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September 30, 2019

Indian Asset Management Industry

Beneficiary of structural shift in household savings…

The past few decades have been a golden period for the Indian asset

management industry. This period of growth has been led by a gradual shift

of household savings from traditional avenues (FD, gold, real estate) to

financial asset including MFs, stocks & bonds. We expect this trend to

continue apace given increasing awareness on MF as investment in smaller

cities & subdued returns in physical asset in the past. Further, the unique

concept of SIP (flows doubled in the last five years) is slated to be a strong

growth driver for equity mutual funds, in particular. Given these

megatrends, we expect industry AUM to grow at CAGR of 18.7% in the next

five years to ~| 47.3 lakh crore, with equity-oriented AUM expected to

outpace overall AUM by growing at 23% CAGR in FY20-23E.

Rising AUM and regulatory effort to lower cost for customers is seen

bringing down yield (TER) on AUM for the industry in the long run. However,

growth in AUM with a favourable mix and continued focus on improving

operational efficiency makes a case in favour of sustainable growth in

earnings.

HDFC Asset Management Company (HDFC AMC)

HDFC AMC is the market leader in the rapidly growing Indian AMC space

with 14% share on an overall AUM basis and 16.2% market share on an

equity AUM basis as of FY19. Distinguished parentage of the HDFC group,

consistent fund performance over the years along with a robust pan-India

distribution network across channels have been key to the company’s

healthy AUM growth in the past (24% CAGR in FY14-19). Its sharp focus on

higher-yielding equity segment and operational efficiency has helped the

company sustain asset growth at highly profitable levels (PAT CAGR of 17%

over FY14-19). Further, HDFC AMC is also the leader in terms of SIP book

(| 1269 crore monthly book, 15.6% market share). Going forward, we believe

the company would be an outsized beneficiary of industry tailwinds like

greater financial savings and increasing awareness. We believe the

company is poised to be an earnings compounder given its strong

parentage, higher share in active equity segment & SIP and best-in-class

operating efficiency. However, a recent spike in the stock price appears to

factor in all the positives. Accordingly, we initiate coverage on the stock with

a HOLD rating and a target price of | 2800 per share.

Reliance Nippon Life Asset Management (RNAM)

Reliance Nippon Asset Management (RNAM) is the fifth largest AMC in India,

with an AUM market share of 8.3% as of FY19. RNAM is strategically focused

on leadership in the retail segment (40% of AUM) via industry leading

presence in B30 cities (20% of AUM) through a widespread distribution

network of independent financial advisors (IFAs). Its market share in the SIP

segment is impressive at 10.6%. We believe the buyout of old promoter’s

stake by Nippon Life removes a substantial overhang on the stock. In

addition, Nippon Life is seen aiding better flows from domestic corporates

as well as offshore segment. In our opinion, this change in parentage will

reduce the existing valuation discount in relative terms. The resulting

multiple rerating is yet to occur in a meaningful manner. Thus, we initiate

coverage on the stock with a BUY rating and a target price of | 300.

Research Analyst

Kajal Gandhi

[email protected]

Vishal Narnolia

[email protected]

Harsh Shah

[email protected]

ICICI Securities | Retail Research 2

ICICI Direct Research

Initiating Coverage | Indian Asset Management Industry

Industry Trend

Indian AMC industry – healthy growth for nearly two decades

The history of the Indian mutual funds (MF) industry stretches from

formation of the first mutual fund - Unit Trust of India (UTI) in 1963 to public

sector financial companies entering the MF business in 1987. Further, many

private and foreign players participated with the number of MF houses

increasing to 33 in 2000 with total assets of ~| 1.22 lakh crore. Since then,

supported by various regulatory measures as well as investor education

initiatives, the mutual fund industry has witnessed healthy growth with AUM

of ~| 25.4 lakh crore as of July 31, 2019; implying ~19% CAGR for nearly

two decades.

Exhibit 1: Evolution of Indian mutual fund industry

Source: Company, ICICI Direct Research

Exhibit 2: Indian mutual fund industry – AUM growth since FY00

1.1 0.9 1.0 0.81.4 1.5

2.33.3

5.14.2

6.1 5.9 5.97.0

8.3

10.8

12.3

17.5

21.4

23.9

0

4

8

12

16

20

24

FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

| Lakh c

rore

Source: AMFI, ICICI Direct Research

Saving rate high…but MF penetration remains low

India has been an economy with a high savings rate of ~30% compared to

other economies. However, a substantial proportion of this have been

channelised into physical assets i.e gold and real estate. This phenomena is

explained by lower financial literacy in the country, which limits risk taking

ability in terms of investments. Additionally, within financial savings, the mix

is skewed towards bank deposits. Therefore, penetration of mutual funds

remained lower in India. However, an improvement in information flow and

ease of transaction led by technology along with rising financial literacy is

seen preparing a fertile ground for the mutual fund industry for incremental

growth ahead.

Gross saving rate in major economies

30

46

15 14

19

13

0

5

10

15

20

25

30

35

40

45

50

India China Brazil SA USA UK

(%)

Source: World Bank, ICICI Direct Research




Mutual fund under penetration offers growth potential ahead

Mutual fund penetration ratio (AUM to GDP) is significantly lower in India at

~11%, compared to the world average of 62% and emerging economies

like Brazil and South Africa at 59% & 49%, respectively. Such relatively low

penetration provides a large potential and opportunity for strong growth

ahead.

Exhibit 3: AUM as percentage of GDP across countries

101%

76%

65%62%

59% 57%54%

49%

30%26%

11% 11%

0%

20%

40%

60%

80%

100%

120%

Source: IMF, ICICI Direct Research

Structural shift in household savings towards financial assets

Indian households have traditionally favoured real estate and gold as means

of investments. However, there has been a shift in saving pattern with

increase in financial savings in recent fiscals. Physical savings, which were

at 62% in FY14, are trending down to 56% in FY17, while financial savings

are on the rise contributing ~42% of the pie in FY17 vs. 36% in FY14.

Within financial savings, bank deposits remained the primary preference due

to their perceived low risks. This phenomena is explained by lower financial

literacy in the country, which limits risk taking ability in terms of investments.

However, an improvement in information flow and ease of transaction led

by technology along with rising financial literacy is seen favouring non-

deposit investment avenues. Muted price movement in real estate (refer

exhibit on the right), demonetisation and GST have further reduced the

lucrativeness of old favourites, thus witnessing a shift towards mutual funds

as a long term investment destination. A large pool of young earners with

rising awareness and an appetite for volatility in equity investment have

boosted AUM growth and is seen continuing further.

Exhibit 4: Pattern of Indian savings – moving towards financial assets

Particulars

| crore % | crore % | crore % | crore %

Net Financial Savings 8,32,100 36.48 9,19,200 36.15 10,82,500 41.47 9,69,729 41.47

Net Currency and Deposits 4,07,800 17.88 4,10,400 16.14 4,31,600 16.52 1,81,814 6.93

Shares and Debentures 20,364 0.89 5,700 0.22 44,893 1.72 36,265 1.38

Insurance 2,04,500 8.97 2,99,300 11.77 2,66,100 10.19 3,49,198 13.31

Pension 1,77,800 7.80 1,88,800 7.42 2,76,900 10.60 3,02,010 11.51

Claims on Government 23,100 1.01 1,000 0.04 66,600 2.55 62,552 2.38

Savings in physical assets 14,12,000 61.91 15,78,200 62.06 14,83,500 56.79 16,06,941 61.27

Savings in form of gold and silver ornaments36,800 1.61 45,600 1.79 46,469 1.78 46,257 1.76

Net Household Savings 22,80,900 100 25,43,000 100 26,12,469 100 26,22,927 100

FY14 FY15 FY16 FY17

Source: RBI, HDFC AMC RHP, ICICI Direct Research

Real estate price index remained muted

7.57.1

6.7 6.6

5.6

-2.1-3

-1

1

3

5

7

9

(%)

Source: NHB, ICICI Direct Research




Strength, sustainability of business model gives confidence

The asset management industry has been in existence for a long time.

