Why HDFC Mutual Fund Stock has fallen more than 30% since high in Aug 2018

HDFC Asset Management Company (AMC) is one of the largest and well-established fund house in the country with focus on delivering consistent fund performance across categories since the launch of the first scheme(s) in July 2000.

HDFC AMC was listed in August 2018. After the listing, the stock price went up a little and from there has been continuously declining. Now, the stock is 30% down from its 52-week high.

The Q3FY18-19 results of the company were released/declared on 21^st January 2019.

HDFC AMC Company Overview

• Assets Under Management (AUM) – Assets Under Management is the amount of the overall market value of assets/capital that a mutual fund house holds and manages for its clients. As per their Q3FY18-19 results, the AUM of HDFC AMC are Rs. 3.29 lakh Cr. This amount is 14.4% of the industry AUM. Industry AUM is the sum of the AUM of all the mutual fund houses in India.

• Equity AUM – This is the most lucrative AUM for any AMC. This is so because this is the AUM on which they can charge the highest amount of expense ratio as they are the actively managed funds. Equity AUM of HDFC AMC is of Rs. 1.53 lakh Cr. They have not included the arbitrage funds and the index funds in the amount as the expense ratio of these funds are low. Without adding these components too the Equity AUM of the HDFC fund house is so high. If arbitrage funds and index funds are added to the equity funds, then the AUM is 16% of the industry AUM.

• Equity-Debt funds Ratio – The ratio is 48:52. That is 48% equity funds and 52% debt funds. The industry ratio is 45:55. So, it can be clearly seen that HDFC AMC has a little advantage over others.

• Systematic Investment Plan (SIP) Book – The SIP concept has grown a lot over the last 2-3 years. HDFC AMC has an SIP book of Rs. 1,170 Cr. The industry SIP book amounts to Rs. 8,000 Cr. So, here too HDFC AMC has a share of almost 15% in the industry.

• B30 Cities – B30 cities are the cities other than the top 30 (T30) cities. T30 are the cities from where the maximum investments in mutual funds comes from. The classification and listing of these cities into T30 and B30 is done by SEBI and AMFI. 14.3% of the new business to HDFC AMC is coming from B30 cities. In these B30, the AMC can keep the expense ratio a little higher to incentivize the distributors there and promote mutual funds and their sales. The reach of HDFC AMC is also increasing in these B30 cities.

• Individual AUM – This means the retail business of the AMC. Having a strong retail business as compared to corporate business is very important. The dependence gets distributed and the individual investors stick for a longer time. Business having higher reach in retail business get higher valuations. 61.8% of the business with HDFC AMC comes from individual accounts, that is from their retail (individual) investors, which is a very positive thing. The industry individual AUM is close to 54%.

• Unique PAN Investors – As per unique PAN, HDFC AMC has 52 lakh investors. The industry has unique PAN investors of 1.19 Cr.

HDFC AMC Q3FY18-19 Results

• Sales (Revenues) – The revenues of HDFC AMC are flat on YoY basis.

• Net Profit & Operating Profit – Both have grown in the range of 25%-30% on YoY basis. So, how have the profits increased? The employee cost has been maintained at the same level and the distributor margins have been reduced, which have directly impacted as an increase in the profitability of HDFC AMC Ltd.

HDFC AMC Stock Price Movement

From the levels of Rs. 1,969 in Aug 2018 the stock has fallen down up to the level of Rs. 1,319 in Feb 2019. So, there has been a fall of almost 30% in the share price of HDFC AMC.

This is so because the valuations given to the company were looking very rich and now too with a PE of 33 the company looks expensive as the earnings growth of the company can be taken as 15%-20%, and the HDFC brand can add a little to the PE. Thus, the PE ratio of 33 doesn’t look attractive.

Key Challenge to the Mutual Fund Industry

Exchange Traded Fund (ETF) Market – Exchange Traded Funds are basically Index funds that are listed and traded on exchanges like stocks. So, ETF’s offer the convenience of a stock along with the diversification of a mutual fund. In coming 5-10 years, the ETF market can be potential challenge to the mutual fund industry. In the developed markets such as the US or the European markets, the penetration of ETF’s is very high. Vanguard is an American registered investment advisor and the largest provider of mutual funds and the second-largest provider of exchange-traded funds in the world. Vanguard focuses mainly on ETF’s and last year the amount collected by Vanguard from ETF investments was more than the collective investments in ETFs collected by all the others. So, this happened because the expense ratio in actively managed funds is more and in ETF’s it is less.

Summary

• The overall brand of HDFC is very strong.
• The earnings visibility of HDFC AMC looks quite good.
• The mutual fund industry is going through some turbulent times owing to the problems in debt mutual funds and bad performance by the equity market in the last 12-15 months. But still, the mutual fund industry is also bound to grow in the coming years.
• HDFC AMC Ltd can be kept under the radar as an investor.

Notes: –

• The numbers that are used are approximate and have been rounded for presentation purposes.
• We are not in any way saying that this is a bad company, or the stock of this company is bad.
• We are also not suggesting anyone to immediately go and buy this stock or invest in the stock markets.
• Only an analysis has been presented here. No judgments or final statements are being made here.