HDFC Asset Management Co Ltd’s June quarter performance disappointed investors on many parameters. To start with, the fund house’s net profit failed to meet street expectations. Its operating expenses surged 28% driven by the 59% jump in employee benefit expenses due to employee stock options charge.
To be sure, this is a one-time hit and the fund house managed to tide over these expenses from the 26% jump in its other income. Nevertheless, the impact on profit was visible. But this was not what miffed investors. Shares of the company have lost 7% ever since the June quarter results were released on 16 July. What is bothering investors is that the fund house has not been able to plug the erosion in market share.
HDFC AMC’s market share based on overall outstanding asset under management (AUM) was 12% in the June quarter, slightly down from 13% in the previous quarter. But, the market share has eroded 159 basis points ever since the pandemic broke out last year. One basis point is one-hundredth of a percentage point. Over six years, the erosion is a steep 5.5 percentage points. This market share loss is led by equity funds even though this segment performed better in the June quarter. The fund house also lost market share in terms of unique investors. In other words, HDFC AMC is neither able to garner more customers nor able to hold on to its existing customers.
The law of averages, though, seems to be on the fund house’s side. Analysts at Jefferies India Pvt Ltd point out that monthly average flows through the systemic investment plan (SIP) during the June quarter are higher than the first nine months of FY21. This shows that the fund house has been able to weather the second wave’s impact better than the initial stages of the pandemic last year.
The fact remains that HDFC mutual fund has improved its performance. The management too has been sanguine on future prospects. New fund offers, willingness to venture more into exchange-traded funds (ETF) and a digital push may work for the fund house on growth. “These measures coupled with strong distribution heft and brand pull should help in improving its market share gradually,” analysts at Jefferies wrote in a note. That said, those at Kotak Institutional Equities warn that ETFs may pull down the profitability of the actively-managed asset management business.
Its smaller peer Nippon Life India Asset Management Ltd has managed to increase its presence. The company gained 20 bps in market share during the June quarter although it was driven largely by an expanding debt fund AUM. Nippon’s overall profitability didn’t excite investors but its flagship equity funds showed strong performance. New partnerships with banks and other distribution channels are seen as a big plus for the company. Meanwhile, for HDFC AMC, its access to a vast distribution network lends it a much-needed heft in clawing back growth. HDFC Bank’s share in cross-selling remains low at 5.4% of the fund house’s AUM, and the potential to leverage on the branch distribution is high.
HDFC AMC has underperformed Nippon Life and the broad market since April, perhaps a reflection of the fund house’s struggle with market share.
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