HDFC Asset Management Company

Stock Opportunities
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How many people fought with Basant in 2014/2015 on high PE, right from Singapore to Delhi to Chennai. Barring some brief period post June 2015, Basant continued to make money in high PE/PBV and his his PMS still does. Just to clarify, I am not subscribed to his PMS. But I do believe that my CAGR did go down substantially , post Sep 2015 because of succumbing to this noise about high PE.

There are hardly 50 stocks that show consistent growth. And one, at least does not lose here. Yes, one can make good amount in value investing, cyclicals, inside information; many ways to skin a cat.

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And of course, small caps are there in India to fool investors. But we do not talk much about those. Some 3000 companies and 700 mutual fund schemes, 1000+ advisories, 300+ PMS. No one says bad about 20 PE in these even though till 3 years back PE was only 5. Four to 10 times increase in PE and see how poor newbies lost money entering in these one year back.

I do not understand why people do not cry foul when PE goes up from 5 to say, 15 with no consistent sales growth. But this is the nature of market. Let some new equity and MF investors pay the price.

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Yet, it’s these same examples that people keep quoting over and over again whenever the topic of overvaluation comes up. The same list of 10-15 stocks. By definition, that makes them outliers. Just because HDFC Bank was able to perform this way in the last 20 years, you cannot quote the example for every bank stock you’d like to purchase. HDFC Bank was an outlier. Same for Page and the others.

But what about the 100 or 1000 other stocks out there (Like HDFC AMC)? You can’t possibly believe HDFC AMC will continue to give good returns because HDFC Bank did or Page did. If you do, then this is a moot conversation.

If you believe HDFC AMC will give good returns because you think it’s undervalued based on some calculation inclusive of the company’s fundamentals (Not necessarily a DCF), then we’re talking some sense and not speculation.

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Sir ji,
IMHO, there are only 50 odd mid/large companies that grow profits somewhat consistently. One can even analyse past 10 - 15 - 20 year data and pick any combo of 15 out of these. Let one figure out what CAGR he gets.

About Banks, Sir, there are many good ones, IndusInd, RBL, even Yes, Kotak, Bandhan. One may cry foul but financials , by and large, 3 years later, would have made good amount of money.

No one has seen future, no investor has been fool-proof. No investor worth his salt can say that this growth stock will not go up for the next 5 years. No matter what methodology he follows.

On HDFC AMC, it is ~3% of my portfolio, of 12 stocks. And if it does not grow at > 10-15%, I will get out. If I do not make money for 1 year, it is fine. If it performs better, I will add much more at a higher price.

However, my personal interactions with some of the successful investors , not fund managers, have been that all said and done, most of the top 5-10 mutual funds will continue to make money for the next 3 to 5 years.
Any future growth projection is speculation, no matter what model you follow. All stock purchases are indeed only bets. Such is the nature.

If you believe that HDFC AMC will not grow or make losses, may be you will be proved right and that is also fine.

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Morgan Stanley on HDFC AMC.
“But we think ~20% CAGR over FY18-21 is achievabale”

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I think once again, you’re missing the point. Let’s see:

  1. You think that it’s okay to believe that a company will go in a certain direction in the future
  2. Because of this, you also have some growth rate conceived for HDFC AMC. If you believe in Morgan Stanley to call the shots on your personal portfolio, so be it.

But I agree to all that. That’s not my contention. My contention is, how will you determine whether the market has already priced in this growth? The answer to that is @Yogesh_s ji’s model (Like he’s mentioned, it’s more of a rule of thumb kind of thing, but still).

My question is, given the above 2 points, why won’t you agree to use some kind of logical method (Any method, as I’ve already mentioned, and not necessarily a DCF) to let your own assumptions assign a Value to you personally?

Obviously, this question is not pointed at you. It’s about the nature of overvalued stocks.

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Current Facts & Model.

  1. Average PE of Private companies with MCAP > 10000 Cr, growing at => 20% profit CAGR ( assume MS Report above) for 5 & 10 years is 40. ( Screener )
  2. As per Yogesh Model, @eps cagr 20% and @40 PE exit, Price cagr is 19%.

More than that, let us talk only and only after 3 years. Saving this.

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Hi

An interesting video at the AMFI summit. This is PayTM’s founder talking about how technology will help customers adopt MFs. Relates to what we have been thinking about the future of MF industry and ‘consumption’.

