HDFC Asset Management Company Ltd IPO - Should you subscribe?

In the last week of October 2017, Reliance Nippon Life Asset Management Company garnered Rs.1500 Crore through IPO. It was the first company in India to go public in this segment i.e. Asset Management or Mutual Fund Manager. The issue was a mix of fresh issue and offer for sale. During that time, there were bullish sentiments across the market and especially IPO market was booming. As a result, the issue got tremendous response from all the category of investors viz. QIB (118 times), NII (209 times) and RII (6 times). Only lucky one could get the shares and they cheered on listing day as it listed with 17% premium to its issue price. Later, the sentiments turned bad due to various economical factors, the share started falling down. As on July 20, 2018, the share was trading at 14% discount to its issue price. The share is fundamentally strong and will go upwardly in a short to medium term.

Now, in the last week of July 2018, yet another Asset Management Company is going public with its 100% Offer For Sale IPO. It is HDFC's subsidiary HDFC AMC Ltd. HDFC AMC Ltd is India's second largest AMC (First is ICICI Prudential). This is the fifth company of HDFC Group going public.

In November 2017, HDFC Standard Life insurance went public with its IPO and got moderate response. It was also 100% Offer For Sale. Its subscription numbers were very ordinary, however, the share listed with a bang and proved to be a multibager for its investors. Currently, the share is trading at 69% premium to its issue price.

In a recent interview with Bloomberg Quint, HDFC Ltd chairman Deepak Parekh spoke about HDFC AMC IPO, "Leave enough money on the table so that the investors are not there to finance you but to make a return. We feel we have some money on the table for investors, we have not fully priced the IPO, we are always conservative in pricing the issue. We don't have a single company in our group where investors have lost money so far and we don't want that to happen with this issue". These words of Mr Deepak Parekh are enough to apply this IPO. There is no need to even vouch statistics.

The comparison is being made with the only listed peer Reliance Nippon Life Asset Management company. RNAMC is being valued at Rs. 13500 Crore while HDFC AMC is being valued at Rs. 23,318 Crore at the upper end. In this regard Mr Milind Barve, Managing Director and CEO of HDFC AMC said in the same interview, "We have almost 65000 Crore higher AUM. More importantly, our equity business is significantly larger. We are almost 56000-60000 Crore ahead on the equity AUM. Our Equity AUM is almost 50% or more. Reliance Nippon is a great company but it is distinctly different from HDFC AMC. If we compare the operating profit from the core asset management business, ours is almost 90% higher than what is being given by Reliance Nippon". These words of HDFC AMC MD along with Chairman's words pump in a lot of confidence in this IPO.

Overview of HDFC AMC Ltd: Incorporated in December 1999, HDFC AMC Ltd is a joint venture between Housing Development Finance Corporation Limited (HDFC) and Standard Life Investments Ltd (SLI).

The company offers a large suite of savings and investment products across asset classes, which provide income and wealth creation opportunities to its customers. As of March 31, 2018, it offered 133 schemes that were classified into 27 equity-oriented schemes, 98 debt schemes (including 72 fixed maturity plans (“FMPs”), three liquid schemes, and five other schemes (including exchange-traded schemes and funds of fund schemes). This diversified product mix provides the company with the flexibility to operate successfully across various market cycles, cater to a wide range of customers from individuals to institutions, address market fluctuations, reduce concentration risk in a particular asset class and work with diverse sets of distribution partners which helps it expand its reach. It also provides portfolio management and segregated account services, including discretionary, non-discretionary and advisory services, to high net worth individuals (“HNIs”), family offices, domestic corporates, trusts, provident funds and domestic and global institutions. 

As of March 31, 2018, the company's equity-oriented AUM and non-equity-oriented AUM constituted Rs. 1,497.13 billion and Rs.1,422.73 billion, respectively, of its total AUM. Its actively managed equity-oriented AUM (which excludes index linked and arbitrage schemes) constituted Rs. 1,449.25 billion of its total AUM as of March 31, 2018. Its AUM has grown at a compounded annual growth rate (“CAGR”) of 25.5% between March 31, 2013 and March 31, 2018. 

