Company Overview

HDFC Asset Management Company Ltd (NSE:HDFCAMC) is one of India’s largest and most profitable mutual fund manager with ₹3.2trillion in assets under management. Started in 1999, the company were set up as a joint venture between Housing Development Finance Corporation Limited (“HDFC”) and Standard Life Investments Limited (“SLI”). During FY18-19 the company carried out an initial public offering, and became a publicly listed company in August 2018. Currently, 20% of the company is owned by the public. HDFC Asset Management Company (“HDFC AMC”) is the investment manager to the schemes of HDFC Mutual Fund (“HDFC MF”).1

The company offer a comprehensive suite of savings and investment products across asset classes, which provide income and wealth creation opportunities to its large retail and institutional customer base of 9.4 million live accounts. HDFC AMC has a dominant position in equity investments, with the highest market share in actively managed equity-oriented funds. The company's strengths lie in delivering simple and accessible investment products for the average Indian household. HDFC AMC is the most preferred choice for retail investors, with the highest market share in assets from individual investors. Over one in four Indian mutual fund investors have invested in at least one of its schemes. The company's offering of systematic transactions further enhances its appeal to individual customers looking to invest periodically in a disciplined and risk-mitigating manner. The company's schemes have weathered multiple market cycles and carry track records of up to 25 years. The company work with diverse sets of distribution partners which helps it expand its reach. The company currently have over 70 thousand empanelled distributors which include independent financial advisors, national distributors and banks. The company serve its customers and distribution partners in over 200 cities through its network of 221 branches and 1,194 employees. The company's highly stable Management has steered the company since its inception through the ever-evolving industry. The company's consistent position as one of India’s leading asset management companies is driven by its comprehensive investment philosophy, process and risk management. The company's 26 member investment team is highly experienced and competent with a track record of performance, stability and a deep understanding of businesses. The company also provide portfolio management and segregated account services, including discretionary, non-discretionary and advisory services, to high net worth individuals (“HNIs”), family offices, domestic corporates, trusts, provident funds and domestic and global institutions.

About HDFC Group: The company's company is part of HDFC Group, a recognized financial conglomerate, with presence in housing finance, banking, life and non-life insurance, asset management, real estate funds and education finance. HDFC Ltd is one of India’s leading housing finance companies and its majority shareholder.

All data is as on 31-Mar-2020 unless otherwise stated.

HOUSING DEVELOPMENT FINANCE CORPORATION LIMITED (HDFC Ltd.) The company's principal shareholders include Housing Development Finance Corporation Limited (HDFC) and Standard Life Investments Limited (“SLI”) who own 52.7% and 26.9% stake respectively. HDFC was incorporated in 1977 as a specialised mortgage finance company and is today a financial conglomerate having a dominant presence in housing finance, banking, life and non-life insurance, asset management, real estate funds and education finance.

Sponsors

HOUSING DEVELOPMENT FINANCE CORPORATION LIMITED (HDFC Ltd.)

The company's principal shareholders include Housing Development Finance Corporation Limited (HDFC) and Standard Life Investments Limited (“SLI”) who own 52.8% and 26.9% stake respectively. HDFC was incorporated in 1977 as a specialised mortgage finance company and is today a financial conglomerate having a dominant presence in housing finance, banking, life and non-life insurance, asset management, real estate funds and education finance.2

STANDARD LIFE INVESTMENTS LIMITED

Standard Life Investments (SLI), a subsidiary of Standard Life Aberdeen plc group, is one of the world’s largest investment companies and was created in 2017 from the merger of Standard Life plc and Aberdeen Asset Management PLC. Operating under the brand Aberdeen Standard Investments, the investment arm manages $643.3bn (as at 31st December 2018) of assets, making it the largest active manager in the UK and one of the largest in Europe, with offices in over 40 locations including 24 investment centres across the Americas, Asia, the Middle East and Australia.

The brand equity, goodwill, and expertise of its sponsors empowers it to grow from strength to strength. While the HDFC brand enjoys deep trust of customers across generations, SLI has contributed towards the industry best practices followed by its company, particularly in operations and risk management.

