What is causing the spectacular rise in the HDFC AMC stock?
Updated: Sep 8, 2019
The HDFC AMC stock has risen spectacularly over the past 9 months
So what is causing the spectacular rise in the share price?
Let us Analyse
Banning of Upfront Commission by SEBI
In October 2018,SEBI banned upfront commission to distributors of MF and asked the AMCs to move to a trailing commission model.
The effect of these changes can be seen in the Q1FY20 result of the company.
The income for the company grew my merely 7%,however he commissions expense was down by a whopping 86% thereby leading to a PBT growth of 46%.
As the trailing commissions start kicking the net effect should cancel out over a period of three years and the company's profitability should return back to normal and this super-normal profit should reverse.
The advantages of trailing commissions would be a sticky AUM and a lower cost of incremental AUM.
However it remains to be seen how much gains can be easily translated to the numbers
AUM growth mainly led by Liquid fund inflows
During Q1FY20 the total AUM base of HDFC AMC grew by 18% YoY to 3.011 Lakh crore.
This was mainly driven by an increase in AUM of liquid funds by 15%.
For a MF companies equity funds are far more profitable as they have expense ratio in the range of 1.3%-2.0%.
Liquid funds have expense ratio in the range of 0.2-0.3% and are not quite as much profitable as the equity funds.
Though HDFC AMC has gained AUM and market share in liquid funds that will not necessarily translate into profitability.
Slowing Equity sales
As can be clearly seen above Equity sales have slowed down considerably when compared to FY18 and FY19.
With the onset of the current bear market,it remains to be seen how the retail investor behaves.!
This is an obvious risk to the profitability of the company
Underperformance of HDFC AMC schemes
HDFC funds have underperformed the market recently.
Out of its top 15 schemes (6 equity oriented funds, 6 debt oriented funds and 3 liquid funds), which constituted 76.5 percent of its total AUM, 8 have underperformed the market in the past one year.
Underperformance of equity-oriented schemes for long time can significantly impact its profitability since equity accounts for majority of management fees.
Low free float
The promoter has smartly sold less number of shares in the market.Low free float also leads to pumping up of the stock price.
Generally all across the world Asset Managers trade at 7-10% of the equity assets.
HDFC AMC trades at nearly 25%-30% of the equity assets which is really really expensive.
AMC business is a great annuity business where AMC's fixed fee on the sticky AUM.They also high operating leverage with high ROEs and good dividend yield.The HDFC brand also is a big help.
The scope for asset managers in India is huge.
However buying a stock at any valuation is a recipe for disaster and investors must be cautious.
Disclaimer:-The author of this report is a Chartered Financial Analyst(CFA) from CFA Institute,USA,the views expressed in the above report are personal and at no point should be construed as an investment advise.Please consult your financial advisor before making any decisions.Reproduction of the above report is strictly prohibited.
If you are looking for investment advice, click here and we will reach out to you within 2 days