HDFC Asset Management Company

@zygo23554, Siphoning of money may not be possible, but subverting unit-holders, or beneficiaries’ interest to other interests is very possible and we do seem to have some very recent incidents of that nature. The most glaring one was ICICI MF investing in ICICI Securities IPO via 5 mutual funds. Clearly the loyalty to king was more important than loyalty to citizens. A lesser known one is the Birla MF investing in Century and thereafter being party to transactions not in best interest of the unit holders. Each such action diminishes the return to unit-holders and it is the hope of investing community that HDFC would not indulge in such practices. Whether the premium placed on such supposed ethics is proportionate to perceived benefits is a matter of valuation and probability.

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There are no gold plated standards for HDFC AMC as well. They are already fined for front running by SEBI. This is a proven case. Unfortunately there is much to be desired when comes to regulating insider trading in Indian markets.

I believe HDFC AMC has timed IPO perfectly (prospectus filing at Dec’17) when market was almost at pick. Now that has become a baseline for evaluating future performance, IMO it’s a big wall to climb

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Excellent example and brilliantly summed up.There r various examples in the past where fund managers have colluded with promotors and it was not in the interest of unit holders

This front running was done by employees to the detriment of their employer (HDFC AMC) and not comparable to the examples I quoted which were about a systemic, or a policy action of toeing the party line, i.e. to rescue a sibling IPO at the cost of stake holders. The HDFC action was more in the nature of personal gain by those employees and the difference is nature of the incidents has resulted in very different amounts of monies involved.

If one has to throw a dart at HDFC AMC, I would pick their action of preferential allotment to distributors which is tantamount to influencing them to push their products ahead of other funds. Yet even this action is not directly detrimental to unitholders of HDFC funds. The second dart would be their indirect messaging that the nature of their two flagship products - Prudence and Balanced funds would continue as before ( in contravention of the spirit of SEBI guidelines, if not letter) & facilitated by the elaborate and confusing mergers of different schemes.

In no way am I saying HDFC AMC is snow white, and as I said above, its the investor perception of hygiene versus the premium placed on valuation. All things remaining the same, would I value HDFC same as RN, even assuming Prashant Jain is not in the picture? No, and that delta is the perception that one is cleaner than the other. Whether the valuation is fair at 1800, or 1600, or 1100 is a different question.

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Indeed very knowledgeable discussions on valuation of AMC…however to me more important is the resilience of business in economy cycles. Someone had earlier in thread given example of US AMCs which have track records of being listed across cycles and having checked some, i was excited to see good performance even in times of depressions and recessions…a chart which was closest to secular stories like fmcg…even though someone rightly pointed out that fmcg products are regular needs for common people unlike mutual funds. Rather than valuations i would think more on this lines that how this business is so resilient in US amd even india as someone mentioned that hdfc amc was profitable during recession…what did those businesses do in times of crisis…agree someone said that crisis is for every company but why are we so scared for AMC even after knowing US AMC history and even about HDFC 20 years history…
Btw i feel mutual fund industry in india is just begining…even in metro cities very few percentage of people money is in MF…or in index funds for that matter…
Can tbese companies be secular growth stories and become bigger than well run banks? If answer is yes then i would leave valuation to mr market to decide while i SIP

Very valid discussion. Hdfc AMC demands attention on count of following factors

  1. Excellent Lineage
  2. Secular growth path
  3. Good HR policies employees don’t leave eg. Prashant Jain
  4. Good proportion of equity mutual find 50℅
  5. Low capital expenditure requirements
  6. Sensible PE ratio

That pretty much is the crux of what I am grappling with right now. I buy most of what people have posted here about the pedigree, parentage and business opportunity.

Where things get a bit hazy for me is what valuation am I willing to pay for it? The issue with having too much conviction in a story is that it more than often ends up looking like a buy at any price. This thought process has worked very well so far in the Indian context where well acknowledged “quality stocks” trade at a premium most of the time. Especially the recent run in CY 2018 where quality has only gone higher while the rest of the market is down 10-20%. But then if the past is all there was to investing, life would have been way easier. I find it extremely tough to even high quality businesses at prices that imply high and linear growth rates over a long period of time (in excess of 8 years). In fact the only tangible sell criteria that I have worked with so far for a good business is that when the CMP starts implying a 18%+ earnings growth rate over 10 years, I take some money off the table.

Ultimately it comes down to this - How much is one willing to pay up for quality? All these days I was fine paying a slight premium but not a hefty one, I still do not see enough reason to change my approach even after the hammering of 2018. If anything stocks that fall into my usual bucket are way cheaper today than they were one year ago.

I guess this is where one starts looking internally, discussions with others can help to some extent but that cannot make the call for you. I will look to quantify this at some point of time over the next 2-3 months

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There is another way to play this is HDFC. Placed at very attractive valuations with fast growing subsidiaries. SOTP valuation shows that core biz is priced at <2 BV.

