PL Stock Report - HDFC Asset Management Company (HDFCAMC IN) - Q1FY24 Result Update - Equity market share continues to improve - BUY

HDFC Asset Management Company (HDFCAMC IN) - Gaurav Jani - Research Analyst, Prabhudas Lilladher Pvt Ltd

Rating: BUY | CMP: Rs2,502 | TP: Rs2,800

Q1FY24 Result Update - Equity market share continues to improve

Quick Pointers:

♦ Core earnings in-line at Rs3.0bn; revenue miss was offset by lower opex.

♦ Equity market share enhanced by 28bps QoQ to 11.7%.

We raise multiple for HDFCAMC from 27x to 35x (5-yr avg. of 40x) as core PAT is upgraded by 7.0% for FY24/25E, due to higher revenue given strong AuM growth in FY24E. Equity growth may outpace industry (+13% YTD) given (1) market share gains from healthy net flows led by superior performance and (2) concerns around TER impact on earnings have been allayed as SEBI will release a new consultative paper. HDFCAMC saw a mixed quarter; despite higher QAAuM growth, core income was a miss due to lower yields and higher opex. However, core profit was protected due to lower tax rate. Company remains top performer in 1-yr and 3-yr buckets while it also moved to rank-1 in the 5-yr bucket. Equity market share is rising and touched 11.9% (+13bps QoQ). Over FY23-25E, we see a core PAT CAGR of 12.7% (earlier 8.7%) with stable core income of 35-36bps. Stock is currently valued at 31x on FY25E core EPS. We raise TP from Rs2,100 to Rs2,800. Retain BUY.

♦ Core income miss due to higher staff cost: Revenue was a bit lower at Rs5.74bn (PLe Rs5.80bn) while QAAuM was 1.1% higher to PLe. Annualized yields were a slight miss at 47bps (PLe 48bps). Opex too was tad higher at Rs1.6bn given ESOP cost of Rs109.7mn. Operating income at Rs4.1bn was lower by 5% of PLe resulting in operating yields at 34bps (PLe 35bps). Other income was ahead at Rs1.6bn (PLe Rs0.9bn) led by MTM gains in equity and debt investments due to favorable equity markets and fall in interest rates. Tax expense was lower with tax rate at 16.4% (PLe 23.5%) due to decrease in deferred tax expense as holding period of certain investments transitioned from short-term to long-term. Hence, core PAT was a beat Rs3.4bn (PLe Rs3.3bn). PAT was ahead at Rs4.8bn (PLe Rs4.0bn) due to higher other income.

♦ Market share continues enhance; equity share at 51.2%: Led by superior equity performance leading to market share gains in net sustainable equity flows, market share in equity+bal QAAuM has been enhancing post Q1FY23; it improved QoQ by 13bps to 11.9%. As of Jun’23, basis weighted average equity performance, HDFC AMC remains the top performing fund (rank 1) in the 1-yr and 3-yr bucket while in the 5-yr bucket it moved to rank-1. Due to strong performance, we expect the healthy momentum in net flows to sustain which should translate to more market share gains. As equity markets have performed well in Q1FY24 (YTD +13.3%), AuM growth could be healthy for FY24 (we see 22% growth) assuming no major macro headwinds and HDFC AMC should outpace industry equity AuM growth.

♦ Blended yields could moderate; ESOP cost to decline in FY25E: Company suggested that there could be some moderation in equity yields as stock margins are higher than margins on fresh flows. Hence we are factoring a 4.4bps YoY decline in equity yields to 74.3bps for FY24E (vs 3.7bps fall in FY23). As per new ESOP plan total estimated cost of Rs550-600mn would be expensed as follows: 55% in FY24E, 30% in FY25E and balance thereafter. Considering ESOP cost under previous scheme, overall staff cost is expected to remain flat in FY25E (+12% YoY in FY24E). We see operating yields to range between 35-36bps in FY24/25E.

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