HDFC AMC share price: ICICI Securities initiates coverage with a BUY rating and target price of Rs 3500

HDFC AMC with 14.2%/13.7% total/equity market share as of 9M FY21, industry-leading profitability at 38bps of AAUM as at 9M FY21, strong brand and well-entrenched distribution, HDFC AMC is among the better plays on Indian AUM growth. ICICI Securities estimates HDFC AMC to generate 10% EBITDA (ex-other income) CAGR between FY20-FY23E with RoE of 30% and FCF/dividend yield of 3.3/1.2%.

Diversification in investment style and induction of new fund managers as well as MD are near term change agents which can positively impact fund performance/flows. ICICI Securities Securities initiated coverage with a BUY rating and target price of Rs 3500 based on 45x core FY23E EPS of Rs 71 and Rs 302/share of cash and investments.

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High AUM market share of HDFC AMC and strong brand remain two distinct strengths:

HDFC AMC has 14.2%/13.7% total/equity AUM market share in 9M FY21. This along with strong distribution (224 offices, >65,000 distributors, 9.1mn live folios and 5.4mn unique investors as on Dec’20) and digital capabilities (49.2% direct AUM mix, 20.6% direct equity AUM mix in Q3 FY21) put HDFC AMC in a good position to benefit from the prospective growth of Indian AUM. HDFC AMC enjoys a strong brand franchise (part of HDFC group), which adds to the business strength.

Expect earnings CAGR of 12-16% for over the next 10 years assuming +/- 300bps movement in equity market share:

Assuming that:

1) Indian nominal GDP grows at 9% CAGR over the next 10 years
2) aggregate net inflow p.a. is 1% of aggregate GDP (vs 0.8% over 2010-20)
3) average annual performance growth is 7.8% (vs 6% over 2010-20) - Indian AUM is likely to grow to Rs 45 trn by 2025 and Rs 100 trn by 2030.

Within a possible +/-300bps change in equity market share, HDFC AMC's revenue/ operating profit / PAT CAGR is likely to be 10-14% / 15-19% / 12- 16% over the next 10 years after adjusting for decline in yields from growth in AUM and periodic stepdown in allowable MF TER

Low cost structure and high AUM book of HDFC AMC lead to industry-leading margins.

HDFC AMC has the lowest cost structure (average 22bps operating cost as a percentage of AAUM in FY18-FY20 split between 7bps employee cost and 15bps other costs) as well as high operating revenue (average 64bps of AAUM in FY18-FY20). These lead to an average of 34bps operating profit as a percentage of AAUM between FY18- FY20, which is higher than peers