Asset Management Company

SECTOR UPDATE
Asset Management Company

A good play on the financialisation theme
19 February 2020
Ajox Frederick, CFA, FRM

Research Analyst
ajox.frederick@bksec.com
+91-044-6122 7005
Summary
• The Asset management industry is another play in the financialisation theme (shift towards financial assets from
physical savings). Being an unlevered industry (0% debt) with high operating margins (over 30%), the Asset Management
Company (AMC) stocks fall under the quality set of names that trade in the Indian markets with premium paid for quality.
• Supportive demographics (1.5 mn new potential customers per year) and macro outlook will contribute to growth. The
population structure and increasing awareness paves way for a sustainable flow into the AMCs through SIPs from
individual customer base. The macro outlook supports the aspirational shift in income and wealth levels.
• Underpenetrated market (at least 50%) helps in demand sustainability through new customer acquisition with limited
compromise to profitability. Our studies re-iterate the fact that the potential market is almost double the existing market,
giving a decent AUM growth (13% to 15%) outlook. Since, the potential market (retail customers) is interested in equity
asset class, the continuity of profits growth (above 10%) will remain.
• Mutual funds are becoming the preferred investment vehicle within household savings’ bucket with increasing
awareness and need for a transparent investment medium.
• Consolidation will make the large players larger than now. The market below the top 10 players will be taken by the bigger
players gaining 16% share in the run.
• Risks of savings rate slowdown and pressure from competing business (insurance) with tax arbitrage exists.
• There is a possible entry of the major players such as UTI, ICICI AMC and SBI AMC to the listed space soon. Thereby
generating further interest and coverage of the AMC sector.
View: Given the current strategic position and valuation, we are optimistic on Nippon Life AMC’s outlook and feel that there is
a 17% upside from trading price (Rs 391, 18th February).
2
Asset management industry snapshot
AUM (Rs trn) Customer mix

30
26%
25
40%
20
15
10
5 32% 1% 1%
0
Corporates Banks/Fis FIIs HNI Retail
FY15 FY16 FY17 FY18 FY19 Dec-FY20
Source: AMFI Source: AMFI, Dec 2019
Asset class mix Market share (Total AUM)

0% 2% 4% 6% 8% 10% 12% 14% 16%
0% 6%
14% 24%
HDFC Mutual Fund
ICICI Prudential Mutual Fund
0%
SBI Mutual Fund
Aditya Birla Sun Life Mutual Fund
Nippon India Mutual Fund
30% Kotak Mahindra Mutual Fund
26%
UTI Mutual Fund
Liquid/Money Market GILT Debt Oriented Franklin Templeton Mutual Fund
Equity Oriented Balanced Gold ETF Axis Mutual Fund

ETFs (other than Gold) IDFC Mutual Fund
Source: AMFI, Dec 2019

3
Long-term view (5 years)
• Growth
o With supporting demographics (awareness increase in tier ii and tier iii cities, population pyramid, women work force)
and macro-economic conditions (increasing financialisation, control on inflation, increasing per capita income,
underpenetrated market), the SIP flow should report a CAGR over 12% in the next five years. The equity flow should be
expanding at least above an annual rate of 5% during the five year period.
o The non-retail flows are expected to be positive for FY20; however, we expect it to normalise between 5% to 7% during
the 5-year period driven by corporate savings rate growth.
• Operating costs
o This is expected go up in the short term, 6 to 8 quarters due to expected expansion into the tier II and tier III cities.
o Increase in advertisement and marketing spends are also expected for NAM, while HDFC AMC would stay put on the
spends.
o Brokerage incentive should drop to zero, since the costs are being tied to the fund instead of AMCs.
• Margins
o Given the focus towards tier II and tier III customers and retail orientation, the margins are bound to expand due to
mix shift, during the near term.
o There is a possibility of TER dropping due to AUM expansion over the longer term.
o Therefore, we expect a very marginal margin expansion in the coming couple of years, followed by a normalized a
stable trajectory. However, we expect both the listed players to report a higher margin than industry due to
distribution reach and brand strength.
• Factors that might affect assumptions

o The possibility of further capping the TER at a lower percentage than now would constraint the margins. Though, the
probability if low for this occurrence in the next five years as the regulatory cap was implemented very recently.
o Sudden spike in unemployment rate will be a major deterrent to SIP flow.

4
Contents
Retail market sizing 06 Sector Introduction 46
Growth Themes 10 Top players and valuation 61

Risks 19 Listed firms 70
Competing products 24 Initiating coverage – Nippon Life AMC 76
An econometric study 27 Initiating coverage – HDFC AMC 120
Valuation technique 37
Recent happenings 41
5
Retail Market sizing
Market Money flow
Indian demographics
Wealth and income
6
Savings flow
• As of now Bank deposits hold a large

proportion of financial savings, followed
by Life insurance.
Household savings Rs 36.8 trn
• The awareness level had been low with
respect to mutual funds earlier, however,
“Mutual Funds Sahi Hai” campaign made
sure that steady flows are coming
through SIPs.
Gross Financial
Rs 18.7 trn
Savings Rs 1.7 trn
Cash/
Rs 9.0 trn currency
Rs 2.4 trn
Rs 3.9 trn Rs 1.7 trn

Bank Shares/
Deposits Mutual
funds
Life Pension and
insurance provident
funds
Source: RBI (FY2018)

7
Indian demographics are highly supportive
of prospective new customers
The population pyramid supports demographic dividend
Source: https://www.populationpyramid.net/india/2030/
• 45% of our population is below 25 years of age as of now. Working population will be growing at a strong pace. 10 years
down the lane, 620 million Indians will be below 25 years. Thus, demographic dividend is bound to exist going forward as
well..
• According to the above chart, close to 5.4% (net) of the population of 1.3 bn ~70 mn will be entering work force in the next
5 years.
• Thus adding 14 million youngsters to the workforce, every year .
• Conservatively, we can presume 10% of that population would enter the mutual fund industry, thereby leading to a
potential addition of 1.5 million customers per year – a 26% increase with respect to number of SIP accounts, in addition
to the existing customer base. 8
Wealth and income scenario indicates
market expansion
India’s wealth pyramid • 92% of Indians adults have wealth less than US$ 10,000,
therefore, conservatively, we can assume them not
More than
$100 mn =
entering mutual funds in near future. From an income
760 angle, taking the current mid affluent and affluent (there
$50 mn to $100 are 65 mn households, which will be 100 mn by 2025)
mn = 1060
• Currently, average SIP ticket size is ~Rs 2,500, while number
$1 mn to $50 mn = 243180 of SIP accounts ~30 mn. A decent proportion of those
customers are from the bottom of the pyramid as well.
$100,000 to $1 mn = 3.95 mn
• Thus potentially, from an income perspective, at least 50%
of the 100 mn could enter with a similar ticket size.
$10,000 to $100,000 = 60.1 mn
• Thus, potential customer market in addition to existing
Less than $10,000 = 770.7 mn
customers = 30 mn to 50 mn. Therefore, the mutual fund
industry could be seen at least 50% underpenetrated and
new customer flow will go on for 20+ years.
Source: Global wealth report (Credit Suisse) 2017. No. of adults.
Distribution of households – Mid affluent and Conservatively, there are 70 mn potential

aspirers are on increasing trend households who can enter mutual funds
50
Increase in mid affluent and decrease in strugglers
102
40
91
78
76
30
69
62
58
61
55
%
20
44
33
31
20
10 12
9
7
3
2
2
2
1
0
Elite (>5M) Mid Elite Affluent (1- Mid Aspirers Strugglers Next Billion 2010 2018 2025
(2-5M) 2M) Affluent (0.3-0.5M) (0.15 to (<0.15M)
Elite (>5M) Mid Elite (2-5M) Affluent (1-2M)
(0.5-1M) 0.3M)
Mid Affluent (0.5-1M) Aspirers (0.3-0.5M) Strugglers (0.15 to 0.3M)
2010 2018 2025
Next Billion (<0.15M)
Source: CCI City Income Database; BCG analysis 9

Growth themes
Low penetration
Shift towards mutual funds

through financial assets
Growth Themes
Consolidation of Top AMCs
Millennials not wanting to own physical

assets
Mobile and internet penetration helps in

digital payments
Next big trigger – New Pension Scheme

(Potential Inflow)
Income and education contribute to

awareness – Published study
10
Penetration to increase in Tier 2 and Tier 3 cities
• In Metros, the income will steadily increase and customers in the income range between 3 to 5 lakhs would move into the
5 to 10 lacs (potential customer base). Moreover, in tier 1 and tier 2 cities, people with higher income and who have not yet
entered the industry will be entering.
• MF Penetration should double by FY30 to reach at least 14% of households. This should double the market size in the next
10 years. Equity AUM will be the greatest beneficiary.
11
Mutual funds are becoming the preferred
Investment vehicle
Household financial assets move into MFs
100
• We see a shift towards financial assets in recent times.
10 13
90
80 • We also see a move away from FD towards Mutual funds.
70
60 • Though, there need not be a dramatic improvement in the
50
%
40 mix of financial assets, the shift of flow from FDs/RDs into

30
20 SIPs (mutual funds) will provide potential thrust in growth
10
0 from existing savers.
FY16 FY18
Mutual funds Provident Funds • The awareness created by AMFI has been helping in
Currency Life Insurance Funds sustaining the interest in mutual funds. Therefore, flows will
Cooperative Banks and credit societies Commercial Bank deposits
continue to be accretive.
Source: RBI
Shift to Financial Assets (% Household Assets)

65%
60%
55%
50%
45%
40%
35%
FY12 FY13 FY14 FY15 FY16 FY17 FY18
Gross Financial Savings Savings in physical assets (inc Gold)
Source: RBI
12
Consolidation: Top AMCs win… and set to
continue…
Market share - Consolidation • Top 5 AMCs (HDFC AMC, ICICI Prudential, SBI Mutual,
Nipponand Birla Sun life) retain strong market leadership. 3
65 of those firms have a bank’s support through parentage.
55 • SEBI guidelines in reducing the target expense ratio has
helped them due to the existing huge base.
45 • The players beyond the top 10 AMCs are losing market
share to the bigger guys due to increased competition and
%
35
weak distribution strength.
25 • We expect the market to consolidate and the top 5 players
are bound to reap maximum benefits in the long run due
15
to brand equity, the large asset base and strong
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
1HFY20
distribution.
• Among the top 10 players, Nipponand UTI lost market share
Top 5 AMCs Next 5 AMCs Rest of Market the most and SBI mutual gained the most in the last 10
years helped by the banking channel and liquid flows
(corporate connects).
Source: AMFI
Bank led AMCs gain market share Largest market share changes
60% 20
55% 15
10
%
50%
5
45%
0
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
1HFY20
40%
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
1HFY20
Reliance Mutual Fund SBI Mutual Fund

Bank led AMCs Other AMCs UTI Mutual Fund Axis Mutual Fund
Source: AMFI
13
Less proportion of millennials want to own
physical assets
Annual Homeownership rates (USA) Interested home buyers (India) - 2019
55 years
45 to 55 years
35 to 45 years
25 to 35 years
Less than 25 years
0% 10% 20% 30% 40%
Source: U.S. Census Bureau Source: Anarock Property Consultants
• Though we do not have such data for India, we can Growth of House Price Index (India)
safely assume that home ownership for population
30
below 30 has been dipping.
25
• Further drop in savings in physical assets could trigger
higher flows in mutual funds and insurance savings 20
products by customers who are below the age of 35. 15

%
• The large ticket size houses, decreasing returns, job 10

switches to places outside home town and affordable
5
rents (rental yields are below 2%, in metros), are other
reasons for the millennials not to buy properties 0
Q1FY12
Q1FY13
Q1FY14
Q1FY15
Q1FY16
Q1FY17
Q1FY18
Q1FY19
Q2FY12
Q3FY12
Q4FY12
Q2FY13
Q3FY13
Q4FY13
Q2FY14
Q3FY14
Q4FY14
Q2FY15
Q3FY15
Q4FY15
Q2FY16
Q3FY16
Q4FY16
Q2FY17
Q3FY17
Q4FY17
Q2FY18
Q3FY18
Q4FY18
• B&K View: There is a possibility of savings in physical
assets to drop further helping mutual fund flows.
Source: RBI
14
Mobile penetration to help new transactions
Transactions through mobile (mn) Digital payments continue to surge

1,200
1,000
800
600
400
200
0
May-18
Sep-18
May-19
Sep-19
Jan-18
Jan-19
Nov-18
Mar-18
Jul-18
Mar-19
Jul-19
Source: TRAI Source: AMFI
• Mobile transactions has been reporting phenomenal Increase in search volumes for “SIP”
growth in recent times.
• We expect this to go up further in the coming days.
• % share of overall flow through mobiles/digital mode

has shown drastic growth in 2019, due to deep internet
penetration with the help of Jio and cheap data.
• B15 cities saw a 16x increase in search volumes for SIP

when compared to T15 cities. This is where the untapped
potential lies.
• B&K’s view: Mobile will be playing a major role in the

expansion of low ticket market going forward.
Particularly from B30 cities. Source: AMFI
15
Next big trigger – New Pension Scheme
Public sector jobs (mn) Total Employees who joined post 2004 (mn)
25 35
30
20
25
15
20
10 15
10
5
5
0 0
1981
1984
1987
2011
1975
1978
2014
2017
2032
2020
2023
2035
2038
2026
2029
1990
1993
2002
2008
1996
1999
2005
2010
2012
2014
2016
2018
2030
2032
2020
2022
2034
2004
2024
2036
2038
2006
2008
2026
2028
2040
Source: Economic survey of India
Expected Pent-up flow (Rs bn) • Defined benefit plan was scrapped for government
employees who joined post 2004. Therefore, employees
4,500 coming out of the jobs in 2040 will be the first batch of
4,000 employees without pension from government.
3,500 • Thus, by 2035, there are bound to a host of articles
3,000 focusing on the low social security net for the
government employees
2,500
2,000 • Thus, mutual funds are bound to be part of every

household to cash upon this opportunity. With our
1,500
conservative assumption of 10% of these new guys
1,000 opening SIP accounts going forwards, the estimated
500 excess flow ~4 trn by FY40.
0 • B&K View: There is a possibility of a larger quantum of
2015 2020 2025 2030 2035 2040 2045 flow coming through this population when
awareness/fear increases further.
Source: Economic survey of India
16
Income level drives mutual fund awareness –
A Study
A study was conducted by three economics professors through 250 respondents to understand the decision making
process among mutual fund investors in Chennai.
Study sample demographic • Observations
Customer Demographic
• There is a significant difference between the gender of the
respondents and awareness about mutual fund.
above 51 years • There is no significant difference between the investors’
age and the knowledge level about mutual fund.
41 years to 50 years
• There is no significant difference between the ‘means’ of
income and the awareness about mutual funds.
31 years to 40 years
• There is a significant difference between the income group
Below 30 years of investors and awareness of mutual fund scheme.
• More than 50% of the respondents were educated through
0% 10% 20% 30% 40%
advertisements, friends and relatives.
Male Female
Education Employment
Source: IJRD – A Management Review
11%
19%
Key takeaways
• Age does not play a major role in knowledge level. Thus,
newbies entering the job market are as aware of mutual 23%
funds due to internet penetration.
• Bankers play a vital role in influencing respondents to 18%
invest in mutual funds. 66% 63%
View
• As income level determines the awareness level,
structurally, the industry will benefit with rising income Under Graduate
Private sector Public sector
level. Post Graduate
• Firms with strong distribution reach and brand will Professional Self employed
continue to benefit.
Source: IJRD– A Management Review
Citation: Awareness and Knowledge of Mutual Fund among the Investors with Special Reference to Chennai – A Critical
Study. International Journal of Research and Development - A Management Review . 2319–5479, Volume-2, Issue–4, 2014 17
Positive attitude towards SIP a big plus –
Educated people like SIPs
A study was conducted to understand the various demographic factors driving investor’s attitude towards SIP. The study
was published in International Journal of Research & Review (www.ijrrjournal.com) Vol.6; Issue: 11; November 2019.
Why does one invest in SIPS (in that order) • Observations
1. Easy to invest • There is association between age and investor’s positive
attitude towards SIP
2. Monthly investment process – small amount to invest
3. Professional services
• Gender is also a factor, male population has a better
liking as most of the financial decisions are being taken
4. Diversification by men.
5. Reduction in risk • Education plays a significant role in customers liking SIP.
• Income also plays a role in contribution towards SIP.
Income continues to be a driver of positive

attitude towards SIPs Educational qualification is the other factor
80 100
70
80
60
50 60
%
%
40
30 40
20
20
10
0 0
< 3L 3L to 5L 5L to 8L > 8L Under graduate Graduate Post Graduate Professionals
Positive attitude Neutral attitude Negative attitude Positive attitude Neutral attitude Negative attitude
Source: International Journal of Research and Review
Citation: Jayalakshmi S, Amma KPS. A study on investor’s attitude towards systematic investment plan in mutual funds -
Kozhikode city Kerala state. International Journal of Research and Review. 2019; 6(11):372-376.
18
Risks
Rising consumerism
Opposing trends
Equity mix stabilizing
Unemployment and salary

stagnation
Structural dip in Total Expense

Ratio
19
Rising consumerism hurts savings…
Unsecured loans (Rs trn) Credit card usage on the rise

6.0 7
5.1
6
5.0
5
4.0 21% CAGR 3.8
4
3.0
3.0 3
2.4
2.0 2
2.0 1.8
1.6
1
1.0 0
FY16 FY17 FY18 FY19
0.0
Amount transacted (Tn) Quantum per transaction ('000)
Source: RBI
Google Trends – “Fine Dine: (India)” • Rising unsecured loans – Since the income has not
been rising at such a high growth rate, the probability of
120
savings rate decline remains.
100
• Rising ‘FINE DINE’ (google trends) has shown a structural
80 increase. Related topics (Buffet, Bar, Zomato, Café).
Though this is not representative of the broader
60
population, we could understand the trends and
40 aspiration of Indian population.
20 • Rising credit card spends implies lesser savings rate,
0
since the growth is stronger than income growth rate. In
addition to that, a move into credit cards and online
May-13
Jun-15
Sep-16
May-18
Oct-13
Jan-15
Nov-15
Apr-16
Oct-18
Dec-12
Mar-14
Aug-14
Feb-17
Jul-17
Dec-17
Mar-19
Aug-19
transactions nudges the customer to spend more than

required.
Source: Google Trends
20
Equity mix expansion might slowdown
going forward
AUM Mix across the globe Stable average ticket size per individual folio
100 200
100
90
80 80
150
70
60 60
50 100
%
40 40
30 54
20 45 45 50
10 25 21 23 20
0 7 7
0 0
Brazil
FY14 - India
Germany
China
US
UK
France
FY19 - India
Jun-19
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Dec-19
Equity Debt Liquid Others No. of folios (mn, left) Average ticket size (Rs '000)
Source: Strategic insight – Simfund, AMFI, BCG analysis Source: AMFI
Retail investors’ average ticket size stabilises
• The rise in ticket size implies that the industry has been moving up the income pyramid. The risk in moving up the
pyramid is that it is constrained (number of new clients are restricted) and not mass affluent, that is why we see a
stability in ticket size.
• Future growth will depend on number of additional folios/customers. As estimated earlier, this number of folios could
double to 170 mn, in the next 5 years, since the number of new SIP customers are 500,000 per month, thus adding 6 mn
new customers per year.
Equity mix to normalize
• Equity mix might not increase from current levels as we have reached the levels of developed market. China’s equity
exposure is just 7%, similar is the case in Brazil.
21
Rising unemployment &
Stagnation of entry level salaries…
Estimated unemployment rate (%) Inflation adjusted median pay stagnates
10 100
9
98
8
96
7
94
6
92
5
90
4
88
3
2011 2012 2013 2014 2015 2016 2017 2018 2019
Jan-16
Apr-16
Oct-16
Jan-17
Apr-17
Oct-17
Jan-18
Apr-18
Oct-18
Jan-19
Apr-19
Oct-19
Jul-16
Jul-17
Jul-18
Jul-19
Inflation adjusted income
Source: CMIE Source: IIM Ahmedabad Placement Reports
• Though gross disposable income has neutral impact on total AUM growth, the possibility of slowdown in new customers
is possible if unemployment rate is not curtailed.
• Unemployment rate leads to drop in disposable income and thereby, there is bound to be a hit on savings rate as well.
This could lead to drop in new customers entering SIP route.
• Median salary increase in one of the top tier management institutions (IIM Ahmedabad) is lower than inflation growth
rate, thereby eating into real income. We have considered THE MOST PREMIER college in the country, therefore, average
salary increase will be lower in cases of other colleges. For, quite sometime now, the starting salary has remained
stagnant, thereby hurting the purchasing power of younger Indians.
• Unless new job creation happens at a faster pace, this will be one of the major risks for the sector expansion.
22
Total Expense Ratio on a declining trajectory…
Direct – TER % (history) Distribution commission remained strong (%)

