HDFC Asset Management Company

[akacker]

I’m afraid I have not looked at CAMS in detail. Based on my limited knowledge, since both seem to derive revenues off AUMs (and are both affected by TER changes / tiers), CAMS looks more like an ETF of AMCs (since I think 5 contribute ~70% RTA?) while HDFC AMC is just like a single AMC stock. Therefore unless we are sure HDFC AMC can outperform market AUM growth (through a combination of market share gain, performance and inorganic), CAMS seems to be a safer bet (assuming it has a reasonable moat).
Given both have similar PEs and Dividend Payouts, in my view your analysis seems reasonable that CAMS could be more stable. Please take with a pinch of salt as I have not investigated CAMS in depth

Disc. Invested in HDFC AMC and likely to be biased. My XIRR on HDFC AMC is ~11% over a 3.5 year period. I will review my position next year and consider whether remaining with a position in any AMC stock is worthwhile (steady, transparent business with some cyclicality and long runway - but are there better opportunities elsewhere?)

[Chandragupta]

@suhagpatel Thanks for asking. I think you have answered your own question! Individual AMCs will have their own ups & downs (‘ups’ is also there, not just downs!). Purely as a business model, AMC is any day a better business than RTA. Once the initial set up is created and a minimum threshold AUM crossed, there is unlimited upside and almost no downside. Every incremental AUM flows directly to the bottom line. The problem for the retail investor is the valuation at which he is getting in, and which of the many AMCs to choose. RTA is just a sectoral bet on the broad financialization theme with very little control over its own destiny. So you have to choose what you want. I am invested in CAMS because there is an optionality in its non-MF business, where they appear to be doing well. That may provide some alpha. But if I am starting a business today, I would choose an AMC over an RTA any day.

[gsapte]

I am interested in knowing if some one has done similar studies about AMC and CAMS like stocks in Developed Nations?
Are there any examples where individual AMC may have done better than CAMS in USA or other Developed Nations?
I think, since those Nations are growing their GDP at much lower rate than India, ideally Indian AMC and CAMS should grow at least 2-3 times faster than Developed Nations. Since it is claimed that Indian GDP growth is the fastest in the world. Can we say that, Indian AMC should grow at much faster rate than Developed Nations and also their Valuations should remain high or grow even further.

Also, since Indian Digital economy is growing much faster than Developed Nations, due to large adoption of UPI, Net Banking, and other Digital channels, Is it possible that, AUM growth will be much faster in India. (Personally I do not believe so, but I can see that, lot of big claims are made by some financial experts hence curious…)

I am curious to have these perspectives.

[ChaitanyaC]

I think all are interconnected to some extent, a strong government whose actions are favorable to the businesses of the country, an environment where businesses can grow, and markets perceiving such actions as beneficial to the participants, so more participation from across the globe, which in turn bring in more domestic participation, MFs emerging as an alternative and standard venue of investments for retail, AMCs with their views, strategies, vision becoming profitable, RTAs too depending on AMCs, everyone is happy.

But as there are many moving parts, some at global level, and some at local level, I am not too sure if this can continue for years to come, as we have not seen a GFC like happening, even if it does not happen, a couple of years of losses might force the new entrants from the retail segment, participating via demat or MF, leave the market, and they may not return again, because they have many ways to get some profit, which are in existence for decades.

5 years look long, they are in a sense, but going by the circulated layman’s explanation for relativity by Einstein himself, in the context of 25 years, 5 years is not that long, it could even be called a fancy, a flash in the pan.

Of course, the financialization theme is backed by data reported by AMFI or other institutions, so there may exist a case of some secular increase YoY from the informed section, and this may have already started, and may continue for many more years till the current working generation retires.

I don’t know about the other verticals these businesses have, PMS, AIF, personalized advice etc, whose revenue may grow irrespective of the state of the markets, and as these folks are different to that of retail in many ways, overtime, these may become bigger than the retail vertical, with more and more new products focused towards these people. Maybe we will have CDS, CDOs and synthetic CDOs in our market too.

So I guess, valuations of AMCs and RTAs play a bigger role here, if the majority of revenue is coming from retail.

Just my thoughts, no investment in AMCs or RTAs, interested in the space.

[vnikam]

I think CAMS certainly deserves place in portfolio but not at the expense of AMCs. This is similar to Auto OEM and Supplier to auto companies. Theoretically, it is safe to invest in supplier as it supplies to lot of OEMs then investing in one or two OEMs. But normally, suppliers are squeezed for margin every time. That’s the reason you may not see lot of suppliers with large market caps but lot of OEMs in Blue-chip bucket.
If individual AMC is facing issue, it will also give less business to CAMS, so that affects CAMS.
I think reason to invest in CAMS should be their other digital business that has good future and off course it will have steady business from AMCs.

[Lajja_Shah]

[akacker]

If one is to believe the following thesis on HDFC AMC, it has successfully turned around the business on an operational basis and now the challenge is to maintain this positive trend and translate into profitability (I think first two quarter’s employee costs are elevated due to higher ESOP charges)

a. Equity AUM is a growing share of total AUM and has higher revenue yield - therefore with a focus on Equity AUM, HDFC AMC is focusing on the higher growth area of the market

b. Key drivers for Equity AUM growth are Individual AUM - for which key drivers are number of individual folios, AUM per folio and share of SIP AUM / flows

See below some operational metrics

[Investor_No_1]

@vnikam

reason to invest in CAMS should be their other digital business that has good future

What are these other good businesses of cams that has good future?

