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HDFC AMC

NOT RATED
PRE-IPO NOTE April 16, 2018

The struggling champion IPO Snapshot


` mn, unless stated otherwise Amount
India’s most profitable large AMC, HDFC AMC, has superlative No. of shares for sale (mn) 25.5
distribution, investor persistency and cost efficiency (~7bps below Total no of shares (mn) 201.0
average). But the superior franchise is undergoing: i) market share loss
% of OFS 12.7%
coinciding with scheme underperformance; and ii) declining profitability
(PAT as % of AUM down 5bps) despite rising share of higher-yield equity Market cap (as per media reports) 300,000
assets (up 9ppt; FY13-17). Multiple recent (and forthcoming) regulatory Price/Share 1,493
changes targeting fees are unlikely to be favorable. Premium multiples 9MFY18 EPS 24.2
will be justifiable only if you hope for: i) equity inflows in MFs to sustain; FY18 EPS (annualised) 32.3
ii) turnaround in scheme performance to arrest market share losses; and
FY18 PE 46.3
iii) improvement in profitability by lowering of distribution costs and
reduction in cash on the balance sheet. IPO proceeds (` mn) 37,996
Source: Ambit Capital Research, Company,
Excellent distribution and persistency but under-performing on growth https://goo.gl/E6v3Wm
HDFC has the superlative distribution (HDFC Bank’s backing as the leading
distribution partner) and investor persistency (lower ticket size, superior
granularity and customer servicing). But it has seen steep market share losses Questions for management
especially in the high yielding equity segment (6ppt decline; FY13-18), which has What steps are being undertaken to
coincided with under-performance of its schemes (only ~45% of equity AUM is improve scheme performance?
rated 3 star and above vs over 75% for most peers, as per Value Research).
Why are prepaid expenses high
Most profitable AMC; but who is eating into your pie? (presumably upfront commissions)
HDFC AMC’s earnings CAGR of 15% over FY13-17 lagged robust AUM CAGR of despite strong distribution?
22% due to rising distribution costs; net yields declined 14bps despite 9ppt Can the balance sheet be more efficient
increase in share of higher yielding equity AUM. Nevertheless, superlative and drive further improvement in RoE?
operating efficiencies and higher share of equity AUM drive HDFC AMC’s best-
What would be the impact of recent
in-class reported profitability by a wide margin of ~10bps. However, core
regulatory changes and offsetting factors
profitability gap between peers is much lesser, at ~3bps, after adjusting for if any?
higher treasury income and un-expensed prepaid expenses.
Will the regulator kill the joyride?
Superlative fees earned by Indian AMCs could be jeopardized by recent
regulatory headwinds like: i) more stringent eligibility for higher fees on deeper
penetration; ii) stringent re-categorization of schemes driving more accurate
reporting of scheme alpha; and iii) reducing additional TER charged in lieu of exit
loads. Recent tax changes could also lower the appeal of balanced funds, where
the market leader HDFC has the highest exposure in its AUM (20%).
Implied valuations hinge on three hopes
HDFC AMC deserves premium multiples to peers due to superior distribution and
profitability. But lofty multiples (media reports suggest 46x TTM P/E) on absolute
basis will only be justified if you expect earnings growth stronger than what was
seen in the best of times (15% PAT CAGR when industry AUM posted 26% CAGR;
FY13-17). Materialization of such hopes depends a lot on a combination of: i)
sustenance of equity market inflows; ii) sharp reversal in 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.

Key financials Research Analysts


` mn FY13 FY14 FY15 FY16 FY17 Aadesh Mehta, CFA
Total revenues 7,840 9,031 10,643 14,943 15,879 +91 22 3043 3239
PAT 3,187 3,578 4,155 4,779 5,502 aadesh.mehta@ambit.co
PAT (% of AUM) 0.33% 0.33% 0.30% 0.28% 0.27% Pankaj Agarwal, CFA
PAT margins 41% 40% 39% 32% 35% +91 22 3043 3206
RoE 49% 45% 41% 42% 43% pankaj.agarwal@ambit.co
Source: Company, Ambit Capital Research
sajid.merchant@ambit.co, ssmerchant@gmail.com
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
HDFC AMC

India’s most profitable large AMC


HDFC Asset Management Company (HDFC AMC) is the asset management arm of
HDFC Ltd. Promoted by HDFC Ltd. in 1999, Standard Life Investments acquired 26%
stake in HDFC AMC in 2001. Through organic growth and acquisitions (Zurich India,
Morgan Stanley MF), it has grown to one of the top 2 AMCs in the country with `3tn
of assets under management, commanding a significant 14% market share in the
industry. HDFC AMC enjoys high share of high yielding equity assets in its AUM mix,
with equity and balanced funds together accounting for ~50% of AUM versus 39% for
the industry. Senior management of the firm has been broadly stable with Mr. Milind
Barve serving as MD since 2000 and Mr. Prashant Jain as CIO since 2004.

Exhibit 1: Evolution of HDFC AMC


Year Events
1999-2000 Incorporation and SEBI’s approval to manage mutual fund schemes.
2001 Standard Life Investments invests ` 566 mn for 26% stake.
2002 Crossed `100bn of AUM
2003 Acquired Zurich India AMC
2009 Crossed `1tn of AUM
2014 Acquired Morgan Stanley’s Indian Mutual Fund business.
2017 Crossed `3tn of AUM
Source: Company, Ambit Capital research

Exhibit 2: HDFC AMC is one of the largest AMCs in India Exhibit 3: HDFC AMC has high equity share in its AUM mix

Industry AUM market share HDFC AMC's AUM mix (Dec'17)


HDFC, Balanced,
14% 20%
Others,
30% Debt, 34%
Floating,
1%
ICICI, 14%

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.