2.5 1.5
2.0
1.0
1.5
1.0
0.5
0.5
0.0 0.0
Equity Balanced Liquid Debt-Others Equity Balanced Liquid Debt-Others
FY13 FY14 FY15 FY16 FY17 FY13 FY14 FY15 FY16 FY17
Source: Reliance AMC DRHP
Expense ratio of US funds • AMCs took the brunt of cut in expense ratio over the
recent period. Even expense ratio for liquid funds, which
1.0 form the major composition of assets under
management fell from 20bps to 10bps, a 50% cut in 5
0.8 years.
0.6 • Distribution commission (TER of Regular – Direct) was on

the rise keeping the total expense ration constant by
0.4 AMCs taking a cut. This lead to a large proportion of
sales being done by distributors in both T30 and B30
0.2 cities. However, the recent TER slash by SEBI hit the
distributors as well as AMCs were not able to absorb the
0.0 cut completely.
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
• We expect the expense ratio to fall further in the coming
Equity Balanced Liquid Debt-Others years and the trend is expected to continue in line with
developed markets.
Source: Lipper and Morningstar
23
Where are the competing products moving?
Competing products
FD
Insurance
24
FD continues to remain integral component of
Savings, but indicates decline
Bank deposits as proportion of GDP remain stable Awareness levels remain high for FD
100 120
100
80 80
60
%
60 40
20
40 0
Bank Deposits
Company Deposits
Real Estate
Precious Metals
Pension Schemes
Equities
Post Office Savings
Debentures
Current Derivatives
Life Insurance
Mutual Funds
20
USA India China
0
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
Source: World Bank Source: SEBI
Deposits decline as % of household savings • FD profiling

o Customers – retirees : Most of the customers are
80 aged above 40 and rural customers play a major
70 role.
60 o Distribution – Banks: Since this has been the bread
and butter of banks, there will be a push/incentive by
50 banks to safe guard this product.
40 o Awareness – SEBI investor survey places FD as the
30 product that 100% of the investors are aware of.
20 • FY17 was an aberration, since it was the year of
Demonetisation.
10
• B&K’s view: There will not be any sudden shift between
0 FD to fixed income funds since only 8% of retail
2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 customers hold non-equity assets and Bank deposits /
GDP shows an upward trend. In the long term, we do
Source: RBI expect a shift to happen. 25
Insurance has a very strong distribution arm…
Cumulative AUM growth – Insurance on par Insurance has a pretty deep reach
400% 1,400
350% 1,200
300%
1,000
250%
800
200%
600
150%
100% 400
50% 200
0% 0
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 Private Agents LIC Agents IFAs
AUM (Mutual Funds) Life insurance (Private) No. in '000s
Source: AMFI and IRDA Source: IRDA and AMFI
New ARNs (IFAs) drop • Insurance agents are 25 times as much as IFAs in the
country.
25,000
• Therefore, the push will be more strong from insurance
side while selling a savings product. Moreover, the
20,000 penetration level of LIC in the rural pockets can never
be overtaken by IFAs of B30.
15,000 • There has been a dramatic dip in new IFAs coming into
the industry. The average registrations per month
dipped to 729 from 1700 starting Dec 18, when the
10,000
upfront commission was removed by SEBI.
5,000
• Mutual funds have shown strong AUM growth, however
insurance growth has been pretty stable as well.
• B&K’s view: We do not expect any dramatic shift from
0 Insurance to Mutual funds going forward since the sales
Apr 17 to Mar 18 Apr 18 to Mar 19 Apr 19 to Mar 20 (E) force will maintain thrust for insurance and given the
better incentive structure, Insurance growth will be in
Source: Morningstar and AMFI line with nominal GDP growth in the long run.
26
An econometric study on growth drivers and
themes
Household savings vs Individual

AUM
Equity market vs individual AUM
Financial savings rate

A macro study –
Growth outlook
Disposable income
Equity flow driver
Debt AUM vs corporate savings
Debt AUM vs interest rate
B&K Inference
Disclaimer: The quantum of data may not be sufficient for this study, however, gives an idea on the dependency and direction.
27
Does household savings rate impact
individual AUM growth?
Household savings growth versus Individual Summary output – Individual AUM growth
AUM growth Regression Statistics
Multiple R 0.30
50
R Square 0.09
45
Adjusted R Square -0.04
40
Standard Error 0.17
35
Observations 9
30
%
25
20
ANOVA
15 df SS MS F ignificance
10 Regression 1 0.02 0.02 0.71 0.43
5 Residual 7 0.20 0.03
0 Total 8 0.22
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
Coefficientsandard Err t Stat P-value Lower 95%
Household savings growth Individual AUM growth rate Intercept 0.18 0.09 1.98 0.09 -0.04
Household savings growth 0.73 0.87 0.85 0.43 -1.31
Source: World Bank, AMFI
• NOT confirmed - Steady decline in household savings

Summary output – Retail AUM growth
rate did not seem to impact individual AUM growth Regression Statistics
Multiple R 0.05
since the recent growth was driven by factors such as R Square 0.00
Demonetisation, 6th pay commission and market Adjusted R Square -0.14
returns. Standard Error 0.25
Observations 9
• Our single factor analysis over the last 8 years did not
give conclusive evidence over the causality of the ANOVA
savings growth rate of Individuals df SS MS F Significance F
Regression 1 0.00 0.00 0.02 0.89
• Therefore, we dived deeper to understand if retail Residual 7 0.44 0.06
customers’ AUM growth was dependent on savings Total 8 0.44
growth rate.
• B&K’s view: We do acknowledge the fact that market Intercept 0.25 0.14 1.85 0.11 -0.07
Household savings growth -0.18 1.28 -0.14 0.89 -3.19
rally would have delivered AUM growth. We will be
studying the impact on market rally in the next slide. Source: B&K Research
28
Did equity market performance drive
individual AUM growth?
Individual AUM growth vs NIFTY 50 performance Direct relation observed
80 60%
Individual growth rate

50%
60
40%
40
30%
%
20 20%
10%
0
0%
(20) -20% 0% 20% 40% 60% 80%
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 Nifty 50 growth
Nifty 50 growth Individual growth rate Individual growth rate Predicted growth rate
Source: AMFI, BSE
• YES – As the t-stat (with 95% confidence interval) states, Summary output – Individual AUM growth
we can relate with certainty that the AUM growth
depends on the market performance. Regression Statistics
Multiple R 0.70
• Since, the slope has been positive, the relation is direct R Square 0.50
(implying that an better market performance will lead Adjusted R Square 0.42
to AUM growth of individual accounts). Standard Error 0.13
• Since, a major proportion of individual accounts (retail Observations 9
and HNIs) are equity oriented, we can see this
observation. ANOVA
df SS MS F Significance F
• B&K’s view: Thus, our assumption of NIFTY 50 Regression 1 0.11 0.11 6.89 0.03
performance of 12%, will provide us with an estimated Residual 7 0.11 0.02
22% AUM growth (implying 10% growth to come through Total 8 0.22
flows).
Source: B&K Research
29
Does market return play a role in
financial savings rate?
Nifty 50 growth vs Net Financial Savings Nifty 50 growth vs Net Financial Savings
80 12.0 9.0
Net Financial Savings

60 10.0 8.0
(Rs Trillion)
40 8.0 7.0
6.0
20 6.0
%
5.0
0 4.0
4.0
(20) 2.0
-40% -20% 0% 20% 40% 60% 80%
(40) 0.0 NIFTY 50 Growth

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 Net Financial savings (Rs Trillion)
Nifty 50 Net Financial savings (Rs Trillion) Predicted Net Financial Savings (Rs Trillion)
Source: RBI and BSE
• NO & YES – There is no evidence for financial savings to Summary – Excluding FY16,FY17 and FY18
grow depending on market performance if we
considered FY16, FY17 and FY18. But, when we remove Regression Statistics
those years, we have conclusive evidence of Multiple R 0.73
R Square 0.54
financialisation improving when markets perform.
Adjusted R Square 0.44
o Why remove FY16 – 7th pay commission increased Standard Error 0.71
pay by 23% thus increasing Provident and pension Observations 7
funds contributed to 60 bps of 80 bps financial
savings growth. ANOVA
df SS MS F Significanc
o Why remove FY17 – Currency was sucked out Regression 1 2.90 2.90 5.81 0.06
through demo. Gross savings fell by 150 bps and 200 Residual 5 2.50 0.50
bps dip was due to Demo. Total 6 5.40
o Why remove FY18 – Currency went back to demo
levels and deposits share also went up, thus net
Intercept 6.37 0.29 21.72 0.00 5.61
financial savings went up again. Nifty 50 2.39 0.99 2.41 0.06 -0.16
• B&K’s view: Market performance drives financial
savings unless any disruption is thrown into the system. Source: B&K Research
30
Did individual AUM growth depend
on disposable income growth?
Summary output – Individual AUM growth Growth in disposable income vs Individual AUM
50 50%
Growth in individual AUM

45
40 40%
35
30%
30
%
25 20%
20
15 10%
10
0%
5
10% 12% 14% 16% 18% 20%
0
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 Growth in disposable income
Growth in Disposable Income Growth in Individual AUM Growth in Individual AUM Predicted growth in Individual AUM
Source: RBI and AMFI Source: MOSPI and AMFI
Summary Output
Regression Statistics
• NOT Confirmed - There do not seem to be a direct Multiple R 0.02
R Square 0.00
relation between growth of Individual AUM and
disposable income. Standard Error 0.18
Observations 9
• Since we do not have flows data, we cannot come to
any conclusive conclusion with respect to disposable ANOVA
df SS MS F ignificance
income and individual AUM growth.
Regression 1 1E-04 1E-04 3E-03 1E+00
• B&K’s view: We cannot use any macro data such as Residual
Total
7
8
2E-01
2E-01
3E-02
disposable income, or household savings growth rate

as a metric to project individual AUM growth. Coefficientsandard Erro t Stat P-value Lower 95%
Intercept 0.26 0.30 0.88 0.41 -0.44
Growth in disposable income -0.12 2.21 -0.06 0.96 -5.35
31
Neither Equity AUM nor Equity Flows
depend on Index (NIFTY 50) performance.
Equity AUM growth does not depend on NIFTY Summary Output
50 market’s performance Regression Statistics
Multiple R 0.1
100 R Square 0.0
80 Standard Error 667.4
Observations 10.0
60
ANOVA
%
40
df SS MS F ignificance
20 Regression 1 60060.7 60060.7 0.1 0.7
Residual 8 3563372.7 445421.6
0 Total 9 3623433.4
(20) Coefficients
tandard Erro t Stat P-value Lower 95%
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 Intercept 525.2 269.6 1.9 0.1 -96.4
Nifty 50 growth -377.9 1029.1 -0.4 0.7 -2751.1
Nifty 50 growth Equity AUM growth
Source: BSE and AMFI
Equity flows versus Nifty 50 growth • NO - Equity flows are neither dependent on the
80 2,000 performance of NIFTY 50. Small cap performance drove
70
AUM flows since FY14 till FY17.
60 1,500
50
40 1,000
• Recent flows (FY17 onwards) were predominantly driven
30 by SIPs to a great extent. This has almost doubled flows
20 500
%
in recent couple of years.

10
0 0
(10)
• B&K’s view: Therefore, the flows were more to do with
(20) (500) the SIP stream coming in and within market, and the
smaller names contributed. Moreover, the Equity AUM
Nifty 50 growth Equity Flows (Rs bn) has no relation with the market performance. Thus a
NIFTY crash may not impact flows.
Source: BSE and AMFI
32
What caused flows? – “Mutual funds
Sahi hai” brought SIPs in… SIP drove flows…
SIP forms the major proportion of equity flow
1,800 100
1,600
1,400 80
1,200
60
1,000
%
800
40
600
400 20
200
0 0
FY17 FY18 FY19 1HFY20
Equity Flows SIP Flows Proportion of SIPs
Source: AMFI
Recent Net SIP account additions (’000) • Roughly 1% to 1.5% net new SIP accounts are being added
every month. This should deliver an increased flow of
700 close to 12%, on an annual basis.
600 • Since, 75% of the Equity assets are through SIPS, close to
500 8% of equity AUM growth will come from SIPS.
400 • This will taper down going forwards as base sets in,
300 however, we do not expect a sudden spurt in SIP
account openings when markets expand in future, as
200
we do not expect a rampant shutting down of
100 accounts.
0 • B&K’s view: Since, we have studied earlier that market
Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 performance is not the direct indicator equity AUM flow,
No. SIP discontinued Net Additions we will be assuming a steady inflow rate for the equity
funds due to continued increase in awareness and SIP
flows.
Source: AMFI
33
What about debt AUM, what drives that?
Corporate savings drive Debt AUM Corporate savings Line fit plot
25,000 40 14,000
35 12,000
Debt AUM (Rs bn)

20,000
30
10,000
15,000 25
8,000
20
%
10,000 15 6,000
10 4,000
5,000
5 2,000
0 0
0
0 5,000 10,000 15,000 20,000 25,000
Debt AUM (Rs bn) Corporate savings (Rs billion)
Corporate savings (Rs billion)
Growth in corporate savings (right) Debt AUM (Rs bn) Predicted Debt AUM (Rs bn)
Source: RBI and AMFI Source: RBI and AMFI
• There is a strong correlation between corporate savings Summary Output

and debt AUM. This must be the only driver for AUM Regression Statistics
growth since we got an adjusted R-square value of 94% Multiple R 0.97
in our regression model. R Square 0.95
Adjusted R Square 0.94
• Since we expect the corporate savings growth to be line Standard Error 743.05
with nominal GDP growth rate, the savings growth rate Observations 10
should be around 10%.
ANOVA
• For an estimated 10% corporate savings growth rate, df SS MS F ignificance
AUM should growth by 12%. Regression 1 84821533.4 84821533.4 153.6 0.0
Residual 8 4416930.0 552116.3
• B&K’s view: We have assumed a 11% increase in debt Total 9 89238463.5
(income + liquid) AUM in our models. We expect the
marked to market returns to be 7%, thus flows to be 4% in Coefficients Standard Error t Stat P-value Lower 95%
Intercept -138.9 622.2 -0.2 0.8 -1573.6
the short term. Corporate savings (Rs trillion) 575.8 46.5 12.4 0.0 468.7
34
Does interest rate play a role in debt AUM
growth?
Debt AUM depends on interest rate move Repo rate line fit plot
14,000 9 14,000
12,000 8.5
12,000
8
10,000 10,000
7.5
8,000 8,000
7
6,000 6,000
6.5
4,000 4,000
6
2,000 5.5 2,000
0 5 0
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 5.0 6.0 7.0 8.0 9.0
Debt AUM (Rs bn) Repo rate (right, %) Debt AUM (Rs bn) Predicted Debt AUM (Rs bn)
Source: RBI and AMFI
• When we tried to study AUM growth with respect to Summary Output

Repo-rate move, we observed what one would expect Regression Statistics
Multiple R 0.84
out of a fixed in come portfolio. We saw that the AUM R Square 0.70
went up when Repo rate dipped. Adjusted R Square 0.66
Standard Error 1823.2
• Interestingly our model predicted 12% growth rate when

Observations 9
we assumed Repo rate dipping to 5.15%. This is the same ANOVA

df SS MS F Significanc
prediction we observed from our previous model in the Regression 1 55287518.6 55287518.6 16.6 0.0
earlier slide. Residual 7 23268110.8 3324015.8
Total 8 78555629.5
• B&K’s view: Thus, with both the studies we have come
CoefficientsStandard Error t Stat P-value Lower 95%
to a conclusion of assuming Debt AUM to grow at 12% in Intercept 28803.8 5296.4 5.4 0.0 16279.8
Repo rate -3053.3 748.7 -4.1 0.0 -4823.6
the near term.
35
Inferences from study
Equity
• Individual AUM growth depends on Market growth (we have conclusive evidence with a confidence level of 95%). We also
have evidence of retail customer flows to increase by 15% depending on SIP flows, going forward assuming equity
returns to be 12% in short run. Therefore, we have assumed ELSS flows growth of 15% in our models, since it has
predominantly individual customer base.
• Apart from ELSS, half of the equity of flow will be through SIPs, therefore, we have assumed net in-flow growth to be 5%
(on the conservative side).
• Market performance drives financialisation – thus when markets slowdown or collapse, the reverse is also bound to
happen, however, the stickiness of SIPs is expected to help.
• Apart from these factors, there seems to be limited correlation or negative relation between household savings rate,
financialisation of savings, affordability with individual AUM flow.
Debt
• We observed the corporate savings to be the primary driver of AUMs of debt mutual funds. Therefore, we have assumed
a debt AUM growth of 12% as the base growth in our models.
• Interest rate also moves Debt AUM and we have independently arrived at the AUM growth when we assumed Repo rate
to fall to 5.15% in the short term to be 12%.
36
How did we value Nippon Life AMC and HDFC AMC
Valuation technique
Valuation
Assumptions
37
What is the technique that we used
Valuation technique
• The operating income depends on the asset mix and TER

o We have broken down the asset composition into products (mutual funds) and decoupled the expense ratios of
specific products as of now.
• Future product mix is estimated using the outlook on asset classes and customer mix based on our earlier slides. Flows
and expected returns are loaded into the growth expectations matrix.
• TER is also estimated from current levels.
• There is a proportion of charges – including distribution expenses, trading costs etc. being distributed from TER. We have
assumed that proportion to be at FY20 (till date) levels.
• The PAT (bps of AUM) is an output of cost and revenue assumptions, post operating income.
• Present value of future profits = 3 stage growth breakdown (FY20 to FY30 / FY30 to FY50 / FY50 and beyond)
o FY20 to FY30 will have a growth around 11%
o FY30 to FY50, the growth would taper off to 7%
o FY50 and beyond, the growth is assumed to remain at 4%.

• Discount rate = Bloomberg discount rate of 11.0% (consistent rate across AMC sector)
• Terminal growth rate = 4% (assuming nominal GDP growth rate + new business flow to be 4% post 30 years)
• The Intrinsic value = Equity Book value + Present Value of future profits
• Benefits of this technique
• This methodology helps us go deep into future in terms of flows and expected returns.
• The multiple based methodology depends on the short term moves to a great extent. Moreover, given the limited
number of listed firms in this space, we could not corner in on an optimal multiple.
38
Key assumptions – Nippon Life AMC
Structural decline in TER expected (equity) Mix expansion expected in equity

1.2 50
1.1 40
1.1 30
%
1.0 20
%
1.0 10
0.9 0
Income Equity Balanced Liquid Equity Gold ETF Other ETF
0.9
(Other (ELSS)
0.8 than ELSS)
FY21E
FY17
FY18
FY19
FY23E
FY27E
FY28E
FY20E
FY22E
FY24E
FY26E
FY30E
FY25E
FY29E
FY13 FY20E FY25E FY30E
Operating revenue to follow a downward

ELSS and Equity growth to remain strong trajectory – Lower TER and higher AUM
40 52
30 20 51
Operating revenue as % of AUM

20 15 13 12
10 11 9
5 50
%
10
0 49
(10)
48
(bps)
Balanced
Income
Gilt
Total
Equity - ELSS
Gold ETF
Equity (other than
Liquid
47
ELSS)
46
45
44
Last 8 years Next 10 years FY20E FY21E FY22E FY23E FY24E FY25E FY26E FY27E FY28E FY29E FY30E

39
Key assumptions – HDFC AMC
Decline in Equity related TER Mix shift towards liquid due to “brand play”
2.00 50
1.80 40
1.60
30
1.40
20
%
1.20
10
1.00
0.80 0
Income Equity (other Balanced Liquid Equity - ELSS
FY21E
FY28E
FY11
FY27E
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY23E
FY20E
FY22E
FY24E
FY26E
FY30E
FY25E
FY29E
than ELSS)
Equity Balanced ELSS Mix (FY11) Mix (FY20) Mix (FY30)
Growth to normalise but stay above industry PAT yield to sustain

40 60
35
30 22
25 50
20 15 15 15 14 15
13
15 40
%
10 4
5
0 30
Balanced
Income
Gilt
Total
Equity - ELSS
Gold ETF
Equity (other than
Liquid
20
ELSS)
10
0
Past 10 years Next 10 years Operating income to AUM (bps) PAT to AUM (bps)

40
Recent happenings
Removal of 80C in
new tax regime
Recent happenings
Cut in expense ratio
Re-classification of funds
Deals/Acquisitions
41
Fiscal move - Introduction of new tax regime
(Budget 2020)
In the Budget speech of Feb 2020, the finance minister introduced a tax regime that has no exclusions. Though it was
proposed to be optional, the idea was to eliminate the exclusions eventually.
Will ELSS flow be impacted due to removal of 80C?
We feel that the impact will be very low on AMCs due to the following reasons
1. Section 80C has been over crowded with insurance, home loan and PF. Therefore, the proportion of mutual fund
customers choosing ELSS or tax saving funds to save taxes is minimal.
2. The proportion of customers who buy mutual funds (ELSS) for tax saving purposes has been pretty stable and roughly 10%
of pure equity AUM (roughly, 4% of total industry’s AUM).
ELSS / Equity AUM remains steady

