Cuts in total expense ratios were supposed to impact the asset growth of asset management companies. But instead some asset management companies such as HDFC Asset Management Company Ltd seem to be coming out unscathed.

HDFC AMC posted a 42% year-on-year rise in net profits in the first quarter of FY20, beating Street estimates.

Phasing out of upfront commissions paid by asset management companies has seen a reduction in commission costs. This was down 86% year on year in the June quarter.

Besides, due to its larger proportion of sticky retail assets, the impact of cuts in total expense ratio (TER) has been negligible. HDFC AMC has managed to pass on a large proportion of the TER cuts to distributors. As a result, growth impact on the topline has been minimal. Revenues increased 7% year on year to 504.4 crore.

“In line with management expectations, the blended net impact on the topline was around 3 basis points of equity AUM (around 1.5 bps on overall AUM), with the distributors absorbing the impact of the rest," said analysts at JM Financial Institutional Securities Ltd in a client note.

Besides, the cut in commissions due to total expense ratio reductions has not impacted asset growth. HDFC AMC’s total assets under management increased by 18% year-on-year to 3.56 trillion. Actively managed AUMs, where profit margins are higher, increased 15% year on year.


A good thing is that new flows have become more profitable after upfront commissions to distributors were banned. Earlier, new inflows were only marginally profitable at best for AMCs. Additionally, HDFC AMC also increased fees on liquid funds, cushioning the impact of TER cuts to an extent.

But margin growth from here on could be impacted, if trail commissions on these new inflows are increased to compensate for the lower upfront commissions.

Another worry for the fund house is the impact of the bonds of the Essel Group the fund has taken on its books. As HDFC AMC has already paid out the bondholders, a shortfall in repayment from the Essel Group could impact profits. Though this is one-time event, analysts say the fund house could need to provide for the same, thus impairing profit growth next quarter.

Another thing to watch for is churn in assets. While HDFC AMC has performed on several of its schemes, a slump in the market or scheme performance could impact AUM growth.

Shareholders, though, are not complaining. The stock has zoomed 7.2% since its results were announced and 29.6% in the past two months. Investors should note that the stock looks pricey at about 43 times trailing 12-month earnings.

Close