However, it was only after enactment of mutual funds regulations that the

industry witnessed healthy growth for over two decades. Performance of

the asset management industry is primarily based on AUM. In turn, this is

an outcome of net inflows and asset pricing. In our view, there is a case for

continued healthy inflows ahead, especially in equity segment, led by rising

preference for financial assets within household savings, access to

information providing risk taking appetite and increasing penetration of

AMCs in smaller cities and towns. Rising AUM and regulatory effort to lower

cost for customers is seen bringing down yield (TER) on AUM for the

industry in the long run. However, growth in AUM with favourable mix and

continued focus on improving operational efficiency makes a case in favour

of continued earnings growth.

In our view, we expect industry AUM to grow at a CAGR of 18.7% in the next

five years to ~| 47.3 lakh crore while higher yield accreting equity-oriented

AUM is expected to grow at a faster pace of 23% CAGR in FY20-23E. Given

higher volatility in asset pricing, growth in equity-oriented AUM is seen

remaining slower in FY20E. However, the same is seen reviving from FY21E,

led by 1) continued SIP flow (accounting for ~46% of incremental AUM), 2)

gradual revival of lump sum flow in equity and 3) mark to market gains. Such

higher growth will lead to inching up of proportion of equity from ~43% in

FY19 to ~50% in FY23E. Overall, we remain positive on the fundamental

prospects of the industry in the long run.

Exhibit 5: AUM growth to remain healthy with rise in proportion of equity AUM

| lakh crore 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E CAGR (%)

Nominal GDP 113 125 138 154 171 190 209 230 253 278 10.0%

Household savings 22.5 24.4 24.7 26.2 29.4 31.7 34.4 37.2 40.3 43.7 8.3%

as % of GDP (%) 19.8% 19.6% 18.0% 17.1% 17.2% 16.7% 16.4% 16.2% 15.9% 15.7%

AUM 8.3 10.8 12.3 17.5 21.4 23.8 25.8 30.3 37.1 47.3 18.7%

as % of GDP (%) 7.3% 8.7% 9.0% 11.4% 12.5% 12.5% 12.3% 13.2% 14.7% 17.0%

Equity AUM 2.1 3.7 4.3 6.3 9.2 10.2 11.2 13.5 17.3 23.3 23.0%

as % of AUM 25.2% 34.3% 34.5% 35.8% 43.2% 42.9% 43.3% 44.5% 46.7% 49.3%

Derivation of equity oriented AUM

MTM 0 0.9 -0.4 1.1 0.5 -0.1 -0.2 0.9 1.6 2.1

Net inflow 0 0.7 0.9 1.0 2.5 1.1 1.2 1.4 2.3 3.9 38.7%

Increase in AUM 0 1.6 0.5 2.0 2.9 1.0 1.0 2.3 3.9 6.0 56.9%

Gross inflow (non SIP) 0.4 1.4 1.5 2.1 4.3 1.9 2.0 3.4 5.4 8.7 45.4%

as % of Equity AUM (%) 0.0% 65.9% 41.6% 49.7% 68.5% 21.1% 20.0% 30.0% 40.0% 50.0%

Redemption 0.6 0.8 1.0 1.6 2.5 1.8 1.8 3.0 4.3 6.1 35.2%

as % of gross inflow (%) 155.1% 59.7% 62.5% 75.0% 58.3% 93.6% 90.0% 90.0% 80.0% 70.0%

Net inflow -0.2 0.6 0.6 0.5 1.8 0.1 0.2 0.3 1.1 2.6 113.8%

SIP 0.1 0.2 0.3 0.4 0.7 0.9 1.0 1.1 1.2 1.3 8.7%

Total net inflow -0.1 0.7 0.9 1.0 2.5 1.1 1.2 1.4 2.3 3.9 38.7%

Source: AMFI, Company, ICICI Direct Research

Country wise MF expense ratio

Country 2015 2017 2019

India 2.65 2.22 1.93

China 1.76 1.73 1.76

Germany 1.44 1.46 1.46

France 1.65 1.76 1.72

Japan 1.65 1.64 1.65

United kingdom 1.65 1.28 0.95

United States 0.84 0.67 0.59

Source: Morningstar Study, ICICI Direct Research




Snapshot of domestic mutual fund industry

As of July 2019, there are 44 active AMCs operating in the current market

comprising six entities sponsored by public sector banks, four entities

sponsored by financial institutions, 25 AMCs sponsored by the private

sector, other financial companies and nine entities sponsored by foreign

players. Despite an increase in number of players, the Indian mutual fund

industry remains concentrated with the top 10 AMCs, which contributed

~83% of industry’s AUM in FY19.

Exhibit 6: Top 10 AMC (FY19)

AMC AUM (| crore) Market Share (%)

HDFC AMC 344144 14.4

ICICI Pru AMC 314123 13.1

Aditya Birla Sunlife 239533 10.0

SBI Fund Mgt 231174 9.7

Reliance Nippon 231174 9.7

Kotak AMC 150315 6.3

UTI AMC 144763 6.0

Franklin Templeton 121459 5.1

Axis AMC 87746 3.7

DSP Investment Manager 76439 3.2


Exhibit 7: Market share concentrated with top 10 AMCs contributing ~83% of QAAUM

Total AUM

Category| lakh

crore

% of total| lakh

crore

% of total| lakh

crore

% of total| lakh

crore

% of total| lakh

crore

% of total| lakh

crore

% of total

Top 5 AMCs 4.87 53.8 6.60 55.5 7.53 55.7 10.43 57.0 11.11 56.9 14.1 58.8

Next 5 AMCs 2.17 24.0 2.76 23.2 3.23 23.9 4.35 23.8 4.72 24.2 5.8 24.3

Rest of Market 2.02 22.3 2.53 21.2 2.77 20.5 3.51 19.2 3.69 18.9 4.0 16.9

Total 9.05 100.0 11.89 100.0 13.53 100.0 18.30 100.0 19.52 100.0 23.9 100.0

Mar-19Mar-14 Mar-15 Mar-16 Mar-17 Mar-18


Continued focus increased penetration beyond major cities

In the Indian mutual fund industry, nearly two-third (61.8%) of AUM is

contributed by top five cities while top 15 cities comprise ~74.6% of AUM.

Though top 15 cities have a major share of AUM, smaller cities are the way

ahead to support incremental business wherein the share of B15 cities has

increased from 14.2% in FY14 to ~25.5% in FY19. This rise is attributable to

lower base and rising penetration led by improvement in technology, access

to data, information and incentive of additional TER provided by the

regulator.

Rise in individual investors to shore up equity AUM

The industry witnessed faster growth in the last five years with growth in

AUM at ~25% CAGR in FY13-18. Traction in FY17 was highest at ~42%

followed by ~22% in FY18 and ~12% in FY19. Greater participation from

individual investors led to higher growth in equity AUM at ~37% CAGR in

FY13-18, followed by liquid segment at ~29% CAGR. Such higher inflows in

equity schemes has led to an increase in proportion of equity oriented AUM

from ~27.5% in FY13 to ~42.8% in FY19. Increase in retail participation in

mutual fund AUM (increased from 44% in FY14 to 55% in FY19) and rising

preference of retail for equity schemes (refer Exhibit 10) bodes well for

growth of proportion of equity in AUM.

