HDFC AMC Share price: Kotak downgrades rating to SELL and revises FV to Rs 2175

Kotak Institutional Equities say that HDFC AMC had a muted quarter with 7% decline in core PBT on the back of 4% decline in equity AUM (even as overall AUM was up 10%) yoy, leading to suppressed core yields and profitability (PBT down 4 bps to 38 bps). While industry outflows put pressure on AUMs, recent equity-rally will help near-term earnings.

HDFC AMC reported 7% yoy decline/6% qoq growth in core PBT (PBT before other income) to Rs3.7 bn owing to compression in yields: pic taken from youtube.com

Kotak Institutional Equities say that HDFC AMC had a muted quarter with 7% decline in core PBT on the back of 4% decline in equity AUM (even as overall AUM was up 10%) yoy, leading to suppressed core yields and profitability (PBT down 4 bps to 38 bps). While industry outflows put pressure on AUMs, recent equity-rally will help near-term earnings. The current sharp stock rally has far extrapolated this trend, completely ignoring structural challenges that are ailing the industry. Kotak downgrades HDFC AMC rating to SELL and revise FV to Rs 2175.

HDFC AMC reported 7% yoy decline/6% qoq growth in core PBT (PBT before other income) to Rs3.7 bn owing to compression in yields. Elevated other income (Rs1.1 bn, up 68% yoy) however supported PAT (up 5% yoy). QAAUM was muted at 2% yoy/4% qoq. Sharp rally in equity markets however led to 10% yoy/15% qoq growth in closing AUM despite continued outflows in actively-managed equity oriented funds.

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HDFC AMC revenues declined 8% yoy owing to compression in yields. Calculated yields declined 6 bps yoy/1 bps qoq to 49 bps. Yield compression is driven by decreasing share of high-yielding actively-managed equity oriented funds, QAAUM ( Quarterly Average Assets Under Management ) down 450 bps yoy to 39.5%; up 40 bps qoq and increasing AUM size per scheme. HDFC AMC managed to control expenses (down 11% yoy/up 5% qoq), core cost-to-income declined 70 bps yoy/20 bps qoq to 23.3%. Overall core PBT was down 2 bps yoy, up 4 bps qoq to 38 bps for the quarter.

Kotak has revised HDFC AMC core PBT estimates by 5-7% to reflect the recent rally in the equity markets which will boost AUM growth. Higher PAT growth reflects strong other income in 9MFY21. Lower TER due to higher AUMs and likely higher trail payouts will lead to lower core yield and operating expenses. Post the revision, we expect HDFC AMC to deliver 12-15% earnings growth during FY2022-24E, following 6% growth in FY2021E.

Kotak rolled over HDFC AMC face value to Rs 2175 (27X EPS FY2023E) from Rs 1950 earlier. Recent rally in the equity markets has likely upped investor sentiments and driven a sharp rally in the stock despite muted earnings performance and industry outflows. HDFC AMC's medium-term challenges of pressure on distributor payouts (from current suppressed levels) and shift to passives is likely ignored by the Street.

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