Thanks Deb.
Results are pretty discouraging.
new fund raising also fizzled out.
Interesting to watch as how Navneet turns around its luck.
Discl: I am holding it with an assumption that it may turn around under his leadership.
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Hi,
Even the newly listed Aditya Birla AMC reported good results today compared to HDFC AMC(though quite small to HDFC AMC) and declared good dividend also.
Thanks,
Deb
YoY total revenue and profit figures are not comparable due to higher other income last year due to MTM gains from selling Zee shares. Operational performance is decent (not great, not so bad). They want to ensure profitability even if it comes at the cost of market share loss. I am not sure if thatās a good strategy but itās HDFC group, they would know what they are doing. A good acquisition would help
Some takeaways
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Open admissions around product white spaces wrt changing market dynamics in passive, global FoF, thematic ( BFSI launched, looking at more) - HDFC group doesnāt seem disruptive/first mover in most of businesses ( bank included) - playing catch up now.
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Emphasized margin profiles of passive( etf ctc) business dynamics arenāt that great ( compared to Actively managed funds), expect some moderation in margins profile in med terms
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Sounded bit critical of NFOs success by peers in terms of profitability
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SIP book growth and Higher equity inflows reflects future outlook good
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didnāt sound concerned about mkt share losses - per them Equity ex EtF holding fine, Debt steady, liquid normalized ( last yr was high share), ETF inflows share expect to catch up in coming times
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Fintech as a channel - see room for improvement - however this is a small size as of now( 2% book as compared to whole MF book size)
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Ex other income ( Q1 is right base ) and barring ESOP + NFO expenses this Qtr , growth YoY would be double digit high teen type
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Active fund has been their key focus and will continue to be
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Standard life stake sale - they donāt have visibility, says good funds picked the stake(?)
Summary - Underperformance could be bottoming out in this Qtr, New mgmt responsive to mkt dynamics,
investments and efforts outside their comfort zone are being done and may reflect in nos in coming quarters, pace may always look slow, slow n steady seems to be HDFC way of doing things.
Valuations seem to be fair range with lower than long term median PE, being an asset light, super high cash flow biz with high mkt share and possibilities of high teen growth over long term. Markets are in thrashing mode and to be seen how they take results.
@zygo23554 - if you are still invested, your thoughts on performance?
Invested
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This was a management resting on past glory. After the new CEO has come in, they have started to do things they should have done 3 years ago. The catch up play will continue on the business initiative front for some more months.
The inherent strengths of the business remain, all comes down to execution now. The next step will be to reinvigorate and incentive their channel sales teams, one of the more sleepy teams in the industry right now. As is always the case, these changes will show up in the financials only after 4-5 quarters.
They have a good fund management team too, the previous management screwed up big time by letting one fund manager control 50,000 Cr of equity AUM. Hopefully they will address this part next, the focus on launching new products that are in line with the market trends is welcome.
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In the investor call, the CEO mentioned that other AMCs that received lot of funds in their recent NFOs had a high cost to get that much funds coming in. Can anyone explain what exactly this cost is and how is the commission paid out to distributors in case of NFO (vs normal funds generation)?
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NJ Invest, the newly formed AMC (one of the major distributors of MFs for big AMCs and now started their own MF business) has garnered 5200 crores in their maiden NFO. This is very big numbersā¦
I think I am bit concerned by this point. Market share losses in between is fine, but why management not concerned? Whey do they feel equity ex ETF holding is fine even though others growing better? If cost saving is the major pros, then why profitability is flat yoy when likes of Birla growing it much higherā¦
The product mix in right ratio should not mean that you stop expanding the equity part. This is not an Insurance business where you need a good product mix for top notch risk managementā¦there is no risk at all in increasing equity mixā¦so I fail to understand this logicā¦
Are they looking for any acquisitions?
When asked this question, I guess there is no other answer to be given as they have been losing market share in active funds excl ETFs also.
