Subscribe. RETAIL EQUITY RESEARCH HDFC Asset Management Company Ltd. Finance - Others. Most profitable player in India s MF space

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1 IPO Note RETAIL EQUITY RESEARCH HDFC Asset Management Company Ltd Finance - Others Sensex: 36,825 Nifty: 11,134 Subscribe Price Range Rs 1, Rs 1, th July, 2018 Most profitable player in India s MF space HDFC Asset Management Company Ltd (HDFC AMC) is one of the largest Asset Management Companies (AMC) in India, manages a total Asset Under Management (AUM) of Rs2,920bn as on 31 st March Through organic and inorganic growth, the company has grown to one of the top 2 AMCs in the country and enjoys a robust AUM market share of about 14% in the industry. It is the most profitable AMC, in FY18 the company had reported PAT/AUM ratio of 0.25% while the other top 5 players had reported the same in a range of 0.14% to 0.21%. HDFC AMC currently offers a total of 133 mutual fund (MF) schemes that includes 27 equity oriented schemes 98 debt schemes, 3 liquid schemes and 5 other schemes. The company has portrait a strong investment track record over the economic cycles. One of its flagship fund HDFC Balanced Advantage fund (~12% of AUM) had given a return of 19% CAGR in the last 15 years. In the mid-cap space, HDFC s mid-cap opportunity fund had given a return of 19% CAGR in the last 10 years. The company has a strong pan-india network of 209 branches (of which 149 were located in B-15 cities) and 65,000 distributors. Aid by its strong distribution network and market outperformance, HDFC AMC s AUM had grown at 28% CAGR over FY As a result HDFC AMC was consistent in its financial performance with about 20% CAGR in revenue, EBITDA & PAT during FY According to CRISIL, MF industry in India is expected to show an AUM growth of 19% CAGR over FY18-23E backed by pick-up in economy, growing investor base, higher disposable income, lower penetration and under-representation of MFs as an asset class. At upper price band of Rs1,100 the issue is valued at FY18 P/E of 32x and 8% of AUM which we believe is justified on account of favourable view on HDFC s brand, higher mix of high-margin equity assets than the industry average, consistent return on equity (RoE) of 40% in the recent past work in the company s favour. We recommend Subscribe to the issue with a long term perspective. Purpose of IPO At the upper price band, total issue size stands at Rs2,800cr. The issue consists of only offer for sale (OFS) wherein the promoters will dilute 2.5cr shares of the company. Although HDFC AMC will not receive any proceeds from this offer, the prime purpose of the issue is to achieve the benefits of listing shares on stock exchanges. Key Risks... Subdued economic activities. Unfavourable regulatory limits on management fees. Highly depends on third-party distribution channel. Any issues with them could adversely affect the business. Peer Valuation... Issue Details Date of Opening 25 th July 2018 Date of Closing 27 th July 2018 Total no. of Shares offered(cr) 2.5 Post Issue No. of shares (cr) 21.2 Price Band Face Value Bid Lot Listing Lead Manager Registrars Issue size (at upper price) Rs1,095-1,100 Rs5 Multiples of 13 shares BSE & NSE Kotak, Axis Capital, BofA Merrill Lynch, City, CLSA, HDFC Bank, ICICI Securities, IIFL, JM Financial, JP Morgan, Morgan Stanley, Nomura Karvy Computershare Rs. Cr OFS 2,800 Total Issue 2,800 Shareholding (%) Pre Issue Post Issue Promoters Others 5 17 Total Size Rs.cr Issue structure Allocation % (at upper band) Retail Non Institutional QIB 44 1,220 Reserved for Employees & S Holders Total 100 2,800 Y.E March (Rscr) FY16 FY17 FY18 Sales 1,443 1,480 1,760 Growth (%) EBITDA Margin% PAT Adj Growth (%) EPS P/E (x) P/BV (x) Mcap/AUM (%) Company (FY18) AUM (Rs cr) MCap(Rs.cr) Revenue (Rs cr) EBITDA % RoE (%) P/E (x) Mcap/AUM (%) Reliance Nippon Life AMC 2,26,100 13,390 1, HDFC AMC 2,91,985 23,319 1, Source: Geojit Research, Bloomberg; Note: Valuations of HDFC AMC is based on upper end of the price band, Valuations as per FY18