14
12
10
8
%
0
Source: AMFI
3. SIP is the primary driver of flows and not ELSS. The proportion of ELSS to SIPs has dipped from 36% (March 2019) to 30%
(December 2019) implying that the SIP flow has decoupled from ELSS flow.
4. There is a good possibility of customers to continue with SIPs in large cap funds when the incentive to hold on to ELSS
diminishes.
B&K’s view: Therefore, we have not factored in a slowdown due to prospective removal of 80C in our numbers.
42
Regulatory move – Cut in TER
History
• 2012: SEBI allowed fund houses to charge an additional 30 bps, should the new inflows from B15 be at least 30% of the
gross new inflows in the scheme or 15% of average AUM, whichever is higher.
• 2015: AMFI capped upfront commission, which accrues to the distributor on a fresh investment, at 1% from 7%.
Proposal: Total Expense ratio was capped by SEBI according to the chart below. SEBI guidelines on total expense ratio was
revised after 22 years, when it fixed expense ratios for the first time
Total expense ratio distribution (equity schemes based on corpus in Rs bn)

3
Old rule (%) New rule (%)
2.5
1.5
0.5
0
0.1 0.5 1 5 10 20 50 100 150 200 300 500 600 800
Source: SEBI
Reason: SEBI wanted to clamp down on mis-selling along with bringing down the cost of managing funds.
Impact on distributors
• Since 2015, when upfront commission was curbed, the closed ended funds saw a slower growth rate than open ended
funds. As closed ended funds saw the distributors earning higher trailing commission earlier.
• On similar lines, the move on reducing total expense ratio would have a immediate negative impact predominantly for
independent financial advisors.
B&K’s view: We feel that banks would start pushing more ULIPs which continues to be favorable in terms of commission.
However, the benefit for the mutual fund industry is the appeal to new customers due to strong marketing and
increasing awareness. This would help in growth of the sector in the long run. 43
Regulatory move – reclassification of funds
Proposal
• Mutual fund schemes are to be broadly classified in the following groups.
o Equity
o Debt
o Hybrid
o Solution oriented
o Other
• Definition of Large Cap, Mid Cap and Small cap
o Large Cap = 1st to 100th company in terms of full market capitalisation
o Mid Cap = 101st to 250th company in terms of full market capitalisation
o Small Cap = 251st company onwards
Reason
• SEBI wanted the AMCs to launch clearly distinct investment strategies and asset allocations in terms of schemes. It also
wanted to prevent the duplication of mutual fund schemes. This would ensure that the investors take an informed
decision to invest in a scheme.
• The regulator wanted to inculcate uniformity within the industry and standardize the schemes.
Impact on markets
• Due to the reclassification of mutual fund schemes and the market cap of stocks, small and mid cap schemes saw a re-
allocation towards large caps in order to have their bets closer to benchmark. Reliance surged in price during this time
frame.
Impact on AMCs
• There was minimal changes made by the larger AMCs. For example, ICICI Prudential Balanced fund has been renamed
into ICICI Prudential Equity and Debt Fund. The strategy and philosophy remains the same.
• Between 20% to 30% of the mutual funds have seen a change in investment style, remaining funds have either wound up
or merged with another scheme.
B&K’s view: We do not expect any significant change in classification in future and the current change would have minimal
impact on the asset flows. There is a slight positive from the customers’ angle with reduced problem of choice.
44
Deal/Acquisitions in the industry
Acquirer Target Stake Year AUM Estimated deal Derived Derived valuation Stake/
(%) (Rs Bn) value (Rs Bn) valuation (Rs bn) (%) AUM Scheme
Societe Generale SBI MF 37 2004 56 1.61 4.35 7.8% Stake
Management
Robeco Canara MF 49 2007 22 1.15 2.35 10.7% Stake
Pioneer Baroda MF 51 2007 n.a. n.a. n.a. 10 Stake
IDFC Standard Chartered 100 2008 145.79 8.31 8.31 5.7% Stake
Religare Lotus AMC 100 2008 54.58 0.5-1.5 0.5-1.5 n.a. Stake
L&T Finance DBS Chola MF 100 2009 30 0.45 0.45 1.5% Stake
Nomura LIC MF 35 2009 324.1 2.8 8 2.5% Stake
T Rowe Price UTI AMC 26 2010 694.44 6.5 25 3.6% Stake
Goldman Sachs Benchmark 100 2011 31.83 1.31 1.31 4.1% Stake
BOI AXA MF 51 2011 n.a. n.a. n.a. n.a. Stake
Amundi SA SBI MF 37 2011 416.72 n.a. n.a. n.a. Stake
Nippon Life Reliance 26 2012 842.99 14.5 56 6.6% Stake
Schroders Axis AMC 25 2012 n.a. n.a. n.a. n.a. Stake
L&T Finance Fidelity India 100 2012 88.81 5.5 5.5 6.2% Stake
Invesco Religare 49 2012 146 4.65 9.49 6.5% Stake
HDFC MF Morgan Stanley 100 2013 32.9 1.5-1.7 1.5-1.7 n.a. Scheme
SBI MF Daiwa MF 100 2013 2.66 0.03-0.04 0.03-0.04 n.a. Scheme
Nippon Life Reliance 9 2014 1,288.88 6.57 73 5.7% Stake
Kotak AMC PineBridge 100 2014 6.6 n.a. n.a. n.a. Scheme
Birla Sunlife ING MF 100 2014 11 n.a. n.a. n.a. Scheme
Dewan Housing Pramerica 50 2014 20.6 0.24 0.49 2.4% Stake
Pramerica Deutsche 100 2015 224.27 4 4 1.8% Stake
Reliance Goldman Sachs 100 2015 71.32 2.43 2.43 3.4% Scheme
Nippon Life Reliance 14 2015 1,510.06 11.96 85.42 5.7% Stake
Invesco Religare 51 2015 215.93 7-10 n.a. n.a. Stake
Edelweiss JP Morgan AMC 100 2016 75.01 1.12-1.50 1.12-1.50 n.a. Scheme
LIC* Nomura 35 2016 111.57 0.27 1.42 1.3% Stake
Source: NipponLife DRHP
• The average valuation as a % of AUM stood at 3.9% over the last 10 years.
• The recently done large transaction was Nippon Life buying stake in Reliance AMC in 2015. The Valuation in terms of AUM
came out to be 5.7%. It is now trading at 3.6% of average assets under management.
• HDFC AMC is currently trading at 9.3% of average assets under management.
• We expect the industry to consolidate and the top AMCs are always on the lookout to acquire smaller firms. 45
Sector Introduction
Industry size and growth
Asset class mix history

Sector Introduction
Customer mix
Product mix – top AMCs
Flow
AUM spread across states
Expense ratio and

commissions
46
Industry size and growth
AUM and Growth rate • AUM growth was pretty strong between FY2013 till FY2018
predominantly driven by growth in equity asset class and
30 60% growth in SIP accounts (flows tripled during the period).
50%
25
40%
• Strong equity market rally along with increased
20
30%
awareness, helped the equity AUM of major players to
15 20%
double in the said time frame.
10
10% • AUM as a percentage of % of GDP reported substantial
0% increase during the period. However, it continues to be
5
-10% lower than global average and higher among South
0 -20% Asian countries. Thus, penetration levels are not as low
FY2008
FY2009
FY2010
FY2011
FY2012
FY2013
FY2014
FY2015
FY2016
FY2017
FY2018
FY2019
when compared to South Asia.
• Top 5 firms rule the market. Recent market sentiment
AUM (Rs trillion) Growth rate (right) helped it to forge their leadership to stronger levels
than before. We expect the industry to consolidate to
Source: AMFI top 10 players in the long run.
Mutual Funds Assets as % of GDP Top 5 firms continue to win Market Share
10.0 70
60
8.0
50
6.0
40
4.0 30
%
20
2.0
10
0.0 0
FY2000
FY2001
FY2002
FY2003
FY2004
FY2005
FY2006
FY2007
FY2008
FY2009
FY2010
FY2011
FY2012
FY2013
FY2014
FY2015
FY2010
FY2011
FY2012
FY2013
FY2014
FY2015
FY2016
FY2017
FY2018
FY2019
India South Asia Top 5 AMCs Next 5 AMCs Rest of Market (right)
Source: World Bank (Data not available post FY15) Source: AMFI
47
Asset class mix (history)
Asset class mix (at industry level)

60
50
40
30
%
20
10
0
Liquid/Money Market Debt Oriented Equity Oriented Balanced ETFs (other than Gold)
Source: AMFI
• Major proportion of the mutual fund industry continues ETFs have grown in recent times
to be debt oriented (fixed income and liquid/money
market funds) 200 6
180
• Recent (FY14 to FY18) equity market performance has 160 5
lead to a significant flow into the equity oriented funds. 140

120 4
The reversal is expected, however, we expect the out 100
3
flows to be milder when compared to earlier equity
%
80
%
market slowdowns due to sticky SIPs. 60 2

40
• ETFs have shown great promise in recent times with 20 1
strong growth. However, this should be taken with a 0
(20) 0
pinch of salt as a great proportion of growth was driven
by launch of CPSE ETF in FY19. Therefore the growth is not
sustainable, and also, the lack of style oriented ETFs will ETF Growth Industry growth ETF mix (right)
mute growth in the short term.

Source: AMFI
48
Customer mix
Customer mix (FY2019) Investor classification (history)

60
50
26%
40% 40
30
%
20
10
0
1%
32% 1%
Corporates Banks/Fis
FIIs High Networth Individuals
Corporates Banks/Fis FIIs High Networth Individuals Retail Retail
Source: AMFI
• Post demonetisation, both retail and HNI customers Retail customers are equity oriented
started entering the markets and improving their share
in assets. 70
60
• HNIs occupy close to one third of the asset base and
50
hold both equity and other assets in their portfolio. We
40
expect AUM growth to be over 20%, and be the major %
growth engine, as retail investors will move into this 30
category eventually. 20
10
• Corporates predominantly hold debt instruments (liquid
0
funds) for operations.
Corporates Banks/FIs FIIs High Networth Retail
• Retail investors’ interest in equity remains strong and Individuals
they hold a larger share of market among equity Equity Non-Equity
investments. Increased awareness is expected to help
growth.
Source: AMFI
49
HNIs and Retail customers prefer equities
Retail % HNIs
100 100
80 80
%
60 60
%
40 40
20 20
0 0
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 1HFY19 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 1HFY19
Liquid GILT Debt Oriented Liquid GILT Debt Oriented

Equity Oriented Balanced Gold ETF Equity Oriented Balanced Gold ETF
ETFs (other than Gold) Fund of Funds ETFs (other than Gold) Fund of Funds
Source: AMFI
Growth rate of number of folios HNI

• The average account size of a HNI client is Rs 1.6 million
70 and almost 20 times that of an average retail investor.
60
50
• HNIs increased they proportion of equity holding to 41%
from 17% in the recent 5 years.
40
30 • There was a surge in the number of folios as well during
%
20
that time.
10 • We expect the AMCs to start focusing on this customer
0 segment and introduce Portfolio Management services
(10) which would command a higher fee and better
(20)
profitability for the AMC
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 1HFY19 Retail
Retail - No. Folios HNIs - No. Folios • Equity composition has dipped slightly (though from
high levels). We expect retail customers to buy more
Source: AMFI balanced funds versus equity in the near term.
50
Retail customers’ stickiness drops, but why?
Retail proportion holding more than 24 months The charts show the percentage of assets being held for
more than 24 months by the respective customer base.
70
60 Retail
50 • With steady inflow during the recent years, the
40 percentage of retail customers holding the equity asset
30 class for more than 24 months has been optically lower,
20 but, still the holding period is much higher when
10
compared to institutional buyers due to a larger
proportion of equity mix
0
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 • Close to 50% of non-equity portfolio is being held more
Equity Non-Equity than 24 months.
Source: AMFI
• This chart does not imply that retail customers are
surrendering their portfolios recently as it should be
HNI proportion holding more than 24 months read along with the flow data as well.
60 • The steadiness of the equity line implies the stickiness of

retail customers who hold equity asset class. Therefore,
50
as the industry moves towards more equity-retail
40
combination, flows would remain stable and in line with
30 expectations.
20 HNI
10 • HNIs continue to hold more debt instruments for a
0 longer duration. Particularly post demonetization, when
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 they moved their currency into liquid funds. This is why
Equity Non-Equity there is a sudden dip, due to increased inflow of new
funds, thereby, reducing the proportion of equity funds
Source: AMFI being held more than 24 months. 51
Product mix – Top AMCs
AMCs with Major Bank Partner Top 10 AMCs market share move
100
90 Axis Mutual Fund
80 DSP Mutual Fund
70
60 Franklin Templeton Mutual Fund
50 Kotak Mahindra Mutual Fund
40
%
30 UTI Mutual Fund

20
10 SBI Mutual Fund
0 Reliance Mutual Fund
1HFY2019
1HFY2019
1HFY2019
FY2014
FY2015
FY2016
FY2017
FY2018
FY2014
FY2015
FY2016
FY2017
FY2018
FY2014
FY2015
FY2016
FY2017
FY2018
HDFC Mutual Fund
ICICI Prudential Mutual Fund
IPRU HDFC SBI
-5% 0% 5% 10% 15%
Debt oriented Equity oriented Balanced schemes ETF's/FoFs Increase / Decrease in market share over 10 years
Source: AMFI Source: AMFI
AMCs without Bank Partner • SBI MF has the largest proportion of ETFs and has show
significant improvement in market share.
100
90
80
• Among the top 10 players, ICICI Prudential has the
70 largest proportion of pure equity, followed by Reliance
60
50 MF.
40
%
30
20 • HDFC AMC has the largest proportion of balanced
10
0
funds., and the most profitable among competitors.
• We expect the equity + ETF component of HDFC AMC
1HFY2019
1HFY2019
1HFY2019
FY2014
FY2015
FY2016
FY2017
FY2018
FY2014
FY2015
FY2016
FY2017
FY2018
FY2014
FY2015
FY2016
FY2017
FY2018
and ICICI Prudential to go up due to good bank support

and increased awareness.
ABSL Reliance Motilal Oswal
• The shift from FDs and RDs towards AMCs because of
Debt oriented Equity oriented Balanced schemes ETF's/FoFs the huge push from AMC’s Relationship Managers to
help AMCs with bank partner.
Source: AMFI
52
Equity flow is driven by SIPs
Flows - History SIPs in recent times

4.0 In ‘000s Apr 19 May Jun 19 Jul 19 Aug 19 Sep 19 Oct 19 Nov 19
19
No. New SIPs 902 965 929 1019 880 850 1003 1089
2.0
No. SIP 540 586 540 563 583 563 530 555
Rs bn
discontinued
0.0 Net Additions 362 379 389 456 297 287 473 534
Total existing 26587 26966 27355 27811 28108 28395 28868 29402
accounts
(2.0)
Income Equity Balanced
Liquid/Money Market GILT ELSS - Equity
Gold ETFs Other ETFs FoF
Source: AMFI
Growth in SIP flows remains strong • Equity flows increased to its 10 year high levels in FY18
following a strong bull rally. Then slowed down, but held
90
stable due to SIP flows.
80
70 • First half of FY19 saw a shift in flows from debt funds to

60
money market funds after the weakening of rupee in
Rs Bn
terms of dollar and bond yield expansion.

50
40 • Net flows were positive during the recent years due to

30 greater stickiness in recent years from strong growth in
SIP accounts. SIP flows tripled in less than 3 years.
20
•
Apr-16
Oct-16
Jan-17
Apr-17
Oct-17
Jan-18
Apr-18
Oct-18
Jan-19
Apr-19
Jul-16
Jul-17
Jul-18
Jul-19
We expect the SIPs to grow further and report a

significant proportion of total retail flows in the long run.
Source: AMFI
53
State-wise exposure
Top 20 states (AUM) AUM as % of GDP

0% 20% 40% 60% 80% 100% Uttar Pradesh
Tamil Nadu
Maharashtra
West Bengal
New Delhi
Gujarat
Karnataka Chandigarh
Gujarat Haryana
West Bengal Karnataka

Goa
Haryana
New Delhi
Tamil Nadu
Maharashtra
Uttar Pradesh
0% 10% 20% 30% 40% 50% 60%
Telengana
Rajasthan Source: AMFI

Andhra Pradesh
Madhya Pradesh
• Uttar Pradesh and Tamil Nadu have lower penetration
levels than the country average (12%). We expect these
Punjab
states to drive future growth after improved awareness
Kerala and increased income.
Orissa
• Haryana has the highest per capita GDP (among states)
Jharkhand
and yet has a comparatively lower penetration levels.
Bihar Haryana has the least allocation towards equities
Goa among the top 10 states. Therefore, we expect Haryana
Chhattisgarh to increase its equity flows once the market stabilizes.
Assam • Himachal ranks only one rank below Tamil Nadu in GDP
Liquid/Money Market Debt Oriented
per capita, however, has a very low AUM% of GDP at 4.7%.
Equity Oriented ETFs/FoFs It has a huge untapped potential. Distribution reach is
an issue in the state.
Source: AMFI 54
Total Expense Ratio (TER) and commissions
Distributor commission (debt funds, bps) HDFC runs a profitable liquid asset class
30 26
Reliance
25 25
20 24
Aditya Birla
15 23
%
10 22
SBI AMC
5 21
HDFC AMC 0 20
ICICI HDFC AMC SBI AMC Aditya Birla Reliance
Prudential
ICICI Prudential
Liquid mix (%) Industry Liquid mix (%)
TER of liquid funds (right, bps)
0 5 10 15 20
Source: Value Research, B&K Research
Total Expense Ratio Weighted Average (Direct) • Firms which have banks as one of the major distribution
arms have a lesser commission being paid to
2.0
1.8
distributor on a weighted average basis.
1.6
1.4
• Though HDFC Life charges a lower expense ratio on
1.2 equity funds on average, they garner profits through
1.0 balanced funds.
%
0.8
0.6 • Nipponcharges the highest expense ratio on a weighted
0.4
average basis on equity and debt oriented mutual
0.2
0.0 funds.
IPRU HDFC SBI ABSL Reliance Motilal
Oswal
• With the removal of upfront commission to distributor,
players who pay larger commission than others will
Debt oriented Equity oriented Balanced schemes
benefit due to positive their positive relationship.
Reliance wins here and IFAs reiterate this fact as well.
Source: Value Research, B&K Research
55
In a nutshell
Profitability
In Brief
Growth drivers
Risks
56
Asians firms are more profitable in a low
penetrated set-up… will it continue?
MF AUM as a % of GDP in FY18 • The mutual fund industry is at a nascent stage in
comparison with developed markets. However, in line
120 with our neighbouring China (much higher savings ratio
than India).
100
• Asian firms report a much higher profit margin when
80 compared to other countries due to a higher proportion
60 of actively managed portfolio and a lower proportion of
ETFs than others.
40
• There has been a steady decline in TER for US mutual
20
funds, which lead to lower profitability.
0
• A major proportion of equity assets are being held by
Brazil
Canada
Germany
South Africa
Japan
China
India
US
France
UK
World
Korea
retail customers, and even among debt funds, our TER is
higher, therefore Indian AMCs are more profitable.
• Current low penetration and minimal ETF options will
hold the expense ratios and profitability of AMCs at
Source: McKinsey Global Asset Management Survey
current levels in the short term. However, a structural
decline in profitability is inevitable.
PAT margins Profitability of Top AMCs

25 20 45
18 40
16 35
20 14 30
12 25
10
%
8 20
15 6 15
4 10
%
2 5
10 0 0
Birla Sun Life

ICICI Prudential
UTI
Motilal Oswal
Reliance Nippon
DSP Mutual fund
Kotak Mahindra
HDFC Life
SBI Mutual
Aditya
5
Life
0
FY2013 FY2016 FY2017
North America West Europe Asia

Revenues (Rs bn) PAT (Rs bn) PAT Margin(%, right)
Source: McKinsey Global Asset Management Survey Note: Revenue includes commission paid till FY19. This has changed for FY20.
57
Profitability
Revenue as % of AUM (sector) PAT margin

0.80 0.20
0.70
0.60 0.15
0.50
0.40 0.10
0.30
0.20 0.05
0.10
0.00 0.00
FY13 FY14 FY15 FY16 FY17 FY18 9MFY19 FY13 FY14 FY15 FY16 FY17 FY18
Revenue as a % of Sector AUM PAT as a % of Sector AUM
Source: HDFC AMC DRHP
PAT as % of AUM (sector) • PAT margin continues to remain strong for the industry.
30
• PAT as a % of sector AUM remains consistent around 16
bps for the industry. This should remain consistent
25 going forward, even, with the new regulatory change
implemented in April 2019.
20
• Listed firms have a revenue as a % of AUM close to the
sector average of 70bps.
%
15
• We expect the revenue as a % of AUM to drop in the
10 coming days as the reduction in cap on Total Expense
ratio will be born by the AMCs to a great extent as
5 distributors are in discussions with AMCs.
0 • We expect the PAT margin to remain strong as the
FY13 FY14 FY15 FY16 FY17 FY18 industry has low operating leverage and will be
minimally impacted due to top line changes.
Source: HDFC AMC DRHP
58
Growth drivers
Factors Current status Expectation Beneficiary
Currently only 5% of the total population hold

