PL Stock Report: HDFC Asset Management Company (HDFCAMC IN) - Q2FY24 Result Update - Higher equity share drove better yields - BUY

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

Rating: BUY | CMP: Rs2,757 | TP: Rs3,000

Q2FY24 Result Update - Higher equity share drove better yields

Quick Pointers:

• Core income beat of 4% driven by stronger growth in equity segment.
• Equity market share further enhanced by 31bps QoQ to 12.3%.

HDFC AMC saw a strong quarter; while QAAuM growth was in-line (+8.1% QoQ), revenue was a 4% beat to PLe leading to better blended yields at 49bps (47bps in Q1’24). Increase in equity mix QoQ and decline in liquid share were major drivers of superior yields. Company remains a top performer in equity within 1-yr and 3-yr buckets while equity market share at 12.3% continues to enhance (+31bps QoQ). Retail presence improved suggested by 1) individual MAAuM higher than industry and 2) larger pie in unique investor additions. With HDFB gaining control post-merger, sales would be boosted due to stronger distribution focus. A rise of 10% in share of HDFCAMC sales by HDFCB could lead to a 4%/5% increase in AAuM and core profits. We see a core PAT CAGR of 13.6% over FY23-25E. Stock is trading at 32x; we maintain multiple at 35x (5-yr avg. of 40x) but as we roll forward to Sep’25E core EPS, our TP increases from Rs2,800 to Rs3,000. Retain BUY.

• Strong quarter led by higher revenue: QAAuM was in-line at Rs5248bn (PLe Rs5256bn) growing by 8.1% QoQ. However, revenue was higher by 4.1% to PLe at Rs6.43bn (PLe Rs18bn) led by healthy increase in equity share QoQ and decline in share of liquid. Hence annualized yields were ahead at 49bps (PLe 47bps). Opex was a miss at Rs1.76bn (PLe Rs1.69bn) due to other opex. ESOP cost was Rs131mn for Q2’24. Led by revenue beat, operating income was higher at Rs4.67bn (+4% ahead of PLe) resulting in operating yields at 35.6bps (PLe 34.2bps). Other income was largely in-line at Rs1.22bn (PLe Rs1.2bn). Tax expense normalized to 25.7%; it was lower last quarter at 16.4% due to certain investments transitioning from short-term to long-term. Hence core PAT yields declined QoQ by 2bps but were in-line with PLe while core PAT was Rs3.47bn (PLe Rs3.4bn). PAT was 1.2% ahead of PLe at Rs4.38bn.
• Equity market share continues to improve; retail contribution enhancing: Equity mix (incl. balanced) increased from 51.8% to 55.1% QoQ while that of liquid declined by 2.8% to 13.1% resulting in better yields. Driven by superior equity performance leading to market share gains in net equity flows, market share in equity+bal QAAuM has been enhancing post Q1FY23; it improved QoQ by 31bps to 12.3%. As of Sep’23, basis weighted average equity performance, HDFC AMC remains the top performing fund (rank 1) in the 1-yr and 3-yr bucket. Retail AuM (stickier) is enhancing; in Aug’23 individual MAAuM accounted for 68% of total, compared to 58% for the industry while incremental market share in unique investor base was strong at 38%.
• Pricing slightly improved; opex for FY24E may be 13bps: Yields in Q2FY24 were as follows: equity 67bps, debt at 27-28bps and liquid at 12bps. Yields on recently launched NFOs ranged between 90-100bps whereas yields on fresh flows in larger schemes were between 50-60bps. Book margins are higher than flow margins although the flow margins slightly improved in Q2FY24. Employee cost rose by 10.9% QoQ majorly led by increase in headcount (116 employees added in Q2’24) towards new vertical to tap HDFCB customers, marketing and sales & distribution. Management suggested that annual increase in employee cost could range between 8-12%.