business numbers for many years now.

Page Industries - Market cap is at 26000+ crores whereas yearly profit is around 400 Crores (I just took the number from BSE and did not check for detailed financial results - subsidiaries or any such)

Comparing HDFC AMC with the above, does a PE of 50 look very expensive? AMC business will be there for a long time. HDFC brand and management capability will ensure they will be in top 3 all the time. Asset light model, no real capex and very good cash flow which results in consistent and increasing dividend payout (in proportion to increase in profits). Main risks (apart from general macro economic slowdown) are: How will the AMC business nature evolve , at what pace will TER move down, will the reduction in TER be compensated by higher AUM resulting in good profitability etc.

The above is not a detailed financial / valuation comparison but just a quick look. Appreciate any feedback.

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It is true that Bajaj Finance has 1.35L AUM, but their net interest income is Rs 15000 cr odd vs AMC’s Rs 2100 cr odd on 3.66L AUM… Basically comparison based on AMC vs NBFC is not appropriate.

But again as I said, I think better alternatives may be available as per one’s assumptions of growth, risk and investment horizon. Investment horizon in my view is very important as time works greatly in favour of such great business.

Disc: Hold both Bajaj Finance & HDFC AMC

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Yes, the idea is not to compare business metrics but just to compare valuations of individual companies that are the best in their respective sectors and how/why they deserve premium valuation. The erstwhile Gruh finance was also trading at a value higher than their loan book.
While I agree the valuation of HDFC AMC is high, I personally feel it is sustainable should the company grow their business consistently. Just my thought.

(A small note - We can’t compare NII of a lending institution with that of a AMC as the lending institution has higher operating expenditure and provisions when loans go bad. On the other hand, the opex is very low for AMC and there is no real provisioning in AMC business - except for cases like what happened with their investment in Essel group NCDs)

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Whatapp forward. Did not verify.

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We may want to consider that wealth management is very matured industry overseas and markets are penetrated compared to India and thus higher valuations.

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With the latest news of Essel group selling their shares (mostly pledged I guess) to financial investors, will HDFC AMC get all their dues back and is there any scope where they gain any interest on delayed payments / profits?

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They provided exposure in their books for the same when they extended the timeline to March 2020. It was of about 500 cr. The first time Essel sold 11% stake to Oppenheimer, AMC’s were paid. However how much is not known.

The terms are not known and hence interest or no interest is speculative.

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This is now confirmed with notification from HDFC AMC themselves

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Interesting interview of prashant Jain and his style of fund management , way of thinking

Thanks

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RNAM: https://www.bseindia.com/xml-data/corpfiling/AttachHis/d2c3ae45-288e-4ad2-bbc6-90b2c141c9da.pdf

HDFC AMC: https://www.bseindia.com/xml-data/corpfiling/AttachLive/271965d6-1c92-418f-a49f-8dc3e9079863.pdf

B-30 numbers are different in both presentations , does anyone know where can we get the accurate data to rectify.

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Now it’s the turn of HDFC AMC OFS by Standard Life -

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Hi

Interesting article from Rohit Chauhan talking about the sky high valuations of HDFC AMC.

Regards

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Is OFS only for institutional investors? not for retail?

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Disclosure first. I have invested in HDFC AMC from ipo price to 1600

What i believe from my past experience people don’t estimate the opportunity size and how one company can evolve every decades and create more opportunities.(obviously my post is only for long term investor)(best example is Kotak Bank bill discounting in 93 to large bank now)

Now i start putting two examples first is interview of Paul and Michael of Manulife partnering with Mahendra mutual fund (they believe Indian AMC can surpass Japan’s AMC industry in 3 years) and old video of Milken institute on The Asset management outlook (listen Ron Mock of Ontario teachers pension funds…Hiring more engineer then equity research analyst in firm)

I think India is at very early stage of AMC business , at present we see AMC business as only debt and equity market . As country evolve , stock market evolve , more sophistication investment solutions will develop and more people come out of bank FD ,gold and real-estate

Now comparing KKR It’s 43 years old company started in 1976 as private equity and 2004 as investment bank and listed 2010 on NYSE
(Consider US market evolving)

Whatever written positive about KKR is not negative for HDFC AMC in fact it’s future opportunities for all AMC business like investment in private equity, hedge fund, other alternative investments

So valuation by steady state condition is not fair for me
AMC businesses in India is in neonatal stage there is decades to go
Thanks

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425

Utpal Sheth PDF on Megatreands and Leadership
cfa-society-megatrends-and-leadership-november-2019-delhi.pdf (676.8 KB)

Excellent slide on Valuing Megatreands and leadership

Terminal value impact disproportionate hence difficult to capture in conventional framework

We overestimate change in short term and underestimate change in long term …
VALUATION REFLECT THIS REALTY

Thanks

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Thanks. Has video been uploaded yet?

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What one can understand from OFS like today is the OFC of HDFC AMC with bid price 3170 ? Could someone explain that …
Regards

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It means promoter itself (Standard life here) are selling their stakes at a discounted rate of 3170. Any retailer (or DII/FII) can place bids and can allotment of share.
This is very similar to that of IPO.

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Surprising to see such a drastic change