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PRE-IPO NOTE April 16, 2018
Exhibit 2: HDFC AMC is one of the largest AMCs in India Exhibit 3: HDFC AMC has high equity share in its AUM mix
MOFS, 1%
Equity, Gilt, 1%
Birla, 12%
UTI, 7% 30%
Reliance, Liquid,
SBI, 10% 11% 14%
Source: Ambit Capital Research, AMFI Source: Ambit Capital Research, AMFI
HDFC AMC’s key shareholders are HDFC Ltd (57% stake) and Standard Life
Investments (38%). About 1.7% stake is held by key management personnel and the
public owns ~3%. The proposed IPO seeks offer for sale of ~13% of existing
shareholding. According to media reports, valuations are expected to be ~`30bn,
implying 46x FY18 P/E.
sajid.merchant@ambit.co, ssmerchant@gmail.com
However, its 19% revenue CAGR was marginally lower than AUM growth as gross
yields declined by 5bps. Combined with a higher 24% CAGR in expenses, HDFC
AMC’s PAT CAGR was a much moderate 15%.
sajid.merchant@ambit.co, ssmerchant@gmail.com
Exhibit 8: HDFC AMC’s AUM posted 23% CAGR (FY13-17) Exhibit 9: However, gross and net yields declined…
0.70%
2,000 1,761
1,620 0.68% 0.68%
0.60% 0.53%
1,500 0.63%
1,134 0.59%
1,021 0.50%
1,000 0.54%
0.51%
0.40%
500
0.30%
- FY13 FY14 FY15 FY16 FY17 9MFY18
FY13 FY14 FY15 FY16 FY17 FY18 Net yields Gross yields
Source: Company, Ambit Capital research, AMFI Source: Company, Ambit Capital research, AMFI
Exhibit 10: …due to increased distribution cost in FY16-17 Exhibit 11: …leading to decline in profitability
0.10% 0.20%
FY13 FY14 FY15 FY16 FY17 9MFY18 FY13 FY14 FY15 FY16 FY17 9MFY18
Source: Company, Ambit Capital research
Source: Company, Ambit Capital research
sajid.merchant@ambit.co, ssmerchant@gmail.com
Exhibit 13: Market share in equity AUM of bank-backed Exhibit 14: Market share in total AUM of bank-backed
AMCs has increased AMCs has increased
20% 42% 39% 39% 40% 43% 46% 47% 49% 52% 53% 55% 20% 41% 40% 42% 44% 44% 47% 48% 49% 50%
52% 53%
0% 0%
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
Top 5 bank backed AMCs Top 5 non-bank backed AMCs Top 5 bank backed AMCs Top 5 non-bank backed AMCs
Source: AMFI, Ambit Capital research Source: AMFI, Ambit Capital research
HDFC AMC’s distribution channels are well-aligned on this metric. Larger national
distributors and banks generated ~45% of its equity-oriented AUM and ~14.6% was
through direct plans. Its biggest distribution partner is HDFC Bank, which accounts for
~9% of its overall AUM and ~13% of its equity AUM. Since HDFC Bank has already
tied up other AMCs, which contribute to ~62% of the AUM, we do not foresee any
incremental risks arising from this HDFC Bank tying up with further AMCs on the
inflows HDFC AMC gets.
