After 5 years of silence, what’s next for this ‘money’ stock?

Now, that might sound like a lot, but let’s put it into perspective.

India’s average savings rate is roughly 20%, which translates to about $500 billion saved annually. So, compared to the annual savings, the mutual fund AUM wasn’t as hefty as one might think.

This indicated a significant growth opportunity.

The “Mutual Funds Sahi Hai” (mutual funds are the right choice) campaign definitely struck a chord because, by 2019, the AUM had climbed to ₹24 trillion (around $282 billion). Among the fund houses, HDFC AMC was a notable leader, capitalising on the surge in interest and scaling up their operations.

Riding this wave, HDFC AMC went public in mid-2018. But here’s where it gets interesting: despite the industry AUM soaring by 140% by October 2024, HDFC’s AUM grew by 120%.

From its IPO until mid-2023, HDFC AMC’s stock performance was somewhat stagnant—it saw some ups and downs but essentially hovered around its initial IPO price. However, post mid-2023, the company’s shares surged by about 140%.

This raises an intriguing question: despite consistent profitability and growth in AUM, why didn’t HDFC AMC’s share price reflect this growth earlier? Could this pattern repeat after the substantial gains in the past 18 months? To understand what might lie ahead, let’s delve deeper into the dynamics of the business.

     HDFC AMC Ltd Share Price Chart (Aug ‘18 till Mar ‘24)

Projecting Mutual Fund Growth in a $5 Trillion Economy

As India inches towards a GDP goal of $5 trillion, the mutual fund industry is bracing for an era of unprecedented growth. This isn’t just about numbers climbing; it’s about understanding the dynamics of savings and investment in an expanding economy.

Let’s delve into how these factors intertwine and what this means for investors and the financial market.

Also Read: Mutual funds and Indian institutions can’t get enough of these five stocks

The Foundation of Savings and Investments

Firstly, it all starts with saving.

In India, the act of putting money aside is deeply ingrained, with households maintaining a savings rate of around 20%.

This robust saving culture provides a fertile ground for investments. But savings alone aren’t enough; the attractiveness of the investment avenue plays a crucial role.

Mutual funds have been gaining favour because they often offer returns that outpace inflation, meaning the real value of savers’ money grows over time.

As mutual funds provide a variety of options that balance risk and return, they are becoming a popular choice for more and more Indian savers.

The Growing Popularity of MFs

Over the past decade, the allocation of household financial savings into mutual funds has seen a remarkable increase—from just 1% in FY13 to 6% in FY23.

   Percentage of Gross Household Financial Savings

View Full Image

This uptick is a clear indicator of growing trust and interest in mutual funds as a preferred investment option. Moreover, the rise in Systematic Investment Plans (SIPs) contributions, which hit a record high of ₹24,509 crores in September 2024, underscores a broader acceptance and integration of mutual funds into the regular investment habits of the Indian populace.

                     Mutual Fund AUM from FY14 till FY24

View Full Image

Projecting Future Growth Amid Economic Expansion

What does a $5 trillion GDP mean for mutual funds?

Even if the national savings rate remains stable, the sheer increase in GDP means the total amount of money saved will grow, providing a larger base for potential investments in mutual funds.

Despite the impressive growth in recent years, mutual fund penetration in India is still relatively low compared to global averages, suggesting significant room for growth. As more individuals climb into higher income brackets and gain financial literacy, the appeal of mutual funds is likely to grow.

Comparison of MF AUM to GDP

View Full Image

Assuming mutual funds’ share of the GDP could increase from the current 18% to 25%, the industry could see its AUM swell to approximately $1,250 billion, marking a 77% increase from current levels. This projection not only highlights the growth potential but also emphasizes the role of mutual funds in shaping the financial landscape of an economically booming India.

How HDFC AMC Stands to Benefit in a Growing Market

Let’s understand the key factors that highlight HDFC AMC’s strong position and future potential.

Expanding Investor Base

First, HDFC AMC has made significant strides in broadening its investor base. As of September 2024, it boasted 11.8 million unique investors. This might sound like just another statistic, but here’s the kicker: this figure represents about 23.6% of the industry’s total, which stands at around 50 million.

That’s nearly a quarter of all mutual fund investors in India banking on HDFC!

This expansive reach is crucial because it opens doors to upsell and cross-sell various investment schemes, much like how a shopper might walk into a store for one thing and leave with several more. This not only drives up sales but also boosts overall profits for the company.

                        HDFC AMC’s Unique Investors

View Full Image

Market Share and Performance Dynamics

Although HDFC AMC holds a commendable share of the market—between 12% and 13% across different fund categories—it’s noteworthy that this share has dipped in areas like equity-oriented mutual funds.

Back in 2018, they held close to 17% in this segment, which has since adjusted to around 13%. This shift isn’t unusual and can be attributed to fluctuations in scheme performances, a common scenario across all fund houses. However, HDFC AMC’s overall strategy and performance remain robust, primarily due to its strong foothold with individual investors.

Individual Investors’ Trust and SIP contributions

Delving deeper, the trust HDFC AMC has cultivated with individual investors is evident in the numbers:

Individual AUM Contribution: About 71% of HDFC AMC’s total assets under management (AUM) come from individual investors, compared to an industry average of 61%. This shows a stronger reliance and trust from personal investors in HDFC’s capabilities.

For more such analyses, read Profit Pulse.

