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HDFCAMC reported an operating PBT of INR 4.1bn (+5% QoQ, +11% YoY) resulting in core PBT margins of 34bps (-1bps QoQ). The moderation was in-line with expectations driven by a) minor dip in top-line yields (-1bps QoQ) as high yielding stock AUM is being replaced by low yielding flows and b) slightly higher employee opex (+17% QoQ) on account of ESOP charge which was indicated in 4Q24 itself. Management stated that the pace of dilution in top-line yields has moderated. MF QUAAM increased by +8% QoQ/+17% YoY driven by strong run-up in equity markets resulting in equity and passive AUM categories growing by +7% and +24% QoQ resp. Equity AUM market share improved to 12.4% (+20bps QoQ) on the back of improved scheme performance and increased distribution efforts. Further, HDFCAMC’s SIP flows increased to INR 18.9bn in Jun’23 (vs INR 17.1bn in Mar’23) and the SIP flow market share increased to 12.8% (+80bps QoQ). HDFC AMC stock has seen a sharp bounce back since the lows seen post SEBI discussion paper on proposed TER changes given that SEBI has indicated that a revised discussion paper is in works. While there is a broad expectation that the new discussion paper will be much more positive for AMCs, we remain watchful of the key changes. HDFC AMC is our top pick in the space and the stock can see a meaningful rerating driven by robust AUM growth and potential benefits from HDFC Bank parentage. Maintain BUY with a TP of INR 2,760.

* In-line operating performance: Core revenue yields dropped marginally to 47bps (vs 48bps QoQ) on account of high yielding stock AUM being replaced by low yielding new flows. Though management has indicated that the pace of dilution has moderated and the impact on top-line yields should slow down going ahead. Opex was a tad higher at INR 1.6bn (+10% QoQ, +9% YoY) driven by slightly higher employee opex (+17% QoQ) on account of ESOP charge which was indicated in 4Q24 itself (1.05mn ESOPs were granted in Apr23 resulting in a charge of INR 0.5-0.6bn spread over 3 years). Thus, operating PBT was at INR 4.1bn (+5% QoQ, +11% YoY) resulting in core PBT margins of 34bps (-1bps QoQ). Other income was much higher at INR 1.6bn (+63% QoQ) driven by high MTM gains on HDFC AMC’s own debt and equity investments. Effective tax rate was lower (16% vs 24% QoQ) primarily due to decrease in DTA for the current quarter, mainly attributed to holding period of certain investments, transitioning from short-term to long-term.

* Equity market share gains continue: MF QUAAM increased by +8% QoQ/+17% YoY driven by strong run-up in equity markets resulting in equity and passive AUM categories growing by +7% and +24% QoQ resp. Equity AUM market share improved to 12.4% (+20bps QoQ) on the back of improved scheme performance and increased distribution efforts. Further, HDFCAMC’s SIP flows increased to INR 18.9bn in Jun’23 (vs INR 17.1bn in Mar’23) and the SIP flow market share increased to 12.8% (+80bps QoQ).

* Valuation: HDFC AMC stock has seen a sharp bounce back since the lows seen post SEBI discussion paper on proposed TER changes given that SEBI has indicated that a revised discussion paper is in works. While there is a broad expectation that the new discussion paper will be much more positive for AMCs, we remain watchful of the key changes. HDFC AMC is our top pick in the space and the stock can see a meaningful rerating driven by robust AUM growth and potential benefits from HDFC Bank parentage. Maintain BUY with a TP of INR 2,760.

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