Geography wise AUM share (FY19)

62%13%

25%

Top 5 Next 10 B15





Exhibit 8: Flow in equity segment on rise in recent fiscal

1.9 2.13.7 4.3

6.69.2 10.2

4.0 4.7

5.35.8

7.6

8.0 7.0

0.91.3

1.62.0

3.1

3.44.7

0.10.2

0.1

0.2

0.2

0.8 1.9

0

5

10

15

20

25

FY13 FY14 FY15 FY16 FY17 FY18 FY19

| lakh c

rore

Equity Debt Liquid Others


Exhibit 9: AUM break-up investor type

56% 54% 55% 54%49% 45%

44% 46% 45% 46%51% 55%

0%

20%

40%

60%

80%

100%

FY14 FY15 FY16 FY17 FY18 FY19

Individual Institutional


Exhibit 10: Individual investor favours equity investment

44

57 57 6168 68

49

38 3835

28 25

0%

20%

40%

60%

80%

100%




Exhibit 11: Institutions have larger proportion in non equity

5 8 9 9 13 11

55 49 49 49 4339

4041 40 38 38

36

0%

20%

40%

60%

80%

100%




Systematic investment plan (SIPs), an important growth lever

One of the key features of the MF business has been continuous growth in

SIP, especially from retail investors. SIPs inflow have been growing from

| 3100 crore per month in April 2016 to | 8100 crore in July 2019; i.e. CAGR

of 34%. In FY19, SIP inflows constitute ~33% of total gross inflow.

Net inflows in the equity segment, which was healthy in FY18 at | 156753

crore witnessed a decline in FY19 to | 101949 crore, on the back of volatility

and uncertainty within equity market. However, SIP inflows have witnessed

a continuous uptrend. Given ease of transaction using technology,

increasing appetite of retail investors and low ticket size, momentum of SIP

flows is seen remaining intact, which will support overall accretion in AUM.

SIP as % of Equity AUM

5.0 4.9

6.9 7.07.3

9.1

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

2014 2015 2016 2017 2018 2019

(%)





Exhibit 12: Healthy trajectory in monthly SIP flows to support AUM

3.1

3.2

3.3

3.3

3.5

3.7

3.4 3.9

4.0

4.1

4.1

4.3

4.3

4.6

4.7

4.9

5.2

5.5

5.6

5.9 6.2 6.6

6.4

7.1

6.7 7

.3

7.6

7.6

7.7

7.7

8.0

8.0

8.0

8.1

8.1

8.1

8.2

8.2

8.1

0

1

2

3

4

5

6

7

8

9

| Bn


Key changes by Sebi making industry more customer friendly

In order to protect investor interest and promote penetration of mutual

funds, the Securities and Exchange Board of India (Sebi) has introduced

number of key regulations.

1) Additional expense ratio of up to 30 bps was allowed for meeting certain

criteria of new inflow from B15 (Beyond top 15) cities. In February 2018, Sebi

notified a change from B15 to B30 (Beyond top 30) cities for additional

expense with effect from April 1, 2018.

2) In February 2018, Sebi disallowed mutual fund schemes without exit load

to charge additional expense of 20 bps. In addition, additional expense

allowed in lieu of exit load was reduced to 5 bps in June 2018.

3) In October 2018, Sebi in its circular banned payment of upfront

commissions and notified that all scheme-related expenses should be

charged to the schemes’ account

4) In September 2018, Sebi announced a reduction in the maximum TER that

can be charged to mutual fund schemes. This has led to ~20-25 bps impact

on equity TER but a majority of this cut has been passed on to distributors.




Exhibit 13: Earlier permissible TER by SEBI

Equity oriented

schemes

Other than equity

oriented schemes

0 - 100 2.50% 2.25%

100 - 400 2.25% 2.00%

400 - 700 2.00% 1.75%

>700 1.75% 1.50%

AUM (in | crore)

Maximum permissible TER

Source: SEBI, ICICI Direct Research

Exhibit 14: New regime of TER by SEBI

Equity oriented

schemes

Other than equity

oriented schemes

0 - 500 2.25% 2.00%

500 - 750 2.00% 1.75%

750 - 2,000 1.75% 1.50%

2000-5000 1.60% 1.35%

5,000 - 10,000 1.50% 1.25%

10,000 - 50,000

TER reduction of 0.05% for

every increase of | 5000

crore in AUM or part

thereof

TER reduction of 0.05% for

every increase of | 5000

crore in AUM or part

thereof

>50,000 1.05% 0.80%

AUM (in |

crore)

Maximum permissible TER

Source: SEBI, ICICI Direct Research

Exhibit 15: Snapshot of Industry players (FY19)

| crore HDFC ICICI Pru Birla RNAM

AUM 344144 314123 265109 231174

3 year CAGR (%) 27.3 23.6 29.4 14.8

% of Industry AUM 14.4 13.1 11.1 9.7

Equity QAAUM 160744 128893 88955 91104

% equity 43% 41% 34% 39%

Total revenue 2097 2003 1407 1589

Total revenue as a % of AUM 0.61 0.64 0.53 0.69

Total expenses 709 936 750 892

Total expenses as a % of AUM 0.21 0.30 0.28 0.39

Net profit 931 683 448 475

Net profit as a % of AUM 0.27 0.22 0.17 0.21

Shareholders’ funds 3071 1178 1521 2532

ROE 30.3 58.0 29.5 18.8

Dividend pay-out ratio (%) 55 62 75 62


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September 30, 2019

CMP: | 2800 Target: | 2800 (0%) Target Period: 12 months

months

HDFC AMC (HDFAMC)

HOLD

Strong business model; fundamentals priced in…

HDFC AMC is the largest and most profitable AMC in terms of AUM & profit

with asset under management (AUM) of | 3.43 lakh crore and PAT of | 931

crore as of FY19. Distinguished parentage of the HDFC group, consistent

fund performance over the years and a robust pan-India distribution network

across channels have been key to the company’s healthy AUM growth in the

past (24% CAGR over FY14-19).

Focus on retail customers, strong SIP flows aid growth

HDFC AMC has been able to build a strong brand franchise due to strong

parentage and consistent returns in the past with top funds witnessing

continuous flows. The company’s persistent focus on garnering high

yielding retail AUM has led equity AUM growth to outpace overall AUM

growth (27% CAGR vs. 24%) in FY14-19. Continued focus on retail

customers and SIP flows led to an increase in proportion of equity oriented

AUM from 35% in FY14 to 48% in FY19. This has led HDFC AMC to garner

superior yield, thereby leading to healthy topline growth.

Strong distribution reach; key ingredient to growth

Over the years, HDFC AMC has successfully built a pan-India distribution

network. It has over 211 branches & empanelment with more than 75000

distributers. The company enjoys advantage of access to the large branch

network of HDFC Bank, which contributes ~7.7% of total AUM. Within B30

cities, HDFC AMC is among the market leaders with a market share of 12.4%.

Superior earning led by higher operational efficiency

HDFC AMC continues to remain the most profitable AMC compared to peers

with PAT at 27 bps of AUM. Superior profitability is attributable to two

factors that is 1) higher share of high yielding equity AUM at 48% and 2) best

operating cost within industry at 21 bps of AUM.

Strong, sustainable fundamentals; rich valuation

Migration to financial savings, strong distribution & consistent performance

are expected to enable healthy AUM growth & maintain leadership. Strong

operating efficiency, higher proportion of equity AUM & strong SIP flows

would aid profitability. We expect PAT growth of 21% CAGR in FY19-21E to

| 1373 crore. Given HDFC AMC’s strong positioning & superior earnings

profile, the business deserves a premium valuation. However, a recent spike

in price appears to factor in all positives. Using three stage DCF

methodology with terminal growth at 8% & Ke (cost of equity) at 12%, we

arrive at a TP of | 2800. We initiate coverage on the stock with a HOLD rating.

Key Financial Summary

Particulars

Amount

Market Capitalisation | 59545 crore

Networth | 3071 crore

52 week H/L 2975/1251

Face Value | 5

DII Holding (%) 0.92

FII Holding (%) 6.08

Key Highlights

Market leader in total AUM, equity

AUM, SIP book, revenue & PAT.

