HDFC Asset Management Company

Since u say premium is huge, can u pls guide whats the correct valuation? I am seing many posts repeating valuation concern, wanted to know if anyone knows correct valuation here…thanks

1 Like

Thanks for this new insight i was unaware, can you pls elaborate how this works? Is expense ratio a function of my current NAV value or what i had invested?

I think enough has been said about pros n cons n ultimately the additional alpha gets generated not by knowing pros n cons but quantifying the probabilities of risk reward scenario. So, unless one does some range valuation , it’s never ending debate n valuation in itself is a never ending debate (as quantification of pros n cons happens through the process) as few will be willing not to give more than 20 times valuation n few might be happy getting quality at 40 times valuation n that’s a personal choice n nothing bad in it. I would just add a small snippet from Dorsey’s book on what he says about such businesses
“With huge margins and constant stream of fee income , asset managers are perennial profit machines. However, these companies are so tied to the market that their stock prices often reflect oversized doses of current optimism or pessimism prevailing in the economy, which means it pays off to take a contrarian approach when you are thinking about when to invest . The best asset managers can present truly outstanding investment opportunities when they are selling at right price”.

I have not read Dorsey telling about contrarian investing usually as his process is more around bottoms up ,moats n paying right price . This is an exclusive context he has mentioned so far whatever I ve read by him or know through his interviews

Update note : By the way, in case anyone is new to AMC business, would be worth to read chapter 18 in “Five rules of successful investing” by Pat Dorsey.

16 Likes

It is a percentage of current NAV.

1 Like

The AUM of all fund houses is rising, but you cannot categorize all the MF investors as one. The reasons are as varying as the type of funds available. Some consider it to be a better investing avenue, some believe it as the only way to beat inflation, some seeing it as a easy way to money not knowing about the volatility at all.

There are also people who like a particular fund house, as the fund house a particular investing philosophy, some simply go by star ratings given by the portals, some investing according to their distributors.

Sometimes if a fund has been successful, investors flock towards it there by increasing the AUM so much so fast that the fund closes its subscriptions to new investors.

In tough times, some will wait for a couple of years trusting the fund, fund manager, but not all as many invest in mutual funds for a particular goal. Some may leave once the bull stops running, they are not here for the long run.

Then there is index investing, although miniscule AUM as of now, they are rising slowly. Experienced and knowledgeable people are slowly moving towards index funds who are okay with index returns and who are not okay with paying high expense ratios.

So much money coming in every month from tier 2, tier 3 cities, so the AUM will keep on increasing for all fund houses. More and more people are getting attracted to mutual funds even from smaller cities, so the total AUM is reaching new highs every year like 23 lac crores, courtesy to the bull run for the past couple of years which is bringing more and more people. Despite the FIIs are moving out, as the domestic inflows are high, it has worked as a cushion until now. But I don’t think even the fund houses are certain of when these inflows will stop or decrease. Some part of the inflow will surely cease, the part that comes of the kind of investors who do not have idea about how equity works or who had high expectations will not hesitate to exit.

All in all it is like elections, crores of stories tangled together which may seem uniform but is not as each story is different.

Hope this adds to the discussion.

1 Like

Hi All,

I just want to know how much bottom line can be hit with this new TER%?? and being largest AMC & having HDFC parenting, i believe they will come with new way of dealing with fund sizes going forward.

Thanks,
Kumar

If all the cut is borne by the AMC it will hit PAT by 40-50% for a large AMC. But the large AMCs will try to pass on major cuts to distributors and expected to have a 15-20% impact on PAT.

The distributors will not take kindly to this & shift retail customers to ULIPs and HNIs to AMCs/AIF. This will affect inflows into AMCs. And their top line growth may be impacted in the short term.

I guess HDFC AMC employees already had a fore-warning & sold their holdings.

They had early warning or headlines like ‘Prashant Jain made 160 crores’ made SEBI look up and take notice and act so quickly? Earlier their financials were all private.