Large players with
Penetration a mutual fund account and 2% of the To reach 10% in 5 years
brand value.
population have demat accounts.
Macro-factor
GDP growth GDP growth is around 7%. To be around 7% till FY2024 Whole industry
4 times in the number of

Customer Working population to grow by 1.5% till FY30
accounts to 300 million Whole industry.
demographics (726 million).
accounts.
Currently 15% of the assets are being sourced Whole industry,
B30 is expected to grow at a
Urbanization from B30 cities. 63% are equity oriented particularly SBI
stronger pace than T30 at 15%.
schemes. mutual funds.
The mutual fund campaign by AMFI -"Mutual Equity assets are expected to Firms with more
Increase in
fund sahi hai" increased awareness to a grow through SIPs above the retail customer
Consumer behavior
awareness
great extent. industry base.
Further dip to 50% as the younger
Move away from Physical assets dropped from 67% (FY12) to
generation has minimal interest Whole industry
physical savings 56% (FY17).
in gold or real estate
Firms with more
Increased retail HNIs + Retail customers assets increased to Expect further increase to 65% in
retail customer
participation 58% from 48% in 5 years. 5 years.
base.
59
Risks
Factors Details Impact
GDP slowdown Current growth is about 7%. Any slowdown in economy would Whole industry
impact the whole savings sector due to lower discretionary
savings and lower per capita income.
Macro-factor
Equity market Retail investors would pull money out of the market when they Firms with more retail exposure.
slowdown see a down market. They would move back to physical assets
when real estates starts to pick up.
Equity markets A slowdown in equity markets would impact firms which Firms with combined ratio > 100%
balance the underwriting losses using investment income and
capital gains.
Competition Since the distribution is open architecture based, the Primarily the smaller AMCs.
Independent Financial advisors distribute products which pay
them higher commission.
Micro Factors
Growth of ETFs ETFs have shown strong growth in recent years. ETFs have As the expense ratio of ETFs are smaller
minimal distribution fee, thus, majority of the ETFs were being than actively managed funds. The
bought direct. profitability of the firms would be hurt
due to growth.
Weakness of Based on a study on investor awareness, brand plays a major Large players with strong brand recall.
brand image role in mutual funds industry. Any news that tarnishes the brand
image would impact the industry to a great extent.
Cap on Mutual SEBI has brought a cap on the Total expense ratio. Though Further reduction on expense ratio
Regulations
Fund Expenses higher than international markets, this move limited the would hurt the smaller players to a
revenue stream of AMCs great extent.
60
Top players in the ecosystem
The ecosystem
UTI
Top firms
Aditya Birla MF
ICIC Prudential
AMC
SBI AMC
61
The Ecosystem – Top Players (FY19)
Revenue drop down (Rs mn) • HDFC AMC has been the most profitable firm in the
sector due to its strong control over operating
80 expenses. Since, the debt mix went up in FY19 and is
70 continually increasing in FY20 as well, the yield has
60
dipped for the firm.
50
40 • Nippon India Mutual Fund is number 2 with respect to
30 profitability yields. Since the advertisement and
20
marketing expenses have been on taking off a bigger
10
chunk, PAT margins have been lower than that of HDFC
0
HDFC AMC Nippon India ICICI Aditya Birla SBI Mutual
AMC.
Mutual Fund Prudential Sun Life AMC Funds • There has been a strong surge in flows for SBI Mutual
AMC
funds in recent times. We could see this fund house
Total Revenue as % of AAUM (bps) PAT as % of AAUM (bps) ending up in the pole position pretty soon due to the
strong exposure to debt and liquid funds.
Source: Company reports, B&K Research
Revenue drop down (Rs mn) Market Share (AAUM)

0 5,000 10,000 15,000 20,000 25,000 14%
HDFC AMC 10%

42%
Nippon India Mutual Fund
13%
ICICI Prudential AMC
Aditya Birla Sun Life AMC 10%

12%
SBI Mutual Funds HDFC AMC Nippon India Mutual Fund
ICICI Prudential AMC Aditya Birla Sun Life AMC
Total Revenue (Rs mn) PBT (Rs mn) PAT (Rs mn) SBI Mutual Funds Others
Source: Company reports, B&K Research

62
Asset mix and operating expense - Top players
As proportion of AAUM (FY19)

120
100
80
60
%
40
20
0
Aditya Birla Axis DSP Franklin HDFC ICICI Kotak Nippon India SBI UTI Industry
Templeton Prudential Mahindra
Income Equity Balanced ETF FoF
Source: AMFI – December 2019, B&K Research
• HDFC AMC continues to hold the pole position in within Market Share – Equity and Income funds
the equity asset class. Helping them report strong
35
profitability. 30
25
• HDFC AMC has a strong hold in Fixed income market 20
%
share as well, driven by brand name and existing 15
10
relationships. 5
0
• On an average, the industry holds 44% of assets in
UTI
Templeton
HDFC
ICICI Prudential
Kotak Mahindra
Nippon India
Axis
Aditya Birla
DSP
SBI
Franklin
equity. Aditya Birla, Kotak AMC, SBI and UTI hold lesser
proportion of assets in equity, due to strong flows in
fixed income buckets.
• The market share of the top AMCs has been fairly
Income Equity
consistent, and these are the firms that will benefit
during a market consolidation.
Source: AMFI – December 2019, B&K Research
63
Profitability metrics
PAT as % of AUM (bps) PAT / Operating revenue (%)

30 60
25 50
20 40
30
%
15
20
10
10
5
0
0 HDFC AMC Nippon ICICI Aditya Birla SBI Mutual UTI
HDFC AMC Nippon ICICI Aditya Birla SBI Mutual UTI India Prudential Sun Life Funds
India Mutual Prudential Sun Life Funds Mutual AMC AMC
Fund AMC AMC Fund
Source: Company reports (FY19), B&K Research
• HDFC AMC has been the most profitable firm in the Operating expense as % of AUM (bps)
sector due to its strong control over operating
expenses. It spends the least on marketing and 40
advertisements. 35
• Nippon India Mutual funds’ spend has been second only 30

to UTI. With a higher share from B30, the mutual fund 25
houses tend to spend a lot through incentives and 20
bonus structures for IFAs and distributors. 15
• UTI has reported one of the highest employee benefit 10
expenses at 19 bps (on AUM) vs 12 bps for NAM. This is 5
bound to continue on similar levels, thus impacting UTI 0
during a slowdown in flows and helping it in upside. HDFC AMC Nippon ICICI Aditya Birla SBI Mutual UTI
• HDFC AMC has a strong control over expenses, partially India Mutual Prudential Sun Life Funds
due to a strong AUM base, and fixed incentive structure Fund AMC AMC
to distributors.
Source: Company reports (FY19), B&K Research
64
UTI – IPO soon, our estimated value = Rs 150 bn
B30 market share • UTI has one of the lowest mix with respect to equity
asset class among peers. However, profitability remains
50
competitive.
40
• Though the retail customer mix is below that of Nippon
Life AMC’s, the firms is able to retain as much
30 profitability (PAT = 22 bps on AUM) due to higher
average TER than NAM.
%
20
• UTI has a strong presence in B30 due to its institutional
10 and PSU sales teams who have a deep penetration.
0 Close to 55.4% of flows happen through this channel.
% of AMC total AUM % of AMC equity AUM • There has been a consistent drop in Banks and
Aditya Birla Sun Life Axis DSP Distribution mix from 16.5% to 13.3%, which might hurt
Franklin Templeton HDFC ICICI Prudential future flows. The IFA’s strength is not as high as that of
Kotak Mahindra Nippon India SBI NAM’s, therefore, we expect UTI to trade at lower equity
UTI AUM multiple (25%) versus NAM’s (31%), thus a valuation
of Rs 150 bn.
Source: UTI - DRHP
Distribution mix Customer mix

5.0% 1.9%
4.1%
31.3%
47.7%
41.3%
55.4%
Individual Investors
Corporate and instititional investors
13.3% Banks and financial inst.
Trusts
IFA Banks Direct NRIs
Source: UTI - DRHP

65
Aditya Birla Mutual Fund = valued at Rs 275 bn
Profit flow (% of AUM – bps) Equity market share improves, hybrid dips
16
0 10 20 30 40 50 60
14
12
Total Revenue 56
10
8
%
Operating Revenue 53 6
4
PBT 26 2
0
PAT 18
Income Equity Hybrid
Source: Company report, B&K Research
Asset mix • Aditya Birla MF has been gaining market share in

domestic equity from 7% to 10% in the last half decade.
• ABSL MF has a high tilt towards fixed income assets
5% 0% within its AUM. Thereby reducing the equity mix to 37%
(below the industry average of 44%)
32% • This has lead to a lower PAT yield (as proportion of AUM)
when compared to the other top players.
Valuation
63% • Based on a 30%x valuation for its equity assets, the firm
is valued at Rs 274 bn.
• On a 12% x Total AUM, method, we arrive at a Rs 297 bn
valuation. Which we feel may be skewed due to higher
Income Equity Balanced ETF FoF proportion of fixed income assets.
• Based on operating income and using a 19x multiple,
Source: Company report, B&K Research valuation comes to be Rs 247 bn.
66
ICICI Prudential AMC, estimate to be 11%
of ICICI Bank’s current market value at Rs 392 bn
Profit flow (% of AUM – bps) Market share move
0 10 20 30 40 50 60 70 20
18
16
Total Revenue 62 14
12
%
Operating 10
60 8
Revenue
6
4
PBT 33 2
0
PAT 21
Asset mix • ICICI Prudential AMC has been able to gain market
share in equity space recently. There could have been a
rebalance from hybrid funds to equity funds.
3.3% 0.0%
6.3% • It has reached number 2 position with respect to equity
market share.
• The advantage with ICICI Prudential AMC is its ability to
hold on to the fixed income assets as well.
Valuation
53.4%
37.0%
• Based on a 30%x valuation for its equity assets, the firm
is valued at Rs 448 bn., giving more than expected value
to equity assets.
• On a 12% x Total AUM, method, we arrive at a Rs 386 bn
Income Equity Balanced ETF FoF
valuation.
67
SBI Mutual Fund is 10% of SBI’s market cap at
Rs 293 bn
Profit flow (% of AUM – bps) Market share move
0 20 40 60 18
16
14
Total Revenue
12
10
Operating Revenue 8
%
6
4
PBT 2
0
PAT
Asset mix • SBI AMC has been of the top players to have gained
maximum market share.
0%
• Their growth in fixed income and hybrid funds has been
26% really strong.
45% • Due to a very high fixed income and ETF mix, the Total
revenue as a % of AUM looks small. Excluding that the
yield is 72 bps and highest among top players.
9% Valuation
• Based on a 30% x valuation for its equity assets, the firm
is valued at Rs 278 bn, giving it less than expected value.
21% • On a 12% x Total AUM, method, we arrive at a Rs 348 bn
Income Equity Balanced ETF FoF valuation.
68
Numbers in a Nutshell
FY19 HDFC Nippon India ICICI Prudential Aditya Birla SBI Mutual UTI
AMC Mutual Fund AMC Sun Life AMC Funds
AAUM (Rs mn) 3,458,781 2,336,168 3,207,929 2,464,797 2,838,067 1,596,942
Total Revenue (Rs mn) 20,968 16,499 20,030 13,910 15,585 10,808
Total Revenue as % of AAUM (bps) 61 71 62 56 55 68
Operating Revenue (Rs mn) 19,152 14,786 19,346 13,052 14,922 10,505
Operating Revenue as % of AAUM (bps) 55 63 60 53 53 66
PBT (Rs mn) 13,747 7,002 10,488 6,480 6,467 4,912
PBT as % of AAUM (bps) 40 30 33 26 23 31
PAT (Rs mn) 9,306 4,871 6,831 4,489 4,290 3,479
PAT as % of AAUM (bps) 27 21 21 18 15 22
AAUM share (%) 14 10 13 10 12 7
Public markets Discount Terminal Market Target Trading Target Potential

status rate growth rate price price P/E P/EPS Upside
HDFC AMC Listed 11.0% 5% 3243 2927 52 47 -10%
NIMF Listed 11.0% 4% 380 460 37 42 20%
69
Listed firms
Asset Management Firms

HDFC AMC
NipponAMC
70
Listed Asset Management Firms’ Strategy
• Increase scale to fully utilise operating leverage

• Equity orientation to improve profitability
HDFC AMC • Ensure quality in the portfolio, particularly on the debt
side
• Continue market leadership among retail customers

• Enhance rural touchpoints through offices in B30
NipponLife cities
• Inorganic growth through strategic acquisitions
71
HDFC AMC
Investment rationale
• High proportion of equity-oriented AUM: The firm has the largest market share of equity oriented assets (including
hybrid) at close to 15%. Equity oriented assets are able to charge a higher fee in comparison with debt and liquid funds.
Therefore, the firm is able to report a higher EBITDA margin and PAT margin than the other AMCs.
• Largest AMC: Asset management firms work on economies of scale. The larger firms will have greater ability to absorb
the regulatory risk of drop in expense ratio for instance. HDFC AMC has close to Rs 3.5 lakh crores of assets under
management and had reported an annualised growth of 25% for the last 5 years when its asset base tripled.
• Strong brand recall: HDFC Bank has the highest brand value among Indian firms. Thus, the AMC, has a natural
advantage through the well recognised HDFC’s brand image. Customers are drawn towards the mutual funds through
means of trust and HDFC is an obvious winner.
• Diversified distribution arm: As of December 31, 2017, IFAs, national distributors and banks generated 27.9%, 23.5%, 16.8% of
our total AUM, respectively, while the remaining 31.8% was invested in direct plans. In terms of our equity-oriented AUM,
IFAs, national distributors and banks generated 40.3%, 25.0% and 20.1% respectively, while the remaining 14.6% was
invested in direct plans, as of December 31, 2017.
Investment concern
• Limited of exposure to ETFs: ETFs are expected to grow at a very high rate. Being a market leader, HDFC AMC’s exposure
to ETFs is limited given their very low profitability.
• Lower proportion of distribution commission (Regular – Direct Total expense ratio): ~68% of AUM was through third
party distribution, yet the commission being paid is less than Reliance, Aditya Birla and ICICI Prudential. Given the open
architecture, Independent advisors will have greater incentive in selling products of competition.
• Concentration of assets in few schemes: Close to 77% of total equity-oriented AUM lies in 3 schemes. 70% of debt AUM
lies in top six schemes. If there is weakness in performance from these key funds, there is a risk of fund outflow.
Metrics to monitor
• Growth in retail customer base and international market expansion.
• Ability to transfer the cut in cap on Total Expense ratio by SEBI.
72
Nippon Life AMC
Investment rationale
• High proportion of retail assets: 34% of assets under management are through retail customers for Reliance AMC. This is
higher than the industry average of 26%. Retail assets are more sticky.
• Product innovation: Reliance AMC is the only mutual fund to have introduced an SIP with an life insurance add-on
feature under a group term insurance to individual investors, without any extra cost in select schemes.
• High proportion of SIPs: Reliance AMC has 30% of its equity investments as SIPs, which is a tad higher then HDFC AMC’s
26% and much higher than the industry average of 8%. The natural inclination towards retail customer base is providing
them with this additional benefit of more SIP flows which have a higher retention rate by nature.
• Decent ETF exposure: The firm has close to 6% of assets as ETFs (through acquiring Goldman Sachs Mutual Fund). It is the
second largest player with a market share of 20% and is much higher than HDFC AMC’s ETF mix of less than 1%. With
strong growth expected through this product line, Reliance AMC has a head start along with SBI AMC.
• Higher proportion of direct: 46% of assets are being invested directly through online channels and direct service. This
minimizes the firm’s risk of depending on third party distributors.
• Higher proportion of assets from B30: 17% of the assets are being source from cities beyond the top 30, higher than the
industry average of 15%. The company added 120 more offices in these cities in a plan on expanding its touch points.
• Brand revamp: With the overhang of ADAG group removed and with the incorporation of Nippon Life, international
investors are expected to add flows into the ETFs.
Investment concern
• Lack of primary banking partner: The new customer acquisition predominantly happens through banking channels.
Reliance AMC sources only 18% of assets through banks.
• Drop in PMS and HNIs asset base: There was a steady decline in PMS asset base. This product category is the most
profitable one under equity asset class. HNIs AUM remained stable around 36,000 crores for the last five years.
Metrics to monitor
• Growth in B30 asset base.
• Growth rate of retail customer base, SIP flows and ETF flows.
• HNI and managed account flows will also be monitored.
73
Investment assessment and Valuation
Investment assessment
Industry – Outlook
and View
74
Outlook and View
• Asset flows: Indian mutual fund market is under penetrated when compared to the global average as a percentage of
GDP and with respect to potential customer base. We expect the GDP growth rate, increased urbanization, increased
awareness among B30 cities, increased proportion of household savings into financial savings and limited pension
products to provide the necessary thrust for the industry to grow at 15% for the next 5 years.
• Products
o ELSS: Retail customers were sold either an insurance savings product on ELSS to bring down the tax outflow earlier.
Given the removal of 80C, there could be a mild impact to ELSS flow going forward.
o SIPs: AMFI and the Asset management firms have marketed SIPs as a safer way of investing. The recent market
slowdown was not catastrophic due to steady flows from SIPs. Yet, the proportion of SIP flows is less than 4% of total
flows. We expect the SIP flows to strengthen further and report strong growth in the long run.
o ETFs: Except SBI Mutual Funds and Nippon Life AMC, none of the other large players have significant presence in the
ETF space due to the limited profitability in the product. We expect the equity market to grow substantially, once the
larger players enter into this market with keen focus. Moreover, ETF markets have grown very strong worldwide and it
is expected to reflect similar pattern in India after five years.
• PAT margins: Employee expense forms a major component of operating expense and thus asset management firms
have high operating leverage. Strong growth in flows are expected to benefit the bottom line in a positive manner. SEBI
has laid a cap on total expense ratio (major source of revenue) recently and we do not expect the regulator to interfere
in the short run. Therefore, the margins are expected to remain at 25%. However, PAT/AUM will structurally decline.
• Distribution: Direct sales proportion is expected to increase in urban pockets and third party distribution channels are
expected to come down due to increased internet penetration, increased awareness, implementation of e-KYC, lower
commissions being paid to distributors and increased proportion of new customers being retail.
• Customer: We expect the retail customer base to strengthen for the earlier mentioned reasons such as increased per
capita income and move into financial savings.
• Market forces – Consolidation bound to happen: Currently, there are 44 asset management firms in the country, with
top 5 firms holding a market share above 50%. These firms have been showing substantial growth in comparison with
bottom 35 companies. There has always been frequent transactions, thus we expect the industry to consolidate to 10
firms in the next 10 years.
75
Initiating coverage
Nippon Life AMC

Role of IFAs paves way to equity flows…
76
Investment thesis
• Asset management sector is at very early stages of expansion in India, with respect to AUM as a percentage of GDP. With
an increasing disposable income, and with very few other retirement options, the AMC industry will benefit substantially.
• Nippon AMC (NAM) is consistently being placed among the top 3 AMCs in the country and will benefit during the industry
expansion.
• NAM has a very strong retail customer base (40% of AUM) and has the highest retail assets as a proportion of AUM in the
industry when compared to competition. Retail customers bring in higher percentage of equity flow.
• Highest proportion of SIPs as a percentage of Equity assets among listed players gives NAM higher persistency of flows,
thereby, lower volatility in their high margin business.
• NAM has a very strong Independent Financial Advisor (IFA) base, thereby generating almost 20% of business from cities
beyond the top 30 (B30), giving it a more loyal and profitable customer base than peers
• Being the largest player in the ETF space (19% market share), very long term future is secure for this AMC. Given the
demand for ETFs is high in international markets, this space is bound to get interesting.
• Nippon Life as sole promoter is expected attract foreign flows, which will help in regional diversification and help in flow
volatility to stabilise.
• The intrinsic value to the stock’s price is estimated to be Rs 460 and the stock is currently trading at Rs 396, and thus
initiating with the BUY rating with a 17% upside.
77
Nippon Life India Asset Management (NAM) BUY
Share Data
Market Cap. Rs xx bn (US$ 3,250 mn) Retail oriented firm with a strong IFA base and a new promoter
Price Rs 379
Target Price Rs 460
Nippon Life India Asset Management (erstwhile Nippon Asset Management) was
BSE Sensex 41,056 incorporated in 1995. The firm consistently has been among the top 3 AMCs in the
Reuters NIPF.BO
country with respect to assets under management. It came up with IPO on
Bloomberg NAM IN
6M avg. daily turnover (US$ mn) 11.1 November 2017 in the price band between Rs 247 and Rs 252.
52-week High/Low (Rs) 411/149
Issued Shares 612 mn Strong retail customer base: Nippon India Mutual Fund has the highest proportion
Valuation Ratios
of retail customers (net worth less than 5 lacs) versus competition. Since retail
Year to 31 Mar FY20E FY21E FY22E customers invest a good proportion of savings into equity funds through SIPs and
EPS (Rs) 9.9 11.0 12.1
+/- (%) 27.9 10.5 10.5
as SIPs have become a market favourite, NAM will be able to benefit in the long run.
PER (x) 38.2 34.6 31.3 The stickiness of this customer segment is also higher when compared to other
PBV (x) 9.2 8.9 8.7
Dividend Yield (%) 2.6 2.9 0.0
customer profiles.
Operting Revenue/AAUM (bps) 52 51 51
IFAs’ favourite: NAM has been paying out commissions on the higher side of the
PAT / AAUM (bps) 23 23 22
spectrum when compared to competition. IFAs had NAM among the top pick in tier
Shareholding Pattern (%)
Promoters 76
II and tier III cities. Since IFAs service a lot of retail customers, the customer profile of
FIIs 6 NAM has been tilted towards retail. IFAs have the ability to retain a customer since
MFs 3
they have a direct connect with him. However, since the upfront commissions were
BFSI's 4
Public & Others 12
removed by SEBI, the positioning of NAM will have to monitored.
Relative Performance New partner will help: Currently, Nippon Life is the sole promoter of NAM. Given the
500 huge asset base and international presence, flows from foreign nations is expected.
300 We assume the culture to reflect a MNC behaviour going forward. This is positive to
100
pull liquid and debt flows.
Jun-18
Jan-18
May-19
Feb-20
Nov-17
Apr-18
Oct-18
Oct-19
Feb-18
Aug-18
Nov-18
Jan-19
Mar-19
Jul-19
Aug-19
Dec-19
Valuation: We have used an appraisal technique to value the firm since a major
Nippon Life AMC (Actual)
portion of cash profits gets accrued in the PAT. We have valued the stock at 42x
Sensex
FY21E with a target price of Rs 460 (terminal growth = 4%, discount rate = 11.0%)
78
Comparison with peers
Peer comparison (FY19) Reliance AMC HDFC AMC