To be outsized beneficiary of

industry tailwinds.

Strong parentage & focus on

operating efficiency to help

compound earnings.

Current stock price factors in current

fundamental, accordingly initiate

coverage with HOLD rating and

price target of | 2800

Price movement

0

2000

4000

6000

8000

10000

12000

14000

0

500

1000

1500

2000

2500

3000

3500

Aug-1

8

Feb-1

9

Aug-1

9HDFCAMC IN EQUITY

NIFTY Index

Source: ICICI Direct Research, Company

Research Analyst

Kajal Gandhi

[email protected]

Vishal Narnolia

[email protected]

Harsh Shah

[email protected]

s

FY16 FY17 FY18 FY19 FY20E FY21E

Net Profit (| crore) 478 550 711 931 1188 1373

EPS (|) 23.6 27.1 34.5 43.9 56.0 64.7

P/E (x) 118.8 103.5 81.1 63.8 50.0 43.3

AUM /share (|) 8161 11332 14232 15754 17637 20699

P/AUM (%) 34.3 24.7 19.7 17.8 15.9 13.5

DPS (|) 40.0 46.0 16.0 24.0 33.6 38.8

RoE (%) 41.5 38.7 32.9 30.3 33.5 33.5




Initiating Coverage | HDFC AMC

Company Background

HDFC AMC is a joint venture between HDFC Ltd & Standard Life Assurance,

effective from April 2001. The AMC is the largest asset management

company (AMC) in India in terms of AUM & profitability. Its AUM & PAT have

grown at 23% & 20% CAGR to | 343938 crore & | 931 crore, respectively, in

FY13-19. The market share of the company is at 14.7%. At 48%, equity

segment constitutes lion share of AUM while non-equity segment makes up

the balance portion. Over FY13-19, the company has grown its equity AUM

at 27.3% CAGR to | 160744 crore while non-equity AUM has grown at 19.5%

CAGR. In the past, the company has acquired Zurich MF’s Indian arm (June

2003) & Morgan Stanley MF (June 2014). As of Q1FY20, HDFC AMC has a

branch network of 211 branches (135 in B-30 cities) & more than 75000

distribution partners.

Exhibit 1: AUM growth over the years

29 37 38 3840

63 59 88 126 161 170 177 212

6 6

127

9

7

6

5

1577

8392

110

40 35 45 52 64

82 102

139

151 97103 105

113

0

50

100

150

200

250

300

350

400

450

(| 000 crore)

Equity Debt Liquid & Others


Exhibit 2: Key financials (FY14-19)

| crore FY14 FY15 FY16 FY17 FY18 FY19

Asset under Management 112570 151755 166719 232224 292225 334188

Total Income 903 1,064 1,494 1,588 1,870 2,097

Total Expense 381 442 786 788 812 722

Net Profit 358 416 478 550 711 931

RoE (%) 39.7 37.1 41.5 38.7 32.9 30.3


Exhibit 3: Company History

Date Particulars

Dec-99 Company incorporated and receives Sebi approval to manage HDFC Mutual Fund schemes

Apr-01 Standard Life Assurance becomes company’s shareholder

Jun-03Company acquires Zurich Mutual Fund schemes, with AUM of | 3400 crore, pursuant to

which the company achieved a combined AUM of | 11800 crore

Oct-09 Company’s AUM crosses | 1 lakh crore

Jun-14 Company acquires Morgan Stanley Mutual Fund schemes, having AUM of | 1900 crore

Apr-17 Company’s equity AUM crosses | 1 lakh crore

Dec-17 Company’s AUM crosses | 3 lakh crore


Shareholding Pattern

Shareholder Holding (%)

Promoters 82.7

Institutional Investor 7.0

Others 10.3

Source: BSE

Top Shareholder

Top Shareholders (%)

HDFC Ltd 52.77

Standard Life 29.94

Small Cap World Fund 1.43

Source: Bloomberg

Employee Count (FY18)

29%

58%

13%

Client Services Salaes Others





Investment Rationale

Equity focus, strong SIP flow keep AUM growth healthy

HDFC AMC has a track record of being one of the largest AMCs on the basis

of AUM, profitability & market share. The company’s AUM has been growing

at ~20% CAGR in FY14-19, largely driven by the equity segment that grew

at a faster pace (27% CAGR). Equity oriented AUM as a proportion of AUM

has grown from 39% in FY13 to 48% in FY19. Therefore, non-equity

proportion reduced to 52% in FY19 from 61% in FY13. This resulted in an

increase in market share of equity AUM, which is at 16.2% as of FY19

compared to FY10.

Exhibit 4: HDFC AMC growth higher compared to industry

38 4063 59

88126

161 170 177212

52 64

82 102

139

151 97103 105

113

79

76

5

1577

8392

110

0

50

100

150

200

250

300

350

400

450

FY13 FY14 FY15 FY16 FY17 FY18 FY19 Q1FY20 FY20E FY21E

(| 000 crore)



Exhibit 5: Market share on rise led by faster growth in equity AUM

11.6 11.7

14.9

13.813.5 13.6 13.5

13.213.6

14.414.7

0

2

4

6

8

10

12

14

16

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 Q1FY20

(%)


Going forward, strong parentage, reputed brand image, widespread

distribution & focus on individual & equity segment are expected to maintain

the AUM growth momentum. Additionally, strong SIP flow (industry leader)

is seen moderating market volatility. We expect AUM growth to remain

healthy at 14% CAGR for FY19-21E.

High quality SIP book with ~15.6% market share

HDFC AMC, due to greater retail participation, strong distribution & investor

awareness programme by Association of Mutual Funds in India (Amfi), has

been able to significantly improve flow of systematic investment plans (SIP).

The company has been able to clock monthly SIP of ~| 1270 crore in June,

2019 compared to | 308 crore monthly in March 2014. Transaction per

month has also witnessed a substantial surge with transaction per month

increasing to 34.3 lakh in Q1FY20 from 12.3 lakh in FY14. Over the years, the

company’s SIP book has demonstrated higher stickiness with 79% of

initiated transactions with a tenure of over five years and 66.6% of

transactions with a tenure over 10 years (as of June 2019). This stickiness

provides comfort as it helps reduce market volatility.

Equity proportion as % of AUM (FY19)

56

48

4139

36

0

10

20

30

40

50

60

70

SBI HDFC

AMC

ICICI

Pru

RNAM Birla

(%)





Further, live individual account & individual monthly average assets under

management (MAAUM) witnessed healthy growth in FY14-19. Live account

more than doubled to 92 lakh in Q1FY20 vs. 44.4 lakh in FY14. Individual

AUM was at | 2.21 lakh crore in Q1FY20 compared to | 62400 crore in FY14.

Thus, as of Q1FY20, share of individuals accounted for 59% of MAAUM vs.

industry average of 54% reflecting attractiveness among investors.

Exhibit 6: Stable industry SIP flows (monthly)

3100

4300

7100

7600

8100 8100

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

April-16 Mar-17 Mar-18 Jun-18 Mar-19 Jun-19

| crore

Source: AMFI, ICICI Direct Research,*- Monthly flows and not annualised

Exhibit 7: HDFC AMC’s strong SIP growth (15.6% share)

308

476 485

677

1153 1165 1182

1270

0

200

400

600

800

1000

1200

1400

Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Jun-18 Mar-19 Jun-19

| crore

Source: AMFI, ICICI Direct Research, *- Monthly flows and not annualised

Consistent performance with superior investor experience

Major schemes of HDFC AMC have been delivering robust returns leading

to consistent inflows within the scheme. Top four equity & debt schemes,

which form ~65% of AUM have delivered superior returns, ahead of

industry & peers. HDFC funds continue to be highly recommended by

distributors despite lower commission due to lower TER. This could be

attributable to superior investor satisfaction of strong brand & consistent

performance.

