hdfc amc analysis

HDFC AMC : A long term bet for great returns? | HDFC AMC Fundamental Analysis

Over the past few years, the mutual fund industry in India has almost exploded. Specially the young generation now understand the importance of mutual funds for long term financial planning.

Now this has created immense growth opportunity for companies that operate in mutual fund space. So in this video, we will discuss one of the top company in mutual fund space. It is HDFC AMC.

As usual, we will start the fundamental analysis of HDFC AMC by analyzing the company and management, competitive strength, future growth prospect and the financial analysis to decide if HDFC AMC is fundamentally strong or not. Then we will analyse the valuations of the company to decide if it is worth investing in HDFC AMC at current levels. So let’s get started.

Company & its management

Established in 1999, HDFC AMC is the largest AMC company in India with a AUM of ~Rs 3.5 lakh Cr.
It is a joint venture between HDFC limited which is a well known financial conglomerate and Standard Life Investment limited. HDFC lmt holds the majority shareholding in HDFC AMC with 52.68% stake.
HDFC AMC chairman is Mr Deepak S Parekh. He is the Chairman of multiple companies within the HDFC group including HDFC ltd, HDFC life, HDFC AMC and HDFC Ergo general insurance.
Deepak Parekh is one of the most respected person in the Indian corporates and has been the man behind the success story of HDFC and HDFC Bank (India’s largest private bank).
As of March 2020, they have an investor count of 56 lakh against the total investor count of 2.08 Cr for the industry. So 1 out of every 4 investors is investing with HDFC AMC.
The latest market cap of HDFC AMC is Rs 70,000 Cr which makes it a large cap company

Business Model: It is an asset management company so basically investors pool money and invest in various mutual fund schemes of HDFC AMC. Now each mutual fund scheme has a fund manager who will invest the money on behalf of the investors. In this process, the mutual fund company or AMC would charge a fee which is also known as expense ratio. And this expense ratio is the key source of revenue for the company.

If you think about it, it is a great business model. There is no set up of factories or investment in land. You just need to hire good fund managers and set up the IT infrastructure and you are done! So basically, there is very low cost involved in this business. Moreover, you should know that the expense ratio is charged on the total investment amount. So even if the investor make a loss, they will still get the fee. For example, today if you invest Rs 1 lakh with HDFC AMC and due to any reason the market falls and your investment value becomes 95k then also the company will get the expense ratio on the investment value of 95k. I hope you understand this.

Overall, HDFC AMC is a solid company and on company and its performance, I would rate it 10/10.

Competitive Strength and weakness

#1 Strong brand: When it comes to investment, trust is the biggest factor. Hence, people prefer to stick with well known companies. HDFC AMC enjoys a strong brand name which is a key strength of the company.

#2 Good distribution network: Distribution is a key to growth for any company. If you have good products and good brands but you don’t have the reach or distribution then you can’t grow. HDFC AMC has a very good distribution network all over the country which is one of the key strengths of the company. It has also got the entire network of HDFC bank which is also a major contributor in the business.

#3 IT Infrastructure: IT infrastructure would be a key driver for growth in AMC space. The major reason is the reach. With IT infrastructure, you can reach out to the remotest village of the country. And considering the increasing usage of the internet, most people prefer online transactions for their investment. Their technology platforms are built on cloud leveraging emerging technologies which are robust and scalable.

#4 Experienced team and sound track record: HDFC AMC is one of the early players in the mutual fund space in India. It has a rich experience of 20 years.

HDFC AMC has a market share of 14.1%. This is followed with ICICI pru with a market cap of 13.1% then SBI MF with 12.2% and then Aditya Birla Sun life and Nippon.

Recently, there has been a lot of concern about the below average performance of the equity based mutual funds of HDFC AMC. Do you know the reason? The reason is their investment style. Their investment style is more of value investing. So they invest in companies that are fundamentally strong but available at lower valuations. With this strategy, they invested a good amount of money in PSU companies. Now these companies are fundamentally strong but didn’t perform well over the past few years. This has impacted the returns of HDFC AMC. However, recently, the PSUs shares have also started to increase. HDFC AMC CIO Mr Prashant Jain is highly experienced person and he is a big time value investor. I think, in the long term, HDFC AMC would certainly do well in both debt and equity space.

Risk: There is a growing awareness about passive investment i.e. Index funds and ETFs. Now these are very low cost investments with expense ratios as low as 0.1%. This expense ratio is the source of profits for the company and if this reduces due to increase in investment towards index funds and ETFs, it will directly impact the profitability of the company.

Overall, on the competitive strength, I would rate HDFC AMC 8/10.