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April 16, 2018 Ambit Capital Pvt. Ltd. Page 2


HDFC AMC

Exhibit 4: HDFC AMC’s shareholding Exhibit 5: IPO valuation snapshot


` mn, unless stated otherwise Amount
Current Shareholding Pattern
No. of shares for sale (mn) 25.5
Standard Total no of shares (mn) 201.0
Life
% of OFS 12.7%
Investments
, 38% Market cap (as per media reports) 300,000
Price/Share 1,493
HDFC, 57%
9MFY18 EPS 24.2
FY18 EPS (annualised) 32.3
KMP, 2% FY18 PE 46.3
Public, 3%
IPO proceeds (` mn) 37,996
Source: Company, Ambit Capital Research, DRHP Source: Company, Ambit Capital Research, https://goo.gl/E6v3Wm

Moderate PAT growth despite robust AUM growth


Strong pick-up in equity markets and increasing financialisation of savings (refer
Annexure-1) led to a strong 23% CAGR in HDFC AMC’s AUM over FY13-17; HDFC
AMC’s equity focused schemes posted a similar 22% CAGR in AUM.
Exhibit 6: Pick-up in industry AUM growth over FY11-18

23,000 21,360 50%


21,000
40%
19,000 17,546
17,000 30%
15,000
12,328 20%
13,000
10,828
11,000 10%
9,000 8,252
7,014 0%
5,923 5,872
7,000
5,000 -10%
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
Industry AUM (Rs bn) (LHS) Growth (% YoY) (RHS)

Source: Ambit Capital research, AMFI

Exhibit 7: Equity has outperformed various asset classes


Returns FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
1 year Sensex -25% 25% 8% 30% -5% 2% 20% 11%
1 year bond yield 6.5% 8.2% 8.0% 8.6% 8.4% 7.5% 6.6% 7.2%
1 year FD 6.0% 8.0% 6.5% 7.5% 7.3% 7.0% 6.8% 6.6%
Source: Ambit Capital research, BSE, Bloomberg

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%.

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April 16, 2018 Ambit Capital Pvt. Ltd. Page 3


HDFC AMC

Exhibit 8: HDFC AMC’s AUM posted 23% CAGR (FY13-17) Exhibit 9: However, gross and net yields declined…

3,500 1.00% HDFC AMC's yields


Total AUM (` bn)
3,008 0.88%
3,000 0.90% 0.84%
0.82%
0.77% 0.77%
2,500 2,375 0.80%

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

0.35% Distribution cost (% of AUM) PAT (% of AUM)


0.35%
0.33% 0.33%
0.29%
0.30%
0.30%
0.30%
0.25% 0.23% 0.28%
0.27%
0.20% 0.25%
0.16% 0.16% 0.25%
0.14% 0.14%
0.15%

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

Exhibit 12: HDFC AMC – RoE analysis


As a % of AUM FY11 FY12 FY13 FY14 FY15 FY16 FY17 9MFY18
Total revenues 0.78% 0.78% 0.82% 0.84% 0.77% 0.88% 0.77% 0.67%
Distribution cost 0.18% 0.14% 0.14% 0.16% 0.14% 0.29% 0.23% 0.16%
Net revenues 0.60% 0.64% 0.68% 0.68% 0.63% 0.59% 0.54% 0.51%
Opex (ex-distribution) 0.19% 0.21% 0.21% 0.20% 0.18% 0.17% 0.15% 0.14%
PBT 0.41% 0.43% 0.46% 0.48% 0.45% 0.42% 0.39% 0.37%
Taxes 0.13% 0.13% 0.13% 0.15% 0.15% 0.14% 0.12% 0.12%
PAT 0.28% 0.31% 0.33% 0.33% 0.30% 0.28% 0.27% 0.25%
AUM/equity (x) 184 158 147 134 136 149 161 140
ROE 51% 48% 49% 45% 41% 42% 43% 35%
EBIT margin 52% 55% 57% 58% 58% 47% 50% 56%
PAT margin 36% 39% 41% 40% 39% 32% 35% 38%
Source: Company, Ambit Capital Research

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April 16, 2018 Ambit Capital Pvt. Ltd. Page 4


HDFC AMC

Growth drivers: All well but performance


HDFC has the superlative distribution (backing of HDFC Bank as the leading
distribution partner) and investor persistency (lower ticket sizes, superior
granularity and customer servicing). Nevertheless, it has seen steep market
share losses predominantly in the high yielding equity segment (6ppt decline
over FY13-18), which has coincided with under-performance of its schemes
(~45% of its equity AUM is rated 3 star and above versus over 75% for most
peers). Key question: What steps are being undertaken for improving the
schemes’ performance?

Well-positioned for distributor consolidation


Mutual fund distribution is seeing a lot of consolidation, with many smaller
distributors exiting. Declining fees of smaller distributors (IFAs – independent financial
advisors) and value additions provided by larger distributors in the form of superior
research capabilities, back-office support etc., resulting in market share gain for
larger distributors like banks and national distributors. Moreover, with the cap on
upfront fees at 1% continuing to exert pressure on the profitability of IFAs, we expect
the AMCs more reliant on banks and national distributors to gain further market
share. Over FY13-17, the share of IFAs in assets under advise (AUA) has declined
from 50% to 40%, helping AMCs backed by banks gain market share from those not
backed by banks; the top-5 AMCs backed by banks gained market share from top-5
AMCs not backed by banks by 12-13ppt over the past decade.

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

Equity AUM share Total AUM share


100% 100%
80% 80%
60% 60%
40% 40%

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.

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April 16, 2018 Ambit Capital Pvt. Ltd. Page 5


HDFC AMC

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%

Banks, ND, 24%


ND, 25% 17%

Source: Ambit Capital research, Company Source: Ambit Capital research, Company

Exhibit 17: HDFC AMC's distribution reach is amongst the best

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

Expect high persistency in HDFC AMC’s assets


Moreover, HDFC AMC also scores better on persistency compared to other AMCs due
to its superior granularity and customer servicing. Whilst the share of retail AUM in
HDFC AMC‘s equity mix of ~45% is marginally lower than the industry average of
47%, its ticket sizes are ~27% lower than the industry. Lower ticket size not only
ensures higher granularity but also drives higher persistency – 2-year persistency is at
~50% for the lower ticket retail and SIP segment versus ~30% for the HNI segment.

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
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April 16, 2018 Ambit Capital Pvt. Ltd. Page 6


HDFC AMC

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

Market share loss coinciding with under-performing


schemes
Information disintermediation by mutual fund research houses like CRISIL,
Morningstar and Value Research has made comparing the performance of funds and
schemes easier. This combined with investors (especially HNIs) preferring to invest
through the direct route has led to performance becoming increasingly important to
garner more inflows rather than distribution push. Data indicates that within the
top10 AMCs, those having 60%+ of equity AUM in 3 star or higher rated schemes
have gained market share from AMCs wherein such schemes contribute less than
60% of AUM. As highlighted in our thematic, we expect high performing AMCs that
deliver alpha to their investors to gain market share.
Exhibit 21: Underperformers are losing market share
Equity AUM Mkt share %
100%

80% 47% 47% 47% 49% 53% 59% 63%


60%

40%
53% 53% 53% 51% 47%
20% 41% 37%

0%
FY11 FY12 FY13 FY14 FY15 FY16 FY17

AMCs with underperforming schemes* AMCs with outperforming schemes*


Source: Value Research, AMFI, Ambit Capital Research * AMCs with outperforming (underperforming) schemes
defined as those with more (less) than 60% of equity AUM in 3 star and above rated schemes by Value Research

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.