Contribution of Individuals to Total AUM for HDFC AMC

View Full Image

SIP Inflows: With nearly 16% of all Systematic Investment Plan (SIP) flows directed towards HDFC AMC’s schemes, it’s clear that a significant portion of regular investing is funnelled into their funds.

                          Share of SIPs for HDFC AMC

View Full Image

Diverse Distribution Channels

As of September 2024, IFAs, national distributors, and banks contributed significantly to HDFC AMC’s asset base, bringing in 27.8%, 21.3%, and 17.2% of its total assets under management (AUM), respectively. Meanwhile, nearly 40% of investments were made through direct plans, which allow investors to bypass intermediaries for a more hands-on approach.

                  Total AUM split through various channels

View Full Image

Deep Penetration in Emerging Markets

HDFC AMC’s strategy shines even brighter when you look at its penetration in the B-30 cities—places that rank beyond India’s top 30 urban areas.

These emerging markets are ripe with opportunity, and as of June 2024, 175 of HDFC AMC’s 275 branches were strategically located in these cities. This deliberate positioning has paid off. By September 2024, HDFC’s market share in the B-30 segment improved to 12.1% from 11% in the fiscal year 2022. Additionally, the proportion of AUM from these areas has grown significantly—from 13.4% in 2019 to 19.5% in 2024.

                      Total AUM split by T30 and B30 Cities

View Full Image

The Road Ahead for HDFC AMC

As we assess the future of HDFC Asset Management Company (AMC), it’s clear that the mutual fund industry is poised for substantial growth, potentially increasing assets under management (AUM) by 77% over the next four to five years. Given its strong market position, HDFC AMC is well-equipped to benefit from this growth. However, navigating the evolving market landscape and emerging challenges will be crucial for sustaining its dominance.

Also Read: These three companies are growing profits the fastest—is it too late to buy?

Dominance In The Market

HDFC AMC has carved out a strong niche, especially in equity-oriented mutual funds where it really shines compared to peers like Nippon India AMC.

For instance, HDFC AMC has a massive 70% of its AUM from individual investors, significantly higher than Nippon’s 30%. Furthermore, about 66% of HDFC’s AUM is invested in equity schemes, which is higher than Nippon’s 50%. This focus on equity-oriented funds is a strategic advantage because these funds typically have higher expense ratios, boosting profit margins for the company.

Financial Performance and Projections

This strategic focus is reflected in HDFC AMC’s financials. The company enjoys higher net margins than its peers, contributing to its premium valuation in the market. Assuming HDFC maintains its market share, its AUM could grow to about $163 billion in the next five years, matching industry growth.

However, there’s a trend shift to consider.

investors are leaning towards passive and debt mutual funds, which might reduce the revenue HDFC earns per unit of AUM. Even so, margins are expected to stay robust at around 70%, assuming market stability and no unforeseen costs.

View Full Image

View Full Image

View Full Image

Based on these numbers, HDFC AMC’s net profit could potentially double to about ₹3,900 crores in the next four to five years. If the company’s valuation remains at about 45 times earnings, the market cap could see a 75% increase, translating to an annual growth rate of about 10%.

While respectable, this might not look very enticing to every investor.

Note: This is not a projection, just a logical extension of what’s happening in the marketplace today.

Navigating Risks

Investing in HDFC AMC does come with risks.

The performance of mutual funds is closely tied to the acumen of fund managers. A top fund manager’s departure could significantly impact the fund’s performance and investor trust.

Moreover, it’s uncertain how continued investments and SIP contributions would fare during a market downturn—something that hasn’t been tested in recent stable conditions.

Additionally, HDFC AMC’s current high-profit margins might not be sustainable if the shift towards lower-margin index and passive funds continues.

Globally, giants like BlackRock operate with much lower AUM-to-market cap ratios.

As of September 2024, BlackRock manages approximately $12 trillion in AUM but in terms of valuation, BlackRock is valued at around $160 billion, which indicates a ratio of market cap to AUM of about 1.3%.

In contrast, HDFC Asset Management Company (AMC) manages an AUM of approximately $90 billion as of September 2024. HDFC AMC’s market cap is around INR 100,000 crores (approximately $12.5 billion), resulting in a much higher market cap to AUM ratio of around 12%.

If the trend shifts towards lower-margin index and passive funds, maintaining high-profit margins could become challenging. If HDFC AMC’s premium over AUM aligns closer to global standards, as seen in firms like BlackRock, this could lead to a reevaluation of its share price altogether.

As HDFC AMC looks to the future, it faces a dual challenge: capitalizing on expected industry growth while adapting to changing investor preferences and market dynamics. The company’s ability to leverage its current strengths and mitigate risks will be crucial in maintaining its leadership position in the evolving asset management landscape.

Note: We have relied on data from the annual report and industry reports for this article. For forecasting, we have used our assumptions.

The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educative purposes only.The views expressed are my own and do not reflect or represent the views of my present or past employers.

Parth Parikh has over a decade of experience in finance and research, and he currently heads the growth and content vertical at Finsire. He has a keen interest in Indian and global stocks and holds an FRM Charter along with an MBA in Finance from Narsee Monjee Institute of Management Studies. Previously, he has held research positions at various companies.

Disclosure: The writer and his dependents do not hold the stocks discussed in this article.

Also Read: How to prepare your stock portfolio for war