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Slight uptick in operating margins

HDFC AMC saw a good quarter with earnings beat led by better operating margins and higher other income. Though QAAuM was a tad lower, revenue was better driven by superior yields. Opex was mainly in-line. Hence operating income was a beat at Rs3.95bn (est. Rs3.84bn). Sequentially, equity share rose by 1.6% due to equity growth ~9% QoQ. Although HDFC is focusing on passive products, ETF share may not significantly change in the medium term. While fintechs have been aggresive, HDFC does not see them as a threat since they contribute only 2% to industry equity AuM. Market share reduction remains a concern and hence we revise our multiple to 44.2x also rolling forward to Sep’23 EPS. Revise TP to Rs3,100. Retain ADD.

Q2FY22 results – Stable quarter with a slight beat on earnings

Revenue at Rs5.4bn was a tad higher (est. Rs5.3bn) largely led by better than expected annualised yields at 49bps (est. 48bps) as QAAuM at Rs4.39trn was a bit lower (est. Rs4.44trn). Yields were stable QoQ and improved in tandem with equity share rise. Opex was Rs1.47bn (est. Rs1.49bn) with staff cost being lower at Rs798mn (est. Rs825mn) which was offset by higher other opex at Rs500mn (est. Rs481mn). ESOP charge of Rs167mn was included in employee cost. Incremental ESOP charge in H2FY22E could be Rs340-350mn. Led by higher revenues, operating income was ahead at Rs3.95bn (est. Rs3.84bn). Hence operating yields improved QoQ from 35bps to 36bps. Other income moderated QoQ to Rs661mn (est. Rs500mn) as last quarter saw sale of collateral on ESSEL group debentures. PAT was a beat at Rs3.44bn (est. Rs3.20bn).

Equity AUM share further improves; new fund launches in pipeline

QAAUM rose by 5.1% QoQ mainly led by healthy equity growth of 8.9% with an Equity/Debt/Liquid mix of 44.2%/36.7%/16.4%. Equity growth was also contributed by the banking fund NFO of Rs18.7bn. Sustained equity market buoyancy led to a sequential rise in equity AuM share by 1.6%. The company earns equity yields of 80bps which could sustain in the near to medium term though over the long term yields could compress as AuM increases. Hence margins will see some dilution over a period of time. Also NFO pricing by competition is very aggressive. Although HDFC is focusing on passive products, ETF share may not materially change in the medium term. While fintechs are growing, competition from them is immaterial as their AuM is only 2% of industry equity AuM.

SIP flows see an uptick and market share loss a tad concerning; opex to rise

SIP for Sep-21 upticked to Rs10.8bn (Rs9.8bn in Jun’21). Market share (MS) continues to fall in SIP (10.8% in Q2FY22 compared to 11.1% in Q1FY22). From a H1FY22 perspective, the company lost SIP MS to 10.9% from 11.7% in FY21. Also, basis closing AuM, HDFC has lost MS over FY21-H1FY22 from 12.6% to 11.9%. Business and technology spends would be incurred and hence we see a 14% CAGR in other opex over FY21-24E.

Valuation and risks

We raise opex est. for FY22/23E due to focus on improving business which would impact PAT by 1.9%/1.7%. Roll forward to Sep’23 EPS but revise multiple to 44.2x (earlier 46.3x) as market share is yet to stabilise, though distribution network is a strength. Change TP to Rs3,100 (earlier Rs3,280). Retain ADD. Risks: weak equity flows, regulatory challenges.

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