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April 16, 2018 Ambit Capital Pvt. Ltd. Page 7


HDFC AMC

Exhibit 22: HDFC AMC’s schemes have underperformed

% of equity AUM rated 3 star & higher


97% 96% 95%
100% 91% 88%
87% 84%
79% 77%
80% 68%

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?

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April 16, 2018 Ambit Capital Pvt. Ltd. Page 8


HDFC AMC

Who is eating into your pie?


HDFC AMC’s earnings growth at 15% CAGR over FY13-17 has lagged robust
22% AUM CAGR due to rising distribution costs – net yields declined by 14bps
despite 9ppt increase in share of higher yielding equity AUM. Nevertheless,
superlative operating efficiencies drive HDFC AMC’s best-in-class reported
profitability by a wide margin. However, core profitability gap between peers
is much lesser post adjusting for higher treasury income and un-expensed
prepaid expenses. Key question: Can balance sheet be more efficient and
drive further improvement in RoE? Why such high prepaid expenses
(presumably upfront commissions) when you have such strong distribution?

Best-in-class reported profitability


HDFC AMC has the best reported profitability amongst peers due to operating
efficiencies and cost discipline. Its ex-distribution operating cost is the lowest amongst
peers due to the scale of the entity.
Exhibit 25: HDFC AMC has superior reported PAT (% of AUM) compared to other AMCs
FY17 Birla AMC HDFC AMC Reliance AMC ICICI AMC UTI AMC Motilal AMC SBI AMC
Total revenues 0.57% 0.77% 0.74% 0.54% 0.62% 2.25% 0.56%
Distribution cost 0.18% 0.23% 0.15% 0.10% 0.06% 0.00% 0.10%
Net revenues 0.38% 0.54% 0.59% 0.45% 0.57% 2.25% 0.46%
Opex (ex-distribution) 0.21% 0.15% 0.33% 0.18% 0.32% 1.75% 0.24%
PBT 0.20% 0.39% 0.34% 0.28% 0.33% 0.51% 0.25%
Taxes 0.07% 0.12% 0.10% 0.10% 0.09% 0.17% 0.08%
ROAUM 0.13% 0.27% 0.24% 0.19% 0.24% 0.33% 0.17%
AUM/equity (x) 182 161 96 412 72 178 188
ROE 24% 43% 23% 77% 17% 59% 32%
EBIT margin 34% 50% 42% 50% 47% 22% 42%
PAT margin 22% 35% 29% 33% 34% 15% 29%
Source: Company, Ambit Capital Research

But profitability declined despite rising equity AUM


Whilst rising share of equity assets in AUM typically leads to higher profitability for
AMCs owing to higher yields, we note that HDFC AMC’s profitability (PAT % of AUM)
declined over FY13-17 despite rising mix of higher yielding equity AUM. Declining
profitability could be driven by higher distribution costs which offset the impact of
increasing yields from rising share of higher yielding equity assets.

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

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HDFC AMC

Exhibit 28: …due to HDFC AMC’s declining net yields… Exhibit 29: …led by increased distribution costs

0.75% Net yields (% of AUM) 0.30% Dist cost (% of AUM)


0.70%
0.25%
0.65%
0.60% 0.20%
0.55%
0.50% 0.15%

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

Core earnings is much lower


Whilst HDFC AMC enjoys the best reported profitability amongst its peers by a wide
margin, we note that its core profitability would have been superior to peers only
marginally. This is due to combination of high share of treasury revenues (~13% of
PBT) and un-expensed expenses (prepaid expenses are ~22% of PBT).
Exhibit 30: HDFC AMC’s core PBT is only marginally superior to other AMCs
Particulars (FY17) MOFS AMC HDFC AMC UTI AMC ICICI AMC SBI AMC Rel. AMC Birla AMC
Reported PBT 0.51% 0.39% 0.33% 0.28% 0.25% 0.34% 0.25%
Other/treasury income 0.01% 0.05% 0.08% 0.02% 0.03% 0.08% 0.03%
Prepaid expenses 0.05% 0.09% 0.00% 0.03% 0.00% 0.11% 0.10%
Core PBT 0.44% 0.25% 0.24% 0.23% 0.21% 0.16% 0.12%
Source: Company, Ambit Capital

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

100% Treasury Assets* (% of NW) 0.6% Treasury Assets* (% of AUM)


87%
76% 0.5%
80% 0.5%
67% 0.4% 0.4%
63% 60% 0.4%
0.4%
60% 50% 0.3%
36% 0.3%
40% 0.2%
0.2% 0.2%
20%
0.1%
0%
0.0%
Reliance
HDFC

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

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HDFC AMC

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

Source: Ambit Capital research, Company

In this regard, it would be worthy to know:


 What is the rationale behind high treasury assets on the balance sheet versus
others?
 What could be the reason for such high prepaid costs despite having a much
superior distribution channel?

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April 16, 2018 Ambit Capital Pvt. Ltd. Page 11


HDFC AMC

Regulatory impact is unclear


Superlative fees earned by Indian AMCs could be jeopardized by recent
regulatory headwinds such as: i) more stringent eligibility for higher fees on
deeper penetration; ii) stringent re-categorization of schemes driving more
accurate reporting of scheme alpha; and iii) reducing additional TER charged
in lieu of exit loads. Also, recent tax changes could lower the appeal of
balanced funds, where HDFC is a market leader (35% market share) and has
the highest exposure in its AUM (20%). Key question should be on the impact
of such regulatory changes and offsetting factors if any.
More stringent rules for incentivizing geographical penetration: Till Feb’18,
SEBI allowed AMCs to charge additional 30bps of commissions to the investors in
schemes where the higher of 30% of inflows and 15% of average AUM from B-15
(beyond the top-15 cities). However, w.e.f. April’18, such commissions will be
allowed to B-30 cities rather than B-15 cities. Consequently, AMCs wherein B-30 is
lesser than the above prescribed metric could see pressure on their yields to the
extent of ~30bps in the respective schemes. In this context, what could be the impact
on HDFC AMC due to this regulatory change?
Exhibit 34: HDFC AMC’s share of B-15 in equity AUM is broadly in line with peers

