HDFC AMC, UTI AMC - Play On Retail Financialisation: Prabhudas Lilladher Initiates Coverage

Prabhudas Lilladher Report

We are constructive on Indian asset management company space driven by its heathy growth potential given-

1. assets under management to gross domestic product ratio is 16% for India compared to world average of 63%,

2. financial assets make up for 41% of household savings, although mutual fund allocation is only 2% and

3. low penetration despite 435 million PAN card holders, while MF unique investors are even lesser at 34 million.

Further, the industry is slated to expand by ~13-15% over FY22-26E led by growing investor base, higher disposable income levels and financial savings, deeper regional presence and ease of investing along with digitalisation.

• We initiate coverage on HDFC Asset Management Company Ltd. with ‘Buy’ rating, as it is regaining lost ground, since market share at 11.5% is improving led by consistent superior performance resulting in improved net flows. Post-merger, HDFC AMC could gain more share of gross MF sales by HDFC Bank Ltd., as currently it accounts for only 25% (peers at 70-98%). Better asset mix and cost control led to healthy profitability with operating yields at 36bps which should sustain.

• We also initiate coverage on UTI Asset Management Company Ltd. with ‘Buy’ rating. Bolstering investment process resulted in better performance and distributor mind share leading to market share gains in net equity flows and higher BND share in equity distribution. Debt revival is attributable to stronger risk management. Core profits would see a healthy compound annual growth rate of ~14% from FY23-25E driven by operating leverage.

Key risks: Industry – Securities and Exchange Board of India could further cut the total expense ratio which would lead to cut in earnings estimates across AMCs.

HDFC AMC – lower industry growth and underperformance on the equity and debt side could also affect average AuM growth.

UTI AMC – Higher variable staff expenses or fresh hiring would keep employee cost elevated resulting in lower profitability.

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