HDFC AMC IPO opens today for subscription at a price band of INR1,095 – 1,100 per share (get more information about the IPO on this page) and JainMatrix Investments has come up with its research note on the public offer. The Bangalore-based research firm has a positive HDFC AMC IPO rating and has recommended investors to subscribe to the offer with a 3 year perspective. It has listed several factors behind its favourable stance.
The IPO is commanding a premium of INR370 – 380 per share in informal market. Readers can find the full report at the end of the article, here are some quick points from the research report.
Key positive factors for HDFC AMC IPO
HDFC has a market leadership in the Indian MF industry of #2 on AUM and #1 on equity AUM. Their market share of total AUM was 13.7% and of actively managed equity-oriented AUM was 16.8%.
HDFC has a trusted brand and strong parentage of HDFC group. The holding company and the 3 other listed group firms have done well on the stock markets. HDFC Standard Life Insurance Co was the most recent to list in Nov 2017. It has also done well post listing, up 65% on IPO price.
Read Also: HDFC AMC IPO Review: Sahi Hai
HDFC MFs have performed well witha solid approach, philosophy and risk management.
HDFC has a superior and diversified product mix distributed through a multi-channel distribution network. Their product mix enables them to operate through various market cycles, cater to specific customer requirements and reduce concentration risk. Strong distribution relationships also ensure the commitment of the channels for new launches and investor support and confidence.
HDFC has consistently had assets and profit growth.
HDFC has an experienced and stable management & investment teams.
The unofficial/ grey market premium for this IPO is Rs. 370-380/share. This is a positive.
Key risk and negative factors for HDFC AMC IPO
The valuations are high in terms of P/E, P/B and market cap/AUM.
HDFC had overextended its distributor benefits pre-IPO, and was ordered by SEBI to avoid a conflict of interest and revoke the distributor allotment of shares. HDFC realizes the importance of distributors, but needs to take care to not cross the legal or market accepted limits.
The global macros are looking cloudy. Trade war tensions between USA – China can escalate. A diplomatic conflict with Iran is playing out. Oil prices are trending higher. Brexit threatens the UK economy. Europe and the Euro are looking weak with poor economic outcomes for the region. In this situation a sharp deterioration on any of these parameters can affect Indian investment climate.
AMCs are closely regulated by SEBI and is subject to changes or tightening of norms. For example in July 2014, the holding period for long-term capital gains tax on debtMFs was increased from 12 to 36 months. It is possible that regulatory changescanaffect their business in future.
SEBI in Oct 2017 issued a circular to categorize and rationalize the MF schemes. MFs are classified into 5 groups, i.e., equity, debt, hybrid, solution oriented and other schemes. These 5 groups have 36 categories of schemes, and only 1 scheme per category is permitted by a MF. This has resulted in many MF schemes being merged, renamed and repurposed in the industry. HDFChas complied with the SEBI changes, but the rationalization may have a adverse impact on their brands and business.
Competition from existing and new MFs could reduce their market share or put pressure the fees.
The tax on Long term Capital Gains from equity was introduced in budget 2018 in Feb at 10%, from zero earlier. This caused a correction in markets, particularly the mid and small cap stocks.
Competition to the MF industry is from alternatives like the PMS industry, AIF/ Hedge Funds, Private equity markets and direct equity advisory services. Many of these are the next steps for MF investors after they have started their investment journey with MFs.
HDFC has defocused from PMS and other segments and appears to focus on Mutual Funds.
HDFC AMC IPO Rating and overall opinion: Subscribe
In India there is a massive trend of financialization of assets, a move away from physical / guaranteed assets like real estate, gold and FDs, towards equity and debt.
The MF industry is witnessing a massive growth with total AUM’s growing rapidly in the last 10 years. The number of new investors and their portfolios hasgrown significantly from retail investors.In fact the domestic driven MF industry has emerged as a foil to the FII investors in India.
The #2 player by AUM, HDFCAMC is well managed financially, has a great brand, high margins and return ratios, low CAPEX and cost structure.
Valuations look high in terms of PE 32.3 times, P/B 10.7 times and market cap/AUM at 8%. However we have seen that in emerging sectors/ industries the excelling high quality players can command very high valuations (think Avenue Supermarts in Retail and group firm GRUH Finance in rural home loans). HDFC certainly faces high competition, but can pull ahead and become #1 by AUM in the next few years. So a good track record, robust financial performance, sectoral tailwinds, reputed management team and strong promoter identity makes this IPO attractive.
Opinion: Investors can SUBSCRIBE to this IPO.
Read JainMatrix Investments’ full report on HDFC AMC IPO rating here