Why HDFC AMC Share Price is Falling

Editor's note: A new year brings in new hopes. After a wild, turbulent, and volatile 2022, Indian share market investors surely had their fingers crossed for 2023.

The year started with a bang as expected, following the biggest ever further public offer (FPO) by Adani Enterprises. But before the Adani group company could even go ahead with its FPO, of US based short seller Hindenburg research issued a report on the Adani group, questioning the group's debt repayment among other things.

Ever since the report was released, the market has faced several sharp sell-offs. The Adani-Hindenburg saga was just the beginning of troubles, as it was followed by the crisis in US banking sector.

If all this was not enough, a new trouble has now ensued the debt fund sector.

On 24 March 2023, the Lok Sabha passed amendments to Finance Bill, 2023, in which Finance Minister Nirmala Sitharaman has done away with the long-term capital gain tax benefit that debt fund investors currently enjoy.

According to the amendments, debt funds having not more than 35% invested in equity shares would be taxed at the income tax slab level and treated as short term capital gain.

The changes would be applicable from 01 April 2023.

As of now, debt mutual funds are treated as long-term investments if held for more than 3 years and taxed at the rate of 20% along with indexation benefits or 10% without indexation. For those with a holding period of less than 3 years, they are taxed according to their tax slab.

Now, debt oriented mutual funds are at par with fixed deposits and non-convertible debentures, from taxation point of view. Considering the amendments, it is possible that investors may move from debt funds to fixed deposits, which means increased deposits for banks.

Following the news, asset management companies (AMCs) witnessed a sharp selloff as their performance is linked with the mutual fund industry. HDFC AMC, one of the leading fund management companies in India, lost around 5% of its market cap following the amendments.

HDFC AMC shares have remained under pressure for quite some time now. In February 2023, we wrote a detailed editorial explaining the reasons as to why HDFC AMC share price was falling.

Continue reading to know more...

Why HDFC AMC Share Price is Falling

Share price of HDFC Asset Management Company (AMC), a leading mutual fund house in India, has seen a decline in recent months.

There are several reasons for this, including concerns over the performance of its funds, loss of market share to new and existing players, and the possibility of a fall in Assets Under Management (AUM) due to revised regulations.

While HDFC-managed funds have a strong track record, they tend to go through periods of underperformance, as is common with funds that have an orientation towards value investing.

So what's causing shares of HDFC AMC to decline this time? Let's find out...

#1 Weak quarterly results

For the quarter ended 31 December 2022, HDFC AMC reported a total revenue of Rs 6,630 million (m). Sequentially income increased by 2% and 4% on a YoY basis.

The net profit of the AMC stood at Rs 3,692 m, which is 1% higher than last quarter's profit. On a YoY basis, net profit rose by 3%.

HDFC AMC's net profit margin stood at 66% which is 0.8% lower on a sequential basis. This shows that the rise in income was wiped off by a rise in the company's expenses. Sequentially, total expenses rose 4%.

Quarterly Results of HDFC AMC

Quarter Ending	Dec-21	Mar-22	Jun-22	Sep-22	Dec-22
Turnover (Rs in m)	6,359	5,809	5,329	6,489	6,630
Growth	5%	-9%	-8%	22%	2%
Gross profit (Rs in m)	4,144	3,935	3,897	4,043	4,128
Gross profit margin	75%	76%	75%	74%	74%
Net profit (Rs in m)	3,598	3,436	3,142	3,639	3,692
Net profit margin	65%	66%	60%	67%	66%

Source: Equitymaster

In the last nine months, the company's employee cost rose 10% with the impact of ESOPs. The management believes the rise in underlying employee costs is a new normal for the company.

The company's expenses also increased on account of the launch of new products like the Business Cycle Fund and other new passive funds.

Hence, HDFC AMC failed to please investors despite marginally better quarterly results.

#2 FII selling

All HDFC group stocks being FII favourites, are stocks where promoter holding continues to remain high.

FIIs are selling Indian stocks by the fistful these days.

FIIs were divesting their stake in HDFC AMC starting from December 2021. In the September 2022 quarter too, FIIs sold 0.23% stake in HDFC AMC.

As of 30 December 2022, total FII stake stood at 12.1%. To know more, check out HDFC AMC's latest shareholding pattern.

Update: On 20 March 2023, US-based GQG Partners, which recently invested in the crisis-ridden Adani group, has sold its partial stake in HDFC AMC.

GQG Partners has sold about 1.2% equity in the company for nearly Rs 4 bn. The deal was executed at an average weighted price of Rs 1,600.9 per equity share.

However, HDFC AMC share price did not fall despite a massive stake sale because on the same day, SBI Mutual Fund picked up 2.2% stake in the company for Rs 7.5 bn at an average price of Rs 1,600 per share.

What next?

In case of asset management companies (AMC), despite all storms, there has been a steady rise in AUM. This essentially means income for the AMCs has seen a steady rise in the last couple of years.

Given the fact that the financialisation of savings is likely to continue, it is very likely that, as a sector, the bottom line will grow at a healthy rate. Yes, there will be increased competition from some digital players. However, there is another side to it. Distribution through digital channels will increase the market size and have a positive impact on AUM.

Hence, the industry prospects are bright. HDFC AMC is one of the most preferred mutual funds by investors. In an exchange filing, the company said it had a market share of 12.8% of the individual monthly average AUM in the industry, making it one of the most preferred choices of individual investors.

Total live accounts stood at 10.8 m as on 31 December 2022. Currently, unique customers as identified by PAN or PEKRN stand at 6.3 m as of 31 December 2022 compared to 36.7 m for the industry. Hence the company has a market share of 17%.

Bottomline is HDFC AMC holds a dominant position in a growing industry.

How HDFC AMC shares have performed recently

On a year-to-date (YTD) basis, shares of HDFC AMC have shed 17.4%. In the past one year, HDFC AMC is down 10.5%.

HDFC AMC has a 52-week high of Rs 2,479.3 touched on 4 April 2022 and a 52-week low of Rs 1,690 touched on 24 May 2022.

About HDFC AMC

HDFC AMC is an investment manager for HDFC mutual fund. The company has a diversified asset class mix across equity and fixed income/others.

Promoted by HDFC in 1999, Standard Life Investments (SLI) acquired a 26% stake in HDFC AMC in 2001, and now the company operates as a joint venture between HDFC and SLI.

Through organic growth and acquisitions, such as Zurich India and Morgan Stanley MF, the firm has grown to one of the top two AMCs in India.

To know more about the company, you can check out the HDFC AMC company fact sheet and HDFC AMC quarterly results.

You can also compare HDFC AMC with its peers.

HDFC AMC vs Nippon Life AMC

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