Equity 9% 12%
Balanced 7% 38%
Market Share Income 11% 17%
Liquid 10% 24%
ETFs 11% 1%
Equity 34% 26%
Balanced 5% 17%
Product mix Income 33% 30%
Liquid 19% 26%
ETFs 9% 0%
Brokerage (as % of AUM) 11 6
Operations Promotion (as % of AUM) 8 1
Employee benefit expense (as % of AUM) 13 5
Operating income / AUM 63 48
Profitability
PPT / AUM 30 35
AUM -5% 36%
Growth Revenue -3% 9%
EPS 8% 29%
Nippon Life AMC – A retail oriented player…

• With Retail AUM as percentage of Total AUM at 40% vs industry average of 26%, NAM enjoys strong persistency with
respect to flows, particularly on the equity assets.
• The high proportion of ETFs, understates the mix of equity to a certain extent. On normalizing ETFs, more than 38% of the
mix is equities, providing a better revenue from operations.
• The Liquid funds are normally in a constant state of flux and during the slowdown, assets moved to HDFC AMC in large
chunks in recent times. However, we saw the flow returning in 3Q.
79
Contents
History and Recent 81
Business introduction 85
Revenue flow 90
Operations 99
Strategy and Risks 109
Valuation 112
Investment Assessment 117

80
History and Recent
NAM – History and Recent

Introduction
Take over
TER cut
81
An Introduction
Nippon Life India AMC – A brief history…

• Reliance Capital Asset Management Limited was incorporated in 1995 at Ahmedabad.
• During the time period between 2000 and 2008, Reliance Asset Management (Mauritius) Limited and Reliance Asset
Management (Singapore) Pte Limited were established
• In 2012, Nippon Life made investments for the first time
• A Japan focused open-ended diversified equity scheme was launched.
• Reached the milestone of Rs 1.5 trn assets under management in 2015
• Acquired ETFs business from Goldman Sachs Asset Management (India) Private Limited in 2016
• Average assets under management reached Rs 2.0 trn in 2017 rally
• Currently, the firm manages an asset base of Rs 2.23 trn as of June 2019, out of which, 12% of assets are ETFs.
Recent happenings…
Cap on Total expense ratio of equity assets
• SEBI capped the maximum TER for closed-ended equity schemes at 2.25% and other equity schemes at 2.00%. The new
fee structure came into effect from 01 April 2019.
• The impact was between 12 to 13 bps on equity assets. This was passed on to distributors to the extent of 80% to 90%.
Removal of upfront commission
• In September 2018, SEBI removed the upfront commission paid to mutual fund distributors. The mutual fund industry
adopts full trail model of commission now.
• The intention was to stop unnecessary churning of mutual fund portfolios by distributors, particularly in B30 cities.
• This move was not taken positively by most in the distributor community, however, the unanimous industry move by
major players led to the implementation of this policy in a very short span.
Nippon Life increasing stake in Nippon AMC
• The Competition Commission of India (CCI) has approved the acquisition of 75% stake in Nippon AMC by Nippon Life.
• Currently Nippon Life is the sole promoter of Nippon Life India AMC. The mutual fund is re-branded to Nippon India Mutual
Fund.
82
Nippon Life Takeover and transactions
Timelines
Source: NAM Presentation
Benefits
• Nippon Life is the number one insurance player in
Japan and second largest insurance firm in Asia.
Their international presence will help in sourcing
funds from international partners.
• At present firms offers Category II & Category III AIFs
o Real Estate
o Equity
o Credit
o Tech / VC Fund of Fund (Indo Japan FoF)
Source: NAM Presentation 83
TER cut and removal of upfront commission
hurt distributors
Expense ratio moves after TER cut TER cut and removal of upfront commissions impacted
IFAs
1.6
1.4 • Reliance Small Cap is one of the top performing funds in
1.2 its portfolio. The expense ratio was increased to 1.28%,
1.0 however, it cannot be further increased as it has
0.8 reached the upper limit. Thus, there is limited leeway for
0.6 any further TER increase.
0.4
0.2 • Commission cut was across board for the equity based
0.0 funds since the upfront was removed. As NAM has a
Reliance Reliance Reliance Reliance Reliance Reliance very strong IFA base, this move would have hurt it the
Value fund Small Cap Multi Cap Growth Large Cap Focused most. On an average the cut was 18bps, lower than the
Fund Fund Fund Equity Fund reduction in FY19 (24 bps).
FY18 FY19 Sep-19
• We will be monitoring the behaviour of IFAs with respect
to NAM following this move.
Source: NAM FactSheet, B&K Research
Commission cut Cap on TER

0.6 2.5
0.5
2.0
0.4
0.3 1.5
%
0.2
1.0
0.1
0.0 0.5
Reliance Reliance Reliance Reliance Reliance Reliance

0.0
Value fund Small Cap Multi Cap Growth Large Cap Focused
Fund Fund Fund Equity Fund 0-500 cr 500-750 cr 750-2000 cr 2000-5000 cr 5000-10000 cr
FY18 FY19 Sep-19 Equity oriented Other schemes
Source: NAM FactSheet, B&K Research Source: SEBI

84
Business intro
Market position
Introduction
Snapshot
Products
85
Market position driven by strategy
NAM is currently at 5th position, with respect to Average Assets Under

Management (Q3FY20) at Rs 2.07 trn. Top 5 players hold 60% market share,
Revenue from up from 58% a couple of quarters ago.
operations 19% of business comes from B30 cities versus industry average of 16%. 26% of
flows are from retail customers, predominantly through equity asset class
versus industry’s 20%.
Employee Benefits Expense = 13 bps (on AAUM of FY19)

Brokerage = 11 bps (on AAUM of FY19)
Expenses Promotion = 8 bps (on AAUM of FY19)
Overall expense ratio = 40 bps (on AAUM of FY19)
RoE = 19% (FY19)/EPS grew by 4.2% to Rs 7.94

PBT Dividend payout ratio = 91% and Dividend Yield = 3.1%
P/E = 28.9 (FY19)
Strategy – Increase profitable AUM

• Focus on retail customers: NAM has one of the strongest retail customer base due to their Independent Financial
Advisor strength. The firm will continue to focus on retail customers and SIPs as most of the flows are into equity asset
class, thus improving the firm’s profitability.
• Expand B30 reach: B30 has a higher proportion of equity assets. NAM will be increasing flow by expanding ground
presence and IFA strength.
• Improve distribution penetration: As of now the firm has offices in 300 locations. NAM is expected to strengthen flows
through digital channels and opening new branches. NAM has empaneled over 1000 new IFAs in 1Q, FY20, with the total
strength reaching 74,500.
• Initiate international presence: NAM has launched the first Indian ETF in Australia with ETF securities Australia to
secure foreign flows.
86
Snapshot
Distribution mix (ex direct) Market share (FY19)
Reliance Mutual Fund
Aditya Birla Sun

Life Mutual Fund
SBI Mutual Fund
ICICI Prudential
Mutual Fund
HDFC Mutual Fund
Independent Financial Advisors Banking Distributors

0 2 4 6 8 10 12 14 16
National Distributors %
Source: Company report Source: AMFI
Retail customer mix Asset mix

45 40
40
30
35
30
20
%
25
%
20 10
15
0
10
FY19
5
Income Equity (other than ELSS)
0 Balanced Liquid
RMF Industry HDFC Birla SBI ICICI Gilt Equity - ELSS
Source: AMFI
87
Product offerings and Total Expense Ratios
Equity Expense ratio 1 yr Funds beaten AUM (Rs bn)

Large Cap 1.1 68% 131
ELSS 1.3 3% 108
Multi Cap Fund 1.4 70% 106
Small Cap Fund 1.2 79% 82
Growth Fund 1.4 87% 67
Focused Equity Fund 1.4 15% 45
Value Fund 1.5 80% 32
Banking Fund 1.5 44% 32
Vision Fund 1.6 41% 30
Pharma Fund 1.4 33% 24
Retirement Fund - Wealth Creation Scheme 1.4 26% 16
Power and Infra Fund 1.6 38% 15
• Top funds report good returns: Except ELSS fund, all the top funds have beaten almost 70% of the peer group in recent
volatile markets. Thus, we expect the AMC to garner flows into equity funds going forward.
• Reliance had a slightly weaker experience with sector specific funds in the recent year due to high volatility.
Direct - Debt funds Expense ratio 1 yr Funds beaten Net Assets (Rs bn)
Reliance Liquid Fund - Direct Plan 0.20 92% 256
Reliance Credit Risk Fund - Direct Plan 1.00 42% 81
Reliance Short Term Fund - Direct Plan 0.34 54% 65
Reliance Floating Rate Fund - Direct Plan 0.15 80% 61
Reliance Ultra Short Duration Fund - Direct Plan 0.38 29% 43
Reliance Strategic Debt Fund - Direct Plan 0.83 13% 42
Reliance Low Duration Fund - Direct Plan 0.34 42% 42
Reliance Money Market Fund - Direct Plan 0.15 79% 33
Reliance Banking & PSU Debt Fund - Direct Plan 0.36 65% 32
Reliance Yearly Interval Series I Direct - 91% 12
Reliance Gilt Securities Fund - Direct Plan 0.69 92% 10
• Reliance liquid fund had beaten 92% of the funds in the category, yet saw outflows during the year. Thus, when the
association with Reliance is removed, we expect flows coming in.
88
Unique Product Features
• Low ticket size: Nippon Life India AMC is one of the few asset managers with a minimum investment level of Rs 100,
minimum additional investment of Rs 100 and minimum withdrawal of Rs 100. Since, NAM has greater focus in tier ii and
tier iii cities than urban cities, the entry level ticket size is lower than other large players. Penetration into mass customer
base will be easier for NAM.
Large cap funds HDFC AMC SBI AMC IPRU AMC ABSL NAM
Investment 5000 5000 100 100 100
Additional Investment 1000 1000 100 100 100
Minimum
SIP Investment 500 500 100 100 100
Withdrawal 500 500 100 1 100
Assets AUM (Rs bn) 171 227 221 216 131
• SIP Insure: 3 AMCs – ABSL (Aditya Birla Sun Life), ICICI Prudential and NAM have this product. ABSL and NAM introduced this
in 2008, ICICI Prudential launched it in 2016. There is a life cover attached to SIP for free. Though, the cover is very low, it
improves the retention of customer through these offerings.
Life Cover
Max Life cover Till age (yrs)
1st Yr 2nd Yr 3rd Yr
Birla MF Century SIP 10x 50x 100x 25 lacs 60
ICICI Pru MF SIP Plus 10x 50x 100x 50 lacs 55
Reliance MF SIP Plus 10x 50x 120x 50 lacs 55
• Anytime Money Card: This card was introduced roughly 12 years ago and the liquid funds are tied to this debit card
powered by Visa. Thereby making cash withdrawal and online purchase happen similar to a debit fund, while the parked
funds earning a higher interest rate than savings account. The target customers are first time investors/young urban
generation who feel that mutual funds are inaccessible. Most of these customers have limited idea about short-term
liquid funds. This product feature has been adopted by robo-advisors such as FundsIndia and Scripbox in 2017. This is one
of a kind innovation by the AMC.
89
Revenue flow
Market share
Revenue from operations
Revenue flow TER
Managed Accounts
Operating expense
Expected spend
Profitability
Dividend Payout
90
NAM is losing market share… However
expected to bounce back…
Market Share – Listed Peers Players with a related banking partner
18 16
16 14
14 12
12 10
%
%
8
10
6
8
4
6
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
HDFC Mutual Fund ICICI Prudential Mutual Fund
HDFC Mutual Fund Reliance Mutual Fund SBI Mutual Fund
Source: Company report, AMFI
Players without related banking partner Market share of AMCs with banking partner did well over
the last 10 years
18 • During the latter half of FY19, when markets were
16 volatile, corporates stayed away from ADAG group.
14 Thus, outflows were hurting the income and liquid funds.
12 This is bound to reverse in coming years since the new
10 promoter - Nippon Life has a very good brand image.
%
8
Nippon’s presence will help in bringing in corporate
flows as well.
6
4 • NAM’s market share dipped in FY19 due to outflows in
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 liquid funds. The outflows were helping HDFC AMC,
which lead to its increase in its market share.
Reliance Mutual Fund
• View: NAM plans to balance lack of banking arm
through revamping the IFA channel going forward. IFA
UTI Mutual Fund
mix went up to 54% from 48% of total AUM during last 15
months. Market share will stabilise going forward due to
Source: Company report, AMFI flows from firms that avoided Reliance brand earlier. 91
Revenue from operations in line with AUM
Revenue from operations Reliance AUM growth – Line fit plot

20,000 1.0 1.0
0.8 0.8
Revenue growth
15,000
0.6
0.6
0.4
10,000 0.4
0.2
0.2
5,000 0.0
0.0
(0.2)
0 (0.2)
(0.4) (0.2) 0.0 0.2 0.4 0.6 0.8 1.0 1.2
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 Reliance AUM growth
Revenue from operations (Rs m) Growth Revenue growth Predicted Revenue growth
Source: Company report
NAM AUM growth trails Industry’s Revenue from operations has a very strong correlation to
AUM
120
• On expected lines, the growth in revenue from
100 operations has a very strong dependency to AUM
80 growth. Sensitivity of revenue growth is 0.77, which
60
implies that 1% increase to AUM growth will increase
revenue growth rate by 77 bps.
40
•
%
NAM’s AUM growth is closely related to AUM growth of

20
industry, however lagging it.
0
(20)
• Except FY15, Reliance AMC was not able to grow above
industry average during the past 10 years.
(40)
• View: As AUM is a strong indicator of revenue from
operations, and because NAM is falling behind industry
Reliance AUM growth Industry AUM growth growth in 90% of time in terms of AUM, the operating
income is expected to grow slower than industry for
Source: Company report NAM, until the mix shifts towards equity.
92
Nippon AMC has a better TER versus peers
Equity – major funds Small cap fund

2.0
Weighted
Average
1.5
1.0 Max
0.5
Min
0.0
Reliance Large Reliance Mid cap Reliance Small Reliance Tax Reliance
Cap (Growth) Cap Saver
Mar-18 Mar-19 Jun-19
0 0.5 1 1.5 2
Source: NAM Fact Sheet Source: NAM Fact Sheet, Value Research
Large, Mid-cap and ELSS NAM maintains a Total Expense Ratio above industry
average – due to better performance.
2.0
• NAM’s most profitable product line is the mid and small
cap fund, where it has priced the product close to
1.5 industry’s maximum with respect to expense ratio.
• Since, we have a positive outlook on flows of mid-caps
1.0 in a 5 to 7 years’ horizon, the profitability should hold for
NAM.
0.5
• NAM has been cutting down price of Large cap funds in
recent times, to slightly above average levels. We
0.0 expect the price to stabilise as cuts have been strong
Large Cap Mid-Cap ELSS during the past 24 months.
Reliance Min Max Weighted Average (industry) • NAM has one of the best performing small cap funds,
therefore we expect a price increase here, if there is
Source: NAM Fact Sheet, Value Research leeway.
93
Managed accounts business
PMS
18,000 5 Very low market share in PMS
16,000
• PMS industry grew by 18% since 2014 to 2019, with asset
14,000 0
12,000
under management rising to Rs 13.70 trn from Rs 6.04 trn.
10,000 NAM has been slow in expanding its PMS base.
(5)
%
8,000
• Over these five years, PMS across categories have
6,000
(10) outperformed benchmark by 3.5% to 9.0%.
4,000
2,000 • View: Since the industry is taking interest in developing
0 (15)
PMS base, and as NAM has a limited exposure to this
FY13 FY14 FY15 FY16 FY17 FY18
business stream, we feel that NAM is missing out on a
PMS (Rs m) PMS (right, Growth)
profitable product.
Source: Company report, DRHP
EPFO
1,400 25
EPFO – a very good market share
1,200
20
1,000 • SBI MF, HSBC AMC, ICICI Securities Primary Dealership
800 15 and UTI AMC are other fund managers for EPFO along
with NAM.
%
600 10
400 • NAM manages almost 50% of the total Rs 2.2 trn AUM.
5
200 • View: Government is expected to provide all support to
0 0 expand EPFO. The equity proportion is also expected to
grow. Therefore, we see NAM having a good prospect
EPFO (Rs b) EPFO (right, Growth) here. Thus helping in providing other income.
Source: Company report, DRHP

94
Operating expenses to hurt short term profitability
NAM – as % of operating income Operating expense as % of Income (Industry)

35 80
30
60
25
20
40
%
%
15
10 20
5
0
0
FY13 FY14 FY15 FY16
Brokerage/Commissions Marketing Costs
Brokerage/Commissions Marketing Costs Employee costs Other costs
Employee costs Other costs As % of Operating income
Source: Company report Source: DRHP (data not available post FY16)
Total Expense mix Higher operating expense cuts into PAT profitability
• Marketing expense has been increasing in recent times
100 eating into the PAT profitability. It has been going up as
a proportion of total mix as well.
80
• Employee costs as a proportion of operating income
60 dropped consistently since FY13 to FY17, as the markets
were bullish and operating revenue growth was
%
40 stronger than employee expense growth. Since the new

regulations kicked in, commission and brokerage
20 expense will eventually drop to zero, as it has been
already accounted for in operating revenue. Thus, net
0 impact on PAT is expected to be neutral.
• View: We expect an increase in marketing expenses in
Brokerage/Commissions Marketing Costs
the short term due to the management’s expansion
Employee costs Other costs
plans into tier ii and tier iii cities,. However, in the long
term, operating leverage should kick in and promotion
Source: Company report expense would dip. 95
Expected Spend in Future
Expected advertisement outlay

Expected spend to rise in short-term
120
100
• Advertisement expense is expected to increase by 12.6%
(Television), 24.3% (Print) and 42.6% (Digital) in FY20.
80
• Spend on technology (both digital and Core Enterprise
Rs mn
60
application) is expected to remain stable over the next
40 couple of years, with it being consistent with FY19.
20 • View: The spend is consistent with the management’s
0 vision of new customer acquisition. Having a focus on
Television Print Radio Digital B30, makes the ad-spend to be done through print and
FY19 FY20E FY21E Television media as well. We expect the spend to
increase for the next couple of years.
Source: DRHP
Digital Core Enterprise Application

120 90
80
100
70
80 60
50
Rs mn
Rs mn
60
40
40 30
20
20
10
0 0
Expected total FY19 FY20E FY21E Expected total FY19 FY20E FY21E
expenditure expenditure
Source: DRHP
96
Profitability – Nippon AMC to report better than
Industry’s profit margin
Profitability PAT (FY19) as % of AUM
0.35 50 0.30
0.30 0.25
40
0.25
30 0.20
0.20
%
%
%
0.15 20 0.15
0.10
10 0.10
0.05
0.00 0 0.05

0.00
PAT Margin (right) PAT (%) of AUM
ICICI AMC HDFC AMC Reliance AMC ABSL AMC SBI AMC
PAT margins to remain consistent, while operating Industry Profitability outlook

margins are expected to drop 0.8
0.7
• Recent SEBI norms mandated the funds to allocate fund 0.7 0.62 0.64
0.56
expenses at the fund level and not at the fund house 0.6
level. Therefore, the operating income is bound to fall. 0.5

0.4
%
• There is a 8bps gap between HDFC AMC and NAM, and

0.3
the gap was predominantly due to the gap in marketing 0.16 0.18 0.16
0.2 0.15
expense. Since, this is not going to reduce in the coming
0.1
years, we expect the gap to remain.
0
• However, since the impact on PAT will be minimal due to FY15 FY16 FY17 FY22
the recent move, we expect the PAT margins to remain Operating income as % of AAUM PAT as % of AAUM
stable for the years to come.

