Shrugging off the unexpected election verdict of a coalition government, the markets continue their onward march. The rallying markets of the past few years have seen asset management companies (AMCs) benefit from increased inflows, mostly into equity-oriented schemes.

As the third-largest mutual fund company in India by assets under management (AUM), HDFC Asset Management Company (HDFC AMC) runs some of the largest and oldest schemes.

Robust AUM growth, steep rise in flows via systematic investment plans (SIPs), healthy rise in customer base that sticks on to investments for the long term and expanding market share are positives for the company. Industry-leading operating margins is another strong factor.

At ₹3,913, the stock trades at 36 times its likely per share earnings for FY25 and about 30 times its expected EPS for FY26. These multiples are at par with what Nippon Life AMC trades at, despite HDFC AMC’s higher margins and AUM. This makes the stock attractive from a two-three year perspective.

However, given the 85 per cent rally in the HDFC AMC stock over the past one year, and as equity markets are at record levels (and uncomfortable valuations), investors can accumulate the stock on declines linked to the broader market.

The still low penetration of mutual funds in India compared to most other emerging and advanced nations, rapid digitisation resulting in ease of investments via online platforms and the rising incomes and financialisation of savings are factors that could give further thrust at the macro level for the industry.

The company’s operating (EBIT) margins have always been comfortable, in excess of 70 per cent (73.5 per cent in FY24). Net profit margin has also remained more than 65 per cent over the years.

In FY24, HDFC AMC’s revenues rose 19 per cent over FY23 to ₹2,584.4 crore, while net profits increased 36 per cent to ₹1,944.2 crore. Given that other income is substantial due to in-house investment and treasury operations, if the ₹578.1-crore figure is added (₹315.8 crore in FY23), the company’s revenues would have risen 27 per cent in FY24.

Sound asset base

Over the past several years, market regulator SEBI has sought to reduce the expense ratios charged by fund houses on their schemes to bring down costs for investors. The ‘telescopic pricing’ methodology of SEBI entails charging lower expense ratios on schemes as asset size increases.

Since HDFC AMC runs several funds with large asset sizes — three of its equity schemes have $6.5-billion to over $10-billion AUM — it had to face the impact of lower expenses it could charge. However, despite these lower charges, the company managed a yield (revenue to average AUM) of 47 basis points in FY24, just one-two points lower than in the previous years, thanks to the overall rise in flows into schemes. This yield is the highest among listed peers and is among the highest in the industry. The operating margin has still remained stable at 35 basis points from FY22 to FY24.

Most of its equity schemes tend to deliver robust returns and beat standard benchmarks over the long term.

The AMC managed ₹6.07-lakh crore as of March 2024, (up 39.2 per cent year on year). Equity-oriented funds accounted for ₹3.98-lakh crore and grew nearly 62 per cent in FY24.

In the actively equity-oriented funds space, HDFC AMC’s market share by closing AUM as of March 2024 was 12.8 per cent (up from 11.9 per cent) in March 2023. Its debt funds market share too rose and stood at a healthy 13.4 per cent as of March 2024. In the liquid funds space, the market share was stable at around 12.7 per cent.

The 63: 22.3: 11 percentage mix of equity-oriented, debt and liquid schemes, respectively, is higher than the industry’s 54.3: 18.9: 10.8. A higher proportion of equity funds in the mix ensures better yields and margins.

HDFC AMC’s unique investors increased from 6.6 million in March 2023 to 9.6 million in March 2024, a rise of 45.5 per cent in the last one year.

The company’s systematic transactions base rose to ₹2,930 crore (₹1,710 crore) in the March 2024 quarter.

Further, HDFC AMC’s SIP AUM stood at ₹1,39,800 crore as of March 2024, up 62.7 per cent year on year.

The resilience of the company’s SIP book can be ascertained from how long investors have stayed put. As much as 87 per cent of the SIP assets remains invested for over five years and 80 per cent for more than 10 years. From an overall industry standpoint, just a little more than half the equity assets remain invested even for a period of over two years.

A return on equity of 29.5 per cent in FY24, up from 24.5 per cent in FY23, also is among the highest in the industry.

With a stable and experienced fund management team, healthy operational metrics and a track record of healthy scheme performances, the HDFC AMC stock can be a good play on the market rally, being among the most reliable names in the asset management business.

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