Home / Markets / Mark To Market /  HDFC AMC’s fourth-quarter profit dips, seems an uphill climb from here

HDFC Asset Management Co. Ltd’s Q4 figures have fallen far short of analysts’ expectations. Given the dire weakness in its equity assets under management (AUM), the climb in the future is likely to be uphill. Shares of HDFC AMC have fallen about 25% from their highs in February, more or less mimicking the drop in the broader market.

While the quarter’s average AUM stood at 3.7 trillion, the sharp slide in the market saw the AUMs decline to 3.2 trillion by the end of the quarter. Equity markets have since rebounded; however, the outlook is still lacklustre.

Graphic: Sarvesh Kumar Sharma/Mint
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Graphic: Sarvesh Kumar Sharma/Mint

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As HDFC AMC derives about 75% of its operating income from equity assets, any weakness in AUM growth will constrain profitability. At the same time, rising overheads will eat into operating parameters. Besides, the recent debt-fund fiasco at Franklin Templeton has sorely dented investor confidence in certain debt fund categories; hence, growth in this category of funds could be severely constrained.

“We believe FY21 will be a tough year for the company as a) persistent weakness in equity markets will have a negative impact on both the profitability and AUM growth outlook, as equity MFs are the highest-yielding product for AMCs and b) 27% increase in operating PBT (profit before tax) in FY20 was aided by a 32% decline in opex (operating expenditure), which will be factored into the base in FY21," said analysts at JM Financial Institutional Equities in a note to clients.

HDFC AMC’s systematic investment plan (SIP) flows have declined by 7% from the December quarter to a run-rate of 1,130 crore in Q4. This suggests that equity SIP inflows are under great pressure and, given the continuing lockdown due to covid-19, fresh SIP additions will obviously be restrained.

Note that the Securities and Exchange Board of India had banned upfront commissions last year and directed asset management companies to pay distribution commissions only through trail fees.

As a result, operating margins increased year-on-year by 260 basis points in Q4, thanks to lower commissions. But with the base having adjusted, the benefits that asset management companies had from the ban on upfront commissions will not be available in FY21, and should keep operating margins under serious pressure in the coming quarters. In fact, on a sequential basis, margins fell 110 basis points over Q3. Nevertheless, there were some one-off expenses that hit profitability.

Despite this, HDFC AMC trades at a premium on the bourses due to its parentage, but the valuations seem to be on the higher side. At 43 times earnings, the stock is pricing in higher growth in assets under management, ignoring the cyclicality of the financial markets.

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