HDFC AMC IPO – Should you invest or avoid?
Mumbai based HDFC AMC IPO would open for subscription on 25th July, 2018. If you are investing in mutual funds, HDFC AMC should be familiar with you. HDFC AMC offer savings and investment products across asset classes, which provide income and wealth creation opportunities to its customers. Company revenues grew by 19% CAGR in the last 5 years. It earned a decent profit of 38% for FY2018. What are positive factors in this HDFC AMC Limited IPO? What are the hidden factors in HDFC AMC IPO? Should you invest in HDFC AMC IPO? Let me provide some insights about this IPO and do the review.
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About HDFC AMC Limited
HDFC AMC is a joint venture between HDFC and Standard Life Investments Limited. They offer a large suite of savings and investment products across asset classes, which provide income and wealth creation opportunities to its customers. As of March 31, 2018, they offered 133 schemes that were classified into 27 equity-oriented schemes, 98 debt schemes (including 72 fixed maturity plans (FMPs)) and three liquid schemes, and five other schemes (including exchange-traded schemes and funds of fund schemes). This diversified product mix provides them with the flexibility to operate successfully across various market cycles, cater to a wide range of customers, from individuals to institutions, address, market fluctuations, reduce concentration risk in a particular asset class and work with diverse sets of distribution partners which helps us expand its reach. They also provide portfolio management and segregated account services, including discretionary, non-discretionary and advisory services, to high net worth individuals (HNIs), family offices, domestic corporates, trusts, provident funds and domestic and global institutions. As of March 31, 2018, they managed a total AUM of ₹64.74 billion as part of its portfolio management and segregated account services’ business.
They have been the most profitable asset management company in India in terms of net profits since Fiscal 2013, according to CRISIL, with a total AUM of ₹2,919 billion as of 31 March, 2018. Its profits have grown every year since the first full year of operations in Fiscal 2002. They have been the largest asset management company in India in terms of equity-oriented AUM since the last quarter of Fiscal 2011 and have consistently been among the top two asset management companies in India in terms of total average AUM since the month of August 2008, according to CRISIL
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HDFC AMC IPO Issue details
IPO opening date: 25-July-2018
IPO closure date: 27-July-2018
Face Value: Rs 5 per share
Issue price band: Rs 1,095 to Rs Rs 1,100 per share
Issue size: 2,800 Crores
IPO Lot size: 13 shares and 13 shares, there-off
Minimum investment: Rs 14,300 on higher price band
Leading Managers: Kotak Mahindra Capital, Citigroup Global Markets, IIFL Holdings, Axis Capital, DSP Merril Lynch, ICICI Securities, CLSA India, JM Financial and JP Morgan India
Listing: BSE / NSE
Objects of the HDFC AMC IPO issue
The Objects of the issue are:
a) Offer for Sale (OFS): OFS by selling shareholders. The company will not receive any proceeds from the Offer and all the proceeds will be received by the Selling Shareholders, in proportion to the Equity Shares offered by the respective Selling Shareholders as part of the Offer.
b) To achieve the benefits of listing the Equity Shares on the Stock Exchanges. Further, the company expects that listing of the Equity Shares will enhance its visibility and brand image and provide liquidity to its Shareholders. The listing will also provide a public market for the Equity Shares in India.
The Promoters of the Company are HDFC and Standard Life Investments. HDFC holds 57.36% and Standard Life Investments holds 38.24%.
Company Financials (reinstated-Standalone)
1) The company generated revenue of Rs 903.1 Crores for the year ended Mar-14 and Rs 1,867.2 Crores for the year ended Mar-18.
2) The company posted a profit of Rs 357.7 Crores for the year ended Mar-14 and profit of Rs 721.6 Crores for the year ended Mar-18.
What are the key strengths of HDFC AMC Limited?
Here are the key strengths of the company.
1) Consistent market leadership position in the Indian mutual fund industry.
2) Trusted brand and strong parentage
3) Strong investment performance supported by comprehensive investment philosophy and risk management
4) Superior and diversified product mix distributed through a multi-channel distribution network
5) Focus on individual customers and customer centric approach
6) Consistent profitable growth
7) Experienced and stable management and investment teams
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What are the Strategies of HDFC AMC Ltd?