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

Source: Ambit Capital research, AMFI

Re-categorization of schemes: SEBI recently asked AMCs to re-categorise their


existing and new schemes under 10 equity, 16 debt and 6 hybrid fund categories. To
follow the new norms, AMCs will have to either merge or change the fundamental
attributes of their schemes. As highlighted in our note “Can the regulator derail the
joyride?” (dated December 14, 2017), such a move would result in more accurate
benchmarking of scheme performance as definitions of MF categories are now more
objective and tighter on basis of market capitalization. With such move likely to
diminish the “reported alpha”, the regulator SEBI is highly critical of the high fees
charged by Indian AMCs (the highest globally, at 1.7-2.2%).
In this regard, how many schemes do you have and how will you move towards
categorizing them? How does this impact your performance reporting and
marketability of schemes?
Reducing additional TER in lieu of exit loads: Since Oct’12, SEBI allowed AMCs to
charge additional TER of 20bps in lieu of exit loads but required them credit back the
exit load to the respective schemes. However, in Mar’18 SEBI reduced this maximum
additional expense ratio in lieu of exit loads from 20bps to 5bps. In light of this, how
would the yields of HDFC AMC evolve?
Headwinds to balanced funds: Until Feb’18, balanced funds were favoured by
investors due to two key reasons: i) favourable taxation of the debt component – tax
free capital gains as in equity versus 10% taxation; and ii) mis-selling by distributors
(https://goo.gl/uoR42w; https://goo.gl/cxgXCC; https://goo.gl/abndof) by
misrepresenting balanced funds as monthly tax-free income products under monthly
dividends option. Given that the FY18 Union Budget removed the exemption on
capital gains for equity, balanced
sajid.merchant@ambit.co, funds have lost some appeal as debt funds are now
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April 16, 2018 Ambit Capital Pvt. Ltd. Page 12


HDFC 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

Market share - Balanced funds 25%


Balanced funds (% of AUM)
Birla 20%
Sunlife 20%
AMC, 10%
SBI AMC, 15%
HDFC
12% AMC, 35% 10% 9%
10%
7%
5%
5% 4%
0%
0%
Others,

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?

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April 16, 2018 Ambit Capital Pvt. Ltd. Page 13


HDFC AMC

Valuations imply hopes of strong earnings


Our 17 Oct 2017 thematic titled “Can all of them outperform?” argued that
AMCs deserve premium multiples only if strong distribution marries befitting
performance and robust profitability. Whilst HDFC AMC deserves premium
multiples to peers (currently at 46x TTM P/E) due to superior distribution and
profitability, the significant premium will only be justified by a combination
of: i) 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 of cash on the balance sheet.

Globally, sector is valued at 13-14x 1-year forward P/E


AMCs are best valued on DCF rather than the conventional ‘percentage of AUM
approach since the latter ignores the profitability of AUM. We see that, globally,
AMCs are typically valued at 16-18x 1-year forward earnings for expected average
earnings CAGR of 15-20%.
Exhibit 37: Relative valuations of AMCs across the globe

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.

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April 16, 2018 Ambit Capital Pvt. Ltd. Page 14


HDFC AMC

Exhibit 38: Relative valuations of global AMCs


P/E (x) P/B (x) ROE (%) ROA (%) EPS CAGR
Company Name
17 18E 19E 17 18E 19E 17 18E 19E 17 18E 19E 17-19E
United States
Black Rock 23 19 17 2.6 2.5 2.4 16% 14% 15% 2% 3% 2% 1%
Franklin Resources 15 11 10 2.0 1.6 1.5 14% 14% 15% 10% 15% 11% 4%
T. Rowe Price 18 15 14 4.4 4.2 3.7 27% 29% 37% 22% 23% 37% 11%
Invesco 16 10 9 1.7 1.3 1.2 14% 14% 14% 4% 4% 6% 9%
Affiliated 24 10 9 3.1 2.5 2.4 19% 20% 21% 8% 9% 9% 23%
Eaton Vance 21 17 14 5.9 6.0 5.9 33% 46% 39% 14% 26% 18% 23%
Legg Mason 20 11 10 0.9 0.8 0.8 5% 7% 8% 3% 0% 0% 31%
Janus Capital 15 NA NA 1.5 NA NA 9% 9% 9% 5% 3% NA 13%
Janus Henderson Group 10 11 11 1.6 1.3 1.2 20% 12% 12% 14% 8% 9% -13%
Alliance Bernstein 10 11 10 1.6 NA NA 13% 5% 6% 13% 2% 3% 10%
Artisan Partners 18 11 10 17.3 NA NA 22% 186% NA 6% 0% 0% 108%
Waddell & Reed 12 9 10 2.1 1.9 1.8 16% 20% 18% 10% NA NA 13%
Wisdom Tree 61 24 20 8.9 10.4 10.4 14% 26% 29% 11% NA NA 50%
Cohen & Steers 21 16 15 7.9 NA NA 34% 41% 37% 25% 28% 27% 15%
Gamco Investors 10 NA NA NA NA NA NA NA NA 56% NA NA NA
Pzena Investment NA 12 10 22.7 NA NA 23% NA NA 4% NA NA 59%
Manning & Napier 3 13 16 0.3 NA NA 2% NA NA 2% NA NA -5%
Average 19 13 12 5.3 3.3 3.1 18% 32% 20% 12% 10% 11%
Europe
Schroders 16 14 14 2.9 2.4 2.2 18% 17% 17% 3% DNA DNA 4%
Investec 12 11 10 1.3 1.3 1.2 11% 12% 12% 1% 1% DNA 10%
Aberdeen 25 NA NA 2.5 NA NA 9% 13% 15% 4% 5% 5% 38%
Ashmore Group 14 19 17 3.4 3.6 3.3 24% 20% DNA 19% DNA DNA -4%
Henderson Group 10 NA NA 1.6 NA NA 20% 12% DNA 14% DNA DNA -17%
Jupiter Fund 18 13 12 4.5 3.3 3.2 25% 24% 25% 18% DNA DNA 5%
GAM Holdings 20 14 13 1.3 1.3 1.2 7% 9% 10% 5% DNA DNA 28%
Rathbone Bros. 28 17 15 3.6 3.1 2.8 14% 19% 19% 2% 3% 3% 30%
Average 18 15 13 2.6 2.5 2.3 16% 16% 16% 8% 3% 4% NA
Australia
Magellan 25 17 15 11.1 7.3 6.4 49% 45% 50% 44% 43% DNA 15%
Henderson 10 NA NA 1.6 NA NA 20% 12% 12% 14% 8% DNA NA
BT Investments 20 15 14 3.8 3.6 3.5 19% 24% 26% 16% 18% DNA 12%
Platinum 15 17 16 8.1 9.1 8.8 55% 55% 54% 50% 58% DNA 3%
Perpetual 19 14 14 4.0 3.2 3.1 22% 22% 22% 12% 16% DNA 3%
Average 18 16 15 5.7 5.8 5.4 33% 31% 33% 27% 28% NA NA
World average 18.0 14.7 13.5 4.5 3.8 3.6 22% 26% 23% 16% 14% 8%
Source: Ambit Capital research, Bloomberg