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I feel a better play would be to buy the 3 companies instead: Bank, Life & AMC. Holding companies - risk of discount widening…

Many people including me don’t understand valuation of insurers. But when compared among icicipru and sbilife, HDFCLife shows better metrics across all parameters. Taking Embedded Value as a valuation metric, HDFCLife trades at 5X FY19 EV. Just like 5x book in case of other financials?

HDFC Bank: They are about to raise 24k crores this FY. Plus 22k crores expected profit. total equity would then be 1.5lakh crores. Trading at value of 6Lakh crores. Actually the Bank has always traded at or above 4 times book.

Coming to AMC, I guess the price hasn’t yet settled down. we should let market decide on the multiple it deserves.

Quality always seemed expensive to me, I have learnt to live with it :zipper_mouth_face:

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Guess this is a deviation from the core purpose of this thread but I need to put this out here…

The way most investors are parroting the funda of “buy and hold quality companies no matter what the price for a long period of time and you are bound to make money” worries me. This is not directed at anyone here but a view on the current state of things. CY 2018 has done it’s part to reinforce the quality theme, all themes work well till they stop working one fine day.

In fact I could not stop chuckling the day the NIFTY index was renamed to NIFTY 50. Read here if you haven’t yet about what happened to the NIFTY 50 stocks in the US in the 1970’s (on wikipedia of all the places) - https://en.wikipedia.org/wiki/Nifty_Fifty

Quality can become a bubble as well, I am not saying it will but please be open to this possibility as well. Every single mistake that one can do as an investor has been made by someone else in the past and well documented!

Do your own reading of history and come to your own conclusions

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A different perspective from a Guru of long term equity investing…

“The lofty levels
reached by the Nifty
Fifty in the early ‘70s
is often held up as an
example of
unwarranted
speculation. But a
glance in the
rearview mirror
indicates investors
were right to predict
that the growth of
these firms would
eventually justify their
prices.” - Jermy Seigel

https://www.aaii.com/journal/article/valuing-growth-stocks-revisiting-the-nifty-fifty

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@karunbirsingh Request you to go through this . Humbly highlighting it as I saw too many one line posts across threads which does not add any value. Of course, there were value adding posts too on some threads n no issues with that. @adminph2 @manish962 Kindly delete in case not relevant.

Think twice before posting: Make sure you are adding Value - #9 by shrikantparakh

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So according to you whats the fair valuation of Amc business in india? P/b or pe or any other metrics? Lets not compare hdfc with reliance in this as then again we are not valuing business…

AMC charges expense on total float wherever it may be invested or not invested. Can they use float to make money like insurance companies or even like banks? No. There is no earning to AMC beyond the expense ratio they charge.

If the news article is true, SEBI may act soon on reducing the charges investors have to pay to invest in MF.

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What started as a discussion on HDFC AMC’s value has slowly derailed into discussions about general market levels and historical pricing of unrelated companies. We have several threads about Valuation alone. You may take the discussion there.

Second everything @suru27 said.

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Hi

There was an article on Moneycontrol here. I tried to map it onto the ET best fund manager’s list. My observation below.

image

Regards
Deepak

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@newone - yes looks like SEBI is going to reduce the fees mutual funds are charging clients and it would directly reduce the revenue of HDFC AMC. I am sure Mutual funds would further rationalise cost (more Direct Plans backed by Technology) and on back of larger AUMs the costs would be spread across so profitability would come down only marginally. But all these changes just make it more difficult to pay such a large premium for HDFC AMC. Post the formal announcement we should get an opportunity to buy the stock at reasonable prices (IPO price as per me was a reasonable entry price)

I think the recent price correction is making the PE ratios more reasonable. It may correct more by the looks of it, and present a good opportunity to buy. Few unique characteristics of this business that I like is

  1. If the value of AUM grows by 10% annually due to the mix of debt+equity funds. The fees will automatically increase. Thus customers will pay more & more fees for being loyal to the fund. So growth of fees without any addition of new customers is truly unique, and is a characteristic witnessed in rare businesses.

  2. Most customers are ignorant of the fees structure & do not compute how much fees per annum they are paying to the MFs. They may sit up & take notice if actual fees are declared. They are not ready to pay a fraction of the same to the advisors. Especially worrying is the amount charged by distributors, as trail commission & thankfully the direct platforms will impact that.

  3. I think we under-estimate the appetite of millennials in adopting the MFs as an option. The adoption of digital platforms has changed habits. More millennials are taking an Ola/Uber in a metro rather than buying a car (considered a status symbol by the previous generation ). Platforms like Zerodha & Paytm will increase penetration exponentially

I think the key risk remains : the cap on fees by the regulator.

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SEBI caps expense ratio of Mutual Funds at 2% and higher the AUM, lower the TER %

. Also in last 7 days, there is heavy selling from HDFC AMC Employees. …

I hope all is well with retail Investors in HDFC AMC

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Exact nos
‘HDFC AMC Employees have sold 7 Lakh Shares worth 131 Crores since IPO Date…’ and Retail Investors are lapping up…

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