Issue Open:Jul 25, 2018 – Jul 27, 2018
Issue Type: Book Built Issue IPO
Issue Size: 25,457,555 Equity Shares of Rs 5 aggregating up to Rs 2,800.33 Cr
Face Value: Rs 5 Per Equity Share
Issue Price: Rs 1095 – Rs 1100 Per Equity Share
Market Lot: 13 Shares
Minimum Order Quantity: 13 Shares
Proceeds of the offer
Proceeds of the offer will be go to existing shareholders. The company gets no funds from the IPO
About the Company:
Incorporated in 1999, Mumbai based HDFC Asset Management Company (HDFC AMC) Limited is well-known fund house engaged in providing savings and investment products. It is a joint venture between Housing Development Finance Corporation Limited (HDFC) and Standard Life Investments Limited (SLI). SLI is part of Standard Life Aberdeen plc., one of the world’s largest investment company.
According to CRISIL, as of December 31, 2017, HDFC AMC has been the most profitable AMC of the country in terms of net profits since Fiscal 2013 with a total AUM (Assets Under Management) of ₹2,932.54 billion. Its profits has grown every year since 2002.
It has been the largest AMC in equity-oriented AUM since the last quarter of Fiscal 2013 and has consistently been among the top two asset management companies in India in terms of total average AUM since the month of August 2008.
HDFC AMC offers a wide range of savings and investment products across asset classes. As of December 31, 2017, it offered 127 schemes categorized into-
- 28 equity-oriented schemes
- 91 debt schemes
- 3 liquid schemes
- 5 other schemes (including exchange-traded schemes and funds of fund schemes).
The company also provides portfolio management and segregated account services to HNIs, family offices, trusts, domestic corporates and provident funds etc. As of December 31, 2017, it managed a total AUM of ₹75.78 billion as part of its portfolio management and segregated account services’ business.
The Promoters of the Company are HDFC and Standard Life Investments. HDFC holds 120,772,800 Equity Shares and Standard Life Investments, holds 80,515,200 Equity Shares, which constitutes 57.36% and 38.24%, respectively, of the Company’s pre-Offer, issued, subscribed and paid-up Equity Share capital.
Asset management is in secular growth phase. With 95% of Indian assets tied up in physical assets like Gold and Real Estate, we believe there is lot of potential from these assets to convert into financial assets with banks and asset management companies.
While we are equally optimistic that companies from this sector are getting listed, we are bit cautious at current juncture. Though this sector has long term growth, it is a cyclical industry. When the markets are in boom, inflows are high and as well as AUM value is high as market prices move up. But in down cycle, outflows and lower market prices take AUM down significantly.
In US, a developed market for financialization, asset management companies do not make a lot of money. The primary reasons are i) Fund managers and analysts have more bargaining power ii) Competition is high and fragmented as market size is huge.
While (i) might be true in Indian context too, but since online and financial awareness is still low in asset management, AMCs with better distribution will have an edge for several years before their profitability drops. AMCs have high operating leverage since fixed costs are high and almost no variable costs. Small drop in Revenues can lead to large drop in profits.
In asset management business, the key competitive advantages come from i) Scale ii) Distribution iii) Low Cost.
HDFC AMC has Scale, good Distribution network from its own sister company HDFC Bank. So we believe AMCs like ICICI Pru MF, HDFC MF and SBI MF are likely to experience good growth.
Current valuation of HDFC AMC is 32X of 2018 EPS. While such high PE is justified on cross cyclical margins, we shouldn’t ignore that current EPS is elevated due to high operating leverage where Profit margins are almost 38% vs 32% just 2 years back. This could be due to heavy flows into equity last year thanks to demonetization and benevolent markets.
Without forecasting any precise value for now, even if we assume same revenue base but lower net margins of 32% and 28%, IPO price of Rs. 1,100/share implies PE of 38.5x and 44x FY 18 EPS. This looks quite elevated and offers no margin of safety. Even if we assume 13-15% CAGR growth in revenues over next 10 years, fair value for share comes to around PE 22x-26x EPS.
IPO’s price is atleast 25% higher than fair prices. We will Avoid the stock as per our value investing process where we do not invest unless we have margin of safety at the time of purchase. However, we are certain that this is one of the high quality companies and continue growing in future despite few hiccups in equity markets.
If you have the risk appetite of holding shares for 10 years+, you may bid for retail investor maximum bid quota of Rs. 2,00,000/-. It is very difficult to obtain allotment in such blockbuster IPO. If you get an allotment, consider holding for 10 years. We are against buying an IPO for near term pop in share price.
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