sajid.merchant@ambit.co, ssmerchant@gmail.com
Exhibit 15: HDFC AMC’s equity distribution mix (FY17) Exhibit 16: HDFC AMC’s total AUM distribution mix (FY17)
Direct Direct
Plans, IFA, 28%
Plans,
15% 32%
IFA, 40%
Banks,
20%
Source: Ambit Capital research, Company Source: Ambit Capital research, Company
15,000
13,161
Distribution (own branches + branches of sponsor banks)
10,000
4,970 4,837
5,000
2,227
215 149
-
SBI AMC ICICI AMC HDFC AMC Motilal AMC Reliance UTI AMC
AMC
Source: Ambit Capital research, Company
Exhibit 18: HDFC AMC’s average ticket size of equity AUM Exhibit 19: Lower ticket investors have higher persistency
is much lower compared to others than HNIs
0.25 0.23 Average ticket size - equity (in ` mn) 60% % of AUM held more than 2 years
0.20
0.16 50%
0.14
0.15
0.11 0.10 40%
0.10 0.08 0.07
0.03 30%
0.05 52% 50%
0.00 20%
30%
Industry
Reliance AMC
Birla AMC
HDFC AMC
SBI AMC
ICICI AMC
Motilal AMC
UTI AMC
10%
0%
Retail SIP HNI
Source: AMFI, Ambit Capital research Source: AMFI, Ambit Capital research
sajid.merchant@ambit.co, ssmerchant@gmail.com
Moreover, HDFC AMC also has much lower customer complaints compared to other
AMCs (11% lower than peers), implying superior customer servicing.
Exhibit 20: HDFC AMC has better customer servicing
1,600
Complaints per mn folios
1,400 1,335
1,200
1,000 931
800
600 511 463 459
400
195 160
200 35
-
SBI AMC ICICI Industry Birla AMC HDFC Reliance UTI AMC Motilal
AMC AMC AMC AMC
Source: Ambit Capital research, AMFI
40%
53% 53% 53% 51% 47%
20% 41% 37%
0%
FY11 FY12 FY13 FY14 FY15 FY16 FY17
HDFC AMCs schemes have not underperformed its peers. As of Sept’17, schemes
rated 3 star and plus by Value Research comprise only 45% of AUM. This is much
lower than ICICI AMC and SBI AMC perhaps due to HDFC AMC’s steep market share
loss over FY13-18 despite excellent distribution channel and higher persistency.
sajid.merchant@ambit.co, ssmerchant@gmail.com
60% 54%
48% 45%
40%
23%
20%
0%
L&T
Motilal
Franklin
Sundaram
Reliance
UTI
HDFC
Kotak
Birla
IDFC
Axis
DSP BR
ICICI
SBI
Source: Ambit Capital research, Value Research, AMFI
Exhibit 23: Market share loss in equity schemes Exhibit 24: Market share loss in balanced funds
22% HDFC AMC's mkt. share in equity schemes HDFC AMC's mkt. share in balanced schemes
50%
20%
20% 48%
45% 47%
18%
44%
16% 17%
16% 16% 40%
41%
14%
14% 35%
12% 13% 35% 35% 35%
12% 12% 33%
10% 30%
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
Source: Ambit Capital research, AMFI Source: Ambit Capital research, AMFI
Key question: What measures is the AMC taking to improve performance to arrest
market share losses?
sajid.merchant@ambit.co, ssmerchant@gmail.com
Exhibit 26: Despite rising share of equity AUM… Exhibit 27: …HDFC AMC’s profitability has declined…
0.35%
Equity + balanced (% of AUM) PAT(% of AUM)
55%
0.30%
50%
45%
0.25%
40%
35% 0.20%
30%
25% 0.15%
20%
15% 0.10%
FY13 FY14 FY15 FY16 FY17 FY18 FY13 FY14 FY15 FY16 FY17
HDFC AMC ICICI AMC HDFC AMC ICICI AMC Reliance AMC
Source: Ambit Capital research, AMFI Source: Ambit Capital research, Company
sajid.merchant@ambit.co, ssmerchant@gmail.com
Exhibit 28: …due to HDFC AMC’s declining net yields… Exhibit 29: …led by increased distribution costs
0.45%
0.10%
0.40%
0.35% 0.05%
FY13 FY14 FY15 FY16 FY17 FY13 FY14 FY15 FY16 FY17
HDFC AMC ICICI AMC Reliance AMC HDFC AMC ICICI AMC Reliance AMC
Source: Ambit Capital research, Company Source: Ambit Capital research, Company
Much lower core profitability could be attributed to higher cash on HDFC AMC’s
balance sheet and high prepaid expenses. Treasury assets for HDFC AMC are higher
than peers at 87% of its networth and 0.4% of its AUM. Also, prepaid expenses are
pretty high at 22% of its PBT.
