HDFC Asset Management Company - Overall inflows to support earnings; relative outperformance might take time - ICICI Securities

HDFC Asset Management's (HDFC AMC) Q1FY22 result was lower-than-expectations due to higher employee costs and continued absence of yield improvement despite higher equity mix. The market share of equity/debt and unique investors/STP did not improve on a QoQ basis. Business levers ahead include: 1) Building on the performance, which can improve flows as indicated by the management; 2) new product pipeline; and 3) possible industry momentum given the net inflows and increase in SIP witnessed in Apr'21 - Jun'21 at aggregate level. However, fruition of these levers might take some time and gain in flow share might come at higher cost. We remain constructive on the structural leadership position of the franchise in the AMC industry. Recommend ADD (BUY earlier) with an unchanged target price of Rs3,284 based on 45x FY23E core EPS of Rs66.4 plus cash and investments of Rs296 /share, which factors the likely drop in yields and rise in operating costs.

- Yields continue to not reflect the improving mix. Despite increase in equity mix (42.6% in Q1FY22 from 40.4% in Q4FY21), the average revenue yield remained flat at 48.7bps in Q1FY22. This will be a function of scheme-specific AUM growth or flow vs stock movement in equity or higher commission expenses to counter the competition amidst spate of New Fund Offering (NFO). Total revenues increased 1% QoQ to Rs5bn. Total operating costs were up 18% QoQ due to higher employee costs (31% QoQ). Total employee cost came in at Rs835mn, which included Rs176mn due to ESOP. Other expenses remained flat QoQ. Other income rose 137% QoQ because of one-time income resulting in 9% QoQ growth in PAT. Core PAT (excluding the impact of other income) declined 5% QoQ.

- Market share loss continued in Q1FY22. Overall/Equity QAAUM market share stood at 12.6%/12.9% in Q1FY22 vs 12.9%/13.3% in Q4FY21, respectively (Debt market share improved marginally to 14.5% in Q1FY22). Individual asset market share dipped marginally to 13.5% from 13.7% in Q4FY21. In terms of unique investor, market share dipped to 22% in Q1FY22 from 23% in Q4FY21. Monthly STP as a percentage of monthly industry SIP flows stood at 10.5% in Jun'21 vs 11.3% in Mar'21 and 12.1% Jun'20.

- Recommend ADD with an unchanged target price of Rs3,284 based on 45x FY23E core EPS of Rs66.4 and investment value of Rs296. We factor-in 18% AUM CAGR between FY21-end and FY23-end with aggregate yields moderating from 48.8bps in Q4FY21 to 47.3bps in FY22E and 46bps in FY23E. This accounts for possible improvement in performance/flows in equities and debt. We also consider operating costs increasing from Rs3.8bn in FY21 to Rs4.6bn in FY23E (both ex-ESOP) while we estimate ESOP cost at Rs648mn/480mn in FY22E/FY23E. This leads to operating profit ranging from 38bps in FY21 to 35.7bps/36.4bps in FY22E/FY23E, respectively.

Shares of HDFC Asset Management Company Ltd was last trading in BSE at Rs. 2880.6 as compared to the previous close of Rs. 2992.05. The total number of shares traded during the day was 28348 in over 4341 trades.

The stock hit an intraday high of Rs. 2990 and intraday low of 2867.05. The net turnover during the day was Rs. 82336370.

Source : Equity Bulls

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