Industry Overview

The Mutual Fund industry’s closing AUM as of March 31, 2020 fell by 6% to Rs 22.3 Lakh Crore as against a closing AUM of Rs 23.8 Lakh Crore as of March 31, 2019. During this period, the equity oriented AUM fell from Rs 10.2 Lakh Crore to Rs 8.3 Lakh Crore while the non-equity oriented AUM grew from Rs 13.6 Lakh Crore to Rs 14.0 Lakh Crore. As can be seen from above, the fall in overall AUM can be attributed to the fall in equity oriented AUM, which fell by 19% due to the fall in market, primarily in the month of March 2020. The Quarterly Average Assets Under Management (QAAUM) for the industry rose by 10% to Rs 27.0 Lakh Crore for the quarter ended March 2020, as against Rs 24.5 Lakh Crore for quarter ended March 2019. QAAUM for equity-oriented assets grew by 7% for the quarter ended March 2020 over the quarter ended March 2019, and QAAUM for non-equity assets grew by 13% for the quarter ended March 2020 as against the quarter ended March 2019. During FY 19-20, industry saw net inflows to the tune of Rs 0.67 Lakh Crore in equity assets, Rs 0.64 Lakh Crore for others (including Arbitrage funds, Exchange Traded Funds (ETF) and Fund of Funds (FoF)), while debt saw outflows to the tune of Rs 0.37 Lakh Crore. This means that on overall basis, industry saw net inflows of Rs 0.87 Lakh Crore.3

As of March 2020, individual investors contributed to 52% of the industry monthly average AUM (MAAUM) adding up to Rs 12.9 Lakh Crore, while institutional investors contributed to the tune of Rs 11.8 Lakh Crore which is 48% of industry MAAUM. The number of individual live accounts for the industry as of March 31, 2020 stood at 8.93 Crore versus 8.21 Crore as of March 2019. During FY 19-20, the MF industry saw inflows of Rs 1 Lakh Crore through systematic investment plans. For the month of March 2020, MAAUM for the industry was split in the ratio of 84-16 between the top 30 cities (T30) and beyond the top 30 cities (B30). The total MAAUM for the industry in March 2020 stood at Rs 24.7 Lakh Crore.

During the year, the regulatory body repealed the earlier SEBI (Portfolio Managers) Regulations, 1993 and introduced SEBI (Portfolio Managers) Regulations, 2020. The key changes inter-alia include enhancement of the eligibility criteria and defining the role of Principal Officer, increment of net-worth requirement from Rs 2 Crore to Rs 5 Crore, increase of minimum investment amount by clients from Rs 25 Lakh to Rs 50 Lakh.

Recent trends

The AUM of the mutual fund industry in India has grown at a CAGR of 15.5% over the past five years, with the equity AUM growing at a CAGR of 17.3%. Rising awareness about benefits of investing in equity markets, growing popularity of ways of investing, such as SIP, are some of the factors contributing to the increased participation of domestic individual investors in the Indian mutual fund industry. The MAAUM of individual investors in the industry has reached Rs 12.9 Lakh Crore in March 2020 and has recorded a growth of 18.2% since March 2015. The number of individual folios have increased from 4.14 Crore to 8.93 Crore in this period. Net inflows into the industry over the past five fiscal years were Rs 9.46 Lakh Crore, of which Rs 6.47 Lakh Crore have been in equity-oriented schemes. On the other hand, fixed income products including liquid funds have seen increased popularity amongst corporate, as well as retail and high net worth investors.

The monthly SIP flows grew 2.8 times from April 2016, to Rs 8,641 Crore in March 2020. The number of SIP transactions processed in March 2020 was 3.12 Crore as compared to 1.01 Crore in April 2016. SIPs offer the benefit of regular investing coupled with benefits of rupee cost averaging and are typically sticky long term inflows and lend visibility and predictability of AUM growth.

In this period, Indian equity markets achieved a healthy balance between the domestic institutional investors (largely Mutual Funds) and Foreign Portfolio Investors (FPIs), thereby significantly reducing the skew towards reliance on FPI inflows, lending more stability to the Indian markets.