2 938 1,089 1,506 1,656 2,306 2,920 Company Description HDFC Asset Management Company Ltd (HDFC AMC) is one of the largest and most profitable asset management companies (AMC) in India, managing a total AUM (Asset Under Management) of Rs2,920bn as on Mar The company operate as a joint venture between Housing Development Finance Corporation (HDFC) and Standard Life Investments Ltd (SLI). HDFC AMC offers a large suite of savings and investment products across asset classes, which seldom provides income and wealth creation opportunities to their customers. As on Mar 2018, the company offered 133 schemes that were classified into 27 equity-oriented schemes, 98 debt schemes, 3 liquid schemes and 5 other schemes. Additionally, HDFC AMC provides portfolio management services to high net worth individuals (HNIs), domestic corporates, trusts, provident funds and domestic & global institutions. As on March 2018, the company managed AUM of Rs64.74bn as part of their portfolio management service. Maintain leadership position in the Indian MF Industry... The company has been a leader in the Indian mutual fund industry in terms of profitability, equity oriented AUM size and total average AUM. Through organic growth and acquisition of Zurich India and Morgan Stanley MF, the company have grown to one of the top 2 AMCs in the country with an AUM of about Rs3tn. HDFC AMC s AUM has grown at a CAGR of about 26% over FY As on March 2018, the company is commanding a significant AUM market share of around 14% in the industry. HDFC AMC enjoys large share of high yielding equity assets in the AUM mix with equity oriented funds accounting for 51% of AUM as compared to 43% for the industry. Further, the company has highest share of individual customers of 15.7%. HDFC AMC s live accounts has grown at a healthy rate of CAGR over FY13-18 and currently stood at 8.10mn as on March In terms of profitability, the company has been reporting the best numbers in the industry owing to operating efficiency. For FY18, HDFC AMC had reported PAT/AUM ratio of 0.25% while the other top 5 players had reported the same in a range of 0.14% to 0.21%. 3,000 2,500 2,000 1,500 1, AUM grew at 26% CAGR over FY13-18 FY13 FY14 FY15 FY16 FY17 FY18 Source: RHP, Geojit Research Others Kotak 5% Industry AUM Market share UTI 6% SBI ICICI 14% Reliance HDFC 14% Birla 11% HDFC AMC's AUM Mix Debt 36% Liquid 13% Equity Oriented 51% Superior product mix with great investment track record... HDFC AMC offer a wide range of investment schemes across asset classes catering to various risk return profiles, many of which have recorded strong and consistent performance compared to industry benchmarks. Currently, its product mix includes 27 equity oriented schemes, 98 debt schemes, 3 liquid schemes and 5 other schemes. The well diversified product mix enables them to operate through various market cycles providing specific customer requirements and reduce concentration risk. The company offers equity-oriented schemes based on market capitalization and asset class mix, as well as thematic, tax saving, goal-based, arbitrage and index schemes. Schemes based on market capitalization include multicap, large-cap, mid-cap and small-cap schemes, while those based on asset classes include equity-oriented hybrid schemes with a mix of equity and debt instruments. HDFC AMC has portrait a robust investment track record over the years. Many of the equity mutual fund schemes managed by the company has shown good performance over economic cycles. One of its flagship fund HDFC Balanced Advantage fund (~12% of AUM) had given a return of 19% CAGR in the last 15 years. In the mid-cap space, HDFC s midcap opportunity fund had given a return of 19% CAGR in the last 10 years. Strong presence across India...Still expanding The company offers their products through an extensive multi-channel sales and distribution network. HDFC AMC s distribution network comprises of banks, national distributors and IFAs (Independent Financial Advisors). As on March 2018, the company has presence in 200 cities through a pan India network of 209 branches and 65,000 empaneled

3 859 1, , , ,760 distributors. The company s largest distribution partner, HDFC Bank, accounted for 10.3% of the total AUM and 12% of the equity-oriented AUM. IFAs, national distributors and banks generated 27.6%, 21.0%, 17.3% of their AUM respectively, while the remaining 34.1% was invested in direct plans. In terms of equity-oriented AUM, IFAs, national distributors and banks generated 39.2%, 24.2%, 19.1% of their equity-oriented AUM, respectively, and the remaining 17.5% was invested in direct plans, as of March 31, Going forward, the company is expected to work towards deepening its relationships with its existing distribution partners and expanding its distributor base which will help them to build wider individual customer franchise. Penetrated well in B-15 cities As on FY18, HDFC AMC s 60 branches were located in top 15 (T-15) cities and 149 were located in B-15 cities in India. According to CRISIL, the company has the second largest market share of 12.7% in the B-15 cities. The company s share of MAAUM (Monthly Average AUM) from T-15 and B-15 cities as of FY18 was 81.9% and 