Q4FY23 Review: HDFC Asset Mgmt. Co.: Clarity on TERs must for re-rating

26 Apr 2023 , 10:40 AM

HDFCAMC’s Q4FY23 PAT grew 10% YoY (5% beat on lower opex), driven by 4% AUM growth to Rs4.5trn and 1% YoY yield improvement to 49bps. Sharp increase in Treasury income (+50% YoY) also aided PAT growth. On QoQ basis, PAT growth was muted given flat AUM, and benefits of lower opex offset by 2% yield moderation (product mix change + B30 incentive adjustment). For FY23, HDFCAMC PAT grew 2% YoY to Rs14.2bn, owing to: 1) Flat AUM YoY at Rs4.4trn (Equity AUM grew 17% YoY, but Debt AUM fell 23% YoY) 2) 2% YoY yield improvement to 50bps (Equity AUM share increased to 52.5% vs 45% YoY). Opex was up from 13.2bps to 14bps, due to higher other expenses. As such, PAT yield improved marginally to 32.7bps.

Market share improves in Equity: 

Management did not make any specific comments on the likely TER changes. On withdrawal of tax benefits of debt MF – though this was one of the key factors, advantages such a tax deferment, liquidity, and diversified portfolio still make Debt MF an attractive proposition. Given its improved fund performance, the company has seen market share gains in Equity segment (up 75bps YoY to 12.3% in Q4FY23). But overall market share remains flattish around 11%, given market share loss in Debt schemes (delays in launching debt index funds). The company is confident of higher wallet share of HDFC Bank distribution after the merger with HDFC Ltd (expected in Q2FY24).

TER uncertainty to weigh on valuations: 

HDFCAMC has granted 1.05mn stock options (0.5% of equity) at Rs1,781/sh (Rs1.87bn) to >50% of its employees. Additional ESOP expense (Rs600mn over 3 years) leads to 1- 2% cut in FY24-25 EPS. ROEs have declined by 200bps to 25% due to rising cash balance (Rs60bn or 16% of MCap); makes strong case for higher payouts (73% in FY23 vs. 64% in FY22). Stock is trading at >30% discount to its long-term multiple (35x 1YF PE), given uncertainty around TER regulations. Although valuations are attractive, it is likely to consolidate at current levels in near term. Analysts at IIFL Capital Services estimate that a 10bps cut in yield will lead to 23% cut in FY24 EPS for the company.