Business overview

HDFC AMC is the investment manager to HDFC MF and with a total QAAUM of Rs 3.70 Lakh Crore for the quarter ended March 2020, and closing AUM of Rs 3.19 Lakh Crore as of March 31, 2020. Equity-oriented closing AUM forms 38% of its total AUM, with the rest coming in from non-equityoriented closing AUM.

The company's Company’s closing AUM as of March 31, 2020 fell by 7% to Rs 3.19 Lakh Crore as against a closing AUM of Rs 3.44 Lakh Crore as of March 31. 2019. During this period actively managed equity-oriented AUM fell from Rs 1.64 Lakh Crore to Rs 1.20 Lakh Crore while the non-actively managed equity oriented AUM grew from Rs 1.80 Lakh Crore to Rs 1.99 Lakh Crore. As can be seen from above, the fall in overall AUM can be attributed to the fall in equity oriented AUM. HDFC AMC’s equity oriented AUM fell due to a fall in the markets as represented by a 23% fall in NIFTY 50 during the month of March 2020. The company's Company’s total mutual fund QAAUM rose by 8% to Rs 3.70 Lakh Crore for the quarter ended March 2020, as against Rs 3.42 Lakh Crore for the quarter ended March 2019. QAAUM for actively managed equity-oriented assets grew by 2% for the quarter ended March 2020 as against the quarter ended March 2019, and QAAUM for nonactively managed equity assets grew by 13% for the quarter ended March 2020 as against the quarter ended March 2019.

The company remain the most preferred choice for individual investors, with the highest market share in assets from individual investors at 15.0%. The company had about 56 Lakh unique investors at the close of the year as against 2.08 Crore unique investors in the MF industry. In other words, 27 out of every 100 Mutual Fund investor in India has invested in one or more of HDFC Mutual Fund schemes. The company had a market share of 14.3% in total closing AUM, and 14.7% market share in actively managed equity oriented funds. Equity-oriented assets formed 38% of its total AUM.

The number of live accounts the company serve increased by 3% Year on Year to reach 94 Lakh. HDFC AMC processed 32.9 Lakh systematic transactions in the month of March 2020, amounting to Rs 1,130 Crore. The company's systematic transactions remained stable during the year. About 81% of all systematic transaction at the time of signing up have been signed up for over five years and about 69% for over 10 years.

Covid-19 Pandemic

In early 2020, the existence of a new coronavirus named SARS-CoV-2 responsible for the disease Covid-19, was confirmed and since then the virus has spread across the globe necessitating the World Health Organization (WHO) to declare it a global pandemic. The pandemic has caused disruption to businesses and economic activity which has been reflected in recent fluctuations in markets across the globe. Various governments have introduced a variety of measures to contain the spread of the virus. The Government of India had announced a country wide lockdown. In this nation-wide lock-down, though most services across the nation had been suspended, some establishments like securities market intermediaries including its Company, were exempt from the lock-down and therefore functional. There has been no material change in the controls or processes followed in the closing of the financial statements of the Company.

The Company has assessed the impact of the pandemic on its operations and its assets including the value of its investments and trade receivables as at March 31, 2020. The management does not believe that the impact on the value of the Company's assets as at March 31, 2020 is material. However, since the revenue of the Company is ultimately dependent on the value of the Assets Under Management (AUM) it manages, changes in market conditions and the trend of flows into mutual funds may have an impact on the operations of the Company. Since the situation is rapidly evolving, its effect on the operations of the Company may be different from that estimated as at the date of approval of the financial statements. The Company will continue to closely monitor material changes in markets and future economic conditions.

Financial Highlights

Key Highlights

  • The company's Company’s Total Income has increased by 2.22% to Rs 2,143.43 Crore in FY 19-20.
  • The Profit After Tax (PAT) stood at Rs 1,262.41 Crore and grew by 35.66% over FY 18-19.
  • The Operating Profit (Profit Before Tax less Other income) grew by 26.80% to Rs 1,512.87 Crore in FY 19-20.
  • PAT as a percentage of Annual Average AUM increased from 0.29% in FY 18-19 to 0.34% in FY 19-20.
  • The Company’s Average Networth increased by 33.34% to Rs 3,549.99 Crore in FY 19-20.