Here are the key strategies of the company.
1) Maintain strong investment performance
2) Expand its reach and distribution channels
3) Enhance product portfolio
4) Invest in digital platforms to establish leadership in the growing digital
Reasons to invest in HDFC AMC IPO
1) The company posted Good Revenue growth. It posted growth of 19% CAGR in the last 5 years.
2) Company posted good profits in the last years. Company posted profitability growth of 19% CAGR in the last 5 years. It earned margins of over 38% in FY2018.
3) Second largest player based on AUM in mutual fund industry. Long-tenure systematic investment plans (SIP) of more than 10 years form about 77% of the company’s SIP book indicating high asset visibility and profitability. HDFC AMC’s wide distribution network of 209 branches and more than 65,000 distributors across India gives it an edge especially when it comes to gaining investors.
Risk Factors / Reasons not to invest in an HDFC AMC IPO
1) Adverse market fluctuations and/or adverse economic conditions could affect its business in many ways, including by reducing the value of its AUM, causing a decline in its investment management fees, portfolio management fees or fees from advisory services, reducing its systematic transactions, and causing its customers to withdraw their investments, each of which could materially reduce and adversely affect its revenue, business prospects, financial condition and results of operations.
2) If its investment products under perform, its AUM could decline and adversely affect its revenues, reputation and brand.
3) Its AUM may be constrained by the unavailability of appropriate investment opportunities or if they close or discontinue some of its schemes, products and services.
4) Its historical growth rates may not be indicative of its future growth and if they do not manage its growth effectively, its financial performance could be adversely affected.
5) Failure to continue with its existing distribution relationships or to secure new distribution relationships may have a material adverse effect on its competitiveness, financial condition and results of operations.
6) They rely on third-party service providers in several areas of its operations and may not have full control over the services provided by them to us or to its customers.
7) If its techniques for managing risk are ineffective, they may be exposed to material unanticipated losses.
8) They may not be able to implement its growth strategies.
9) Any concentration in its investment portfolio could have a material adverse effect on its business, financial condition and results of operations.
10) There are outstanding proceedings against us, Promoters, Directors and Group Companies and any adverse outcome in any of these proceedings may adversely affect its profitability and reputation and may have an adverse effect on its business, results of operations and financial condition.
11) Its Promoters may be subject to conflicts of interest because of their interests in other companies, which could have a material adverse effect on its business, financial condition, operations and prospects.
12) There is a risk that customer data could be lost or misused.
13) They may have negative cash flows.
14) They have in the last 12 months issued Equity Shares at a price that could be lower than the Offer Price.
15) Certain of its Group Companies has incurred losses in the preceding fiscal year and may incur losses in the future. One of its Group Companies may also have unsecured loans.
16) Company will not receive any proceeds from the Offer and the entire proceeds of the Offer will be paid to the Selling Shareholders.
17) The mutual fund business in India may be adversely affected by changes to the present favourable tax regime.
18) Its operations are dependent on the performance of the Indian economy and securities market.
19) For complete internal and external risk factors, you can refer the DRP of the company.
Should you invest in HDFC AMC IPO?
On FY2018 EPS of Rs 35 and on an upper price band of Rs 1,100, P/E works out to be 31.4x. On last 3 years average EPS of Rs 30.56, P/E works out to be 35.9x. Means company is asking for a higher price band Rs 1,100 where P/E would be in the range of 31x to 36x. There are listed peers like Reliance Nippon AMC which are trading at P/E of 26x, hence the price band of Rs 1,100 at P/E of 40x to 44x is over priced.
The company posted revenue of 19% CAGR in the last 5 years. It earns decent profits. However, its issue price is highly priced. I would have been excited if the issue price was on the lower side. Considering its brand in the mutual fund business and positive factors, investors can invest in this IPO for 4-5 year tenure. Investors may or may not get listing gains.
Disclaimer: I have an interest in investing in this IPO and above analysis is based on my personal views. The idea of giving positive and negative factors to investors in this article is to create awareness and education about this IPO. One should NOT constitute this as investment advice to buy or not to buy. Please consult your investment advisor before you invest in such high risk investment options.
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HDFC AMC IPO – Should you Invest or Avoid