A key element of its strategy is to promote a customer-centric culture that spans across all aspects of its  business. As of March 31, 2018, the company served customers in over 200 cities through its pan-India network of 209 branches (and a representative office in Dubai) and service centers of its registrar and transfer agent (“RTA”), which is supported by a strong and diversified network of over 65,000 empaneled distribution partners across India, consisting of independent financial advisors (“IFAs”), national distributors and banks.

The company believes that it is at the forefront of leveraging technology in the Indian asset management sector, with a focus on digitization to transform sales, customer on-boarding and internal processes. It believes that its focus on technology has enriched its customers’ experience and has enhanced the productivity of its employees and distributors. It offers its products and services through its online portal, HDFC MFOnline and mobile applications, both of which have become increasingly relevant to its business in recent years.

Issue Details : The issue shall remain open for three days from July 25,18 to July 27, 2018

Investors Category: Out of 2,54,57,555 shares, 32,80,000 shares are reserved for HDFC AMC Employees (3,20,000 Shares), HDFC Employees (5,60,000 Shares) and HDFC Shareholders (24,00,000 Shares). Out of net 2,21,77,555 shares, 35% are reserved for Retail Investors.

List of selling shareholders : HDFC AMC promoters viz. HDFC and Standard Life Investments are selling shares in this arrangement. 

Objects of the offer : The objects of the Offer are to achieve the benefits of listing the Equity Shares on the Stock Exchanges and to carry out the sale of Equity Shares offered for sale by the Promoter Selling Shareholders. Further, the Company expects that the listing of its Equity Shares will enhance its visibility and brand image, and will provide a public market for Equity Shares in India. The Company will not receive any proceeds from the Offer and all the proceeds from the Offer will be received by the Promoter Selling Shareholders, in proportion to the Equity Shares offered by the respective Promoter Selling Shareholders as part of the Offer. 

Pricing of the share: The company has set the price range between Rs. 1095 - Rs. 1100 which is 31x of its March 31, 2018 earning i.e. Rs. 34. 96 (diluted EPS). The price is 11x of its NAV as on the same date. Now a days, any ordinary company demands excess premium in its public issue. For example, TCNS Clothing Co Ltd asked the premium which was 47x of its present earnings and 9x of its book value even though altogether in a different segment. Here, HDFC itself is a brand and household name. So, the share price set seems very reasonable. 

The company has only one listed peer i.e. Reliance Nippon. Reliance Nippon's share is trading at cheaper price than  HDFC AMC has asked. Currently, it is trading at 25x of its present earning and 6x of its book value. However, MD of HDFC AMC has already clarified the difference between HDFC AMC and Reliance Nippon. So, the comparison becomes little vague. However, the comparison is given below:

Revenue and Profitability: The company has an established track record of delivering robust financial performance. Its total revenue increased from Rs. 903.11 Crore in Fiscal 2014 to Rs. 1867.25 Crore in Fiscal 2018, with a CAGR of 19.91%, and its net profit has grown from Rs. 3,57.77 Crore to Rs. 721.62 Crore during the same period at a CAGR of 19.17%.

Dividend and RoNW : The company's dividend payout ratio increased from 41% in Fiscal 2014 to 56% in Fiscal 2018 and it paid a dividend of Rs.336.89 Crore in Fiscal 2018 compared to Rs.126.20 Crore in Fiscal 2014. It had a net worth of Rs. 2159.97 Crore as of March 31, 2018. Its return on average net worth exceeded 40% every year since Fiscal 2014 and was 40.28% for Fiscal 2018.

Competitive strengths: HDFC AMC has competitive strengths viz. consistent market leadership position in the Indian Mutual Fund Industry, trusted brand and strong parentage, strong investment performance supported by comprehensive investment philosophy and risk management, superior and diversified product mix distributed through a multi channel distribution network, focus on individual customers and customer centric approach, consistent profitable growth, experienced and stable management and investment teams. 

Conclusion : Any HDFC Group company has a strong fundamentals and back up of its holding company. HDFC AMC is a 100% debt free, dividend paying cash rich company. And top of that it has a huge earning potential. This issue is worth applying


Thank you for reading...Jai Hind

(I write reviews based on my knowledge and understanding. The reader of this blog should his/her own research before applying)