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Strong franchise in a growth industry

With 14.2%/13.7% total/equity market share as of 9MFY21, industry-leading profitability at 38bps of AAUM as at 9MFY21, strong brand and well-entrenched distribution, HDFC AMC is among the better plays on Indian AUM growth. We estimate HDFC AMC to generate ~10% EBITDA (ex-other income) CAGR between FY20-FY23E with RoE of 30% and FCF/dividend yield of 3.3/1.2%. Diversification in investment style and induction of new fund managers as well as MD are near term change agents which can positively impact fund performance/flows. We initiate coverage with a BUY rating and target price of Rs3,500 based on 45x core FY23E EPS of Rs71 and Rs302/share of cash and investments.

* High AUM market share and strong brand remain two distinct strengths.

HDFC AMC has 14.2%/13.7% total/equity AUM market share in 9MFY21. This along with strong distribution (224 offices, >65,000 distributors, 9.1mn live folios and 5.4mn unique investors as on Dec’20) and digital capabilities (49.2% direct AUM mix, 20.6% direct equity AUM mix in Q3FY21) put HDFC AMC in a good position to benefit from the prospective growth of Indian AUM. Company enjoys strong brand franchise (part of HDFC group), which adds to the business strength.

* Expect earnings CAGR of 12-16% for over the next 10 years assuming +/- 300bps movement in equity market share.

Assuming that: 1) Indian nominal GDP grows at 9% CAGR over the next 10 years, 2) aggregate net inflow p.a. is 1% of aggregate GDP (vs 0.8% over 2010-20), and 3) average annual performance growth is 7.8% (vs 6% over 2010-20) - Indian AUM is likely to grow to Rs45trn by 2025 and Rs100trn by 2030. Within a possible +/-300bps change in equity market share, HDFC AMC's revenue/ operating profit / PAT CAGR is likely to be 10-14% / 15-19% / 12- 16% over the next 10 years after adjusting for decline in yields from growth in AUM and periodic stepdown in allowable MF TER.

* Low cost structure and high AUM book lead to industry-leading margins.

HDFC AMC has the lowest cost structure (average 22bps operating cost as a percentage of AAUM in FY18-FY20 split between 7bps employee cost and 15bps other costs) as well as high operating revenue (average 64bps of AAUM in FY18-FY20). These lead to an average of 34bps operating profit as a percentage of AAUM between FY18- FY20, which is higher than peers.

* Initiate with BUY and a target price of Rs3,500 based on 45x core FY23E EPS of Rs71 and add Rs302/share of cash and investments.

Our earnings estimates are based on HDFC AMC maintaining its equity AUM market share at 14% in FY23 and increasing its market share in debt segment from 14% in FY21TD to 16% by FY23 and Indian AUM clocking 11% CAGR during FY20-FY23E.

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