18.1% respectively. HDFC AMC is well positioned to capture the underpenetrated B-15 market where industry MAAUM has grown at a CAGR of 32.3% between March 2014 and March 2018, according to CRISIL. At the same time their presence in T-15 in the T-15 cities continues to grow. Earlier, till Feb 2018, SEBI allowed AMCs to charge additional 30bps of commissions to the investors in the schemes where the higher of of inflows and 15% of average AUM from B-15 cities. However, from Apr 2018, such commissions will be allowed to B-30 cities rather than B-15. Consequently, the fund houses will have to bring the proportionate inflows from B30 cities to claim the additional 30bps expense ratio. Consistent financial performance Over the years the company has demonstrated robust financial performance. During the period FY14-18, HDFC AMC s revenue grew at a CAGR of 20% over FY This growth was largely on account of robust AUM growth of 28% CAGR during the same period. In the profitability front the company enjoys superior margins as equity oriented schemes (51% of FY18 AUM) generally have higher fee structure. In the last 5 fiscals the company has reported a healthy average EBITDA margin of 53% and currently it stood at 55%. Aid by robust topline and stable margins, the company s PAT has grown at 19% CAGR over FY14-18 with an average PAT margin of 39% Revenue grew at 20% CAGR over FY % 20% 19% 19% 3% FY14 FY15 FY16 FY17 FY18 50% 40% 20% 0% Enjoys superior margins over the period 57% 58% 48% 46% 42% 41% 37% 33% 55% 41% FY14 FY15 FY16 FY17 FY18 60% 55% 50% 45% 40% 35% Revenue (LHS-Rs cr) Growth EBITDA PAT EBITDA Margins PAT Margins Source:RHP, Geojit Research

4 Indian MF industry outlook remains bright... According to International Monetary Fund (IMF) the world economy grew by 3.8% in the financial year 2017, while India s economy stood at 6.7%, The growth in India is mostly impacted by demonetisation, dwindling private investment and slower global growth. However, as per IMF estimates, the Indian economy is expected to clock 7.6 % CAGR in the next five Fiscals. Stable macros and prudent government policies strengthens India s position as one of the fastest growing economies. The household savings data compiled by the Ministry of Statistics and Programme Implementation indicates that Indian households have traditionally favoured real estate and gold as means of investments. However, over the years there has been an increase in financial awareness and a consequent increase in financial savings. Within financial savings, there is a marked preference for deposits due to their perceived low risks. Nevertheless, the share of equity & debentures has been on the rise from 2% of net financial savings in FY12, to in the FY % 80% 60% Trend in household savings of India 2% 2% 2% 2% 2% 52% 66% 62% 62% 56% Trend in Financial savings of India 2% 2% 2% 3% 15% 15% 15% 18% 17% 17% 23% 18% 16% 24% 40% 57% 56% 50% 44% 62% 20% 33% 36% 36% 46% 42% FY13 FY14 FY15 FY16 FY17 0% FY13 FY14 FY15 FY16 FY17 Net Financial Savings Physical assets Gold & Silver ornaments Source:RHP, Geojit Research Currency Total Deposits Life insurance Provident Fund Claims on Govt. Shares & Debentures Past trends and future outlook of MF industry in India. The mutual fund industry s AUM grew at a CAGR of 25% from Rs7tn as of March 2013 to Rs21.4tn as of March 2018, led by strong investor inflows. Supported by strong inflows, growing participation from individual investors and market outperformance, the industry s assets surged 42.3% in FY17 and 21.7% in FY18. Between March 2013 and March 2018, the AUM of equity-oriented funds grew at a CAGR of 37.3% from Rs1.9tn to Rs9.2tn faster than the debt segment CAGR during the same period. The ETF segment also saw robust growth, because of recent move by the Employees Provident Fund Organisation (EPFO) to invest a portion (currently 15%) of the corpus in equities. The AUM of liquid/money-market funds too grew at a rapid pace of 29.1%, supported by corporate investments and stable returns. Systematic wealth accumulation has gained significance in the recent months, especially among individual investors. The SIP book size increased from Rs31.2bn as of April 2016 to a whopping Rs71.2bn as of March This is a huge positive for the mutual fund industry, as SIPs aid in building a healthy long-term asset base. As per CRISIL Research analysis, the industry s AUM will grow from Rs20.6tn as of March 2018 to Rs48.4tn by March 2023, clocking a robust CAGR of 18.6% on the back of pickup in economic growth, growing investor base, higher disposable income, ease of investing, increasing geographical penetration and perception of mutual funds as long-term wealth creators % -18% 45% India MF industry AUM trend AUM (Rs tn) Growth -3% 0% 19% 19% FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 14% 42% 89% 1 90% 70% 50% - - Source:RHP, Geojit Research Note: AUM as on end of Fiscal