Exhibit 8: Consistent return profile boosts investor’s acceptance

Scheme Name Inception Date Average AUM (| Crores) CAGR (10 Years) (%) Benchmark CAGR return (%)

HDFC Top 100 Fund Oct-96 16949 11.24 10.26

HDFC Equity Fund Jan-95 22620 12.36 10.26

HDFC Mid-Cap Opportunities Fund Jun-07 22354 16.94 10.26

HDFC Small Cap Fund Apr-08 7949 13.04 10.26


Strong distribution channel

HDFC AMC has a well-diversified pan–India branch network consisting of

211 branches in over 200 cities & more than 75000 empaneled distribution

partners. As of June, 2019, the distribution mix constituted major proportion

from direct channel (without any distributor) at 39.2%, national distributors

contributes 20%, IFAs - 27.5% and banks - 13.3%.

The company has a work force of over 1200 employees with 60-67% of

employees within sales, distribution & customer service. One of the

advantages is access to the large branch network of HDFC Bank, which was

at 5130 branches. The bank contributes ~7.7% of total AUM & 10.3% of

equity AUM. Increasing digitisation & emergence of fintechs like Paytm

Money, ET Money are expected to increase the share of the direct scheme

to AUM thereby reducing the reliance on traditional distribution network.




Exhibit 9: Distribution channel (total AUM) (Q1FY20)

39%

27%

20%

8%

6%

Direct IFAs National Distributors HDFC Bank Other Banks


Exhibit 10: Distribution channel (equity AUM) (Q1FY20)

19%

40%

25%

10%

6%

Direct IFAs National Distributors HDFC Bank Other Banks


Strong earnings profile compared to its peers

HDFC AMC remains the most profitable AMC in the industry in terms of PAT

by AUM. HDFC AMC delivered a PAT, AUM of 27 bps as of FY19, which is

best in the industry. Top five AMC forms 57% market share in total AUM &

60% in equity AUM with HDFC AMC leading with 14.5% market share in total

AUM & 14.6% in equity AUM. The best in class profitability could be

attributable to 1) higher proportion of equity AUM in overall AUM, which has

grown at 27.3% CAGR for FY13-19 with equity AUM contributing 48.1% of

total AUM and 2) high efficiency with operating cost at 21 bps of AUM, which

is lowest in industry.

Operating leverage helps the company sustain higher RoE of 30% over the

years. Further, a unique business model and lower capex requirement helps

the company generate free cash flow & maintain payout ratio of 50%+.

Going ahead, we expect equity AUM to grow at 15.6% CAGR in FY19-21E

vis-à-vis rise in proportion to 49% by FY21E. In turn, this would help the

company maintain its revenue growth of 12% CAGR in FY19-21E to | 2359

crore. Over and above this, best in class operating leverage would drive

healthy PAT growth of 21% CAGR in FY19-21E to | 1373 crore, well ahead

of its peers.

Exhibit 11: Revenue as percentage of AUM (FY19)

61

69

64

53

60

0

10

20

30

40

50

60

70

80

HDFC AMC RNAM ICICI

Prudential

Aditya Birla

Sunlife

SBI MF*

bps

Source: Company, ICICI Direct Research,*-calculated

Exhibit 12: PBT as percentage of AUM (FY19)

40

30

33

2426

0

5

10

15

20

25

30

35

40

45

HDFC AMC RNAM ICICI

Prudential

Aditya Birla

Sunlife

SBI MF*

bps





Exhibit 13: Healthy trajectory of profitability

1064

14941588

1870

20972233

2560

416 478550

711

931

1188

1373

0

500

1000

1500

2000

2500

3000

FY15 FY16 FY17 FY18 FY19 FY20E FY21E

Revenue PAT


Exhibit 14: Expenses as percentage of AUM (FY19)

8

17

6 6 9

6

12

8 9 8

7

10

12 15

16

-

5

10

15

20

25

30

35

40

45

HDFC AMC RNAM ICICI

Prudential

Aditya Birla

Sunlife

SBI MF*

bps

Other Exp Employee Brokerage


Experienced investment & management team

HDFC AMC’s senior management and investment team have been with the

organisation for more than 10 years and have a total experience of more

than two decades. The company’s MD Milind Barve has been with the

company since inception while its CIO & ED Prashant Jain have been with

the company since the acquisition of Zurich India Asset Management in

2003. The company has one of the lowest attrition rates in the industry.

Second largest player in B-30 markets

HDFC AMC sources 14% of AUM from B30 cities, which is lower compared

to its industry peers. Despite that, HDFC AMC has a market share of 12.4%,

second in line to SBI MF, which enjoys a leadership position with a market

share of 18%.

Exhibit 15: B30 AUM as percentage of total AUM

14%

86%

B30 T30


Exhibit 16: Second largest AMC in B30 by market share

12%

18%

70%

HDFC AMC SBI Other AMC





Valuation

HDFC AMC, with its consistent focus on growth, has achieved the position

of largest AMC in FY19. Under penetration of MF, up-scaling of financial

savings, strong distribution and consistent performance of stocks are factors

to keep growth trajectory healthy ahead. Consequently, AUM growth is seen

remaining healthy at 15% CAGR for FY19-21E to | 453710 crore.

Additionally, rising share of high yield equity AUM and strong flow of SIP is

expected to keep leadership in profitability abate. Continuous focus on

improvement in operating efficiency is expected to keep profitability and

return ratios superior. The recent cut in corporate tax would aid profitability.

We forecast PAT growing at 21% CAGR in FY19-21E to | 1373 crore,

translating to an average RoE of 33.5%. Given HDFC AMC’s strong strategic

positioning and superior earnings profile, the business deserves a premium

valuation. However, a recent spike in stock price appears to factor in all

positives. Using three stage DCF methodology with terminal growth at 8%

and Ke (cost of equity) at 12%, we arrive at a target of | 2800/share. We

initiate coverage on the stock with a HOLD rating. Structural positives of

business model having growth visibility and its cost efficiency remain but

high valuation leads us to believe that returns may be muted in the near

term.

Exhibit 17: Valuation

Company RatingMarket Cap

(| crore)

CMPTarget

Price

Upside/Down

side

FY19 FY20E FY21E FY19 FY20E FY21E

HDFC AMC HOLD 54545 2800 2800 0% 63.8 50.0 43.3 16.3 14.6 12.4

RNAM BUY 15900 260 300 15% 33.5 24.5 20.9 7.0 6.2 5.4

P/E (x) Mcap/AUM (%)