IMO AMC and companies like CAMS are not comparable at all….

Also auto ancillaries have a sure shot business case as for example tyres, bearings or EV software etc. will always be needed & relevant (at least in long term) and they demand as much skills, innovation as an OEM company……not sure if same analogy works for CAMS and AMC….

[vnikam]

@Investor_No_1

IMO AMC and companies like CAMS are not comparable at all….

Yes… They are not comparable and hence CAMS deserves separate place in portfolio.

As the case with sure shot business of auto ancillaries, CAMS and KFintech have sure business from AMCs. Although auto ancillaries need to compete a lot here there are only 2 players.

CAMS have lot of small seeds which can grow like CAMSFinserv,CAMS eNPS,WealthServe, CAMSRep,CAMSPay etc.

[Investor_No_1]

@vnikam

As the case with sure shot business of auto ancillaries, CAMS and KFintech have sure business from AMCs.

Auto anciliaries business needs innovation and seperate key competence which OEM may find difficult to pursue along with their core business…also auto anciliaries arenmot dependent on regulations from gov. etc.

CAMS type business imo needs no drastic innovation, R&D and its just transactional and dependent on regulations as well (directly & indirectly)

Cams type business is not comparable to auto anciliaries in this context as well…

we cannot say for sure that growth in amcs will always result in growth of transactional companies that serve them…any change in regulations can even put a question mark on existence of such businesses as well or the way the operate and make profits…

Above only my thoughts and i can be wrong in my assessments…not a biy/sell recommendation.

[sanmar96]

By seeing the macro trend in future the insurance industry and asset management industry both are under penetrated currently.But finding it very hard to develop a conviction on which of the companies have a clear advantage with this macro trend.

[RajAnalyst]

Among the listed AMCs you have HDFC, Nippon, Birla and UTI. While UTI and Birla are relatively undervalued, they are having challanges wrt growth --particularly of equity AUMs. Clearly this is a sector which will provide high returns because

• Mutual Funds are now accepted by more and more people for their investments
• All the growth in equity indices get reflected in the growth in AUM (for example if Nifty doubles in say 5 years, the equity AUMs will grow even without further inflows)
  -The incremental costs of managing higher amounts is very low, thus margins will improve with rising AUMs
• The SIP book for the industry is rising every month
  Overall wealth and asset management industries are sunrise sectors

[valueinvesting101]

Rising Equity AUM might not benefit AMC players if there is relentless pressure on margin via competition from new entrant, passive equity investments and regulatory cap on fees.

With fintech startups, investing in overseas market is becoming easier. So rising allocation of Indian investor’s equity portfolio will also go to overseas asset manager offering cheaper passive investment options.

HDFCAMC AUM hasn’t done that great over last 5 years and revenue growth is even more disappointing. When starting valuation has sky high, stock returns might be very different than performance of the underlying business.

There is a limit for improving profits when business is not generating good revenue growth.

[newone]

This should not be a concern I guess as it’s a financial investment for LIC and not strategic

With so many projections of sensex hitting 84,000 to 1,00,000, if they were to come true, big AMCs will benefit with rise in AUM and profits

LIC reduces stake in HDFC Asset Management Company to 7% from 9.04%

[Unknowninvestor]

@Unknowninvestor

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 AMC’s 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.

Thought that I will do a quick check on my original thesis from two years ago.

The company has made progress

1. New fund launches have been completed
   2.Prashant jain is no longer there but the funds are doing well
2. Hdfc amc website and app is better

Unforeseen things were

1. Hdfc bank is now the parent so distribution will help. This is a positive
2. The regulatory push to decrease TER has abated somewhat so the overhang is gone. This was a sentiment negative for last 12-18 months
3. Sip flows have been strong . Didn’t expect sips to go up 3 times. This is a positive

Big question is

As TER decreases with increasing AUM size at what growth rate and AUM levels does it mean positive operating leverage from here on

Disc: invested from long time ago and holding

[newone]

FY2023 profits of AMC companies. HDFC may go down to 3rd position in current fiscal due to SBI’s excellent growth in AUM

Management should make aggressive plans to move up to 2nd position in AUM first

ICICI Pru is the most profitable AMC in FY 2023 - Cafemutual.com

[Ravi_Hundal]

https://www.valueresearchonline.com/stories/53841/money-magnets-of-2023/

In 2023, HDFC AMC attracted the highest net flows amongst all.

[newone]

HDFCAMC crosses lifetime high achieved in 2020

Any views on valuation?

[valueinvesting101]

Market cap is around 82K cr and AUM is about 575K cr. Typically AMC are valued at 5% of the AUM but HDFCAMC is around 14% now.

May be it deserves higher multiple for upcoming growth in AUM but with new entrants and rise of indexing net profit to AUM ratio will be trending downward. Currently AMC earns about 35 bps of profit for 100 of AUM. So valuation looks stretched. AUM will go down if correction is in the market.

I feel banks offers more barriers to entry compared to an AMC business.

Recently reduced position in HDFC AMC stock.

HDFC AMC has following section https://www.hdfcfund.com/information/amc-shareholder but links are not working for me. Overall they seem to be under investing in tech side of the business.

[Investor_No_1]

@valueinvesting101

Typically AMC are valued at 5% of the AUM but HDFCAMC is around 14% now.

Is this typical to US, global or Indian Markets the valuation of 5% of AUM? Is there any logic behind this criteria? Product mix of AUM should be equally important IMO. Can you elaborate this point with any examples. Thanks!