5 Promoter and promoter group The promoters of the company are HDFC and Standard Life Investments, which holds 56.97% and 37.98% respectively of the pre-offer equity share capital of the company. The IPO includes an offer for sale of up to 25,457,555 Equity Shares by the Promoter Selling Shareholders. After the completion of the Offer, Promoters and Promoter Group shall hold 83% of outstanding Equity Shares of the company. Key management personnel Deepak Parekh, is the Non-Executive Director and Chairman of the company. He has been on Board since June 4, Along with that he is also the Non-Executive director and chairman of one of promoters, HDFC Ltd. He is an associate of Institute of Chartered Accountants (England and Wales). He is on the board of several leading companies across diverse sectors. He has won several awards, which includes Padma Bhushan conferred by Government of India in Keki Mistry, is a Non-Executive Director of the company. He has been a Director on Board since December He is also the vice chairman and chief executive officer of HDFC Ltd. He is a fellow of the Institute of Chartered Accountants of India. He is the chairman of the CII National Council on Corporate Governance and a member of the Committee on Corporate Governance set up by SEBI. Renu Karnad, is a Non-Executive Director of the company. She has been on the board since July 4, She is also the managing director of one of the Promoters, HDFC Ltd. Norman Keith Skeoch, is a Non-Executive Director of the company and has been appointed as a nominee of Standard Life Investments. He has been on Board since October 26, He has also been on the board of Standard Life Aberdeen plc (formerly known as Standard Life plc) since 2006 and was appointed chief executive officer in 2015, having been the chief executive officer at Standard Life Investments Limited, one of the Company s Promoters, since Prashant Jain is the Chief Investment Officer of the Company. He has been associated with the Company for over 14 years since June 20, 2003 and was appointed as the Chief Investment Officer of with effect from July 1, Prior to joining the Company, he was associated with Zurich Asset Management Company (India) Pvt. Ltd. and SBI Mutual Funds Management Pvt. Ltd.

6 Consolidated Financials Profit & Loss Account Y.E March (Rscr) FY15 FY16 FY17 FY18 Sales 1,022 1,443 1,480 1,760 % change EBITDA % change Depreciation EBIT Interest Other Income PBT ,063 % change Tax Tax Rate (%) Reported PAT Adj Adj PAT % change No. of shares (cr) Adj EPS (Rs) % change Balance Sheet Y.E March (Rscr) FY15 FY16 FY17 FY18 Cash Accounts Receivable Inventories Other Cur. Assets Investments ,237 1,951 Gross Fixed Assets Net Fixed Assets CWIP Intangible Assets Def. Tax (Net) Other Assets Total Assets 1,312 1,423 1,600 2,371 Current Liabilities Provisions Debt Funds Other Liabilities Equity Capital Reserves & Surplus 1,095 1,126 1,398 2,055 Share capital sus. ac Shareholder s Fund 1,120 1,151 1,423 2,160 Total Liabilities 1,312 1,423 1,600 2,371 BVPS (Rs) Cash flow Ratios Y.E March (Rscr) FY15 FY16 FY17 FY18 PBT ,063 Non-cash adj. (23) (37) (91) (96) Changes in W.C (505) 70 (254) (346) C.F.O Capital exp. (16) (9) (13) (18) Change in inv. (2,133) (3,863) (2,732) (4,203) Sale of investment 2,241 3, Other invest.cf (2) C.F - investing 104 (297) (176) (635) Issue of equity Issue/repay debt - (347) - - Dividends paid (164) (201) (232) (337) Other finance.cf (33) (41) (47) (71) C.F - Financing (197) (447) (279) 15 Chg. in cash 1.5 (1.6) Closing cash Y.E March FY15 FY16 FY17 FY18 Profitab. & Return EBITDA margin (%) EBIT margin (%) Net profit mgn.(%) ROE (%) ROCE (%) W.C & Liquidity Receivables (days) Inventory (days) Payables (days) Current ratio (x) Quick ratio (x) Turnover &Levg. Net asset T.O (x) Total asset T.O (x) Int. covge. ratio (x) Adj. debt/equity (x) Valuation ratios EV/Sales (x) EV/EBITDA (x) P/E (x) P/BV (x) AUM (Rs cr) 1,50,569 1,65,619 2,30,594 2,91,985 MCap (Rs cr) 23,319 23,319 23,319 23,319 MCap/AUM (%)