Revenue

Revenue from operations comprises of investment management fees from the Mutual Fund and portfolio management services and advisory fees. This increased from Rs 1,915.18 Crore in FY 18-19 to Rs 2,003.25 Crore in FY 19-20, due to an increase in investment management fee by 3.69% from Rs 1,895.39 Crore in FY 18-19 to Rs 1,965.28 Crore in FY 19-20. This increase was led by an increase in the Annual Average AUM of Mutual Fund schemes. Subsequent to the regulatory change in October 2018 referred to earlier, commission and certain other expenses related to the schemes of the Mutual fund which were earlier borne by the Company are now borne in the books of the schemes of the Mutual Fund which has had some effect in reducing the investment management fee. These regulatory changes were effective only for a part of FY 18-19 but for full period of FY 19-20. Hence, the growth rate of Investment Management Fees for the FY 19-20 was more subdued than that for FY 18-19.

Other Income

The company's investment book rose in value due to retained surpluses. The Company holds certain Non Convertible Debentures (NCDs) that are secured by a pledge of listed equity shares. These NCDs are classified as financial assets at fair value through profit and loss. Hence, any changes in their fair value on the reporting date is reflected as a part of ‘Other Income’. On fair valuation of the said NCDs as at March 31, 2020, the unrealised loss recognised in the financial statements for the year ended March 31, 2020 stands at Rs 120.36 Crore.

Accordingly, its other income decreased by 22.81% from Rs 181.60 Crore in FY 18-19 to Rs 140.18 Crore in FY 19-20, primarily because of fair value loss on investments as explained above, which is non recurring in nature. Other income also includes reversal of certain accruals made for expenses related to the earlier years which were not paid due to regulatory changes.

Profit Before Tax

The company's Profit Before Tax increased by 20.25% to Rs 1,653.05  Crore in FY 19-20 from Rs 1,374.70  Crore in FY 18-19.

Tax Expenses

The company's Company has elected to exercise the option of a lower tax rate provided under Section 115BAA of the Income-tax Act, 1961, as introduced by the Taxation Laws (Amendment) Ordinance, 2019 dated September 20, 2019. Accordingly, its total tax expenses decreased by 12.04% to Rs 390.64 Crore in FY 19-20 from Rs 444.10 Crore in FY 18-19. The company's current tax decreased by 7.85% to Rs 410.52 Crore in FY 19- 20 from Rs 445.47 Crore in FY 18-19. The company's effective tax rate, including deferred tax was at 23.63% and 32.31% for FY 19- 20 and FY 18-19, respectively

Profit After Tax

As a result of the factors outlined above, its Profit After Tax increased by 35.66% to Rs 1,262.41 Crore in FY 19-20 from Rs 930.60 Crore in FY 18-19

Dividend

Directors have recommended a final dividend of Rs 28 (Rupees Twenty Eight Only) per equity share of Face Value of Rs 5 each for the financial year ended March 31, 2020. The Dividend payout ratio for the FY 19-20 would stand at 47.20%.

Outlook

There is immense scope for the industry to grow. Given its strong positioning in the mutual fund industry, HDFC AMC is well placed to capture and capitalise on the opportunities in in the domestic market. The company believe, there is enough and more scope for savings and investment related products which should lead to material growth in mutual fund industry. Some of the prominent catalysts for its future growth include strong brand recall, disciplined investment philosophy and process, customer-centric approach, well laid out distribution network and growing reach and healthy financials.

References.

  1. ^ https://www.hdfcfund.com/about-us/corporate/overview
  2. ^ https://www.hdfcfund.com/about-us/corporate/sponsors
  3. ^ https://files.hdfcfund.com/s3fs-public/2020-06/HDFC%20AMC%20-%20Annual%20Report%202019-20.pdf
Tags: IN:HDFCAMC
Created by Asif Farooqui on 2020/08/10 13:24
     
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