Comparing with Aditya Birla AMC numbers or even their own Q2 FY21 is not correct as there was big other income last year which led to additional profits. In their investor presentation, you can look at the operation revenue and profits.
QoQ comparison shows a good increase of 35 crores in operational revenue due to increase in AUM QoQ with a higher share of equity part in it.
Their costs will more or less remain constant (except for one time items like big ESOPs and new fund offer expenses). And they still have about 5000 crores in investments which contribute to healthy interest income, which at some point in time can cover all expenses (if they donāt use it for acquisitions OR donāt give them as dividends)
I asked this question in the investor call. The answer is that they are always on the lookout and cannot share any specifics. As per news channels, L&T MF is available on sale & IDFC AMC has publicly announced their intention to sell the AMC business. If such AMCs have equity products with lower fee, I guess HDFC may not be interested in it.
In my personal opinion, Q2 was not bad and rather stable. Moving forward, if stock markets donāt crash, HDFC AMC will do fine and core profitability will keep increasing. How well they do to increase market share is something to watch out for.
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I read this article and a very interesting paragraph below -
"Previous instances of stunning debuts
PineBridgeās maiden NFO was launched in the middle of a bull run (May 2007) and held the record for most inflows (Rs 1,104 crore) till NJās debut. The house was later taken over by Kotak MF. The next two highest NFO inflows were recorded by Standard Chartered mutual fund and Morgan Stanley mutual fund, as per Value Research data. IDFC Core Equity Fund, formerly IDFC Classic Equity Fund and, before that, Standard Chartered Classic Equity Fund, had collected Rs 1,009 crore in June 2005. At that time, the fund was sold largely by Standard Chartered Bank. IDFC Ltd acquired Standard Chartered mutual fund in 2008. Prior to that, the highest ever maiden NFO collection was managed by Morgan Stanley Growth Fund (MSGF) in 1994. HDFC AMC acquired Morgan Stanley mutual fund in 2014. MSGF is now known as HDFC Large and Mid-Cap Fund."
What can be observed is that strangely bumper NFOs are given by rather new joiners or smaller less serious (for long term) players, who eventually end up being acquired rather than existing leaders or long term players with long term vision. Now, why has this been the case so far, I think someone with solid knowledge on the matter like @zygo23554 can let us know betterā¦or is this just a data point by chanceā¦I donāt knowā¦
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I am not able to understand why HDFC wont buy business that are set and on sale ? kindly explain what type of business they would be interested in then?
I heard in one of the quarterly calls with the ex-ceo. As per him, they will look for companies with higher margins (that are comparable to their own). You can join the quarterly investor calls and ask questions. They may not give the exact answer you are looking for but you will get some idea
sure. I never attended one.
I shall get the invitation from google search or any other SM channel I need to be aware of.
please suggest.
thanks
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The MF industry is roaring on all cylinders in my assessment. There will always be some amount of cyclicality here due to the equity market performance though.
SIP book has crossed 10,000 Cr per month with all leading AMCs reporting an uptick after the stagnation seen till H1 FY21. The kind of AUM being mopped up by leading AMCs in NFO is unbelievable - ICICI Pru mopped up 13,000+ Cr in their plain vanilla equity offering, SBI AMC mopped up 10,000+ Cr in balanced fund and now HDFC AMC mopping up 1200+ Cr in their fund of fund offering. A smaller AMC like Mirae has two equity funds with > 20,000 Cr AUM on the basis of performance and getting empaneled with leading wealth managers.
The Q2 results of HDFC AMC hide more than they reveal. Operating revenue grew by 19% YoY, if not for the fall in other income and the 17 Cr employee eSOP charge, PAT would have shown a healthy growth number. Market share within the fixed income category has been steadily rising for HDFC AMC, a deeper look reveals that they are focusing more on the other categories than on liquid which is a low yield and corporate dominated category. The FoF NFO in my assessment has been a success, Axis Global FOF has 1500 Cr while MOSL largest global equity ETF/FoF has 3,600 Cr built over 3 years. This is a high expense ratio product and charges close to 2% if not more.
