HDFC AMC's ability to handle cost-related pressures helped its Q1

In the four quarters of publishing results after last year’s listing, June quarter (first quarter or Q1) has been the best so far for HDFC Asset Management Company (AMC). While revenues from operations grew only 7 per cent year-on-year (YoY) to Rs 504 crore, net profit growth at 42 per cent YoY to Rs 287 crore in Q1 was sizeable.

Consequently, the stock of HDFC AMC rose by 4 per cent on Wednesday reacting to positive numbers. The Street’s expectations have moved a notch higher, given the company’s ability to handle cost-related pressures quite effectively. These pressures cropped up, owing to the recent changes in norms governing the total expense ratio (TER).

For instance, HDFC AMC has been able to pass on a large part of the reduction in TER to distributors. Most AMCs resorting to a price hike in liquid funds had also cushioned the impact of a TER cut. Phasing out upfront commission expenses from HDFC AMC’s profit-and-loss statement has also helped the company bring in significant cost efficiencies. Q1’s fees and commission expenses declined by 86 per cent YoY, thus, explaining the improvement in net profit, despite only a 7 per cent revenue growth.

While higher efficiencies are an internal factor, HDFC AMC’s ability to grow its assets under management (AUMs) by 18 per cent YoY in Q1 is also a positive.

For investors, the important takeaway is that the share of individual AUMs (retail plus high net worth individuals) rose to 59 per cent, against the industry levels of 54 per cent in Q1. HDFC AMC leadership across segments such as equity, debt, and liquid funds with 15.8, 13.4, and 16.9 per cent market share, respectively, adds strength to its financials.

However, it would be important to keep an eye on the overall inflows into mutual funds (MFs). While the environment turned incrementally conducive in June, it is still far from comforting. Reports suggest that equity inflows in Q1 (excluding those into arbitrage schemes and exchange traded funds) was nearly 72 per cent lower than 2018-19’s average.

The industry was faced with lump sum redemption of Rs 16,200 crore in Q1 in equity schemes, while debt funds saw an outflow of Rs 14,700 crore, according to a HDFC Securities report. While June 2019 performance was better than a month ago, with a near-42 per cent month-on-month increase in flows into equity schemes, at about Rs 7,663 crore of equity inflows, it was still 20 per cent lower than the previous year. Analysts at Emkay Global Financial Services say MFs have turned somewhat cautious with cash position up to 2.3 per cent, the highest in 10 months.

 “Flows are improving, but we prefer to remain cautious,” says a fund manager. While the larger positives such as market positioning and tight cost structures are a long-term positive, sustenance of inflows is important for HDFC AMC to replicate Q1’s performance. Another factor to watch out for is how the company’s balance sheet exposure to Essel Group will pan out in the coming months. Fund houses’ ‘standstill’ arrangement with promoters of Essel Group expires on September 30. If the Essel entities are unable to meet their repayment obligations, the probability of HDFC AMC taking a hit on its exposure is likely; an event that will have a bearing on its financials. 

Trading at 36x its 2019-20 earnings, there is limited scope for any misses by the company.

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