Source: DRHP
97
Dividend Payout – to remain high
EPS NAM has a strong dividend payout ratio
10 12 • The dividend payout has been one of the highest for

NAM. Since, the requirement of capital was high for Anil
8 10
Dhirubhai Ambani, and since asset management
8
6 business need not plough in capital to sustain growth
6 as other industries, the payout was close to 100%.
Rs
%
4
4
• Therefore the yield was pretty strong since listing for
2
2 NAM (>4%, FY19). It is much higher than HDFC AMC’s 1.1%.
0 0 • View: We expect the dividend payout to remain
FY16 FY17 FY18 FY19
constant around 90% since the AMC business does not
EPS (Rs) EPS growth (right) require cash to expand. That should maintain a healthy
yield at 3% with current stock price.
Dividend yield Dividend payout

5.0 5,000 120
4.5
100
4.0 4,000
3.5 80
3,000
3.0 60
%
%
2.5 2,000
40
2.0
1.5 1,000
20
1.0
0 0
0.5
FY16 FY17 FY18 FY19
0.0
Dividend payout ratio (right) Dividends paid (Rs m)
FY18 FY19 July FY20

98
Operations
Product mix
SIP
Operations ETFs
Distribution Strength
Customer mix
Retail customer
Region mix
Direct vs Regular
Fund Performance
99
Product mix to tilt towards equity
Asset mix
100
90
80
70
60
50
%
40
30
20
10
0
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Income Equity (other than ELSS) Balanced Liquid Gilt Equity - ELSS Gold ETF Other ETF
Source: AMFI, B&K Research
TER (weighted average) We expect ETFs to gain steam going forward due to flows
from outside India
1.4
1.2 • NAM has launched Indian ETF in Australia with ETF
1.0 securities Australia. We expect the influence of Nippon
0.8
Life to introduce more such products in near future.
%
0.6
0.4
0.2
• We expect the equity flow to remain strong due to SIP
0.0 flows.
•
Balanced
Equity (ex ELSS)
Income
Gilt
Equity - ELSS
Gold ETF
Liquid
Other ETF
Though we expect inflows in fixed income and liquid

assets, we do not expect them to be very strong in high
yield category given the current economic scenario.
• View: The growth of equity and ETFs should balance
FY18 FY19 Aug FY20 each other with respect to profitability. Thus, there need
not be negative impact on margins.
Source: Factsheet, B&K Research
100
SIPs to drive flow in ELSS and equities
SIP count (Rs mn) Proportion of SIP AUM to equity AUM

3.5 14
3.0 12
10
2.5
8
2.0
%
6
1.5
4
1.0 2
0.5 0
FY15 FY16 FY17 FY18 FY19
0.0
Reliance AMC HDFC AMC
FY16 FY17 FY18 FY19
Source: Company presentation Source: Company presentation
Annualised SIP book SIPs remain a strong forte for NAM!

• NAM has a 24% market share among unique investors.
120
This is much higher than the firm’s overall market share
of 10.1%. Ticket size (average) of SIP is Rs 2,580 for NAM
100
versus industry average of Rs 2,850, implying a higher
80 proportion of customers in the lower part of income
pyramid.
Rs bn
60
• NAM has a SIP market share of 12%, with respect to SIP
count, 2% points higher than its overall market share.
40
Retail customer base (40%) of AUM has been a good
20
driver of SIP growth.
• View: We expect the SIP book to grow by at least 15% on
0 flows in the coming years (5-year view). This is a strong
FY16 FY17 FY18 FY19 positive for NAM versus HDFC AMC. Once the market
turns around, book would further increase.
Source: Company presentation
101
ETFs – to contribute on a sustainable basis
ETF - mix ETFs will continue to attract flow, particularly from

outside India.
14
12 • NAM acquired Goldman Sachs in November 2016. 12

10 Schemes exchanged hands, out of which 10 were ETFs.
8
• Since then NAM leads the ETF market with a share of
%
6 19.3%, in a Rs 1,401 bn market.

4
• NAM has a the largest bouquet of 17 ETFs in the industry
2
across Equities, Debts and Commodity (Gold).
0
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 • NAM was the first to launch Gold ETF and Money Market
Gold ETF Other ETF ETF in India.
Source: Company report • Currently, the market share in ETF volumes between July
18 and July 19, in NSE and BSE reached a 78.6% market
ETF mix and Region mix share.
9% 5% • Since, most of the ETF flows happen from T30, the

immediate growth from India could be slower when
compared to flow from outside India.
• NAM recently launched India Nifty 50 ETF in Australia in

June 2019.
View: Taking cues from the global trend, the industry will
move towards ETFs in the long run. Therefore, NAM is well
91% 95% placed to capture the opportunity then. This proves to be a
Gold ETFs T30 B30 big positive for the firm in the long run with respect to a
stable fee income.
Source: AMFI
102
Distribution strength – IFAs will continue to deliver
IFA – AUM Distribution continues to be the centre of business

expansion strategy
700
• Since NAM does not have a banking partner, it depends
600
on IFAs to a great extent. 52% of the business is being
500 sourced through this channel.
•
Rs bn
400 No Single distributor contributes to more than 6% of AUM

300 due the IFA model.
200 • Digital purchases went up by 101% from 195,000 (1QFY19)

to 391,000 (1QFY20). Digital contributed 41% of total
100
purchase transactions for Q1 FY20.
0
Strategy
FY17 FY18 FY19
• Build long-term relationships with IFAs – since the
management believes that IFAs will prove to be
beneficial in expanding retail assets.
Distribution mix
• Use the separate business vertical, to focus on
developing business with PSU bank to leverage rural
29% network for widespread distribution of products.
44%
• NAM has a dedicated team to cater to HNI
requirements.
• Investment in technology is bound to increase. NAM
launched e-NACH mandate in June 2019.
16%
View: Though the lack of banking partner is a negative, the
11% strength of IFA is very strong for NAM. NAM is the most
Independent Financial Advisors Banking Distributors
preferred AMC in B30 according to the comments by few
National Distributors Direct
IFAs who had a discussion with us. Therefore, retail flows
are bound to be higher than corporate for NAM going
forward. 103
Customer mix – Retail customer mix to gain
Customer mix comparison Retail AAUM/Total AAUM (FY19)

50 %
0 10 20 30 40 50
40
Reliance
30
Industry
%
20
HDFC AMC
10
ABSL AMC
0 ICICI AMC
Corporates Banks FIIs HNIs Retail
Industry Customer mix Reliance SBI AMC
Source: B&K Research, AMFI Source: B&K Research, NAM presentation
Historical mix NAM is a retail oriented firm and will continue to remain so
• NAM is second largest player among AMCs with respect
60 to retail customers. It has 14% market share among retail
50 assets.
40 • Clear strategy in expanding retail customer base has
been evident since FY13.
30
•
%
When compared to retail mix, NAM holds 39% of AUM

20 sourced through retail customers. HDFC AMC sources
10 only 24% from retail customers.
0 • The persistency of retail customers are much more
FY13 FY14 FY15 FY16 FY17 FY18 FY19 June than corporates. The flow of equity assets will also be
FY20 higher in firms which have higher proportion of retail
Retail Corporate HNI Other Institution AUM
customers.
• View: Since the management’s vision is to expand into
Source: B&K Research, AMFI B30, retail customer base is bound to expand further
Note: Shift in definition of Retail from fund assets <2 lacs to < 5 lacs in FY19 and benefit NAM. 104
Retail customer strength and asset allocation
Folio count growth remains strong Retail customers prefer equity
9.2 4 • Retail customers prefer equity, ELSS and Balanced funds

9.0 since SIPs play a major role in ELSS and retail customers
8.8 3 are attracted towards higher historic returns.
8.6
• The customers in B30 have bought a higher proportion
8.4 2
%
of equity and ELSS funds when compared to T30. There
8.2
has been a distributed asset allocation for T30
8.0 1
customers.
7.8
7.6 0 • The folio count has gone up consistently in recent
Mar 18 Jun 18 Sep 18 Dec 18 Mar 19 quarters, reporting a 11% growth during the fiscal 2019.
RMF Folio count (mn) RMF folio growth (QoQ, right)
• View: We expect the trend of B30 bringing in more
equity flow to continue for NAM.
Retail asset mix (total) B30 buys more equity

60 60
50 50
40
40
30
%
30
%
20
20 10
10 0
Equity/Growth
Balanced
ELSS
Gold
Other
Liquid
GILT
FMP
Other debt
0
schemes
Equity/Growth
Balanced
ELSS
Gold
Other
Liquid
GILT
FMP
Other debt
schemes
Income/Debt oriented Equity ETF

Income/Debt oriented Equity ETF T30 B30

105
Region - Focus on B 30 to support equity flows
Region mix
100
90
80
70
60
50
%
40
30
20
10
0
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
Top 5 cities Next 10 cities Next 20 cities Next 75 cities Others
Source: B&K Research, AMFI
B-30 proportion Strategic focus continues to be towards B30

• NAM has a higher proportion of its AUM flowing through
B30 when compared to industry.
• The push from IFAs increased flows from B30 in recent
Industry years.
• The jump in FY16 was due to the jump in ETFs and 90% of
the ETFs flows through T30.
• Out of 171 branches, 132 branches are located below the
top 15 cities.
RNAM • NAM has a dedicated retail business development
team, which focuses on developing relationships with
PSU banks, which will increase geographical reach as
well.
0 5 10 15 20 25 • View: B30 mix is expected to grow in the medium term
%
when the market bounces back. We do not see a major
Source: B&K Research shift in short term.
106
Regular mix to sustain and benefit Nippon AMC
Direct versus Regular Role of distributors will remain important
30
• On an overall basis, flows from distributors contribute to
5 times to equity flows when compared to customer
20
who opt for direct route.
%
10
0
• Customers in B30 prefer the regular route more than
customers from T30 as T30 has better internet
(10)
penetration and awareness among urban customers .
Equity/Growth
Balanced
ELSS
Liquid
GILT
FMP
Other debt
Gold
Other
schemes
• The younger population is opting for online options

instead of going through an IFA.
View: We do not expect the shift from regular to direct
Income/Debt oriented Equity ETF happen at a fast pace. We do not expect more than 20% of
Direct Regular the population taking the direct route. This is expected to
benefit NAM due to their distribution strength tilt.
B-30 mix T-30 mix

50 30
40
30 20
%
%
20
10 10
0
(10) 0
Equity/Growth
Balanced
FMP
Other debt
ELSS
Gold
Other
Liquid
GILT
Equity/Growth
Balanced
FMP
Other debt
ELSS
Gold
Other
Liquid
GILT
schemes
schemes
Income/Debt oriented Equity ETF Income/Debt oriented Equity ETF
B30 Direct B30 Regular T30 Direct T30 Regular

107
Fund performance remains strong
Equity oriented funds - percentile Outperformance

100
Reliance Small Cap Fund
80
60 Reliance Growth Fund
%
40
Reliance Regular Savings Fund -…
20
0 Reliance Tax Saver (ELSS) fund
Reliance Reliance Tax Reliance Reliance Reliance
Equity Saver (ELSS) Regular Growth Fund Small Cap Reliance Equity opportunities fund
opportunities fund Savings Fund Fund
fund - Balanced (15) (10) (5) 0 5 10 15
option %
1 yr 3 yr 5 yr Outperformance 5 yr Outperformance 3 yr Outperformance 1 yr
Source: Value Research online Source: Value Research online
Debt oriented funds - percentile Returns are important to drive flows
100
• Reliance small cap fund has been able to consistently
rank among the top funds, thereby contributing to huge
80
flows and NAM was able to hike fee there.
60
• ELSS and Balanced option have struggled to outperform
%
40
peers.
20
• Interestingly, the short term fund has been able to
0
outperform close to 65% of peers.
Reliance Reliance Reliance Reliance Reliance
Money Medium Term Floating Rate Short term Regular • View: Profitability will be driven by small cap funds in
Manager Fund Fund - Short Fund savings - future as well (within equity funds). Flows will come in
Fund term plan Debt option through short term fund as performance has remained
1 yr 3 yr 5 yr strong.
Source: Value Research online

108
Strategy and Risks
Strategy & risks

Business strategy
Risks
109
Business strategy
Expanding investor base and retain focus on retail customers will remain the core strategy
• Open new branches: NAM has a pan-India network of 171 branches, of which 132 are in cities below top 15 cities. The
management plans to expand the branch network by adding 150 new branches in tier ii and tier iii cities and relocating 54
existing branches into more diversified zones across India by FY2021.
• Growth distributor network: NAM improved its distributor base from 58,000 (including banks, financial institutions, IFAs,
national distributors and online platforms) to 74,400 (June 2019) within a span of two years. Thereby reporting a 13% growth
annually. The management intends to expand this further to include B30 cities. The possibility of cross selling also goes up
with increasing distributor base. NAM has a dedicated retail business development team, which focuses on developing
relationships with PSU banks, which will give a good thrust to expand geographical reach.
• Increase investor base: The initiatives that are expected to increase investor base includes offering a diverse portfolio of
equity, debt, hybrid and sector focused funds. Increasing investor education forums, providing a simple, multi-device,
app-based and user friendly technology experience and facilitating easy KYC and account opening systems to attract
investors.
• Advertising and marketing initiatives: NAM has one of the highest marketing and ad spends. One an average marketing
expenses amounts to about 27% of total spends. This is expected to continue on similar lines in the short-term as well.
Expanding other income flows
• Focus on Developing AIF Business: Reliance AIF launched its first AUM in 2014 and is currently managing six schemes, four
of which are closed for subscription. Reliance AIF intends to launch various offerings to capitalise on market opportunities.
Reliance AI plans to launch between six and tem new schemes (Category II and Category III) over the next three financial
years.
• Inorganic Growth through Strategic Acquisitions: In November 2016, NAM acquired asset management rights to 12
schemes launched by 2016, in order to strengthen the ETF offerings. NAM continues to evaluate targets for strategic
acquisition in order to increase branch network, geographic reach, knowledge-base, and know-how.
• Expand Out Overseas Operations: Relationship with Nippon Life is expected to provide opportunities to obtain advisory
service mandates from overseas markets.
110
Risks
Further tightening of Fees and Commission
• AMFI had asked Mutual funds to cap upfront commission at 1% and trail commissions at 1.75% for every year from 01 April
2015. Before this, the AMCs used to give upfront commissions of more than 2%. The move by AMFI is to prevent distributors
from mis-selling schemes and pushing clients to churn their portfolio in an effort to earn higher commissions. The sales
through distributors might be affected. Though, we do not expect any change in commission structure in the short term,
long term tightening cannot be ruled out.
Cap on Mutual Fund Expenses
• SEBI capped Total Expense Ratio to 1.25% for equity funds and other than equity oriented funds shall be a maximum of
1.00%. The TER for index schemes, Exchange Traded Funds (ETFs) and Fund of Funds shall be maximum of 1.00%. This cap
reduces with growing AUM size. Therefore, in the short term, as funds grow in size, the profitability in terms of bps per AUM
will decrease, though PAT would increase. In the long run, the probability of further cuts is real. Thus, we expect a declining
trajectory for PAT (bps as a proportion of AUM).
Competition from Unit Linked Insurance Plans/Other higher commission products
• The premium allocation charges (which is used to pay distributor commission upfront) are high for ULIPs when compared
to mutual funds. Therefore, the probability of IFAs/Agents selling an insurance product over a mutual fund is high. Even
though the AMCs deny this move, our ground checks validate this point to a certain extent. The relationship with
distribution channel plays a key role in maintaining flows.
Rise of Inflows in ETFs / Passive funds
• International markets saw a very strong move towards ETFs. Indian markets are not mature enough to move towards ETFs,
however, the shift is bound to happen in the long run. As ETFs are the least profitable products for an AMC, the profitability
will be impacted once flows increase.
Fund under-performance could trigger outflows
• Fund performance has been a leading indicator to TER and to flows in a risk-on market. Thus, any continuous
underperformance could lead to structural outflow. Outflow in Liquid/Income funds in FY is one such example, due to the
fund’s exposure to ADAG group.
111
Valuation
Key assumptions and

outlook
Valuation
Target price
Financials
112
Key assumptions – Nippon Life AMC
Structural decline in TER expected (equity) Mix expansion expected in equity

1.3 50
40
1.2
30
%
1.1 20
10
%
1.0 0
Balanced
Income
Equity (other
Gilt
Equity - ELSS
Gold ETF
Liquid
Other ETF
than ELSS)
0.9
0.8
FY21E
FY17
FY18
FY19
FY23E
FY27E
FY28E
FY20E
FY22E
FY24E
FY26E
FY30E
FY25E
FY29E
Operating revenue to follow a downward

ELSS and Equity growth to remain strong trajectory – Lower TER and higher AUM
40 52
30
Operating revenue as % of AUM

51
20
50
10
%
0 49
(10)
(bps)
48
Balanced
Income
Gilt
Equity - ELSS
Gold ETF
Total
(other than ELSS)
Liquid
47
Equity
46
45
44
Last 8 years Next 10 years FY20E FY21E FY22E FY23E FY24E FY25E FY26E FY27E FY28E FY29E FY30E
Source: B&K Research 113

Valuation – Target = Rs 460 (upside of 20%)
FY15 FY16 FY17 FY18 FY19 FY20E FY21E

AUM (Rs bn) 1371 1584 2109 2449 2336 2655 3009
EPS (Rs) 6.0 6.2 6.8 7.5 7.8 9.9 11.0
RoE (%) 27 26 21 20 19 24 26
Valuation technique Profitability projections (bps of AUM)

• Future product mix is being projected along with TER,
80
which drives operating revenues of the firm
70
• There is a proportion of hidden charges – including 60
distribution expenses, trading costs, etc. being 50
distributed from TER. We have assumed that proportion
40
to be 30%, going with run rate of 9MFY20.
30
• The PAT (bps of AUM) is an output of cost and revenue 20
assumptions 10
• The Intrinsic value = Book value + Present Value of future 0
profits
FY21E
FY28E
FY16
FY17
FY18
FY19
FY23E
FY27E
FY20E
FY22E
FY24E
FY26E
FY30E
FY25E
FY29E
• Discount rate = Bloomberg discount rate of 11.0%.
Operating revenue (bps of AUM) PAT (bps of AUM)
• Terminal growth rate = 4% (assuming nominal GDP
growth rate to be on similar levels post 30 years) Source: B&K Research
• Based on the above valuation, target price comes to be

WACC
Rs 460 with a 20% upside from Rs 380 (17th February)
9.0% 10.0% 11.0% 12.0% 13.0%
Risks to valuation: We have not factored in a market crash
during the period of evaluation – expecting a bounce back 3.0% 672 539 446 377 326
after crash. We have not factored in a recession or mass 3.5% 693 551 452 381 328
job loss – as larger population is self employed, job loss is Terminal
less impactful compared to recession. Since, these are 4.0% 719 564 460 386 331
Growth
corner solutions and the probability is low in the near term, 4.5% 749 580 469 391 334
we have not factored it in. A lower than expected AUM
5.0% 788 600 479 397 337
growth of ELSS would impact stock price.
114
Nippon Life AMC – Financials
Income Statement Balance Sheet
Year ended 31 Mar (Rs mn) FY19 FY20E FY21E FY22E Year ended 31 Mar (Rs mn) FY19 FY20E FY21E FY22E
- Revenue From Operations 14,786 13,679 15,228 17,168 Total Financial Liabilities 974 1,448 1,367 1,263
-Other Income 1,713 1,850 1,998 2,158

Total Non-Financial Liabilities 822 733 801 855
Total income 16,499 15,529 17,225 19,325
-Equity Share Capital 6,120 6,120 6,120 6,120
Growth (%) (5.6) (5.9) 10.9 12.2
-Other Equity 19,203 19,826 20,514 21,275

-Employee Benefits Expense 2,935 3,228 3,551 3,906
-Depreciation and
101 10 10 10 Total Equity 25,323 25,946 26,634 27,395
amortisation
-
Brokerage/Incentives/Fee/M 2,583 266 301 340 Total Liabilities 27,118 28,127 28,802 29,512
utual Fund expenses
-Promotion 1,978 2,124 2,317 2,719
-Cash and Cash Equivalents 132 132 132 132
-Others 1,900 1,593 1,866 2,209

-Receivables 902 560 612 691
Total Expense 9,497 7,221 8,045 9,185
-Investments 12,800 13,423 14,111 14,872

Growth (%) (13.1) (24.0) 11.4 14.2
PBT 7,002 8,308 9,181 10,140 -Other Financial Assets 541 527 547 538
Growth (%) 6.8 18.6 10.5 10.5

Total Financial Assets 23,465 24,038 24,667 25,557
Tax 2,132 2,077 2,295 2,535
Non-Financial Assets 3,653 4,089 4,135 3,955
PAT 4,871 6,231 6,885 7,605
Growth (%) 6.4 27.9 10.5 10.5 Total Assets 27,118 28,127 28,802 29,512
115
Nippon Life AMC – Financials
Key Ratios
As % of AUM (bps) FY19 FY20E FY21E FY22E Product mix - Avg Q4 AUM (%) FY19 FY20E FY21E FY22E
Revenue from operations 63.3 51.5 50.6 50.5 AUM (Rs bn) 2,336 2,655 3,009 3,399
Fees and Commission Expenses 11.1 1.0 1.0 1.0