The current CEO was able to launch new products at SBI AMC, which was arguably more bureaucratic than what HDFC AMC is today. He has shown the intent and the ability to stay more calibrated to market demands than was the previous management.
Other AMCs that have declared Q2 results have shown 30%+ operating revenue and PAT growth because the lower TER now reflects in the base.
Come to your own conclusions, not investment advice though this continues to be a part of my portfolio.
Disclaimer: I am a SEBI registered IA, transactions in the past 30 days for customers.
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The international FoF is not expensive. Direct plan TER is 0.2% and regular is 0.8%. I expected them to raise more than what they did.
Very astute observations. Adding few more from my pov.
The newly launched funds will contribute mainly from next quarter since they were largely launched in jul- sept one.
FoF funds will help maintain their margin profile on incremental book
Prashant Jainās lagging funds have picked up recently and will start showing up in top quartile of funds in the next two quarters if performance is maintained. There was even a cover story on a business magazines for his fund performance.
New CEO navneet munot is quite sharp and the first thing he is doing is launching funds in all the categories. Read somewhere that they have approvals from. Sebi for 12 new schemes including thematic and other categories. Expect more launches
As regards acquiring other AMCās sebi does not allow one amc to have more than one fund per category per amc so even if they buy another firm with a lower cost profile they have to roll it up to their own fund.
Among other things to think is
Hdfc bank contributes significantly to hdfc life sales but very little to hdfc amc. That cross sell is yet to be leveraged
Hdfc amc web site and app are pretty crappy. Once revamped they will help the direct book too.
Thereās a ton of things to do .all that is needed is to execute well.
Disc. Invested
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On the revenue growth, Q2FY22 at 542 cr is just 5-7% above the first 3 quarters of FY20 (504 cr, 498 cr, 525 cr) when Nifty was at 10k levels.
In FY16, itās topline was 1500 crores and it may end FY22 at ~2200 crores, thatās a pathetic 8% CAGR on revenue for 6 years.
So I donāt find anything exciting about the revenue growth in current quarter numbers unless Iām missing some big change in the way the revenue is reported.
With 79-80% EBITDA margins, not sure how much more operating leverage can really play out.
PS: Coincidentally, I wanted to exit completely today given the sub-par growth, loss in market share, etc. in recent years but my sell order never got executed. I find a lot of better alternative opportunities if I know the management changes will start reflecting in financials only 3-4 quarters down the line.
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The math on topline is slightly convolutedā¦
Say 2 years ago the overall AUM was 3.2 lakh Cr at 50% equity AUM. The average expense ratio was 1.8%. Then contribution from equity AUM revenue was 2,880 Cr before accounting for commission. Reduce 50% of that and the revenue reported in the P&L will be around 1400-1450 Cr
Today the overall AUM is 4.2 lakh Cr at 50% equity AUM but the average expense ratio has fallen to 1.5%. Then contribution of equity AUM after accounting for commission will be around ~1,575 Cr.
Every time SEBI comes out and reduces TER (which I expect will be a 5-6 yr occurrence) the business will go through a similar reset where the revenue might stay flat/slightly dip but PAT grows at a hygienic rate. FY2020 revenue is more than the TTM revenue but the TTM PAT is almost 10% higher.
As for operating leverage, the beauty of any AMC business is that none of the expenses may scale at a higher pace than revenue over a 4-5 year horizon. Even if AUM were to double in 3 years, employee cost, marketing cost, advert spends, depreciation and finance cost wonāt scale up proportionately.
The best way of seeing the business is to see the yield/AUM and how much of that will flow down to PAT over the investment horizon one is considering. Buying at the right price will be 90% of the job in such businesses, some amount of cyclicality will be there due to the reliance on equity market and possible regulatory action.
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You havenāt considered underlying fund expense ratio in this calculation.
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