Exhibit 31: HDFC AMC has high share of treasury Exhibit 32: HDFC AMC has high share of treasury
investments as % of net worth investments as % of AUM
UTI
MOFS
Birla
ICICI
SBI
Relianc
UTI
MOFS
HDFC
Birla
SBI
ICICI
e
Source: Ambit Capital research, Company, *Treasury assets are short term Source: Ambit Capital research, Company, AMFI, *Treasury assets are short
investments, short term loans & advances and cash & cash equivalents term investments, short term loans & advances and cash & cash equivalents
sajid.merchant@ambit.co, ssmerchant@gmail.com
Exhibit 33: HDFC AMC’s prepaid expenses are much higher versus peers
39%
40% Prepaid (% of PBT)
35% 32%
30%
25% 22%
20%
15% 12%
11%
10%
5% 1% 1%
0%
Birla Sun Reliance HDFC ICICI MOFS SBI UTI
Life
sajid.merchant@ambit.co, ssmerchant@gmail.com
60%
B-15 presence (% of equity AUM)
49%
50%
39%
40% 34%
28% 27% 27%
30% 25%
20%
13%
10%
0%
UTI AMC SBI MF Reliance Industry HDFC Birla AMC ICICI AMC Motilal
AMC AMC AMC
more tax efficient with lower taxation rate and added indexation benefit. Moreover,
taxation of dividends of balanced funds also reduces the attractiveness of balanced
funds as tax-free monthly income products.
HDFC AMC is the market leader in the balanced fund category with 35% market
share and gets ~20% of its AUM from this segment. Moreover, this segment has
been the fastest growing segment with 51% AUM CAGR over FY13-18. In this regard,
what could be impact of slowing sales of balanced funds on growth and profitability?
Exhibit 35: HDFC AMC is the most dominant AMC in the Exhibit 36: Share of balanced funds is highest for HDFC
balanced fund category AMC
Reliance
HDFC
UTI
MOFS
Birla
SBI
ICICI
27%
ICICI
AMC, 16%
Source: AMFI, Ambit Capital research Source: AMFI, Ambit Capital research
ULIPs enjoy tax arbitrage: Post the FY18 budget, investing through ULIPs is more
tax efficient than mutual funds. Moreover, with commissions on ULIPs much higher
than mutual funds, there is a high risk that the market share gains of mutual funds
over ULIPs in equity investment management would stagnate. In this regard, how are
you engaging with regulators to bring down the tax arbitrage?
Thoughts on future regulations: Also, SEBI is likely to release a discussion paper
on total expense ratios (TER) soon, with customer protection as the primary objective.
What are your thoughts on this? What is your outlook on future regulations?
sajid.merchant@ambit.co, ssmerchant@gmail.com
R² = 26%
Relative valuations of global AMCs
25
SDR LN
BLK US
PE Ratio FY18
20
TROW US
15 EV US
BEN US
IVZ US LM US AMG US
10
-5% 5% 15% 25% 35% 45% 55%
EPS CAGR FY17-19
Source: Bloomberg, Ambit Capital research; size of the bubble indicates the AUM size; Note: BLK– Black Rock,
BEN – Franklin Resources, TROW – T. Rowe Price, LM – Legg Mason, EV- Eaton Vance, IVZ – Invesco, APAM –
Artisan Partners, AMG – Affiliated, SDR - Schroders.
sajid.merchant@ambit.co, ssmerchant@gmail.com
sajid.merchant@ambit.co, ssmerchant@gmail.com
0.05%
0.00%
Invesco
UTI MF
Reliance MF
Schroders
HDFC
Blackrock
Resources
T Rowe
ICICI MF
Birla
Franklin
Price
T Rowe Price
Reliance MF
HDFC
Schroders
Blackrock
ICICI MF
Birla
Franklin
Source: Company, Ambit Capital research; PAT CAGR of Indian AMCs is based on historical 2 year (FY15-17)
and for global AMCs is based on 2 year forward estimates provided by Bloomberg.