The PSUs are poorly valued since the government runs it. I think sectors that are under regulation should also be discounted for regulatory risk

2 Likes

India’s average equity expense ratio or Total Expense Ratio (TER) of 2.22% is among the highest in the world, said an October 2017 study by mutual fund tracker Morningstar Inc. So some reduction is good for investors.

For MF industry, I think this is a short-term impact. I believe that in medium to long-term if investor’s returns increase by say 30-40 basis point, it will make MFs even more attractive. The same thing happened after SEBI ruled MFs to stop charging entry/exit loads in 2012.

Compare the past returns of Mutual Funds vs FDRs (post-tax). Mutual funds will get even more attractive. This year may be a flat-ish year (PAT-wise) and company’s top line may reduce but impact overall should be positive for the MF industry in the longer run.

Disc: Invested

2 Likes

Has anyone compared HDFC AMC with RELIANCE NIPPO. HDFC commands premium but after todays correction RELIANCE NIPPO is trading around 24 PE which do not sounds expensive to me. So is the valuation premium HDFC is having just because of brand name or their are difference in fundamentals of the company. Would be great if some one can throw light on this. I will be happy to buy HDFC AMC at 24 PE but not able to decide if I can do the same for RELIANCE NIPPO AMC or not (at 24 PE)

1 Like

Hi @Yogesh_s

Thank you for starting the thread. Would like to know your views on the recent correction. More so because the price is now in the range of approximate FV computed by you. Is your calculation impacted adversely or otherwise due to the recent SEBI announcement?

Thanks in advance!

In that case, is this the end of the TER cuts proposed by the regulator ? What if there are more cuts ? Beyond a point, the AMCs are left with a very little pie for Sales & Marketing, given there is an onerous task for consumer education/trial. I think if one compares FDRs and MFs even at this stage, the risk/reward favours the latter. Consumers are reluctant to shift. The distributors exercise a lot of influence on many ignorant consumers and they will easily engineer a shift to ULIPs, where they get higher commissions ,as well as upfront commission.

Regulation is good & some of the steps proposed are healthy. But once a regulator in India senses blood, it overdoes it.Besides one set of regulators do not seem to align with other sets of regulators. Are the SEBI & IRDA talking?

To invest in AMCs one needs to believe that while there may be regulations from time to time, the government won’t completely kill off the industry.

The US MF industry started in the mid sixties and there have been umpteen regulations since however the good MFS have continued to grow, take a look at the Long term chart of T.Rowe Price Group.

1 Like

Price drop is happening due to SEBI regulation related to expense ratio.

The new expense ratio slab is applicable for both direct and regular plans. Direct equity plans have lower expense ratios (1-1.5% - varies by AUM) compared to over 2% for regular plans due to the commission paid to the distributors. So the impact of this new regulation will depend on contribution of direct plan to the overall AUM higher the contribution of direct plans lower the impact. Below is Morningstar’s estimation of the impact based on AUM.

Recently during AMFI meet SEBI chairman spoke that he is worried about high concentration in MF industry where 4-5 players account for 70-80% of market. He said this should change. High expense ratio was also one of the point he spoke and he has already taken steps to rationalize it.

There will also be uncertainty of what steps SEBI would take to keep check on high concentration in these sector.

Disc - Not invested.

If you know the details, can you share the pre & post TER% for direct plans?

I don’t understand what can be done to reduce the concentration risk? Can they stop the company from taking a new client or pursuing an organic growth? This is not a license raj!

They can allow more players in AMC business, however, with this new cost structure why should one go to a new player managing say Rs 500 cr and charging 2% TER and with no practical history of returns or corporate governance vs a top player charging 1.05% TER

I think, they can just stop them from making an acquisition.

1 Like

Its not that far fetched to think Reliance industries may want Jio to enter mutual fund space.
Non compete between ADAG and RIL had been discarded some time back which allowed Jio to enter telecom.
In some ways it’s copying China tech playbook of Alibaba and Tencent. Both those companies have huge mutual funds. Tecent alone has close to 3.5 lakh crore AUM.