-Equity 39.1 39.7 40.4 41.3
Employee Benefit Expenses 12.6 12.2 11.8 11.5

-Income 33.0 33.3 33.5 33.3
Other expenses 17.0 14.0 13.9 14.5
-Liquid 18.2 18.0 17.7 17.5
PBT 30.0 31.3 30.5 29.8
-Others 9.7 9.0 8.4 7.9
Tax 9.1 7.8 7.6 7.5
AUM Growth (%)
PAT 20.8 23.5 22.9 22.4
-Equity 4.8 15.4 15.4 15.4
PAT (excluding other income) 13.5 16.5 16.2 16.0
-Income (21.3) 15.0 13.8 12.5
Profitability ratios (%)
-Liquid (4.8) 12.0 11.8 11.5
Operating margin 42.4 53.5 53.3 52.5
-Others 51.3 5.2 5.6 6.0
PAT margin 29.5 40.1 40.0 39.4
TOTAL AUM (4.6) 13.7 13.3 13.0
RoE 19.2 24.0 25.9 27.8
Weighted Average TER (%)
Valuations ratios
-Equity 1.1 1.2 1.1 1.1

EPS (Rs) 7.8 9.9 11.0 12.1
P/E (x) 27.0 38.2 34.6 31.3 -Income 0.8 0.8 0.8 0.8
BVPS (Rs) 40.4 41.4 42.5 43.7 -Liquid 0.1 0.1 0.1 0.1
P/B (x) 5.2 9.2 8.9 8.7 -Balanced 0.8 0.8 0.8 0.8
116
Investment assessment
Investment assessment Key points
Investment thesis
B&K View
117
Key points
Pros
• Retail focus: NAM is second largest player among AMCs with respect to retail customers. It has 14% market share among
retail assets. Management has a clear focus in expanding the retail customer base since they are sticky and persistent.
• Strong IFA base: Since NAM does not have a primary banking partner or parent, it depends on IFAs to a great extent in
selling its products. Particularly, IFAs play a major role in roping in retail customers from tier ii and tier iii cities. From the
IFAs angle as well, NAM occupies one among the primary spots.
• B-30 remains a stronghold: What they lack in market share, they focus through distribution. Though, NAM is behind HDFC
AMC with respect to market share of B30 cities, they are setting up offices to expand reach. When the AUM flow through
B30 is compared to industry, NAM comes out on top. The growth potential of B-30 is expected to be higher than T-30,
moreover, IFAs gain a higher commission when they are distributing to B30 customers in comparison to T30.
• ADAG moving out is a positive: The recent acquisition by Nippon Life is expected to turn things favorable for NAM. Till
recently, there have been outflows from liquid and income funds due to the firm’s affiliation to ADAG group. Since, there
ties have been cut, there is a prospective inflow being expected.
• Foreign flows through ETFs and FoFs: NAM has introduced their Fund of Fund in the tech space through which inflows are
being expected from Japan. Since Nippon Life is the number tow life insurer in terms of asset size in Asia, it will surely
contribute in bringing in flows and ETFs are expected to be one of the channel.
• Profitability to remain intact: Since the distribution expense is no longer reported at the AMC level, we will be seeing a
dip in revenue from operations, but PAT is expected to remain stable.
Cons
• Expenses to increase through advertisements and marketing spends: Since the firm is looking to bring in flows, the
marketing and advertisement spends are expected to go up. This could hurt bottomline in the short-term.
• Asset flow growth has been historically slower to industry's growth: The firm has been taking steps to enhance the
growth of AUM; however, it has been lagging industry and competition to a great extent.
118
B&K View
1. The possibility of NAM’s market share increasing is low taking parallels from history and also since NAM does not have a
very strong banking partner. We expect the firm to report an AAUM CAGR of 12% over the next 10 years.
2. NAM has been under pressure due to its affiliation with ADAG since IPO. Since the current sole promoters have a very
strong brand image in both international and domestic markets, we should see the flows going up for Income funds. The
income funds will be growing at an annualised rate of 10% and liquid funds are expected to report a growth of 11% over the
next 10 years.
3. The profitability (PAT/AAUM) is expected to remain intact for the next 10 years, slightly above 21 bps (current). Thus,
reporting an annualized growth of 10% for the next 10 years. This is slightly below the historical (last 10 years’) growth of 11%,
during when the markets expanded phenomenally.
4. We believe that IFAs will continue to play a major role in NAM’s business. Their ability to sell the firm’s products in tier ii and
tier iii cities will guide growth to a great extent.
5. We have valued the frim at 42xFY21 EPS of Rs 10.9 at Rs 460.
119
Initiating coverage
HDFC AMC
Leader with a strong brand play…
Investment thesis
• HDFC AMC is the number one AMC in India (December 2019). Asset management sector is at very early stages of
expansion in India, with respect to AUM as a percentage of GDP. With an increasing disposable income, and with very few
other retirement options, the AMC industry will benefit substantially. HDFC AMC will benefit the most due to economies of
scale.
• HDFC has a strong individual customer base (28 out of 100 individual investors in India prefer HDFC AMC), and the highest
individual market share of 15.4%.
• High proportion of equity linked assets (equity + balanced), with 43% mix helps in maintaining a higher profitability on a
consistent basis when compared to peers.
• Focus on expanding beyond the top 30 cities (B30) will drive growth with better profitability. HDFC AMC is number two in
B30, and has been taking steps to expand their network into a region which is equity asset class dominant (73%).
• Strong brand presence and recall has been driving flows during slowdown or market volatility. This plays a bigger role in
roping in liquid funds when compared to other asset classes.
• Ability to pass the regulatory cut to distributor without impacting flows is a testimony to the firm’s relationship with its
distributors. Thus, regulatory pressure need not impact profitability in the short-term.
• Thus, the intrinsic value to the stock’s price comes out to be Rs 2,927 (at 46x FY21 EPS) and the stock is currently trading at
50x FY21 EPS. We have not given the stock any ‘HDFC’ premium that is generally being attached to any ‘HDFC’ stock. Thus,
we feel that HDFC AMC warrants a Hold rating given that the market sees a premium in the brand value, which we have
not captured in our numbers.
121
HDFC AMC Hold
Share Data
Market Cap. Rs xx bn (US$ 9,668 mn) Largest asset manager in the country!
Price Rs 3,224
Target Price Rs 2,927 HDFC AMC received SEBI approval to launch mutual fund schemes in 2000 as the
th
BSE Sensex 41,056
26 asset manager. Its consistent performance gained customers’ trust and
Reuters HDFA.BO
Bloomberg HDFCAMC IN
currently it holds the pole position in terms of assets it manages. HDFC AMC
6M avg. daily turnover (US$ mn) 60.7 launched its IPO on 25 July 2018 with a price band between Rs 1,095 and Rs 1,100.
52-week High/Low (Rs) 3,844/1,302
Issued Shares 212.7 mn Number one in asset size and profitability: Being the asset manager with an AUM
Valuation Ratios of Rs 3.76 trn, and a PAT/AAUM of 27bps, HDFC AMC retain the number one spot in
Year to 31 Mar FY20E FY21E FY22E
terms of both assets and profitability. HDFC AMC is able to be the most efficient firm
EPS (Rs) 57.1 64.2 72.1
with respect to operations, therefore, the operating leverage is able to provide a
+/- (%) 30.2 12.4 12.2
PER (x) 34.9 34.9 34.9 strong support to margins during expansion of AUM. This is expected to continue in
PBV (x) 10.6 10.6 10.6 future as well.
Operting Revenue/ AAUM (bps) 55 55 55
PAT / AAUM (bps) 27 27 27 Strong brand recall: There is an inherent quality image attached to the ‘HDFC’ brand
Shareholding Pattern (%)

that was built over the years. To validate this trust of customers, the firm took the loss
Promoters 80 of ILFS to its books in FY19, thus, enhancing the confidence further. We expect the
FIIs 8
brand strength to deliver a growth rate above competition in the long run.
MFs 1
Public & Others 11 High individual asset base: HDFC AMC categorises retail + HNIs under the
Relative Performance ‘’individual’’ customers bucket. This has been growing for the firm and HNIs
4,000 proportion has increased in recent years due to the shift from equities to fixed
3,000 income asset class by the rich folk. Since the ability to save increases as one climbs
2,000 the income ladder, HDFC AMC is poised to benefit from this customer mix.
1,000
Valuation: We have valued HDFC AMC at 46x FY21 EPS, given the higher profitability
Oct-18
May-19
Feb-20
Jan-19
Nov-18
Oct-19
Aug-18
Mar-19
Jul-19
Aug-19
Dec-19
and growth rate when compared to NAM’s at Rs 2,927. We initiate coverage with a
HDFC AMC (Actual) Sensex Hold rating since we have not factored the ‘HDFC’ brand into our valuations.
122
Comparison with peers
Peer comparison (FY19) Reliance AMC HDFC AMC

Equity 9% 12%
Balanced 7% 38%
Market Share Income 11% 17%
Liquid 10% 24%
ETFs 11% 1%
Equity 34% 26%
Balanced 5% 17%
Product mix Income 33% 30%
Liquid 19% 26%
ETFs 9% 0%
Brokerage (as % of AUM) 11 6
Operations Promotion (as % of AUM) 8 1
Employee benefit expense (as % of AUM) 13 5
Operating income / AUM 63 48
Profitability
PTB / AUM 30 35
AUM -5% 36%
Growth Revenue -3% 9%
EPS 8% 29%
HDFC AMC – Number 1 firm with a very strong brand
• High proportion of individual customer base (63% vs 56% - industry) helps in high persistency and profitability.
• Keen focus on profitability due to a good operational efficiency (Brokerage and employee benefits are very low as a
proportion of AUM).
• Operating profit remains strong at 35bps with a high proportion of equity oriented funds (43%) when compared to
Reliance AMC. 123
Contents
History 124
Business introduction 128
Revenue flow 132
Operations 142
Business Plan 152
Valuation 155
Investment Assessment 160

124
History and Recent
HDFC AMC Intro
Regulatory changes
125
HDFC AMC – an intro
HDFC AMC – A brief history…

• July 2000 – Company received SEBI approval to manage HDFC Mutual Fund Schemes.
• August 2001 – Standard Life Investment became the company’s shareholder.
• September 2002 – Company’s AUM reached Rs 100 bn.
• June 2003 - HDFC AMC acquired Zurich Asset Management Company Ltd., having an AUM of Rs 34 bn.
• October 2009 – Company’s AUM reached Rs 1 trn.
• March 2011 – HDFC Mutual Fund reaches number one position from being number 26 in 2000.
• June 2014 – Firm acquired Morgan Stanley Mutual Fund schemes, having an AUM of Rs 19 bn.
• May 2016 – AUM reaches Rs 2 trn.
• December 2017 – Breaks Rs 3-mn mark.
Recent happenings…
Cap on Total expense ratio of equity assets
• SEBI capped the maximum TER for closed-ended equity schemes at 2.25% and other equity schemes at 2.00% on
schemes with AUM below 500 crores . The new fee structure came into effect from 01 April 2019.
• The impact was between 20 to 25 bps on equity assets. This was passed on to distributors to the extent of 80% to 90%.
Removal of upfront commission
• In September 2018, SEBI removed the upfront commission paid to mutual fund distributors. The mutual fund industry
adopts full trail model of commission.
• Increased trail commission gets amortised over 36 months instead of the earlier 12 month amortization of up-front
commission, thereby, AMC’s expense ratio would optically drop.
• The intention was to stop unnecessary churning of mutual fund portfolios by distributors, particularly in B30 cities.
• This move was not taken positively by most of the distributor community, however, the unanimous industry move by
the major players led to the implementation of this policy in a very short span.
126
Regulatory moves
Negative Impact on top 4 (85% of AUM) funds Commission paid remained stable
0 2.0
(5)
1.5
(10)
(15) 1.0
(20)
0.5
(25)
(30) 0.0
HDFC Equity HDFC Top 100 HDFC Mid-Cap HDFC Equity Fund HDFC Equity HDFC Top 100 Fund HDFC Mid-Cap HDFC Equity Fund
Savings Fund Fund Opportunities Savings Fund Opportunities
Fund Fund
Change in TER post cut (bps) FY18 FY19 Post cut (Aug 19)
Source: B&K Research, Factsheet
Regulatory moves
TER cap
• TER cut – HDFC AMC cut between 20 to 25 bps for the
large funds except Mid-Cap Opportunities Fund. Every 2.5
Rs 5000 crore increase will lead to a 5 bps cut on
expense ratio. Thus, structural decline will happen. 2.0
• Commission paid – The removal of upfront commission

1.5
did not impact distributors as few distributors have
adopted trail commission well ahead of the change.
%
1.0
• All scheme related expenses to be paid from Scheme
Only, and not from AMC. This will reduce the revenue 0.5
from operations; however, commissions and brokerage
will also reduce at a P&L level. Thus, impact on PAT is 0.0
neutral. 0-5 bn 5 to 7.5 bn 7.5 to 20 bn 20 to 50 bn 50 to 100 bn
• Higher incentive for distributors servicing B30 cities will Equity oriented Other schemes
help in getting more flows from B30. HDFC AMC will
benefit as well through this. Source: SEBI
127
Business introduction
Market position
Introduction
Snapshot
Product offerings
Distributors’ talk
128
Market position driven by strategy
HDFC AMC is the number 1 AMC, with respect to Average Assets Under
(2FY20). New product launched in liquid category helped to regain the pole
Revenue from position.
operations 14% of business comes from B30 cities vs industry average of 16%. 24% of
flows are from retail customers, predominantly through equity asset class
versus industry’s 26%.
Employee Benefits Expense = 6 bps (on AAUM)

Brokerage = 7 bps (on AAUM)
Expenses Promotion = 6 bps (on AAUM)
Overall expense ratio = 21 bps (on AAUM)
RoE = 35% (FY19) / EPS grew by 29% to Rs 43.8

PBT Dividend payout ratio = 66% and Dividend Yield = 1.1%
P/E = 58 (FY19)
Strategy – Increase individual investor base and AUM

• Focus on individual customer accounts: Among 100 individual investors, 28 chose HDFC AMC. This is due to the firms
strong brand and strong faith of HNIs. HDFC AMC plans on expanding the individual customer touchpoint through
differentiated products and distribution reach.
• Expand B30 reach: The mix from B30 has been a focus area given the increased flow of equity from this region.
Establishing new offices and reaching out through IFAs will drive future growth with profitability intact. Enhance product
portfolio: HDFC AMC does not launch products on a frequent basis; however, they are very good in bridging the gap
between customer demand and product profile. HDFC Ultra Short term fund was a huge success in FY19.
• Improve digital presence: The firm plans on exploring data analytics, especially using behavioural analysis tools for
predictive analytics and deploying the same for improved customer servicing and cross/up selling.
129
Snapshot
Industry Leader – AUM market share Distribution mix

16
14 28%
38%
12
10
8
%
6
6%
4
2
9%
0
HDFC Mutual ICICI SBI Mutual Reliance AMC Aditya Birla SL 20%
fund Prudential Fund AMC
IFA Banks HDFC Bank National Distributors Direct
AMC
A well balanced product mix Customer mix – Individual oriented

30 45
25 40
20 35
15 30
%
10
%
25
5 20
0 15
FY19
10
Income Equity (other than ELSS)
Balanced Liquid 5
Gilt Equity - ELSS
0
Gold ETF Other ETF
Corporate HNIs Retail Banks/Fis FIIs/FPIs

130
Product offerings
Expense ratio 1 yr funds beaten AUM (Rs bn)

Debt funds
HDFC Medium Term Debt Fund 0.5 75% 11
HDFC Ultra Short Term Fund 0.3 71% 74
HDFC Banking and PSU Debt Fund-2014 0.6 35% 33
HDFC Hybrid Debt Fund 1.4 53% 30
HDFC Floating Rate Debt Fund 0.2 40% 113
HDFC Short Term Debt Fund 0.3 50% 82
HDFC Low Duration Fund 0.4 65% 155
HDFC Corporate Bond Fund 0.3 78% 124
HDFC Credit Risk Debt Fund 1.1 80% 149
Liquid Funds
HDFC Liquid Fund 0.2 49% 864
HDFC Money Market Fund 0.2 64% 69
HDFC Overnight Fund 0.1 0% 87
Equity funds
HDFC Capital Builder Value Fund 1.16 31% 43
HDFC Small Cap Fund 0.85 64% 79
HDFC Equity Savings Fund 1.18 47% 51
HDFC Top 200 Fund 1.38 69% 171
HDFC Mid-Cap Opportunities Fund 1.21 39% 209
HDFC Equity Fund 1.27 64% 222
Source: Value Research Online (October 2019)
• HDFC maintains leadership in Debt funds: Ultra short term fund was launched in FY19, and the fund saw huge inflows.
The AMC was able to beat over two-third of active asset managers in the debt asset class through its top 3 funds which
hold an AUM of Rs 428 bn (11% of total assets and 39% of Debt funds).
• HDFC plays a concentrated game, with top 5 funds holding majority of the assets, both in Debt and equity asset class.
• Equity funds have performed well in the last one year where except Mid-cap opportunities fund, both Top 200 and Equity
fund beat close to 70% of its peers.
131
Revenue flow
Market share
Brand
Revenue
Revenue flow
Fee income
Returns
Operating expense ratio
Major product lines
Profitable growth
132
Market share – Banks play a important part
Market share of listed players Players with related banking partner

20% 15
15%
10
10%
%
5
5%
0% 0
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
HDFC Mutual Fund Reliance Mutual Fund HDFC Mutual Fund ICICI Prudential Mutual Fund
Market share – top 5 firms Banks play a major role in driving market share up
• HDFC AMC regained number one position by March
14%
2019.
42% 13% • Firms such as HDFC Mutual Fund, ICICI Mutual Fund and
SBI Mutual Fund have gained significant market share in
the last 10 years.
• Due to very strong corporate flows in the liquid and
12% fixed income funds, HDFC AMC was able to regain
market share.
10%
10% • Brand image helped during periods of volatility in
September and October of 2018.
HDFC Mutual fund ICICI Prudential AMC SBI Mutual Fund
View: AMCs with their banking partner would command a
Reliance AMC Aditya Birla SL AMC Others
premium over competitors as banks are bound to play a
major role in the improving mutual fund penetration.
133
Brand, strength a big driver of asset flows
Flows to liquid & income funds increase (Rs bn) Total flows (Rs bn)
175 600
500
125
400
75
300
25 200
100
(25)
0
(75)
(100)
FY8 FY9 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
(200)
Liquid Income
During market volatility, funds moved to a house with a % of times AUM growth beating industry
strong brand image
80
• HDFC AMC received very good flows in FY18 and FY19
70
through liquid and income funds.
60
• Ultra short term fund was launched in FY19, and it
50
garnered Rs 39.2 bn worth of flows during the year.
40
%
• Thus, two prime reasons – Brand image and flow into

30
new product launched at the right time contributed.
20
• HDFC AMC reported AUM growth above industry for a
10
major portion of the last 13 years.
0
View: Brand plays a major role and HDFC does command a HDFC AMC Reliance SBI ICICI Pru UTI DSP
brand premium over competition. This is expected to
continue in future as well, helping flows. Source: Company report
134
Revenue from operations
Revenue from operations Revenue from operations depends on AUM growth
25 50
• HDFC AMC’s AUM grew at an annualized rate of 18%, in
similar lines to the industry. However, it was able to beat
40
20 industry over 67% of the time.
15
30
• Sensitivity of Revenue growth to AUM is 0.55,
Rs bn
20 interestingly this is lower than NAMs, thus, stability of
%
10 revenue flow is higher for HDFC AMC than NAM due to
10
5
product mix and Total expense ratio.
0
0 (10)
• Portfolio Management and other Advisory fees
constitute only 1.4% of the total revenue from operations.
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20E
View: Strategy to expand beyond T30 will lead to lower
Revenue from operations(Rs bn) Growth ticket size flows, thus operating revenue growth is expected
to be slower than NAM if both the firms’ AUM grew at similar
Source: Company report rates.
AUM growth versus Industry AUM growth line fit plot

70 0.5
60 0.4
50 0.4
Revenue growth
0.3
40
0.3
30 0.2
%
20 0.2
10 0.1
0 0.1
0.0
(10)
(0.1)
(20)
(0.1) 0.0 0.1 0.2 0.3 0.4 0.5 0.6
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 AAUM growth
Industry HDFC AUM growth Revenue growth Predicted Revenue growth
Source: AMFI Source: B&K Research

135
Fee income (TER) has been on the decline
Income and liquid funds (%) Balanced (%)

1.20 2.0
1.8
1.00
1.6
0.80 1.4
0.60 1.2
1.0
0.40
0.8
0.20 0.6
0.4
0.00
0.2
0.0
Income Liquid
Equity and ELSS (%) TER to drop going forward, debt TER holds strong in short
term.
2.0
• Fee income depends on Total Expense ratio.
1.5 • All the major asset classes saw a decline in TER in the
last 10 years.
1.0
• Fund performance is one of the drivers of TER,
extrapolating recent performance => Balanced funds
0.5
and Income funds saw TER increase in FY19, however,
Equity funds saw a dip of 12bps in FY19.
0.0
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 View: HDFC AMC’s profitability will drop structurally, in line
Equity (other than ELSS) Equity - ELSS with the industry. Short term decline is not visible as the
firm has increased TER in Liquid and Fixed Income funds
Source: B&K Research where they are seeing good tractions.
136
Returns – Income funds perform well in recent times
Fixed income – % beaten

1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
HDFC Medium Term HDFC Ultra Short HDFC Banking and HDFC Hybrid Debt HDFC Floating Rate HDFC Short Term HDFC Low Duration HDFC Corporate HDFC Credit Risk
Debt Fund Term Fund PSU Debt Fund-2014 Fund Debt Fund Debt Fund Fund Bond Fund Debt Fund
Expense ratio 1 yr funds beaten 5 yr funds beaten
Source: Value Research online (Oct 2019)
Equity – % beaten Performance acts as boost to flows

1.60
1.40 • 4 key large funds, comprising of 66% of AUM of the Fixed
1.20
1.00
income, have beaten 50% of the competitors.
0.80
0.60 • 5 year performance of Top 3 equity funds, have been
0.40
0.20 average (beating roughly 50% of the funds)
0.00
• Based on performance TER was increased for Fixed
HDFC Mid-Cap
HDFC Equity
HDFC Capital
HDFC Small Cap
HDFC Top 200

Savings Fund
Builder Value
Opportunities
HDFC Equity
income assets vs Equity funds.