South Korea
China
US
France
UK
India
Australia
Canada
Germany
Brazil
Mexico
Switzerland
Taiwan
However, such high multiples on a more absolute basis will only be justified by
prospects of earnings growth, stronger than what HDFC AMC has delivered in the
best of the times (15% PAT CAGR over FY13-17). Materialization of such hopes
depends a lot on a combination of: i) equity market inflows sustaining; ii) sharp
reversal of market share losses led by turnaround in scheme performance; and ii)
steep improvement in profitability by lowering of distribution costs and reduction in
cash on the balance sheet.
sajid.merchant@ambit.co, ssmerchant@gmail.com
30
India
Gross domestic savings
Russia
25
(as % of GDP)
Bangladesh
Mexico
Sri Lanka
20
South Africa
Philippines
15 Brazil
Turkey
10
0 2000 4000 6000 8000 10000 12000 14000 16000
Source: World Bank, Ambit Capital research. Note: Data pertains to CY15
Exhibit 44: Whilst gross savings have improved in India Exhibit 45: …most of those have been channelised into
since FY2000… physical assets
30% 60%
26%
40%
25% 24%
20%
20% 0%
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
Source: The RBI, Ambit Capital research Source: The RBI, Ambit Capital research
We expect the share of financial savings in the savings pie to increase due to the
following factors:
Expectation of positive real interest rates: Given high inflation over FY09-13, the
real interest rates were negative for savers. However, the RBI’s target to moderate
inflation over the last three years has led to positive interest rates. With the RBI
continuing with its agenda of targeting inflation of 5%, we expect the trajectory of
real interest rates to remain positive. Hence, the trend of savings moving away from
physical to financial savings should continue.
sajid.merchant@ambit.co, ssmerchant@gmail.com
Exhibit 46: Financial savings are improving now that real rates are positive
55% 4.0%
50% 2.0%
45% 0.0%
-2.0%
40%
-4.0%
35%
-6.0%
30% -8.0%
25% -10.0%
20% -12.0%
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
Source: The RBI, Ambit Capital research; Real interest rates are calculated as the difference between CPI inflation
and AAA bond yields
Real estate has lost its sheen as an asset class: Real estate as an asset class has
underperformed in India over the last 2-3 years due to huge inventory pile-up and
slowdown in demand. Moreover, due to various regulatory changes such as Benami
Transactions Act, 2016 and capping of tax deduction of home loan interest on 2nd
properties, real estate as an asset class is likely to remain under pressure.
#2: MF’s increasing penetration Real estate as an asset class will
Of all the financial savings products, mutual funds are the most under-penetrated in remain under pressure due to
India. The level of mutual fund under-penetration in India can be gauged from the various regulatory changes.
fact that the number of outstanding mutual fund folios is 1/7th the number of life
insurance policies and 1/8th the number of savings accounts.
Exhibit 47: MFs are the most under-penetrated financial product At 1/7th the number of life
insurance policies, mutual funds
Penetration (% of population)
35% 31%
are the most under-penetrated
29% savings product in India.