Exhibit 18: Peer Comparison


AUM 344144 314123 265109 231174

3 year CAGR (%) 27.3 23.6 29.4 14.8

% of Industry AUM 14.4 13.1 11.1 9.7

Equity QAAUM 160744 128893 88955 91104

% equity 43% 41% 34% 39%

Total revenue 2097 2003 1407 1589




Net profit 931 683 448 475



ROE 30.3 58.0 29.5 18.8






Financial Summary

Exhibit 19: Profit & Loss Statement

(| crores) FY16 FY17 FY18 FY19 FY20E FY21E

Revenue from Operations 1,442.5 1,480.0 1,756.8 1,915.2 2,069.7 2,386.8

Growth (%) 41.1% 2.6% 18.7% 9.0% 8.1% 15.3%

Other Income 51.8 107.9 113.0 181.6 163.5 173.5

Total Revenue 1,494.3 1,587.9 1,869.8 2,096.8 2,233.2 2,560.4

Employee Benefit Expenses 143.2 157.6 186.1 206.3 229.0 254.1

Depreciation & Amortization Expense 11.1 12.0 9.4 12.9 10.0 10.0

Other Expenses (incl fees) 631.6 618.4 616.1 503.0 399.8 453.1

Total Expenses 785.8 787.9 811.5 722.1 638.8 717.3

Profit Before Tax 708.5 800.0 1,058.2 1,374.7 1,594.4 1,843.1

Taxes 230.4 249.5 346.9 444.1 406.6 470.0

Profit After Tax 478.1 550.4 711.3 930.6 1,187.8 1,373.1

EPS (|) 23.6 27.1 34.5 43.9 56.0 64.7


Exhibit 20: Balance Sheet


Sources of Funds

Share capital 25.2 25.2 105.3 106.3 106.3 106.3

Reserves and surplus 1126.1 1397.8 2054.7 2964.4 3439.6 3988.8

Total Shareholders funds 1151.2 1422.9 2160.0 3070.7 3545.8 4095.1

Total Non-Current Liabilities 15.0 0.8 0.8 4.6 5.1 5.6

Total Current Liabilities 256.5 175.9 209.9 148.4 163.3 179.6

Total 1422.7 1599.6 2370.6 3223.8 3714.2 4280.3

Applications of Funds

Property, plant and equipment 22.8 22.6 24.6 25.6 27.1 28.6

Intangible assets 8.4 8.5 8.2 14.1 14.1 15.1

Intangible asset under development 1.1 0.0 6.0 3.2 3.2 3.2

Investments* 159.9 168.8 639.5 2935.0 3172.5 3447.1

Long term loans and advances 97.4 71.4 61.7 47.9 47.9 47.9

Deferred tax assets (net) 13.9 9.4 9.7 0.0 0.0 0.0

Total Current Assets and Others 1119.3 1318.8 1620.9 198.0 449.4 738.3

Total Assets 1422.7 1599.6 2370.6 3223.8 3714.2 4280.3


Exhibit 21: Key Ratios


Valuation

No of Equity shares (crore) 20.3 20.3 20.6 21.2 21.2 21.2

EPS 23.6 27.1 34.5 43.9 56.0 64.7

DPS 40.0 46.0 16.0 24.0 33.6 38.8

BVPS 56.7 69.9 104.8 144.8 167.2 193.0

P/E 118.8 103.5 81.1 63.8 50.0 43.3

P/BV 49.4 40.0 26.7 19.3 16.8 14.5

Operating Ratios (%)

Rev/AUM 0.8 0.6 0.6 0.6 0.5 0.5

EBITDA/AUM 0.4 0.3 0.3 0.3 0.4 0.4

PAT/AUM 0.3 0.2 0.2 0.3 0.3 0.3

Return Ratios (%)

RoNW 41.5% 38.7% 32.9% 30.3% 33.5% 33.5%

NAV per equity share 33.6% 34.4% 30.0% 28.9% 32.0% 32.1%


ICIC

I S

ecurit

ies –

Retail E

quit

y R

esearch

Init

iatin

g C

overage

September 30, 2019

CMP: | 260 Target: | 300 (15%) Target Period: 12 months

months

Reliance Nippon Life Asset Management

(RELNIP)

BUY

Strong distribution network to drive growth ahead…

Reliance Nippon Asset Management (RNAM) was incorporated in 1995 as

Reliance Mutual Fund. Currently, it is the fifth largest asset management

company (AMC) in India. As of June 2019, RNAM has a total AUM of

| 431000 crore, of which MF AUM is at | 202500 crore with ~8.3% market

share. The company also manages | 225100 crore of managed fund largely

pension funds. Recently, Nippon Life entered into an agreement to buy 30%

stake from Reliance Capital taking its stake to ~72%.

AUM growth to remain healthy led by strong distribution

RNAM, the fifth largest mutual fund in AUM terms has grown its MF AUM at

17% CAGR in FY13-19. It has been able to develop a strong AUM base owing

to a large distribution network despite being a non-bank promoted entity.

Additionally, it has been able to garner ~11% share in the SIP market,

doubling its share in previous five years. A strong foothold in B30 cities (20%

of AUM) has helped AMC garner & improve its retail share, which has aided

in lowering its dependence on HNI & institutional flows. In FY19, multiple

downgrades on parent & exposure to stressed companies led to outflows in

debt & liquid funds, impacting AUM growth. Going ahead, the Nippon Life

buyout is seen shedding promoter overhang on the stock & aiding in

garnering better flows from domestic corporates as well as offshore flows.

Operational leverage to aid future profitability

When compared to its peers, RNAM’s operational expenses are a tad higher.

This is attributable to greater reliance on the Independent Financial Advisor

(IFA) channel leading to higher distribution cost. Going ahead, we expect

profitability to strengthen on account of economies of scale. However,

operating expense could remain higher due to widespread distribution

channel & absence of bank as a promoter. The recent corporate tax cut is

seen improving profitability.

Quasi play on Indian financialisation; valuation gap to reduce

Reliance Nippon Asset Management (RNAM) is the fifth largest AMC in India,

with AUM market share of 8.3% as of FY19. Strategic focus on retail segment

(40% of AUM) via presence in B30 cities through a widespread distribution

network of IFAs to enable sustain healthy growth ahead. We expect AUM to

grow at ~14% CAGR in FY19-21E to | 295672 crore. Improving share of

retail equity flows & gradual revival in debt & liquid flows could improve

profitability. Accordingly, we expect PAT to grow at ~27% CAGR in FY19-

21E to | 761 crore, translating to an average RoE of 24.8%. Buyout of old

promoter’s stake by Nippon Life is seen removing a substantial overhang

and aiding better flows. We initiate coverage on the stock with BUY rating

valuing it using three stage DCF methodology with terminal growth at 7%

and Ke (cost of equity) at 14%. We arrive at a target price of | 300 per share.

Key Financial Summary

Particulars

Amount

Market Capitalisation | 15900 crore

Networth | 2532 crore

52 week H/L 289/120

Face Value | 10

DII Holding (%) 3.83

FII Holding (%) 10.8

Key Highlights

Strong hold within B30 cities with

20% of AUM to aid incremental retail

flows.

IFA led distribution network provides

strength in B30 cities & retail

Change in ownership to aid AUM

inflows & reduce valuation gap with

leader

Accordingly initiate coverage with

BUY rating & target price of | 300 per

share

Price movement

0

2000

4000

6000

8000

10000

12000

14000

0

50

100

150

200

250

300

350

Nov-17

May-18

Nov-18

May-19

RNAM IN EQUITY NIFTY Index


Research Analyst

Kajal Gandhi

[email protected]

Vishal Narnolia

[email protected]

Harsh Shah

[email protected]

s


Net Profit (| crore) 370 405 447 475 649 761

EPS (|) 6.0 6.6 7.3 7.8 10.6 12.4

P/E (x) 43.0 39.3 35.6 33.5 24.5 20.9

AUM /share (|) 2387 3327 3694 3722 4188 4831

P/AUM (%) 10.9 7.8 7.0 7.0 6.2 5.4

DPS (|) 125.0 215.0 6.0 6.0 7.4 8.7

RoE (%) 25.6 21.9 19.1 18.8 23.8 25.7




Initiating Coverage | Reliance Nippon Life Asset Management

Company Background

Reliance Nippon Asset Management (RNAM) was incorporated in 1995 as

Reliance Mutual Fund. Nippon Life acquired ~42% stake from Reliance

Capital in March 2012. Currently, it is the fifth largest asset management

company in India. As of June 2019, RNAM has a total AUM (including foreign

assets) of | 431000 crore, of which MF AUM is at | 202500 crore with ~8.3%

market share. RNAM is also the second largest ETF player with 19.3%

market share and an AUM of ~| 27000 crore. It manages | 225100 crore of

managed fund largely comprising pension funds. It also manages offshore

funds worth | 8500 crore (| 5400 crore advised) through its international

subsidiaries. Recently, Nippon Life entered an agreement to buy 30% stake

from Reliance Capital taking its stake to ~72%.