Aside.
There is a post somewhere by @Yogesh_s which talks about 3 aspects to a prospective investment - business quality (runway for growth), quality of management and valuations. Most of the time we will never get all three and all three do matter. We will always be on a shaky stool if one of the three legs of the stool is not firm.
There is no point in trying to convince each other as to the value one sees in a business 10yrs down the line. I agree it’s critical as Dinesh says to have an objective view of the future cash flows of a business. But then the market wouldn’t be as it is if all of us had the same views and assumptions of the future.

In the Goa presentation I had a slide with a humorous take on this.

p.s. a little taken aback to see a lot of threads on ‘overvalued’ businesses totally hijacked with discussions on my valuation is better than yours or you don’t have one. The content will keep getting diluted if we continue like this. We need to mature a little.

Regards
Deepak

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@Yatharth: We also have companies like Bosch and Symphony which delivered ZERO returns to their investors in last few years because of their high valuation. People keep on quoting that Prof. Sanjay Bakshi minted a lot of money from investing in Nestle at high P/E. He did that but he had invested when the company was small and so was our Indian economy. Indian economy is much bigger now and even these quality names will have problems growing at the same pace in the future. Pepsi was once dominating the Indian chips market with it’s Lays, Cheetos & Kurkure. But now even regional brands are able to get funding, use technology and scale up much faster.

I feel HDFC AMC is over valued as the business depends upon the emotions of people. Market up or down does not matter for Britannia as biscuit consumers will still buy them. But the growth rate of mutual fund aum does depends upon the market conditions and emotions of people. As always A huge correction and liquidity crunch after a big multi year run up will come later or sooner which will affect the growth rate of HDFC AMC.

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I see AMC business as combination of two components, one is cyclical & other is secular.

Cyclical component is reduction of equity AUM during bear market. If I manage 1000 cr of equity assets then bear market (20% drop in indices) will reduce this AUM to roughly 800 cr. This will result in reduced fees from existing assets as fees are function of AUM and resultant reduced profits from existing assets.

Secular component comprises of financialisation of savings & increasing MF assets over a period of time.

In my opinion, during bear market, it will not be possible for new assets coming in to mutual funds to compensate loss of assets as a result of bear roaming on the street. Also, flow of new assets will be considerably reduced due to psychological impact of bear market on investors.

So, profits will likely reduce during the bear phase and that combine with reduction of multiples assigned to the stock during bear phase will result in considerable quotation loss.

It appears to me that AMC business valuation is driven more by cyclical factors. Hence, right time to buy such business is when bear market is well advanced and lot of negatives already factored in the price.

Here and now, we are closer to bull market top. Hence, in my opinion, it is time to say good bye to this business not good buy.

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  1. We are talking about long term returns.
  2. Symphony - 10 Year CAGR is 73%, 5 years is 47.5%.
  3. In each of above posts , I have said to watch for quarterly results and take an exit option if it is not growing.
  4. Had bought Symphony every year since 2010 till 2016.
  5. Since last 1-1.5 year, Symphony has been struggling with Sales/Profit growth.
  6. Had to get out, as per my theory after 2 quarters of dissatisfactory performance.
  7. Last exits at ~2000, 1750 & 1450.
  8. Even at last exit, my 3 year price cagr > 10%. I should not have waited till then though over all > 8 bagger during 5-7 years.
  9. One CANNOT be wedded to a stock, Sir. One should watch for Sales and profit growth of one quarter comparing on an annual basis and start exiting if original hypothesis is not working out.
  10. If this happens for 2 quarters, no point in being there.
  11. Did not buy Bosch. It has never been 20% cagr company since I started tracking.
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Respect your opinion. If there is a severe bear market approaching, AMC as well as many other business are going to go down along with economy.

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One point about Asset Management companies is huge leverage on existing investments and hence profits will increase much quicker than AUM.

AMCs are far superior biz compared to lending/banks as there is complexity of borrowing, lending, credit cost, NPA etc.

It is close to an FMCG biz with outsourced manufacturing in long term which may be cyclical in short to medium term.

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In my opinion, Bear market will test the leaders in AMC business and leading player will able to ride through it leveraging operational efficiency and other levers. And also when consolidation kicks in AMC industry, market leaders will hold all the cards.