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April 16, 2018 Ambit Capital Pvt. Ltd. Page 15


HDFC AMC

Indian AMCs deserve premium


As discussed in our 17 Oct 2017 thematic, Indian AMCs not only enjoy superior
growth prospects but also superior profitability. Over FY15-17, most of the top Indian
AMCs grew by 10-38% CAGR versus a broad range of 10-23% expected to be
delivered by global peers over FY17-19E.
Exhibit 39: PAT (% of AUM) is higher for Indian AMCs

0.28% 0.27% PAT (% of AUM)


0.30%
0.24% 0.23%
0.25% 0.21%
0.20%
0.15% 0.14% 0.14%
0.15% 0.12%
0.10% 0.08%

0.05%
0.00%

Invesco
UTI MF
Reliance MF

Schroders
HDFC

Blackrock
Resources

T Rowe
ICICI MF

Birla
Franklin

Price

Source: Company, Ambit Capital research

Exhibit 40: PAT growth is also higher for Indian AMCs


40% 38% 2yr PAT CAGR*
35%
30% 28%
25%
20%
20% 15%
15% 11% 10% 9%
10% 6%
5% 1% 1%
0%
Invesco
UTI MF

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.

Exhibit 41: Low penetration implies higher growth opportunity

MF AUM to GDP (2015)


114%
120%
100% 91%
80% 70% 63%
53% 51% 49%
60%
38%
40% 30% 23%
20% 11% 11% 9% 7%
0%
Japan

South Korea

China
US

France

UK

India
Australia

Canada

Germany

Brazil

Mexico
Switzerland

Taiwan

Source: EFAMA, Oxford Economics, Ambit Capital research


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April 16, 2018 Ambit Capital Pvt. Ltd. Page 16


HDFC AMC

Relative versus absolute valuations: A conundrum


Whilst Indian AMCs enjoy superior profitability and growth prospects, they should
deserve much higher multiples amongst each other only if they have strong
distribution and performance track records. Media reports suggest HDFC AMC is
commanding 46x TTM P/E, which is at ~31% premium to its immediate comparable
peer Reliance AMC. Such premium could be justified on a relative basis owing to the
latter’s superior distribution and profitability.

Exhibit 42: Relative valuations of peers


Mcap P/B P/E EPS CAGR ROA ROE
US$bn FY18E FY19E FY18E FY19E FY17-19E FY18E FY19E FY18E FY19E
Stock-brokers/distributors
Motilal Oswal* 2.3 6.7 5.1 26 19 33% 21% 31% 26% 28%
ICICI Securities 2.0 21.3 NA 25 NA NA 23% NA 85% NA
India Infoline 4.1 4.9 4.1 27 22 26% 3% 3% 21% 21%
Geojit Financial Services 0.3 4.9 4.5 35 27 33% NA NA 16% 19%
AMCs
Reliance Nippon AMC 2.4 5.9 5.4 30 24 23% 18% 19% 22% 23%
HDFC AMC 4.6 16.5 NA 46.3 NA NA 35%* NA 35%* NA
Source: Bloomberg, Ambit Capital Research; *Based on extrapolating 9MFY18 figures.

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.

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April 16, 2018 Ambit Capital Pvt. Ltd. Page 17


HDFC AMC

Appendix 1: Growth prospects


AMCs enjoy strong growth prospects not only due to increasing
financialisation of savings but also due to rising share of mutual funds in the
financial savings pie. Positive real interest rates and muted returns from real
estate would increasingly financialise savings in India. Moreover, share of
mutual funds will significantly increase in the financial savings pie due to
increasing penetration (which is 1/7th of insurance). Penetration will improve
as the deepening reach of larger distributors coincides with regulatory thrust
to increase mutual fund penetration; B-15 AUM has increased from 11% to
17% over FY11-17.
#1: Increasing financialisation
India has the highest savings rate of 30% among developing nations with lower per Whilst India has the highest savings
capita income versus peers. However, the high inflation environment over the past rate of 30% high share of that has
decade (average inflation of 6-7%) and a large black economy (estimated to be been channelized in real estate
`30tn) meant that physical savings (gold and real estate) dominated savings. and gold.
Exhibit 43: Higher savings rate despite low per capita income

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

Per capita income (in current USD)

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

40% as a % of household savings


Gross savings as a % of GDP
Financial Savings Physical Savings
100%
35%
35% 34%
32% 32% 32% 32% 80%

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.
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April 16, 2018 Ambit Capital Pvt. Ltd. Page 18


HDFC AMC

Exhibit 46: Financial savings are improving now that real rates are positive

Financial Savings Real Interest rates (RHS)

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)

Source: IRDA, RBI, AMFI, Ambit Capital research

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.

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April 16, 2018 Ambit Capital Pvt. Ltd. Page 19


HDFC AMC

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

% of total AUM Share of bottom 5 states in AUM


40% 36%
Beyond 35%
top 15 30%
cities, 25% 21%
17%
20%
15%
10% 7%
Top 15
cities, 83% 5%
0%
Savings Individual Mutual Funds
Insurance (retail)

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.