Exhibit 1: AUM growth over years

6088 91 101

121

47 5264

77

100

9877

83

92

2026

33

35

53

5965

72

83

50

100

150

200

250

300

350

FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E

| thousand c

rore



Exhibit 2: Historical Performance

| crore FY15 FY16 FY17 FY18 FY19

Asset under Management (MF) 129400 146100 203600 226100 227800

Total Income 930 1,271 1,400 1,681 1,589

Total Expense 484 775 818 1,044 902

Net Profit 360 370 405 447 475

RoE (%) 26.8 25.6 21.9 19.1 18.8


Exhibit 3: Timeline for RCAP stake sale deal

Date Details

23-May-19Nippon Life Insurance signs binding definative agreement to increase stake in RNAM

to 75%

27-May-19 Sale of 7.89% holding in RNAM by RCAP

14-Jun-19 Sale of 2.86% holding in RNAM by RCAP

23-Jul-19 Open offer at | 230 per share

05-Aug-19 Closure of open offer

21-Aug-19Last date for communication of rejection/acceptance & completion of payment of

equity shares

30-Sep-19 Likely conclusion of deal subject to regulatory approval


Shareholding Pattern

Shareholders Holding (%)

Promoter 75.0

Institutional Investor 14.6

Others 10.4

Source: BSE

Top Shareholder

Top Shareholders (%)

Reliance Capital 32.12

Nippon Life insurance 42.88

HDFC Trustee 2.1

IIFL Special opportunities fund 1.31

BARON Emerging Market fund 1.21

Source: BSE




Investment Rationale

Well diversified distribution network

Reliance Nippon Life Asset Management (RNAM) is the fifth largest mutual

fund in terms of AUM with market share as of Q1FY20 at 8.1%. Despite being

a non-bank promoted mutual fund, RNAM has been able to develop a strong

AUM base owing to large distribution network with high brand recognition.

The company has a distribution network across 294 location with more than

74400 distributors & 73 banks including foreign banks & 90 alternate

distributors. Distribution mix as of Q1FY20, excluding direct AUM, is: IFA

(54%), banking distributor (26%) & national distributor (20%). In the absence

of bank promoter, RNAM focused on developing a strong IFA network. IFA

AUM, over the years, has increased from | 35000 crore (27% of AUM) in

FY15 to | 62200 crore (31% of AUM) in Q1FY20. As of June 2019, RNAM has

a presence with 48 lakh unique customers (based on PAN number).

Exhibit 4: Distribution mix* (FY19)

54%

26%

20%

IFA Banks National Distributors

Source: Company, ICICI Direct Research, * excludes Direct AUM

Exhibit 5: IFA AUM

27%26%

24%

26%28%

31%

35000

37300

48400

58500

63700

62200

0%

5%

10%

15%

20%

25%

30%

35%

0

10000

20000

30000

40000

50000

60000

70000

FY15 FY16 FY17 FY18 FY19 June-19

| crore

IFA AUM % of Total AUM


Focus on retail & SIP flow to aid AUM growth

Reliance Nippon Life Asset Management (RNAM) is the fifth largest mutual

fund with total MF AUM of | 202500 crore, growth at 17% CAGR in FY13-19.

Over the past few years, the MF has been focusing on increasing granularity

of AUM by rising retail proportion (AUM up to | 5 lakh), thereby reducing

dependence on cyclical HNI & institutional flows. Accordingly, share of retail

in AUM has nearly tripled to 40% in FY19 from ~13% in FY14 vs. industry

average of 26%. This has also been seen via a gradual increase in market

share of retail AUM. Overhang of domestic promoters led to outflows within

debt & liquid funds in FY19, which impacted AUM growth. Takeover by

Nippon is expected to arrest outflow in debt & liquid funds, with the new

parents’ corporate relation to help the company garner higher share of

future inflow.

Going ahead, with improving share in SIP flows and focus on garnering

higher retail AUM in B-30 cities, we expect MF AUM to grow at ~14% CAGR

for FY19-21E, higher than industry growth of ~13%.

Retail AAUM to total AAUM (Q1FY20)

40

2624

22

19 19

0

5

10

15

20

25

30

35

40

45

(%)





Exhibit 6: AUM growth in FY19-21E to be faster than industry

6088 91 101

121

47 5264

77

100

9877

83

92

2026

33

35

53

5965

72

83

50

100

150

200

250

300

350

FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E

| thousand c

rore



Exhibit 7: Share of retail AUM in total AUM

13.6

19.3

21.3

24.6

30.5

40

0

5

10

15

20

25

30

35

40

45


(%)


Exhibit 8: Improving market share within retail segment

8.8%

11.0%

12.4%

13.3%

14.1%

14.8%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%



High quality & granular SIP book

RNAM has witnessed doubling of annualised SIP flow from ~| 5000 crore in

FY15 to | 10300 crore as of FY19. Market share of SIP is currently at ~10.6%,

which is greater than its total AUM market share of ~8.1%. The strong SIP

flows have aided in increasing retail share in total AUM. SIP commitments

received by the company, over the years, has been sticky; as illustrated by

79% of SIP book having tenure of more than five years. Going ahead, focus

on garnering SIP is seen enabling growth of sustainable AUM.

Exhibit 9: Increasing SIP flows (monthly)

340

441

750

859 860

0

100

200

300

400

500

600

700

800

900

1000

March-16 March-17 March-18 March-19 June-19

| crore


Exhibit 10: Monthly SIP market share largely stable

10.6

10.2

10.5

10.7

10.6

9.9

10.0

10.1

10.2

10.3

10.4

10.5

10.6

10.7

10.8

March-16 March-17 March-18 March-19 June-19

(%)





Non-MF flows to remain strong

RNAM has non-MF AUM of | 228500 crore comprising ETF, pension, AIF &

international asset. RNAM is one of the largest players within the ETF

industry. As of Q1FY20, ETF AUM was at | 27000 crore with market share of

19.3%. The company also manages pension fund AUM worth | 2.21 lakh

crore. These funds are largely deployed by EPFO, ESIC, PFRDA & CMPFO.

RNAM continues to leverage Nippon Life’s international tie-ups & increase

its share of non-MF AUM. Though the non MF AUM may generates lower

yield, it aids in overall AUM growth.

Exhibit 11: Faster growth witnessed in non MF AUM

2240 2246 2261 2318 2238 2272 22782025

1575 1632 1739 1782 1812 1868 1942 2285

0

1000

2000

3000

4000

5000

September-17 December-17 March-18 June-18 September-18 December-18 March-19 June-19

| B

n

MF Non MF


Operational leverage to aid future profitability

When compared to its peers, RNAM’s operational expenses are a tad higher.

This is attributable to higher employee cost of 12 bps of AUM & other cost

of 26 bps. Greater reliance on IFA channel has led to relatively larger

distribution cost.

There is limited scope for a reduction in operating expense (absence of

captive bancassurance). Going ahead, we expect profitability to strengthen

on account of economies of scale, improving share of equity flows and a

gradual improvement in debt & liquid flows .The recent corporate tax cut is

also expected to improve profitability. We expect PAT to grow at 27% CAGR

in FY19-21E.

Exhibit 12: Operating leverage to aid PBT

34 34

29 28

30

34 35

5

10

15

20

25

30

35

40


as %

of A

UM


Exhibit 13: Expenses to moderate, going ahead

11

12

11

13

11

87

7

6

79

5

5 57

20

1313 10

4 4

12 149 11 12 13 12

0

10

20

30

40

50

60


bps

Employee expense Brokerage Admin Others





Exhibit 14: PAT growth over years

360 370405

447475

649

761

0

100

200

300

400

500

600

700

800


| crore


Exhibit 15: Return ratio to improve, going ahead

27%26%

22%

19% 19%

24%

26%

0%

5%

10%

15%

20%

25%

30%



Top player in B-30 market

RNAM’s focus on increasing its granular reach in the retail space has led the

share of AUM from B30 cities to increase to 20% of AUM (11% market share)

to | 40500 crore. Accordingly, it has highest share of B30 cities to AUM

among peers. Such higher share of AUM in B-30 cities aids in claiming

additional 30 bps TER benefit.

