HDFC Asset Management (HDFC AMC) reported strong Q3 FY19 earnings, with net profit rising 25 percent year-on year, on the back of an increase in assets under management (AUM) and favourable asset class mix. It also regained its position as the largest asset management company (AMC) in India, with total AUM market share of 14.4 percent as on December 31, 2018.
Liquid AUM surged
HDFC AMC’s AUM increased to Rs 3,29,100 crore as of December-end, a growth of 12 percent YoY, better than industry growth of 8 percent during the same period.
Growth in AUM was mainly driven by liquid assets, which increased to Rs 78,655 crore during Q3, a sequential growth of 72 percent. Against this, industry growth in liquid funds was a mere 15 percent quarter-on-quarter. The AMC earns negligible fees on liquid funds. So, how should investors read this growth? As positive.
The MF industry faced large redemptions (withdrawals) in liquid schemes in September last year, triggered by the default of IL&FS group companies. HDFC AMC, however, saw a surge in liquid flows in the aftermath of the liquidity crisis. Market share gains during this tumultuous period is a testimony of HDFC AMC’s strong brand.
Asset mix still favourable and better-than-industry
Equity AUM growth of 4 percent was in line with the industry during the quarter under review. Share of high revenue earning equity assets declined 48 percent in Q3 from 52 percent of the AMC’s total assets QoQ. This decline in equity asset mix shouldn’t bother investors much as it was mainly due to disproportionate growth in liquid assets. In terms of asset mix, HDFC AMC still stands out far better than the industry, which has 44.8 percent of its total AUM in equity assets as at December-end.
Granularity of the asset book adds to the comfort HDFC AMC continues to enjoy the highest share of individual customers. The AMC reported unique individual accounts of 8.86 million as at December-end, a growth of 17 percent YoY. As a result, 62 percent of the AMC’s total monthly average AUM is contributed by individuals compared to 54 percent for the industry. This is very encouraging as flows from individual customers are relatively sticky. Also, individual investors favour equity schemes, which generate higher investment management fees compared to debt schemes.
Current monthly flows through systematic investment plans (SIP) stood at Rs 1,169 crore. Around 64 percent of the SIP book has tenure of more than 10 years, adding to predictability and visibility in AUM growth.
Operating expenses declined
The AMC reported a 22 percent decline in operating expenses during Q3 due to decline in scheme-related expenses, which will be borne by MF schemes and not by the AMC as per market regulator SEBI's directive.
In its circular dated October 22, 2018, SEBI banned payment of upfront commission and mandated a full trail model for distributor commission. It has further mandated that all scheme-related expenses, including distributor commission, will have to be paid by MF schemes and not by the AMC.
HDFC AMC took a Rs 9 crore hit during Q3 (Rs 21 crore in Q2) on its Rs 40 crore exposure towards IL&FS’ (holding company) preference shares. Adjusting for this one-off impairment expense, core operating profit increased 25 percent YoY, better than the reported growth of 21 percent.
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