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Earnings to remain under pressure from dipping yields despite improved business performance

HDFC AMC reported an EBITDA of INR 4.3bn, up 4% QoQ (highest in last 21 quarters wherein the average EBITDA was ~INR 4bn). There is strong improvement in fund performance which has led to superior business metrics such as gain in equity market share, unique investor share, and gain in flow market share in equity segment across channels. Higher AUM accretion from parent channel post-merger is also an available tailwind. We have increased our valuation multiple from 25x to 30x core EPS in line with these positive trends along with expected lower regulatory impact on TERs. However, post the 43% stock price rally since Apr’23, there is limited upside the considering the constant lag in revenue growth compared to AUM growth. The lag is due to telescopic pricing, fresh flows and other factors like regulation and competition. Downgrade to HOLD (from Add).

Downgrade to HOLD (from Add); valuations and key assumptions

Our valuations are based on 30x FY25E (earlier 25x) core EPS of INR 74 (earlier: INR 61) and cash of INR 339 per share to arrive at a revised target price of INR 2,550 (earlier: INR 1,865). Our key assumptions include: 1) 26%/15% growth in AUM between Mar’23 and Mar’25; 2) 3bps cumulative annual decline in yields in FY24E/FY25E; 3) total cost CAGR of 7% between FY23-FY25E. This translates into 16%/15% CAGR in core EBITDA / core PAT. Our higher AUM growth expectation in FY24E is driven by possibly strong capital markets as seen in the 8% QoQ AUM growth for HDFC AMC in Q1FY24, better flow on the back of improved fund performance and invigorated HDFC Bank channel post-merger.

Channel share has improved along with fund performance; reinvigorated HDFC Bank channel to aid growth

Good traction on the performance front has helped the company gain market share in the flows spread across all the channels of distribution. HDFC Bank channel share in the AMC AUM is ~6/8% for aggregate/equity segments while HDFC AMC has 30% mix in terms of total MF AUM distributed by HDFC Bank. As of Jun’23, in terms of total AUM HDFC Bank’s share stood at 5.8%

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