Exhibit 16: City wise break-up of AUM

5564

71 68 69

17

15

1411

1510

7

6

7712 8

811

86 6

1 3 1

0%

20%

40%

60%

80%

100%

RMF HDFC Birla SBI ICICI

Top 5 Cities Next 10 Cit ies Next 20 Cit ies Next 75 Cit ies Others

28%21%

15%21% 16%


Exhibit 17: Higher share of AUM from B30 AUM

20%

80%

B30 T30


Exhibit 18: Top five player within B30 market

11%

12%

18%

59%

RNAM HDFC SBI Others





Risk and concerns

Market volatility

If the ongoing correction within the equity market gets aggregated that could

hamper equity flows as seen in past that equity flows are largely in tandem

with market returns. This could also impact future profitability as equity

oriented AUM are major revenue aggregators.

Underperformance of scheme

Inflows within the scheme are dependent on performance compared to

benchmark. Continuous underperformance within the top scheme could

lead to higher redemption and lower AUM growth, which would dent

management fees & profitability.

Resignation of key personnel

The MF industry is driven by performance of fund manager. Resignation by

key personnel could impact future strategy and returns of the company

leading to lower AUM growth.

Reduction in financial savings

The flow into mutual funds is a result of an improvement in financial savings.

Any shift to physical savings may materially impact new fund flows into

mutual funds.

Increased competition

Increased flow in the past few years could lead to entry of new players,

which could impact the market share of existing player & profitability, going

ahead.

Exposure to Essel Group

Various schemes of HDFC AMC have total exposure worth ~| 470 crore to

Essel group. With extension of deadline in place, ambiguity over repayment

still continues to remain an overhang.




Valuations

The unfavourable return from physical asset in the last decade and

comparative superior performance of financial asset has led to migration of

fund towards financial assets. Investment within the AMC industry could be

seen as a quasi-play towards rising financialisation. Increasing flow into MF

& equity market coupled with widening distribution reach is expected to

keep growth strong. With increasing presence in B30 cities & garnering

sticky retail flows, yields & AUM growth is expected to remain healthy. We

expect AUM growth to remain marginally above industry at ~14% CAGR in

FY19-21E to | 295672 crore. An expected improvement in economies of

scale, improving share of retail equity flows and gradual improvement in

debt & liquid flows is expected to improve profitability. The recent cut in

corporate tax is also expected to aid profitability.

We believe that post Nippon Life buyout will shed promoter overhang on

the stock and aid in garnering better flows from domestic corporates as well

as offshore flows.

We forecast PAT will grow at ~27% CAGR in FY19-21E to | 761 crore,

translating to an average RoE of 24.8%. With play on increasing

financialisation in India, we initiate coverage on the stock with a BUY rating

valuing it using three stage DCF methodology with terminal growth at 7%

and Ke (cost of equity) at 14%. We arrive at a target price of | 300/share.

Exhibit 19: Valuation

Company RatingMarket Cap

(| crore)

CMPTarget

Price

Upside/Down

side

FY19 FY20E FY21E FY19 FY20E FY21E

HDFC AMC HOLD 54545 2800 2800 0% 63.8 50.0 43.3 16.3 14.6 12.4

RNAM BUY 15900 260 300 15% 33.5 24.5 20.9 7.0 6.2 5.4

P/E (x) Mcap/AUM (%)


Exhibit 20: Peer comparison (FY19)


AUM 344144 314123 265109 231174

3 year CAGR (%) 27.3 23.6 29.4 14.8

% of Industry AUM 14.4 13.1 11.1 9.7

Equity QAAUM 160744 128893 88955 91104

% equity 43% 41% 34% 39%

Total revenue 2097 2003 1407 1589




Net profit 931 683 448 475



ROE 30.3 58.0 29.5 18.8






Financial Summary

Exhibit 21: Profit & Loss Statement


Revenue from Operations 1,164.2 1,269.6 1,532.0 1,415.3 1,489.8 1,688.3

Growth (%) 41.7% 9.1% 20.7% -7.6% 5.3% 13.3%

Other Income 106.8 130.8 148.6 173.8 168.0 170.9

Total Revenue 1,271.0 1,400.4 1,680.6 1,589.0 1,657.7 1,859.1

Employee Benefit Expenses 201.8 181.6 242.4 277.4 323.5 341.8

Depreciation & Amortization Expense 4.2 17.9 8.5 10.0 10.0 10.0

Other Expenses (incl fees) 568.9 618.9 793.6 615.0 453.3 486.0

Total Expenses 774.9 818.3 1,044.4 902.4 786.8 837.8

Profit Before Tax 496.1 582.1 636.2 686.6 870.9 1,021.3

Taxes 125.7 177.3 188.8 211.6 222.1 260.4

Profit After Tax 370.4 404.8 447.4 475.1 648.8 760.9

EPS (|) 6.05 6.61 7.31 7.76 10.60 12.43


Exhibit 22: Balance Sheet


Sources of Funds

Share capital 41.5 41.5 612.0 612.0 612.0 612.0

Reserves and surplus 1404.1 1808.8 1728.2 1920.3 2114.9 2343.2

Total Equity 1445.6 1850.4 2340.2 2532.3 2726.9 2955.2

Trade payables 58.9 103.2 112.2 42.3 44.4 46.6

Others 382.2 66.3 137.6 137.2 151.0 166.1

Total Liabilities + Equity 1886.6 2019.9 2590.0 2711.8 2922.3 3167.9

Applications of Funds

Property, plant and equipment 8.3 8.5 12.2 12.3 12.3 12.3

Intangible assets 3.4 242.5 245.2 243.6 243.6 243.6

Cash and bank balance 41.8 4.7 560.2 490.5 539.5 593.5

Investments 925.7 973.8 905.9 1280.0 1409.7 1561.9

Recieveables 47.0 40.7 37.3 90.2 90.2 90.2

Deferred tax assets (net) 12.2 7.6 8.3 12.2 12.2 12.2

Others 848.2 742.2 820.8 583.1 614.8 654.2

Total Assets 1886.6 2019.9 2590.0 2711.8 2922.3 3167.9


Exhibit 23: Key Ratios


Valuation

No of Equity shares (crore) 61.2 61.2 61.2 61.2 61.2 61.2

EPS 6.0 6.6 7.3 7.8 10.6 12.4

DPS 125 215 6.0 6.0 7.4 8.7

BVPS 23.6 30.2 38.2 41.4 44.6 48.3

P/E 43.0 39.3 35.6 33.5 24.5 20.9

P/BV 11.0 8.6 6.8 6.3 5.8 5.4

Operating Ratios (%)

Rev/AUM 0.8 0.6 0.7 0.6 0.6 0.6

EBITDA/AUM 0.3 0.2 0.2 0.2 0.3 0.3

PAT/AUM 0.3 0.2 0.2 0.2 0.3 0.3

Return Ratios (%)

RoNW 25.6% 21.9% 19.1% 18.8% 23.8% 25.7%

NAV per equity share 23.6 30.2 38.2 41.4 44.6 48.3





RATING RATIONALE

ICICI Direct endeavors to provide objective opinions and recommendations. ICICI Direct assigns ratings to its

stocks according to their notional target price vs. current market price and then categorizes them as Buy, Hold,

Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined as

the analysts' valuation for a stock

Buy: >15%

Hold: -5% to 15%;

Reduce: -15% to -5%;

Sell: <-15%

Pankaj Pandey Head – Research [email protected]

ICICI Direct Research Desk,

ICICI Securities Limited,

1st Floor, Akruti Trade Centre,

Road No 7, MIDC,

Andheri (East)

Mumbai – 400 093

[email protected]




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