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Hold HDFC Asset Manangement Company Ltd For Target Rs.3,050

HDFC AMC delivered a strong quarter with a surge in equity markets and normalcy returning to debt and liquid segments. HDFC closing AUM surpassed INR 4,000bn, highest Closing AUM, and registering growth of 15% QoQ. Revenue/EBITDA/PAT in Q3'FY21 grew by 6%/6%/9% sequentially reflecting strong surge in market and AUM. Equity oriented AUM excluding index funds stood at ?1,605 billion with a market share of 13.4%. We lift our FY21/22 EPS by 11.5%/9.1%, due to buoyant stock market and tight control over cost. SIP of INR 9.1bn processed during December 2020, is marginally higher sequentially, overall SIP AUM has reached INR 532bn. As the stock price has rallied strongly since November, We recommend a "Hold" with target price of INR 3,050 (Valuation metric unchanged at 42x FY22 EPS, uplift in target price inline with upgraded EPS).

HDFC AMC AUM set to increase with financialization of savings

Indian savings are gradually moving away from Gold and Real estate, financial assets market share in incremental savings is inching higher. Financial assets clocked50% market share of gross saving over the past three years. SIP inflow for December stood stable for industry at INR 84bn, while HDFC AMC garnered11% of market share. Vibrant capital market will ensure new investors will keep coming to reap benefit from India's strong economic growth over the coming years. 55% of the HDFC AMC's total monthly AAUM is contributed by individual investors, reflecting better profitability for the company

HDFC AMC at a sweet spot among mutual fund players

HDFC AMC wide coverage, with one of the highest empanelled distributors over 65,000, helped the company to build strong customer base. HDFC AMC has a dominant ~13% market share of overall AUM / individual folios in the industry. AMC business is extremely asset light model, near 90% of HDFC AMC balance sheet is cash and equivalent, needs limited investment in fixed assets/ working capital to expand their business. HDFC AMC EBITDA margin,one of the highest in the sector, reflected optimized cost structure among distributors and other overheads.

Upgrading FY22 forecast

With surge in stock market and indices, industry and HDFC AMC quarterly closing AUM took strong surge. With buoyancy in stock market, we have lifted FY22 revenue to INR 21,392mn. We expects tight control over cost to continue in FY22, generating EBITDA margin of 81%. We upgraded EPS forecast for next year by 9%, delivering strong profitability and return ratios.

Outlook and Valuation

HDFC AMC trades at rich valuations 44x of FY22 EPS, we believe, given strong tailwind in the sector and its leadership position to capture future growth, it will continue to trade at premium valuation. Asset light business model and high cash flow generation from the AMC business will ensure high return ratios and dividend yield to shareholder. As the stock price has rallied strongly since November, We recommend a "Hold" with target price of INR 3,050 (Valuation metric unchanged at 42x FY22 EPS, uplift in target price inline with upgraded EPS).

Key Risks

Any potential loss in HDFC AMC market share, selling stake from promoter or reduction in mutual fund fees/regulatory changes is the key risk to our recommendation.

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