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April 16, 2018 Ambit Capital Pvt. Ltd. Page 20


HDFC AMC

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
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April 16, 2018 Ambit Capital Pvt. Ltd. Page 21


HDFC AMC

Institutional Equities Team


Saurabh Mukherjea, CFA CEO, Ambit Capital Private Limited (022) 30433174 saurabh.mukherjea@ambit.co
Pramod Gubbi, CFA Head of Equities (022) 30433124 pramod.gubbi@ambit.co
Research Analysts
Name Industry Sectors Desk-Phone E-mail
Nitin Bhasin - Head of Research E&C / Infra / Cement / Home Building (022) 30433241 nitin.bhasin@ambit.co
Aadesh Mehta, CFA Banking / Financial Services (022) 30433239 aadesh.mehta@ambit.co
Abhishek Ranganathan, CFA Retail / Consumer Discretionary (022) 30433085 abhishek.r@ambit.co
Amandeep Singh Grover Small Caps (022) 30433082 amandeep.grover@ambit.co
Anuj Bansal Consumer (022) 30433122 anuj.bansal@ambit.co
Archit Varshney Consumer (022) 30433275 archit.varshney@ambit.co
Ariha Doshi Consumer (022) 30433228 ariha.doshi@ambit.co
Basudeb Banerjee Automobiles / Auto Ancillaries (022) 30433141 basudeb.banerjee@ambit.co
Bhargav Buddhadev Power Utilities / Capital Goods / Small Caps (022) 30433252 bhargav.buddhadev@ambit.co
Deep Shah Media / Telecom (022) 30433064 deep.shah@ambit.co
Gaurav Khandelwal, CFA Oil & Gas (022) 30433132 gaurav.khandelwal@ambit.co
Gaurav Kochar Banking / Financial Services (022) 30433246 gaurav.kochar@ambit.co
Girisha Saraf Home Building (022) 30433211 girisha.saraf@ambit.co
Karan Khanna, CFA Strategy / Small Caps (022) 30433251 karan.khanna@ambit.co
Kushagra Bhattar Agri Inputs / Chemicals (022) 30433062 kushagra.bhattar@ambit.co
Nikhil Mathur Small Caps (022) 30433220 nikhil.mathur@ambit.co
Mayank Porwal Retail / Consumer Discretionary (022) 30433214 mayank.porwal@ambit.co
Pankaj Agarwal, CFA Banking / Financial Services (022) 30433206 pankaj.agarwal@ambit.co
Prateek Maheshwari Cement / E&C / Infrastructure (022) 30433234 prateek.maheshwari@ambit.co
Prashant Mittal, CFA Strategy / Derivatives (022) 30433218 prashant.mittal@ambit.co
Rahil Shah Banking / Financial Services (022) 30433217 rahil.shah@ambit.co
Rasik Pandita Healthcare (022) 30433293 rasik.pandita@ambit.co
Ravi Singh Banking / Financial Services (022) 30433181 ravi.singh@ambit.co
Ritesh Gupta, CFA Oil & Gas / Agri Inputs / Chemicals (022) 30433242 ritesh.gupta@ambit.co
Ritika Mankar Mukherjee, CFA Economy / Strategy (022) 30433175 ritika.mankar@ambit.co
Ronil Dalal, CFA Conglomerates (022) 30433278 ronil.dalal@ambit.co
Sudheer Guntupalli Technology / Staffing (022) 30433203 sudheer.guntupalli@ambit.co
Sumit Shekhar Economy / Strategy (022) 30433229 sumit.shekhar@ambit.co
Utsav Mehta, CFA E&C / Infrastructure (022) 30433209 utsav.mehta@ambit.co
Vivekanand Subbaraman, CFA Media / Telecom (022) 30433261 vivekanand.s@ambit.co
Sales
Name Regions Desk-Phone E-mail
Sarojini Ramachandran - Head of Sales UK +44 (0) 20 7886 2740 sarojini.r@ambit.co
Anmol Arya India (022) 30433079 anmol.arya@ambit.co
Dharmen Shah India / Asia (022) 30433289 dharmen.shah@ambit.co
Dipti Mehta India (022) 30433053 dipti.mehta@ambit.co
Nityam Shah, CFA Europe (022) 30433259 nityam.shah@ambit.co
Punitraj Mehra, CFA India / Asia (022) 30433198 punitraj.mehra@ambit.co
Shaleen Silori India (022) 30433256 shaleen.silori@ambit.co
Singapore
Praveena Pattabiraman Singapore +65 6536 0481 praveena.pattabiraman@ambit.co
Shashank Abhisheik Singapore +65 6536 1935 shashankabhisheik@ambitpte.com
USA / Canada
Hitakshi Mehra Americas +1(646) 793 6751 hitakshi.mehra@ambitamerica.co
Achint Bhagat, CFA Americas +1(646) 793 6752 achint.bhagat@ambitamerica.co
Production
Sajid Merchant Production (022) 30433247 sajid.merchant@ambit.co
Sharoz G Hussain Production (022) 30433183 sharoz.hussain@ambit.co
Jestin George Editor (022) 30433272 jestin.george@ambit.co
Richard Mugutmal Editor (022) 30433273 richard.mugutmal@ambit.co
Nikhil Pillai Database (022) 30433265 nikhil.pillai@ambit.co

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HDFC AMC

Explanation of Investment Rating


Investment Rating Expected return (over 12-month)
BUY >10%
SELL <10%
NO STANCE We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation
UNDER REVIEW We will revisit our recommendation, valuation and estimates on the stock following recent events
NOT RATED We do not have any forward looking estimates, valuation or recommendation for the stock
POSITIVE We have a positive view on the sector and most of stocks under our coverage in the sector are BUYs
NEGATIVE We have a negative view on the sector and most of stocks under our coverage in the sector are SELLs
* In case the recommendation given by the Research Analyst becomes inconsistent with the rating legend, the Research Analyst shall within 28 days of the inconsistency, take appropriate measures (like
change in stance/estimates) to make the recommendation consistent with the rating legend.
Disclaimer
This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Ambit Capital Private Ltd. AMBIT Capital Private Ltd. research is disseminated and available
primarily electronically, and, in some cases, in printed form.
Additional information on recommended securities is available on request.

