The first quarter earnings of HDFC Asset Management Co. Ltd (HDFC AMC) have given investors plenty of reasons to justify the lofty valuation its stock commands. For starters, the HDFC AMC reported a healthy 25% growth in its net profit and this was backed by a strong 29% growth in operating revenue.

Essentially, the HDFC AMC was not only able to grow business but also knew how to squeeze enough gains out of its activities. Its operating profit as a percentage of average AUM improved to 35 basis points (bps) from 32bps a year ago. One basis point is one-hundredth of a percentage point.

The second-largest AMC’s assets under management grew 22%, which underscores the strength of its past performance versus peers.

The calibre of an AMC lies in what assets it acquires and how it manages them. HDFC AMC scores high on these as well. Its equity to debt AUM ratio is 50:50, unlike the industry average of 42:58.

Furthermore, its active customer base grew by 29% and over 60% of its AUM is from retail on a monthly average basis. Mutual funds are a popular product, and HDFC AMC seems to be a top choice among people.

Also, given that systematic investment plans (SIP) dominate the mode of investment, HDFC AMC is in a sweet spot in predicting future flows and hence profitability. More than 75% of its SIPs are for a tenure exceeding five years and about 65% for tenures of more than a decade.

All this adds up to a promising earnings outlook for the stock and hence, investors haven’t batted an eyelid over the stupendous 65% premium to the issue price at which the stock got listed. The AMC is currently valued at over 12% of its average assets under management.

Also read | Shall I buy the HDFC AMC stock or mutual fund?

Some analysts view the valuation as still rich, which explains the fact the stock has hardly gained since its listing premium.

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