30%
25%
20%
15%
10%
10%
5%
5% 2%
0%
Savings Deposits Life Insurance Term Deposits Mutual Fund Demat Accounts
Policies (retail)
Moreover, most of mutual fund business comes from the top-15 cities (~83% of total
AUM and ~73% of AUM of individual investors). This is also validated by mutual
funds having the least contribution of AUM from the financially most under-
penetrated 5 states – the share of financially under-penetrated states like Punjab,
Bihar, Odisha, Madhya Pradesh and Uttar Pradesh forms ~7% for the mutual fund
industry versus ~21% for insurance and ~36% for savings accounts.
sajid.merchant@ambit.co, ssmerchant@gmail.com
Exhibit 48: Top-15 cities account for 83% of individual AUM Exhibit 49: Concentration of MFs is lowest amongst the
bottom 5 states in terms of financial penetration
Source: AMFI, Ambit Capital research Source: AMFI, IRDA, Ambit Capital research; Note: data for five states
includes Punjab, Bihar, Odisha, Madhya Pradesh and Uttar Pradesh;
Insurance premium also includes group premium to make it consistent with
Bank and Mutual Fund data.
sajid.merchant@ambit.co, ssmerchant@gmail.com
Financials
Income statement
FY13 FY14 FY15 FY16 FY17 9MFY18
Total Income 7,840 9,031 10,643 14,943 15,879 13,167
- Revenue from operations 7,157 8,585 10,224 14,425 14,800 12,910
- Other income 683 446 418 518 1,079 257
Total expenditure 3,372 3,807 4,417 7,861 7,881 5,859
Employee costs 1,005 1,116 1,275 1,432 1,576 1,357
Admin costs 874 923 1,048 1,373 1,473 1,260
Marketing and publicity expenditure 1,328 1,683 1,992 4,945 4,713 3,156
Others 164 84 101 111 120 86
Profit before tax 4,468 5,225 6,226 7,082 7,998 7,308
Tax 1,281 1,647 2,071 2,304 2,496 2,352
PAT 3,187 3,578 4,155 4,779 5,502 4,956
Source: Ambit Capital research
Balance sheet
FY13 FY14 FY15 FY16 FY17 9MFY18
Networth 7,020 9,013 11,199 11,512 14,229 23,420
Borrowings - - - - - -
Total Sources of funds 7,020 9,013 11,199 11,512 14,229 23,420
Cash 9 10 26 10 13 21
Investments 6,646 7,366 6,505 9,858 12,367 21,221
Fixed Assets 187 278 338 312 312 370
Loan book 7,498 10,285 4,240 2,706 2,342 3,051
Net working capital (7,320) (8,926) 90 (1,373) (804) (1,243)
Total Application of funds 7,020 9,013 11,199 11,512 14,229 23,420
Source: Ambit Capital research
ROE Tree
FY13 FY14 FY15 FY16 FY17 9MFY18
Total revenues (% of AUM) 0.82% 0.84% 0.77% 0.88% 0.77% 0.67%
Distribution cost (% of AUM) 0.14% 0.16% 0.14% 0.29% 0.23% 0.16%
Net revenues (% of AUM) 0.68% 0.68% 0.63% 0.59% 0.54% 0.51%
Opex (ex-distribution) (% of AUM) 0.21% 0.20% 0.18% 0.17% 0.15% 0.14%
PBT (% of AUM) 0.46% 0.48% 0.45% 0.42% 0.39% 0.37%
Taxes (% of AUM) 0.13% 0.15% 0.15% 0.14% 0.12% 0.12%
PAT (% of AUM) 0.33% 0.33% 0.30% 0.28% 0.27% 0.25%
Core PAT (% of AUM) 0.28% 0.30% 0.28% 0.26% 0.23% 0.24%
AUM/equity (x) 147 134 136 149 161 140
ROE 48.9% 44.6% 41.1% 42.1% 42.8% 35.1%
Source: Ambit Capital research
Key Metrics
FY13 FY14 FY15 FY16 FY17 9MFY18
EBIT margin 57% 58% 58% 47% 50% 56%
PAT margin 41% 40% 39% 32% 35% 38%
ROE 48.9% 44.6% 41.1% 42.1% 42.8% 35.1%
BVPS (`) 35 45 55 57 71 114
Dil. EPS (`) 16 18 21 24 27 24
Source: Ambit Capital research
sajid.merchant@ambit.co, ssmerchant@gmail.com
sajid.merchant@ambit.co, ssmerchant@gmail.com
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