Reblog: IPO Analysis: HDFC Asset Management Company (AMC) Limited
Verdict: A ‘no-brainer’ Buy
HDFC Asset Management Company (AMC) Limited is entering the primary market on Wednesday 25th July 2018, with an offer for sale (OFS) of up to 2.55 crore equity shares of Rs.5 each, by both the promoters, HDFC (34% of OFS) and UK’s Standard Life (66% of OFS), in the price band of Rs. 1,095 to Rs. 1,100 per share. Representing 12.01% of the post issue paid-up share capital, total issue size is Rs. 2,800 crore at the upper end of the price band. The issue closes on Friday 27th July and listing is likely on 6th August, which will be the 5th listing from HDFC stable.
HDFC AMC, 56.97% subsidiary of HDFC Ltd, with foreign JV partner UK’s Standard Life owning 37.98% stake, is India’s second largest AMC (behind ICICI Prudential) with asset under management (AUMs) of Rs.2.91 lakh crore (31-3-18) and 13.7% market share. Company is the largest AMC with equity oriented funds (at 51.3% of AUM vis-à-vis industry average of 43.2%), which also helps it become the most profitable AMC in India, having earned net profit of Rs. 722 crore in FY18 or 18.1% market share of the industry PAT, due to higher fees earned in equity as against debt product. Thus, with only 13.7% market share in total AUM, 16.8% market share in actively managed equity-oriented AUM help the company garner 18.1% market share in net profits of the industry, comprising of 42 players. Besides high profitability, company also enjoys benefit of retailisation of portfolio, with 62% AUM coming from retail investors, unlike industry average of ~50%, again highest market share in retail AUM of 15.7%. Systematic investment plan (SIP) products, with average ticket size of Rs. 3,800, also provide high revenue visibility, as 77% of company’s SIPs are signed up for 5 years.
From FY15 to FY18, all 3 broad line numbers reported 20% CAGR – AUM, revenue and net profit. AUM nearly doubled from Rs. 1.67 lakh crore, as of 31-3-15 to Rs. 2.92 lakh crore, as of 31-3-18, with revenue jumping from Rs. 1,022 crore in FY15 to Rs. 1,760 crore in FY15, and net profit increasing from Rs. 416 crore in FY15 to Rs. 722 crore in FY18. For FY18 alone, revenue grew at 19% while net profit growth was much stronger at 31% given ‘financialisation of savings’ in India, post demonetisation and GST. FY18 EPS stood at Rs. 34.96, with healthy dividend per share of Rs. 16, or dividend payout ratio of 55%. In FY18, RoE of 33.41% was reported which is healthy, albeit on a decline, as denominator (net worth) is increasing at a faster pace, given low base (net worth of only Rs. 2,160 crore, as of 31-3-18 and Rs. 1,423 crore as of 31-3-17). Going forward, to optically maintain high RoE, company will need to continue with a liberal dividend payout policy, although, which on yield basis, may not be exceptionally high.
Between April-June 2018, when mutual fund industry AUM grew by 1.5%, HDFC AMC’s average AUMs clocked 2.1% growth to Rs. 3.07 lakh crore, indicating its leadership. On 30th April 2018, company has made a preferential allotment of 12.6 lakh shares to its distributors at Rs. 1,050 per share, which was disapproved by market regulator SEBI on premise of possible conflict of interest. Hence, those shares were placed with PE giant KKR India at 1,075 a piece, few weeks later. Post preferential allotment, current equity stands at Rs. 106 crore (FV Rs. 5 each) with BVPS of Rs. 109.
Objects of Issue and Shareholding Pattern:
Since issue is 100% OFS, no proceeds will flow into the company. Post listing, HDFC will hold 52.92%, from current 56.97%, while Standard Life’s 37.98% holding will shrink to 30.03%. With combined post-listing promoter shareholding of 82.94%, about 90 senior management members holding nearly 4.5% stake, public shareholders will be left with less than 13%, majority of which is likely to be cornered by institutional investors. Shareholding of KKR is 0.59%.
At Rs. 1,100, company’s market cap will be Rs. 23,319 crore. Below is the comparison with the sole listed asset manager Reliance Nippon Life Asset Management (RNAM):
|AUM (MF)||Rs. crore||2,91,985||2,26,100|
|Share of equity in AUM||%||51%||36%|
|PAT (FY18)||Rs. crore||722||505|
|PAT as a % of AUM||%||0.25%||0.22%|
|Market Cap (Mcap)||Rs. crore||23,319^||13,280|
|Mcap as % of AUM||%||8.0%||3.4%|
^ at Rs. 1,100 per share
While HDFC AMC’s AUM is 29% higher than RNAM’s, its PAT is 49% higher, due to industry-superior share of equity in total portfolio of 51%. This is also reflected in HDFC’s higher RoE of 33% versus 22% for the sole peer. Despite all these positives, HDFC’s PE, based on FY19E earnings, of 26x is only marginally higher than RNAM’s 24x. RNAM’s parentage is a drag on its valuation, while HDFC pedigree definitely deserves healthy premium. Hence, based on M Cap as % of AUM, 8% seems fair, as 2% premium for brand HDFC and another 2% premium for being the most profitable mutual fund company in the country, due to high equity share of portfolio, seems justified.
While performance of some of company’s schemes over the past 1 year has been below benchmarks, it is not likely to be a party-pooper in the overall scheme of things. With mutual fund industry AUM expected to grow over 20% over the next 3-4 years, HDFC AMC looks well poised to tap this opportunity, given its leadership, consistent performance and focus on high quality equity portfolio.
A proxy to financialisation of savings in India, HDFC AMC is the preferred choice to ride India’s fast growing per capita income (and hence savings) story. IPO is very attractively priced and we advise all investors to go for it – even if one has a short term view (listing gains) or long term horizon (portfolio building). Simply put, HDFC AMC is a must buy for all.
The original review is written by Geetanjali Kedia, appears on sptulsian.com and is available here.