by Suhani Adilabadkar
It has been a weak quarter for HDFC AMC, one of India’s largest and most profitable mutual fund managers with Rs. 3.2 trillion in assets under management. The company, which went IPO in August 2018, is no spring chicken - it was established in 1999, as a joint venture between Housing Development Finance Corporation Limited (HDFC) and Standard Life Investments Limited. The fund house has a market share of 14.5% in AUM and offers a comprehensive suite of savings and investment products across asset classes, to its large retail and institutional customer base of 9.4 million live accounts via a network of 221 branches and more than 65000 distribution partners.
Quick Takes
- HDFC AMC reported muted numbers for Q1 FY21 as operating revenues declined 18.4% YoY, operating profit declined 20% and PAT jumped 4% YoY. Market share however, rose..
- About 70-75% of HDFC AMC’s revenues (fee income) is garnered from equity AUM.
- As on June 2020, equity AUM was 39% of our total AUM while non equity AUM was around 61% of total AUM.
- HDFC AMC is the largest manager of actively managed equity funds, growing at revenue and PAT at a CAGR of 14% and 25% over the last five years.
- HDFC AMC faced high redemptions of about Rs. 400-500 crores in the very first weeks of May which have now tapered down to about Rs. 120-150 crore a month.
June Quarter FY21 Was Muted
HDFC AMC reported muted numbers for Q1 FY21, as operating revenues declined 18.4% YoY due to weak equity markets and product mix tilted in favour of liquid funds. Operating revenues stood at Rs. 412 crore in June quarter FY21 against Rs. 504 crore same period previous year.
Operating profit declined to Rs. 316 crore in June quarter FY21 compared to Rs. 396 crore same period previous year declining 20% YoY. Net Profit or PAT was reported at Rs. 302 crore in Q1 FY21 against Rs. 292 crore corresponding quarter previous year rising 4% YoY maintained by higher other income and lower taxation. The closing AUM as of June 2020 was Rs. 1,378 billion against the closing AUM of Rs. 1,200 billion for March 2020. The company’s market share in quarterly average AUM stood at 14.5% for June quarter FY20 as against 14.2% for June 2019 and 13.7% as of March 2020. HDFC AMC operated with just 140 branches out 221 during the quarter recording about 65-70% of its total transaction volumes.
Covid19 Shocks On the Equity Markets
If you don’t want to dabble in everyday volatility of equity markets, mutual funds are a safer option for decent long term returns. Managing systematic risk, providing diversification benefits, dealing with economic cycles, fund managers achieve superior alphas attracting retail and institutional investors to mutual fund arena. The mutual fund industry has been growing at a CAGR of 16% as on 31st March 2020 as the investment and savings vehicle moved across hinterlands and Indian mega cities over the past five years. Indian mutual fund industry has about 41 players managing over Rs. 25 lakh crore of AUM.
50% of the total industry AUM is garnered by roughly the top 4-5 four mutual funds in India. HDFC AMC is one of them, coming in second after ICICI Prudential and the largest manager of actively managed equity funds, growing revenue and PAT at a CAGR of 14% and 25% over the last five years. As on June 2020, its equity AUM was 39% of total AUM as against 48% in June 2019 while non equity AUM was around 61% of total AUM.
Covid19 struck equity markets world over as business activity became paralysed and lockdowns were implemented in nearly every country. Equity markets took a significant hit, with a decline of 30% wiping off years of investor wealth. Though the Central Government and RBI swung into action, Covid19 already saw customers pulling back and entrepreneurs conserving cash. The mutual fund industry, which is highly co-related with equity market movement was also highly impacted. HDFC AMC saw lower revenues and de-growth in SIP flows, as 70-75% of its revenues (fee income) is garnered from equity AUM.
Equity AUM has strong sensitivity to equity markets, and consequently, HDFC AMC’s topline suffered due to MTM (mark-to-market) loss in equity AUM and as customers moved towards safer low margin liquid and debt funds to ward off volatility. In fact, as book size of equity AUM comes from MTM movement, equity as a percentage of HDFC AMC’s total AUM at 48% in June 19 declined to 39% by June 20.
Another side-effect of Covid was the Templeton issue (closure of its six debt schemes) in the month of April, spreading panic among investors leading to high redemptions impacting the mutual fund industry as a whole. HDFC AMC also faced high redemptions of about Rs. 400-500 crores in the very first weeks of May which have now tapered down to about Rs. 120-150 crore a month. As per management, the credit risk fund’s AMC of about Rs. 13500 crore was reduced to Rs. 6300 crore by the end of June 2020.
Road To Recovery
Operating for the past two decades, HDFC AMC had witnessed the volatility of the 2008 crises, its spill over effect and still maintained its revenue growth and profitability. Describing the reasons for the growth trajectory amidst massive market volatility, Milind Barve, MD, HDFC AMC said, “ We have a very strong focus on the high margin equity business which remains the core, as I mentioned almost 75% of our revenue last year has come from the equity AUM amongst mutual fund revenues. So, I think one is a very strong focus on profitable part of the market segment which is in equity business or actively managed equity. That is one thing that helps and the second is that we have extremely strong control on operating cost and expenses”.
In the current Covid-ridden scenario, the same levers have come handy, optimising high margin business and maintaining a highly prudent level of cost control. In fact, the company has saved Rs. 10 crore in June quarter and plans cost savings of Rs. 35-40 crore on a 12-month basis. HDFC AMC has the lowest operating expenditure as a percentage of AUM in the industry, about 6 basis points.
With its brand positioning, earnings profile, high operating efficiency and mass affluent scale of business, the company expects to tide over uncertainty in the Indian stock markets. Recovery is definitely visible as HDFC AMC’s AUM of Rs. 1,20,000 crore in March has grown to about Rs. 1,40,000 crore by the end of June. Markets started recovering from April and over the past three months, our benchmark indices have gained roughly 40-45% since early April 2020.
This precarious Covid environment has also distilled winners in the form of companies with low financial leverage, resilient business models, agile management and strong balance sheet. And for this, mutual fund expertise would be very handy in a time of volatility, and some uncertainty around the quarters ahead.