Future Growth Prospects

In the short term, Covid has impacted the entire Indian economy where GDP has plunged to all time low due to nationwide lockdown. This has also impacted the overall spending and investments as people are worried about the overall economic situation.

However, the long term growth prospects of Indian economy remain intact. Some of key drivers of growth include:

#1 Brighter GDP growth prospects: One of the positive impact of Covid19 is that it has exposed the business risk by overdependence on Chinese economy. Hence, many companies are likely to shift their manufacturing from China to India. So this would create a great huge growth opportunity in India. Even the Indian government is working towards ease of doing business and incentivising manufacturing in India. After the COVID crisis, Indian GDP is expected to bounce back strongly. And when the economy does well, it would attract more investments. In fact, now even the Indian government is investing a huge amount of pension and PPF money via Index funds and ETFs.

#2 Foreign Investors: Offlate, Indian markets are attracting a lot of investment from foreign institutional investors and this trend is expected to grow in the future. Foreign investors know that Indian economy has bright growth prospects and everyone wants a share of the pie.

#3 Under penetrated Market: As of March 2020, there are only 2 Crore investors in India against the population of ~140 crore. So you can imagine the scope for growth. Not only this, as the income levels and awareness about investment would increase, people would invest even more.In fact, you can also look around and see where the young folks invest their money. Earlier, the majority of investment was in FD, PPF or LIC. But now, the young investors like to invest in equity as well as debt mutual funds. I personally invest the majority of my money in equity and debt mutual funds.
#4 Rising awareness: Earlier, there was no knowledge about mutual funds. But ther have been many awareness campaigns run by AMFI specially the “Mutual Fund Sahi hai '' campaign. Moreover, every mutual fund house is spreading awareness about mutual fund investments.
#5 Ease of investment: Ease of investment is also a key driver behind the growth of the mutual fund industry. A few years ago, the entire investment process would be extremely cumbersome. But now, it is a matter of a few clicks. Today, there are so many Fintech companies and discount brokers like Kuvera, Zerodha Coin, Paytm, Groww, etc. that has made investing a cake walk.
#6 Multiple investment options: If you look around, there are so many investment products for every need of an individual. Each category caters to a specific risk vs return profile. If you are a long term investor, you have equity mutual funds. Within that, you have large cap, mid cap, small cap, multicap, flexicap, focused fund, etc. Within each category, you have multiple schemes from different fund houses. For the short term, you have debt mutual funds. Again there are many categories like liquid fund, money market fund, short duration, medium duration, long duration, banking and PSU, etc. Then you have a mix of equity and debt with hybrid funds category. Then you have sectorical and theme based mutual funds. In short, this is a huge market.
Guys, mutual fund Industry is in a very nascent stage in India. If you compare the Indian investment marmet with US market, we are way too small. If you look around HDFC AMC was the only listed company till last year before UTI AMC launched its IPO. There are so many AMCs like Axis AMC, ICICI AMC, Kotak AMC, etc. that are still not public.

Overall, on future growth, I would rate HDFC AMC 10/10.

Financials

#1 Growth Ratio:

Over the past 4 years Revenues have grown at a CAGR of 9.2% and profits have grown at a CAGR of 32%. That’s fantastic. Hence, on growth ratio, I would rate it 10/10.

#2 Profitability Ratio:

HDFC AMC has a operating margin of ~80%. Now, how many companies in the world would have that kind of operating margin? Personally, I haven’t seen any. The major reason for such a high profitability is due to its low cost business. As we discussed earlier, there is very low investment or operating expenses. They just need good fund managers who can invest the money of investors and they get a fee. That’s a great business model. Both ROE and ROCE are well above 30% which is brilliant. Hence, on profitability, I would rate it 10/10.

Valuations

In the last 1 year, the share price fell down 43% during COVID from the high of Rs 3448 to the levels of Rs 1962. SInce then, it has recovered to the current levels of 3,300. At current levels, its PE ratio is 56.

Since its IPO in 2018, the median PE of the stock has been 42 which is reasonable. But at a current PE of 56, it is on the higher side. And that’s obvious due to such unprecedented increase in the share market where Sensex is close to 50,000 and looking overvalued. Hence, on valuations, I would rate it 6 on 10.

Having said this, HDFC AMC would continue to enjoy the premium valuations because of its HDFC band name and strong future growth prospects.

The better strategy again would be to invest periodically and buy on dips.

PS: If you want to learn every aspect of fundamental analysis of stock and other important concepts of personal finance, you can explore my video course on "Everything about money management".

Disclaimer: This article is only for education purpose. Consult your financial Advisor before investing your money.

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HDFC AMC : A long term bet for great returns? | HDFC AMC Fundamental Analysis

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