Disclaimer
1. AMBIT Capital Private Limited (“AMBIT Capital”) and its affiliates are a full service, integrated investment banking, investment advisory and brokerage group. AMBIT Capital is a Stock Broker, Portfolio
Manager, Merchant Banker, Research Analyst and Depository Participant registered with Securities and Exchange Board of India Limited (SEBI) and is regulated by SEBI.
2. AMBIT Capital makes best endeavours to ensure that the research analyst(s) use current, reliable, comprehensive information and obtain such information from sources which the analyst(s) believes
to be reliable. However, such information has not been independently verified by AMBIT Capital and/or the analyst(s) and no representation or warranty, express or implied, is made as to the
accuracy or completeness of any information obtained from third parties. The information, opinions, views expressed in this Research Report are those of the research analyst as at the date of this
Research Report which are subject to change and do not represent to be an authority on the subject. AMBIT Capital and its affiliates/ group entities may or may not subscribe to any and/ or all the
views expressed herein and the statements made herein by the research analyst may differ from or be contrary to views held by other parties within AMBIT group.
3. This Research Report should be read and relied upon at the sole discretion and risk of the recipient. If you are dissatisfied with the contents of this complimentary Research Report or with the terms of
this Disclaimer, your sole and exclusive remedy is to stop using this Research Report and AMBIT Capital or its affiliates shall not be responsible and/ or liable for any direct/consequential loss
howsoever directly or indirectly, from any use of this Research Report.
4. If this Research Report is received by any client of AMBIT Capital or its affiliate, the relationship of AMBIT Capital/its affiliate with such client will continue to be governed by the terms and conditions
in place between AMBIT Capital/ such affiliate and the client.
5. This Research Report is issued for information only and the 'Buy', 'Sell', or ‘Other Recommendation’ made in this Research Report as such should not be construed as an investment advice to any
recipient to acquire, subscribe, purchase, sell, dispose of, retain any securities and should not be intended or treated as a substitute for necessary review or validation or any professional advice.
Recipients should consider this Research Report as only a single factor in making any investment decisions. This Research Report is not an offer to sell or the solicitation of an offer to purchase or
subscribe for any investment or as an official endorsement of any investment.
6. This Research Report is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied in
whole or in part, for any purpose. Neither this Research Report nor any copy of it may be taken or transmitted or distributed, directly or indirectly within India or into any other country including
United States (to US Persons), Canada or Japan or to any resident thereof. The distribution of this Research Report in other jurisdictions may be strictly restricted and/ or prohibited by law or contract,
and persons into whose possession this Research Report comes should inform themselves about such restriction and/ or prohibition, and observe any such restrictions and/ or prohibition.
7. Ambit Capital Private Limited is registered (SEBI Reg. No.- INH000000313) as a Research Entity under the SEBI (Research Analysts) Regulations, 2014.

Conflict of Interests
8. In the normal course of AMBIT Capital’s or its affiliates’/group entities’ business, circumstances may arise that could result in the interests of AMBIT Capital or other entities in the AMBIT group
conflicting with the interests of clients or one client’s interests conflicting with the interest of another client. AMBIT Capital makes best efforts to ensure that conflicts are identified and managed and
that clients’ interests are protected. AMBIT Capital has policies and procedures in place to control the flow and use of non-public, price sensitive information and employees’ personal account
trading. Where appropriate and reasonably achievable, AMBIT Capital segregates the activities of staff working in areas where conflicts of interest may arise and maintains an arms – length distance
from such areas, at all times. However, clients/potential clients of AMBIT Capital should be aware of these possible conflicts of interests and should make informed decisions in relation to AMBIT
Capital’s services.
9. AMBIT Capital and/or its affiliates may from time to time have or solicit investment banking, investment advisory and other business relationships with companies covered in this Research Report and
may receive compensation for the same.
10. The AMBIT group may, from time to time enter into transactions in the securities, or other derivatives based thereon, of companies mentioned herein, and may also take position(s) in accordance
with its own investment strategy and rationale, that may not always be in accordance with the recommendations made in this Research Report and may differ from or be contrary to the
recommendations made in this Research Report.

Additional Disclaimer for Canadian Persons


11. AMBIT Capital is not registered in the Province of Ontario and /or Province of Québec to trade in securities and/or to provide advice with respect to securities.
12. AMBIT Capital's head office or principal place of business is located in India.
13. All or substantially all of AMBIT Capital's assets may be situated outside of Canada.
14. It may be difficult for enforcing legal rights against AMBIT Capital because of the above.
15. Name and address of AMBIT Capital's agent for service of process in the Province of Ontario is: Torys LLP, 79 Wellington St. W., 30th Floor, Box 270, TD South Tower, Toronto, Ontario M5K 1N2
Canada.
16. Name and address of AMBIT Capital's agent for service of process in the Province of Québec is Torys Law Firm LLP, 1 Place Ville Marie, Suite 1919 Montréal, Québec H3B 2C3 Canada.

Additional Disclaimer for Singapore Persons


17. This Report is prepared and distributed by Ambit Capital Private Limited and distributed as per the approved arrangement under Paragraph 9 of Third Schedule of Securities and Futures Act (CAP
289) and Paragraph 11 of the First Schedule to the Financial Advisors Act (CAP 110) provided to Ambit Singapore Pte. Limited by Monetary Authority of Singapore.
18. This Report is only available to persons in Singapore who are institutional investors (as defined in section 4A of the Securities and Futures Act (Cap. 289) of Singapore (the “SFA”).” Accordingly, if a
Singapore Person is not or ceases to be such an institutional investor, such Singapore Person must immediately discontinue any use of this Report and inform Ambit Singapore Pte. Limited.

Additional Disclaimer for UK Persons


19. All of the recommendations and views about the securities and companies in this report accurately reflect the personal views of the research analyst named on the cover. No part of this research
analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst in this research report. This report may not be
reproduced, redistributed or copied in whole or in part for any purpose.
20. This report is a marketing communication and has been prepared by Ambit Capital Private Ltd. of Mumbai, India (“Ambit”) and has been approved in the UK by Ambit Capital (UK) Limited (“ACUK”)
solely for the purposes of Section 21 of the Financial Services and Markets Act 2000. Ambit is regulated by the Securities and Exchange Board of India and is registered as a Research Entity under the
SEBI (Research Analysts) Regulations, 2014. ACUK is regulated by the UK Financial Services Authority and has registered office at C/o Panmure Gordon & Co PL, One New Change, London,
EC4M9AF.
21. In the UK, this report is directed at and is for distribution only to persons who (i) fall within Article 19(1) (persons who have professional experience in matters relating to investments) or Article
49(2)(a) to (d) (high net worth companies, unincorporated associations etc.) of the Financial Services and Markets Act 2000 (Financial Promotions) Order 2005 (as amended) or (ii) are professional
customers or eligible counterparties of ACUK (all such persons together being referred to as "relevant persons"). This report must not be acted on or relied upon by persons in the UK who are not
relevant persons.
22. Neither Ambit nor ACUK is a US registered broker-dealer. Transactions undertaken in the US in any security mentioned herein must be effected through a US-registered broker-dealer, in conformity
with SEC Rule 15a-6.
23. Neither this report nor any copy or part thereof may be distributed in any other jurisdictions where its distribution may be restricted by law and persons into whose possession this report comes
should inform themselves about, and observe, any such restrictions. Distribution of this report in any such other jurisdictions may constitute a violation of UK or US securities laws, or the law of any
such other jurisdictions.
24. This report does not constitute an offer or solicitation to buy or sell any securities referred to herein. It should not be so construed, nor should it or any part of it form the basis of, or be relied on in
connection with, any contract or commitment whatsoever. The information in this report, or on which this report is based, has been obtained from publicly available sources that Ambit believes to be
reliable and accurate. However, it has not been prepared in accordance with legal requirements designed to promote the independence of investment research. It has also not been independently
verified and no representation or warranty,
sajid.merchant@ambit.co, express or implied, is made as to the accuracy or completeness of any information obtained from third parties.
ssmerchant@gmail.com