7 Investment Rating Criteria Large Cap Stocks; Buy - Upside is above. Hold - Upside is between 0% -. Reduce - Downside is more than 0%. Neutral - Not Applicable Mid Cap and Small Cap; Buy - Upside is above 15% Accumulate - Upside is between - 15%. Hold - Upside is between 0% -. Reduce/Sell - Downside is more than 0%. Neutral - Not Applicable To satisfy regulatory requirements, we attribute Accumulate as Buy and Reduce as Sell. The recommendations are based on 12 month horizon, unless otherwise specified. The investment ratings are on absolute positive/negative return basis. It is possible that due to volatile price fluctuation in the near to medium term, there could be a temporary mismatch to rating. For reasons of valuations/return/lack of clarity/event we may revisit rating at appropriate time. Please note that the stock always carries the risk of being upgraded to BUY or downgraded to a HOLD, REDUCE or SELL. Neutral- The analyst has no investment opinion on the stock under review. 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8 REGULATORY DISCLOSURES: Geojit s Associates consists of privately held companies such as Geojit Technologies Private Limited (GTPL- Software Solutions provider), Geojit Credits Private Limited (GCPL- NBFC Services provider), Geojit Investment Services Limited (GISL- Corporate Agent for Insurance products), Geojit Financial Management Services Private Limited (GFMSL) &Geojit Financial Distribution Private Limited (GFDPL), (Distributors of Insurance and MF Units).In the context of the SEBI Regulations on Research Analysts (2014), Geojit affirms that we are a SEBI registered Research Entity and in the course of our business as a stock market intermediary, we issue research reports /research analysis etc that are prepared by our Research Analysts. We also affirm and undertake that no disciplinary action has been taken against us or our Analysts in connection with our business activities. In compliance with the above mentioned SEBI Regulations, the following additional disclosures are also provided which may be considered by the reader before making an investment decision: 1. Disclosures regarding Ownership*: Geojit confirms that: (i) It/its associates have no financial interest or any other material conflict in relation to the subject company (ies) covered herein. (ii) It/its associates have no actual beneficial ownership greater than 1% in relation to the subject company (ies) covered herein. Further, the Analyst confirms that: (i) he, his associates and his relatives have no financial interest in the subject company (ies) covered herein, and they have no other material conflict in the subject company. (ii) he, his associates and his relatives have no actual/beneficial ownership greater than 1% in the subject company covered 2. Disclosures regarding Compensation: During the past 12 months, Geojit or its Associates: (a) Have not received any compensation from the subject company; (b) Have not managed or co-managed public offering of securities for the subject company (c) Have not * received any compensation for investment banking or merchant banking or brokerage services from the subject company. (d) Have not received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company (e) Have not received any compensation or other benefits from the subject company or third party in connection with the research report (f) The subject company is / was not a client during twelve months preceding the date of distribution of the research report. 3. Disclosure by Geojit regarding the compensation paid to its Research Analyst: Geojit hereby confirms that no part of the compensation paid to the persons employed by it as Research Analysts is based on any specific brokerage services or transactions pertaining to trading in securities of companies contained in the Research Reports. 4. Disclosure regarding the Research Analyst s connection with the subject company: It is affirmed that I Mathew Joseph Research Analyst (s) of Geojit have not served as an officer, director or employee of the subject company 5. Disclosure regarding Market Making activity: Neither Geojit/its Analysts have engaged in market making activities for the subject company. Please ensure that you have read the Risk Disclosure Documents for Capital Market and Derivatives Segments as prescribed by the Securities and Exchange Board of India before investing. Geojit Financial Services Ltd. (formerly known as Geojit BNP Paribas Financial Services Ltd.), Registered Office: 34/659-P, Civil Line Road, Padivattom, Kochi , Kerala, India. Phone: , Website: For investor queries: customercare@geojit.com, For grievances: grievances@geojit.com, For compliance officer: compliance@geojit.com. Corporate Identity Number: L67120KL1994PLC008403, SEBI Stock Broker Registration No INZ , Research Entity SEBI Reg No: INH , Investment Adviser SEBI Reg No: INA , Portfolio Manager: INP , Depository Participant: IN-DP , ARN Regn.Nos:0098, IRDA Corporate Agent (Composite) No.: CA0226.