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@rvetri

This DCF stuff is only for those guys who have the knowhow and confidence in the system. The only care that needs to be taken while applying this type of models etc is to know where it is applicable. One should not get carried away by this knowledge of DCF and try to apply to companies with lumpy earnings. Sometimes this leads one to be too clever for one’s own good.

But in good hands and in people who know where to apply, it might be useful to some extent. But for others there are various other ways to bell a cat and the latter group of guys are also hugely successful. So everyone to his own style and best of luck.

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If this is start of a trend i.e. pacifying of retail interest - then wealth management and brokers would be one of the first companies to get out of as bear case growth rates would kick in.

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I happen to read (again) The Five Rules for Successful Stock Investing by Pat Dorsey who wrote about the now (ab)used term “MOAT.” He believes that AMCs are lucrative business and requires no incremental capital to run. He believes AMC have economic moat and I listing them along with my comments and opinion.

Moat and hallmarks of success of AMCs

1. Diversity

HDFC AMC does not manage only equity based assets. They also manage debt, fixed income, AIFs (including REITs & InvITs), Gold and hybrid (balanced, equity savings & multi) assets. As on June 2018, Debt AUM is 50% of total AUM.

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Certain AMCs like PPFAS, Motilal Oswal and Quantum who have a much larger equity AUM will find it difficult when the equity market flatters. While they may be equity focused and it is a good thing for unit holders but it would be a double whammy for investors when market falls and because of this AUM would also fall.

AMFI’s “Mutual Funds Sahi Hai” campaign is now going to cover Debt funds soon to increase awareness among retail investors. News item: AMFI’s new campaign to focus on debt investment benefits.

Debt funds’ share in the total AUM may still fall and it is a lesser margin product but the absolute AUM of debt funds is set to increase over the years.

2. The rise of Direct plans
When we see distributors and aggregators competing among themselves to sell our product, and that too for free, then we know this is indeed a good business to own. :smiley:

Now PayTM, Zerodha, Kuvera, ET money, etc. are offering (for now) direct plans free. If we listen to what PayTM founder said and what we read, there is going to be a big pool for new investors coming in and they are vying for assets from everyone from rickshaw pullers to corporate CEOs. PayTM wants to aims to double Mutual Fund investors in India and increase penetration in B30 centres which is good for the AMCs. If we open PayTM Money, it suggests alternatives to savings account and FDs.

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Direct plans give better margins to AMCs than Regular plans thus increase in direct plans bodes well for the AMCs.

3. Sticky Assets
HDFC AMC who have a increasing SIP book, incremental SIP running for long term, buy-and-hold juntas and retirement/children funds can count on steady earnings in all market conditions.
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While investors can stop the SIP, redeem existing units and might not do a fresh SIP on market downturns, nonetheless having a book SIP book is a positive and gives “AUM visibility.”

4. Market Leadership, Trusted brand and strong parentage
Economy of scale in this business is a completive advantage. Larger AMCs do not need more investments in manpower, offices, etc to manage more incremental assets and they have longer track record to show to investors which will further attract more assets. This makes it much difficult for smaller AMCs.

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HDFC is a widely know, enhanced appeal and trusted brand which helps even further in gathering assets and manage them profitably. Having a strong parent also helps in distributing and HDFC bank alone distributing 9.1% of HDFC AMC’s total AUM as on June 2018.
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HDFC AMC have been a leader in the Indian mutual fund industry as the most profitable, largest equity oriented AUM and second in the total AUM by all AMCs.

Disc: I own HDFC AMC.

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@drgrudge, all valid points. The next question we should ask then is ‘Does the seller not know that?’. If buyers expect to make money because of all the factors listed above, why would the sellers be willing to give up those profits? Aren’t all the bullish arguments not baked into the stock price already?

BTW, just today ET Wealth came out with Best MF awards for 2018 and not even a single HDFC Fund featured in the list. Not that it matters, but something relevant.

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if this can be a reasonable explanation, there should be no stock market at all. Once can argue same for any stock whether undervalued or over valued…

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I think Dec’19 results would be interesting to watch. If present market condition continues then there would be marginal growth compared to Dec’18 in AUM. I believe market would give many lucrative opportunities to own this business in years to come. That said I am amazed to see PayTM enrolling 9 Lacs prospective customers within days of launching. That might have taken few years and so many physical branches for traditional distributors!