April 16, 2018 Ambit Capital Pvt. Ltd. Page 23


HDFC AMC

25. The information or opinions are provided as at the date of this report and are subject to change without notice. The information and opinions provided in this report take no account of the investors’
individual circumstances and should not be taken as specific advice on the merits of any investment decision. Investors should consider this report as only a single factor in making any investment
decisions. Further information is available upon request. No member or employee of Ambit or ACUK accepts any liability whatsoever for any direct or consequential loss howsoever arising, directly or
indirectly, from any use of this report or its contents.
26. The value of any investment made at your discretion based on this Report, or income therefrom, maybe affected by changes in economic, financial and/or political factors and may go down as well
as go up and you may not get back the original amount invested. Some securities and/or investments involve substantial risk and are not suitable for all investors.
27. Ambit and its affiliates and their respective officers directors and employees may hold positions in any securities mentioned in this Report (or in any related investment) and may from time to time add
to or dispose of any such securities (or investment). Ambit and ACUK may from time to time render advisory and other services to companies referred to in this Report and may receive compensation
for the same.
28. Ambit and its affiliates may act as a market maker or risk arbitrator or liquidity provider or may have assumed an underwriting commitment in the securities of companies discussed in this Report (or
in related investments) or may sell them or buy them from clients on a principal to principal basis or may be involved in proprietary trading and may also perform or seek to perform investment
banking or underwriting services for or relating to those companies.
29. Ambit and ACUK may sell or buy any securities or make any investment which may be contrary to or inconsistent with this Report and are not subject to any prohibition on dealing. By accepting this
report you agree to be bound by the foregoing limitations. In the normal course of Ambit and its affiliates’ business, circumstances may arise that could result in the interests of Ambit conflicting with
the interests of clients or one client’s interests conflicting with the interest of another client. Ambit makes best efforts to ensure that conflicts are identified, managed and clients’ interests are
protected. However, clients/potential clients of Ambit should be aware of these possible conflicts of interests and should make informed decisions in relation to Ambit services.

Additional Disclaimer for U.S. Persons


30. The Ambit Capital research report is solely a product of AMBIT Capital Pvt. Ltd. and may be used for general information only. The legal entity preparing this research report is not registered as a
broker-dealer in the United States and, therefore, is not subject to U.S. rules regarding the preparation of research reports and/or the independence of research analysts.
31. Ambit Capital is the employer of the research analyst(s) who has prepared the research report.
32. Any subsequent transactions in securities discussed in the research reports should be effected through Ambit America Inc. (“Ambit America”).
33. Ambit America Inc. does not accept or receive any compensation of any kind directly from US Institutional Investors for the dissemination of the AMBIT Capital research reports. However, Ambit
Capital Pvt. Ltd. has entered into an agreement with Ambit America Inc. which includes payment for sourcing new MUSSI and service existing clients based out of USA.
34. Analyst(s) preparing this report are resident outside the United States and are not associated persons or employees of any US regulated broker-dealer. Therefore the analyst(s) may not be subject to
Rule 2711 restrictions on communications with a subject company, public appearances and trading securities held by the research analyst.
35. In the United States, this research report is available solely for distribution to major U.S. institutional investors, as defined in Rule 15a – 6 under the Securities Exchange Act of 1934. This research
report is distributed in the United States by Ambit America Inc., a U.S. registered broker and dealer and a member of FINRA. Ambit America Inc., a US registered broker-dealer, accepts responsibility
for this research report and its dissemination in the United States.
36. This Ambit Capital research report is not intended for any other persons in the USA. All major U.S. institutional investors or persons outside the United States, having received this Ambit Capital
research report shall neither distribute the original nor a copy to any other person in the United States. In order to receive any additional information about or to effect a transaction in any security or
financial instrument mentioned herein, please contact a registered representative of Ambit America Inc., by phone at 646 793 6001 or by mail at 370, Lexington Avenue, Suite 803, New York,
10017. This material should not be construed as a solicitation or recommendation to use Ambit Capital to effect transactions in any security mentioned herein.
37. This document does not constitute an offer of, or an invitation by or on behalf of Ambit Capital or its affiliates or any other company to any person, to buy or sell any security. The information
contained herein has been obtained from published information and other sources, which Ambit Capital or its Affiliates consider to be reliable. None of Ambit Capital accepts any liability or
responsibility whatsoever for the accuracy or completeness of any such information. All estimates, expressions of opinion and other subjective judgments contained herein are made as of the date of
this document. Emerging securities markets may be subject to risks significantly higher than more established markets. In particular, the political and economic environment, company practices and
market prices and volumes may be subject to significant variations. The ability to assess such risks may also be limited due to significantly lower information quantity and quality. By accepting this
document, you agree to be bound by all the foregoing provisions.
Disclosures
38. The analyst (s) has/have not served as an officer, director or employee of the subject company.
39. There is no material disciplinary action that has been taken by any regulatory authority impacting equity research analysis activities.
40. All market data included in this report are dated as at the previous stock market closing day from the date of this report.
41. Ambit and/or its associates have received compensation for investment banking/merchant banking/brokering services from HDFC Bank Ltd. in the past 12 months.

Analyst Certification
Each of the analysts identified in this report certifies, with respect to the companies or securities that the individual analyses, that (1) the views expressed in this report reflect his or her personal views
about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly dependent on the specific recommendations or views expressed in this
report.

© Copyright 2018 AMBIT Capital Private Limited. All rights reserved.


Ambit Capital Pvt. Ltd.
Ambit House, 3rd Floor. 449, Senapati Bapat Marg,
Lower Parel, Mumbai 400 013, India.
Phone: +91-22-3043 3000 | Fax: +91-22-3043 3100
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www.ambitcapital.com

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April 16, 2018 Ambit Capital Pvt. Ltd. Page 24

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