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HDFC AMC's Rs 2,800-cr initial public offer in progress: Should you subscribe?

BusinessToday.In     July 25, 2018

HDFC Asset Management Company, the country's second-largest mutual fund firm, opens its initial public offer (IPO) today with an aim to raise Rs 2,800 crore in one of the biggest IPOs in India this year.

The IPO is available at a price band of Rs 1,095 to 1,100 per share. The issue size comprises 2.5 crore equity shares which includes 8,59,2,970 (4.08 per cent stake) equity shares by HDFC Ltd and 16,864,585 (7.95 per cent stake) equity shares by Standard Life Investments.

Post-issue, excluding reserved portion for employees and shareholders, HDFC's shareholding will come down to 52.92 per cent from 56.97, while that of Standard Life will be down from 37.98 to 30.03 per cent. HDFC AMC operates as a joint venture between Housing Development Finance Corporation (HDFC) and Standard Life Investments.

The IPO will close on July 27, 2018. Shares can be bid in lots of 13 equity shares and multiples thereof. The fund house had filed preliminary papers with Sebi in March, seeking its approval to float an IPO.

Ahead of the share sale, HDFC Asset Management Company garnered Rs 732 from anchor investors yesterday. The company's IPO committee finalised allocation of 66,53,265 equity shares to 35 anchor investors at Rs 1,100 per scrip, the firm said. At this price, the total proceeds will be Rs 731.86 crore.

Camas Investments, Reliance Strategic Investments, Goldman Sachs (Singapore), Abu Dhabi Investment Authority - Relval, FIL Investments (Mauritius), HSBC Indian Equity Mother Fund, SBI Large and Mid Cap Fund, Kotak Emerging Equity Scheme and Smallcap World Fund, Inc  were among the anchor investors.

HDFC AMC, which has a total asset under management of over Rs 3 lakh crore as of March-end, is the country's second largest fund house after ICICI Prudential AMC that has an asset base of Rs 3.06 lakh crore during the same period.

It will become the second AMC to hit the markets after Reliance Nippon Life AMC, which had raised Rs 1,542 crore last year.

Book    running    lead    managers to the issue are Kotak Mahindra   Capital    Company, Axis Capital,    DSP    Merrill    Lynch, Citigroup   Global   Markets   India   Private,  CLSA  India,  HDFC  Bank, ICICI  Securities,  IIFL  Holdings,  JM Financial,  JP  Morgan  India, Morgan  Stanley  India  Company and Nomura  Financial  Advisory  and Securities (India). Karvy  Computershare is registrar  to  the issue.

The shares of HDFC AMC will be listed on BSE and NSE.

HDFC Mutual Fund has for long been the most profitable fund house in the country in terms of net profit since fiscal 2013. As of March 2018, its AUM stood at Rs 2.92 lakh crore, of which 62 per cent or Rs 1.5 lakh crore is by retail investors, making it the largest in this category. With 13 per cent market pie, HDFC AMC is the second-largest fund house in the private sector, just behind ICICI Prudential AMC which has 13.3 per cent market share.

We look at recommendations which brokerages have assigned to the IPO.

Prabhudas Lilladher: Subscribe

HDFC AMC has been delivering robust capital return ratios of + 40% over last few years and also has been having high dividend payout. The company is being valued at 8% of FY18 AUM or  32 x FY18 P/E which offers  scope  for decent gains over the medium term given strong macro outlook, improving penetration of financial savings, strong distribution setup across PAN India and  strong  pedigree. We  recommend  Subscribe to  the issue  for long-term returns.

Geojit: Subscribe

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 FY14-18. As a result HDFC AMC was consistent in its financial performance with about 20% CAGR in revenue, EBITDA & PAT during FY14-18.

At upper price band of Rs 1,100 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.

Way2wealth Research: Subscribe

HDFC AMC has grown its AUM at a  CAGR of 26%  from  FY14 to FY18 and Revenue/EBITDA/PAT  at  20%/19 %/19%  during  the  same  period. With  Net  Financial savings as a percentage of household savings on the rise (42% in 2017 as against 31% in 2012) coupled with increasing preference towards Shares and Debentures in gross financial savings  basket  ( 10%  in  FY17  as  against 2 %  in  2012),  we  believe HDFC AMC is  well poised to capture the increasing trend of financialization of savings and Mutual Funds being a prefer red vehicle within gross financial savings.  Further, with higher mix of equities in the AUM  compared  to  Mutual  Fund  industry,  dominant  no.  2  player  in  terms  of  AUM,  no.  1  in terms of profitability, high operating leverage and strong parentage, we believe HDFC AMC is well poised to grow its profits multi-fold in the coming years.

At a price band of  Rs 1095-1100, the asking valuation  for HDFC AMC is  8.0% of AUM at the upper end. Reliance AMC currently trades at 5.9% of AUM. We believe the premium valuations  of  HDFC AMC  are  justified  on  account  of  higher  share  of  equities  (higher yielding products) in the AUM, higher historical AUM and profit CAGR, higher ROE and strong parentage. We recommend investors to SUBSCRIBE to the issue.

Angel Broking: Subscribe

At the upper end of the IPO price band, it is offered at 32 times its FY2018 EPS and 11x its FY2018 book value, demanding Rs 23,318 crore  market capitalisation, which is 7.6% of the MF AUM (Rs 3,06,841cr for the month of June 2018). Considering that HDFC AMC is the second largest AMC coupled with huge potential of MF industry growth, strong return ratios, asset light business, higher dividend payout ratio and track record of superior investment performance, we are positive on this IPO and rate it as SUBSCRIBE.

Motilal Oswal: Subscribe

Favorable perception of HDFC AMC's brand, higher mix of high-margin equity oriented AUM, consistent RoE of 40%, a wide distribution network (209 branches and >65,000 distributors), and increasing dividend payouts work in HDFC AMC's favor. Over FY15-18, it recorded Revenue/ EBITDA/ PAT CAGR of 19.8%/ 17.8%/ 20.2%. At the upper price band, HDFC AMC is valued at 32x FY18 EPS (20% premium to its only listed peer Reliance Nippon AMC), which is justified given the strong parentage, consistent market leadership and superior growth. We recommend SUBSCRIBE.

Emkay: Subscribe

HDFC AMC has priced its IPO at 7.8% of total FY18 AUM (31.5 times P/FY18 earnings) with 40% FY18 ROE. The  only  peer  comparison  is  Reliance  Nippon  AMC  (RNAM), which issued  IPO  at  6.3%  of  FY18  AUM  (29.6 times P/FY18  earnings) with  25%  RoE. Following a correction in its stock price, RNAM is now trading at 5.5% of FY18 AUM (26.1x P/FY18 earnings).

Considering  superior  return  ratios, supported  by a favorable  AUM  mix an d  relatively stable management profile, HDFC AMC is expected to command a premium over RNAM. Hence, the valuation  premium commanded  by  HDFC  AMC  IPO  is  justified.  We  allocate SUBSCRIBE rating to the IPO.

Reliance Securities: Subscribe

As one of the leading players in India's asset management industry, we expect HDFC AMC to be one of the key beneficiaries of rising preference of retail investors towards MFs. Further, less capital regulatory requirement for running AMC and lower reinvestment needs enable HDFC AMC to pay substantial portion of profit as dividend (>50% in last three years). At higher price band of Rs1,100, the Issue is priced at 31.4x PE of FY18 and 7.6% of average AUM, which makes it an attractive investment opportunity. We recommend SUBSCRIBE to the Issue, as it provides a healthy investment opportunity for the long-term investors, in our view.

Written and edited by Aseem Thapliyal

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