Fund
Fund
Fund
Fund
Fund
• View: With performance acting as a leading indicator of

flows, we expect flows to be stronger in fixed income
Expense ratio 1 yr funds beaten 5 yr funds beaten instruments than equities in future as well. Equity flows
will rebound once markets stabilise.
Source: Value Research online (Oct 2019)
137
Operating expense ratio
As a % of operating income Total expenses

40 70
30 60
%
20
50
10
40
%
0
Promotion
Employee
Depreciation
Incentives/Fee/
Others
amortisation
30
Expense
Benefits
Mutual Fund
Brokerage/
expenses
and
20
10
FY08 FY09 FY10 FY11 FY12 FY13 0

FY14 FY15 FY16 FY17 FY18 FY19 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
Expense mix Operating expense ratio on the decline, due to scale

benefit
100
90 • Brokerage proportion of expenses dropped from 58% to
80 33% in the recent four years.
70
60
50
• Promotion as proportion of operating income has been
%
40 rising steadily over the years. This is expected to

30 increase in future as well. However, low versus peers.
20
10 • There was a reclassification in FY16 which led to a jump
0
in brokerage in FY16.
Others • Total expense as a proportion of operating income has
Promotion been on the decline. Decline was dramatic in FY18 and
Brokerage/Incentives/Fee/Mutual Fund expenses FY19 due to strong growth in operating income.
Depreciation and amortisation
Employee Benefits Expense View: The expense ratio is expected to drop further in FY20
since the brokerage will drop due to removal of upfront
commissions and then it is expected to stabilise going forward.
138
Major products’ profitability declined
Equity Total Expense Ratio Debt TER

2.5 1.2
1.0
2.0
0.8
1.5
0.6
1.0
0.4
0.5 0.2
0.0 0.0
HDFC Top 100 Fund HDFC Mid-Cap HDFC Equity Fund HDFC Low Duration Fund HDFC Corporate Bond HDFC Credit Risk Debt
Opportunities Fund Fund Fund
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
TER of Balanced funds Profitability will continue to decline, for the industry and
for HDFC AMC
2.5
• HDFC AMC has been leveraging its brand image by
2.0
increasing TER in HDFC Credit Risk Debt Fund (the largest
1.5 among debt funds of the house). This is a natural
advantage the firm experiences with customers and
1.0
this is definitely a positive move from a shareholders
0.5 angle.
0.0 • All the remaining funds saw structural decline,

HDFC Childrens' Gift Fund HDFC Hybrid Equity Fund HDFC Balanced particularly Equity and Balanced funds saw reduction
Advantage Fund due to increasing size and to play a competitive game.
• View: Profitability of equity funds are bound to decline
structurally in future.
139
Profitable growth
Operating revenue as % of AAUM (bps) The strategy to expand AUM will take a hit on profitability
as a percentage of AUM, however, absolute PAT to grow in
80
a steady manner.
70
• Operating Revenue (OR) as a percentage of AUM has
60
been steady at 70 bps till FY13, post which there was a
50 shift in product mix towards balanced funds. In the
%
40 earlier slides, we saw the TER declining at a faster rate

30 for balanced funds when compared to equity or fixed
income funds. Thus, the operating revenue (bps) dipped
20
to 56bps in FY19.
10
0
• HDFC AMC’s one of the core philosophy is “Consistent
profitable growth”. Their implication of profitability is at
PAT level and not as operating revenue as percentage
Source: Company report of AUM.
o Inherent management strength (CEO since
AUM growth vs Operating revenue (bps) growth inception and Prashant Jain – The only fund
80 manager to manage a mutual fund for 25 years in
India) will attract flows
60
40
o HDFC’s brand recall has been very strong (HDFC is
India’s most valued brand for 5 years in a row)
20
which should help in retail flows
%
0
o HDFC AMCs do not launch lot of new products,
(20) therefore the AUM swells, and SEBI will mandate it to
cut TER. Therefore, this proves to be negative at OR
(40)
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 (bps) but positive from fund management angle.
AUM growth Op revenue bps growth • View: We reiterate the earlier view of Operating revenue
(bps) to structurally drop, but PAT will report growth.
140
Profitability
Profitability PAT (FY19) as % of AUM

0.35 60 0.30
0.30 50
0.25
0.25
40
0.20
0.20
%
30
%
0.15 0.15
20
0.10
0.10
0.05 10
0.05
0.00 0
0.00
PAT (%) of AUM PAT Margin (right) ICICI AMC HDFC AMC Reliance AMC ABSL AMC SBI AMC
The management run an operationally efficient firm. Industry profitability outlook

• In recent years, the PAT margin (PAT divided by 0.80
0.70
Operating Revenue) has shown strong increases as we 0.70 0.62 0.64
0.58 0.56
have see the operating expense ratio decline a couple 0.60
of slides ago. % 0.50

0.40
• HDFC AMC is also able to report a much higher PAT as 0.30
proportion of AUM when comparted to competition due 0.20 0.16 0.18 0.16 0.18
0.15
to better product mix and operating efficiency. 0.10
• View: Though the industry has been reporting a much 0.00

FY15 FY16 FY17 FY18 FY22
lower PAT margin and forecasted to decline, we expect
Operating income as % of AAUM PAT as % of AAUM
HDFC to improve operational efficiency and maintain
PAT margins going forward.
141
Operations
Product mix
SIPs
ETFs
Operations
Distribution strength
Regular vs Direct
Customer mix
Individual customers
Region mix
Products - performance
142
Product mix
Product mix
100
80
60
%
40
20
0
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20E
Income Equity (other than ELSS) Balanced Liquid Gilt Equity - ELSS Gold ETF Other ETF
Source: AMFI
Top 3 funds’ proportion – Debt versus Equity HDFC Brand is shifting the mix towards liquid assets, but,
120
expected to bounce back towards equity.
100 • Concentration risk has come down for equity funds as

Top 3 funds hold only 80% of assets from close to 100%, a
80
few years ago.
60
•
%
Predominant supply of equity flow is through SIPs.

40 Currently HDFC AMC holds only 8.3% market share due
to lower proportion of IFAs and a lower proportion of
20
flows through B30 when compared to NAM. HDFC AMC is
0 strategically focusing to improve this.
• View: Once market settles and the push in B30 starts
Top 3 Debt Funds Top 3 Equity Funds
bearing fruits, HDFC AMC’s market share in SIPs would
improve and help expanding equity mix.
Source: AMFI
143
SIPs
Ticket size (Rs) Proportion of SIP to equity

4,000 14
3,500 12
3,000
10
2,500
8
%
2,000
6
1,500
4
1,000
500 2
0 0
RNAM HDFC Reliance AMC HDFC AMC
SIP count (mn) SIPs are a focus area for the firm.
14 • HDFC AMC has a lower proportion of SIPs (8% vs 13%)

within the equity books, when compared to NAM.
12
• Retail (< 5 lacs) flows constitute only 19% of the total AUM,
10
and this is less than half the contribution of NAM. As
8 close to 100% of the SIPs are being bought by retail
6
customers and since more than 80% of the retail
customers opt the IFA route, HDFC is lagging behind on
4 the SIP story.
2 • View: The IFAs were inclined in selling NAM products
0 earlier as they paid high upfront commissions. With that
FY16 FY17 FY18 FY19 being abolished, HDFC will be on a level playing ground
and the possibility of SIP book expanding is high.
144
ETFs
ETFs mix ETFs split

1.0 12 120
10 100
0.8
8 80
0.6
6 60
%
%
%
0.4
4 40
0.2 20
2
0.0 0 0
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 HDFC AMC Reliance AMC
HDFC AMC RNAM Gold ETF Other ETFs
Growth HDFC AMC has a negative stance towards ETFs

• ETFs had a lacklustre performance in India since
10,000 100
inception. Actively managed large cap funds delivered
80 13% CAGR return over 5 year, while Sensex produced a
8,000
60 6% annualized return over the same period.
6,000 40 • Since the TER is very low, leaving little space for
commissions, distributors (IFAs) have no incentive to
%
20
4,000 distribute this product.
0
2,000 • There are no small cap ETFs in the country, thus
(20) investors will have no exposure to the small cap beta
0 (40) when they are building a passive portfolio.
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
• View: We feel that domestic ETF market will be growing
HDFC ETFs (Rs mn) Growth (right) slow in short term. Since HDFC is domestic focused, as
the domestic investors are looking for high returns, this
Source: Company report positioning will not hurt HDFC AMC.
145
Distribution strength
Distribution mix Direct channel focused firm, while IFAs play second fiddle
50 • IFAs continue to prefer NAM over HDFC AMC due to

better commission structure, incentives and
40
established relationships (among top IFAs).
30
• The AMC’s employees have a target in garnering more
%
20 direct flows as part of their KPIs.

10 • HDFC Bank plays a vital role in bringing both retail and
0
corporate money in.
IFA Banks HDFC Bank National Direct
• View: We expect the direct mix to expand further in the
Distributors
coming year. Thus, the possibility of commissions
FY18 FY19
coming down and employee expense going up
remains.
IFA mix (excluding direct) Banks (excluding direct)

60 33
50 32
40 31
30 30
%
%
20 29
10 28
0 27
HDFC AMC RNAM HDFC AMC RNAM

146
Regular versus Direct
Direct vs Regular (August 2019) Direct will continue to excel for HDFC AMC
120 • HDFC AMC has been predominantly focusing on

100
establishing and strengthening its direct channel.
80 • The proportion of direct flows moving up from 34% to

37% was due to liquid inflows. Since more than 60% of
%
60
income funds are being sourced direct, the mix went up.
40
20 • Management had reiterated that the advisory channels

are recommending direct plans. The shift will help in
0
Income Equity Balanced Exchange Total moving the mix further up.
Traded Fund
• View: The benefit of having a very strong direct channel
Direct Regular
will help in reducing volatility of asset flows due to
changes in IFA commissions.
T30 B30
120
Total
100
Exchange…
80
60 Balanced
%
40
Equity
20
Income
0
Income Equity Balanced Exchange Total
0 20 40 60 80 100 120
Traded Fund %
Direct Regular Direct Regular

147
Customer mix
Customer mix comparison - History Retail AAUM / Total AAUM (FY19)

50
SBI AMC
40
ICICI AMC
30
ABSL AMC
%
20 HDFC AMC
10 Industry
0 Reliance
FY14 FY15 FY16 FY17 FY18 FY19 Aug FY20
0 10 20 30 40 50
Retail Corporate Banks/Fis FIIs/FPIs HNIs
%
Listed firms (YTD - August FY20) HDFC’s brand has a very strong pull among HNIs
50 • Recent market volatility in equity markets and the run
up to elections saw the equity flows slowing down in
40
April and May.
30 • Since IFAs have a very strong retail customer base,
commission cut impacted the flows in FY20.
%
20
• Good inflows from liquid and fixed income funds
10 skewed the customer mix as of August 2019, < 5% of retail
customers contribute to income fund flows.
0
Retail Corporate Banks/Fis FIIs/FPIs HNIs • View: Though optically the mix towards retail seems to
have dipped, the absolute quantum has gone up on a
HDFC AMC Industry RNAM
pro-rata basis. Thus, HDFC will be a preferred brand
among retail customers as well.
148
Individual (Retail + HNIs) customers
Individual assets’ market share is high Retail customers are long term investors
20
• At an industry level, more than 42% of retail customers
hold on to their assets for more than 24m.
15 • HDFC AMC retain leadership (15.4%) in the individual

space. The market share is above the firm’s overall
10 market share implying its brand strength among HNI
%
customers.
5 • Number of individual customers grew at 15% annually
for the past 5 years.
0
• View: The industry is seeing shift towards individual
HDFC MF ICICI Pru MF SBI MF RNAM ABSL MF
investors in terms of percentage of overall AUM.
Individual Assets Overall Therefore, HDFC AMC is expected to benefit the most
due to scale and brand.
No. Individual accounts Individual MAAUM

10 35 65 60
30 50
8
25 60
40
6 20
%
%
%
55 30
4 15
20
10
50
2
5 10
0 0 45 0
No. of Life Individual Accounts (mn) Growth (right) Individual MAAUM% Growth of MAAUM

149
Region mix
B30 Market Share Strategically moving towards B30
20
• SBI MF retains the top spot with respect to B30 market
share due to its bank’s penetration. HDFC AMC and NAM
hold almost similar assets.
15
• Since the direct channel plays a predominant role and
10 since HDFC Bank is urban focused, HDFC AMC has a
%
lower market share in B30 when compared to overall

market share.
5
• The state wise split gives a more granular picture, NAM
0 holds lesser flow in New Delhi and higher exposure to UP
HDFC MF ICICI Pru MF SBI MF RNAM and West Bengal.
B30 Overall • View: The industry has started targeting B30 for growth.
The role of IFAs will determine that. Therefore, HDFC
Source: Company report, AMFI AMCs expansion could be slower than NAM’s in B30.
B15 / *B30 State-wise distribution

20 50
18 40
16 30
14 %
20
12
10
%
10
0
8 Gujarat
New Delhi
Haryana
Maharashtra
West Bengal
Telengana
UP
Karnataka
6
4
2
0
RNAM HDFC MF Total
FY14 FY15 FY16 FY17 FY18 FY19*

150
Products - performance
Debt Excess Return (10 years, annualised) Blend and Liquid fund (10-year CAGR)
20
HDFC Credit Risk Debt Fund
HDFC Corporate Bond Fund
15
HDFC Low Duration Fund
HDFC Short Term Debt Fund
%
10
HDFC Floating Rate Debt Fund
HDFC Hybrid Debt Fund 5
HDFC Banking and PSU Debt…

0
HDFC Ultra Short Term Fund
Hybrid - Equity Balanced Liquid Money Market
HDFC Medium Term Debt Fund
Advantage
0 2 4 6 HDFC RNAM
%
Source: Factsheet, Value Research Source: Factsheets – NAM and HDFCAMC
Equity Excess Return (10 years, annualised) HDFC has been performing very well, particularly in the
debt space
HDFC Equity Fund • The alpha generation has been pretty strong both on
the debt and equity assets classes over a 10-year time
HDFC Mid-Cap Opportunities Fund
frame.
HDFC Top 100 Fund
• The excess returns, have been pretty strong in the small
HDFC Equity Savings Fund (Hybrid) cap and mid cap fund (even after considering the
recent crash). The returns are a testimony to the quality
HDFC Small Cap Fund of the fund management team.
HDFC Capital Builder Value Fund • Reliance and HDFC had comparable performance.
0 2 4 6 8 • View: At an industry level, fund management fee would

% be increased based on performance and flows. Thus,
we could expect a hike in small cap and mid-cap funds
Source: Factsheet, Value Research once the equity markets stabilises.
151
Story and Risks
Story and stumble
Business Strategy
Risks
152
Business strategy
Expanding investor base and retain focus on retail customers will remain the core strategy
• Increase share into B-30: Since the distribution channel has a lower exposure to IFAs in comparison with competition, the
B30 reach has been lower. Management has acknowledged the necessity to expand into B30 and have expanded the
physical footprint from 128 branches (Dec, FY18) to 208 (June, FY20). HDFC AMC intends to increase the number of
employees in the sales and distribution and customer services teams as well.
• Diversify distribution reach: HDFC AMC plans on expanding reach by seeking new opportunities such as relationships
with PSU banks, online platforms and robo-advisors. The objective is to increase customer base. Currently, the live
accounts have increased from 4.9 mn (March, FY13) to 7.6 mn (December, FY18).
• Improve digital presence: The firm plans on exploring data analytics, especially using behavioral analysis tools for
predictive analytics and deploying the same for improved customer servicing and cross/up selling. They make targeted
investments in areas such as mobility platforms, data science and other analytics, cognitive automation and cloud
computing. These investments are expected to decrease costs in efficient distribution, order processing and servicing.
• Enhance product portfolio: HDFC AMC has a knack for creating products and match it with customer requirement. They
introduced HDFC Ultra short term fund and garnered Rs 39 bn worth of flows in FY19. The firm intends to launch an
alternative investment fund (“AIF”) as well. In this regard, they have received SEBI approval to operate as a Category II AIF
and intend to seek SEBI approval to be recognised as a Category III AIF.
• Maintain strong investment performance: HDFC AMC aligns investment strategy with the scheme’s mandate at all
times. It avoids investing in risky assets. This helps in garnering strong flows during periods of volatility. We experienced
such inflows in 4QFY19 and 1QFY20.
153
Risks
Sector specific
Further tightening of Fees and Commission
• AMFI had asked Mutual funds to cap upfront commission at 1% and trail commissions at 1.75% for every year from April 1,
2015. Before this, The AMCs used to give upfront commissions of more than 2%. The move by AMFI is to prevent distributors
from mis-selling schemes and pushing clients to churn their portfolio in an effort to earn higher commissions. The sales
through distributors might be affected. Though, we do not expect any change in commission structure in the short term,
long term tightening cannot be ruled out.
Cap on Mutual Fund Expenses
• SEBI capped Total Expense Ratio to 1.25% for equity funds and other than equity oriented funds shall be a maximum of
1.00%. The TER for index schemes, Exchange Traded Funds (ETFs) and Fund of Funds shall be maximum of 1.00%. This cap
reduces with growing AUM size. Therefore, in the short term, as funds grow in size, the profitability in terms of bps per AUM
will decrease, though PAT would increase. In the long run, the probability of further cuts is real. Thus, we expect a
declining trajectory for PAT (bps as a proportion of AUM).
Firm specific
Weakening relationship with IFAs and other distributors
• When we found the difference between Regular and Direct Total Expense Ratio, HDFC AMC ranked behind Reliance AMC,
Aditya Birla AMC and ICICI Prudential AMC. Currently, 68% of AUM flows through distributors. Given the open architecture,
independent advisors will have greater incentive in selling products of competitors.
Rise of Inflows in ETFs / Passive funds
• International markets saw a very strong move towards ETFs. Indian markets are not mature enough to move towards
ETFs, however, the shift is bound to happen in the long run. HDFC AMC has a very limited exposure to ETFs and since the
probability of international money flowing in through ETFs is higher in the short term, HDFC AMC could be missing out on
the income stream, though a very small quantum.
Concentration of assets
• HDFC AMC is not a firm that releases products quite often. Close to 90% of the total equity-oriented AUM lies in 5 schemes
and 70% of Debt AUM is among the top 5 schemes. Since, the SEBI mandate has a lower TER for large funds, profitability on
AUM would reduce even if PAT increases. 154
Valuation
Key assumptions &

Valuation Outlook
Valuation – Target Price
Financials
155
Key assumptions – HDFC AMC
Decline in Equity related TER Mix shift towards liquid due to “brand play”
2.0 50
1.8 40
1.6
30
1.4
%
20
1.2
10
1.0
0.8 0
Income Equity (other Balanced Liquid Equity - ELSS
FY21E
FY28E
FY11
FY27E
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY23E
FY20E
FY22E
FY24E
FY26E
FY30E
FY25E
FY29E
than ELSS)
Equity Balanced ELSS Mix (FY11) Mix (FY20) Mix (FY30)
Growth to normalise but stay above industry PAT yield to sustain

40 60
AUM - History vs Projections
30 50
20
%
40
10
30
0
Balanced
Total
Income
Gilt
Equity - ELSS
Gold ETF
(other than ELSS)
Liquid
20
Equity
10
0
Past 10 years Next 10 years Operating income to AUM (bps) PAT to AUM (bps)

156
Valuation – Target price = Rs 2,927
FY15 FY16 FY17 FY18 FY19 FY20E FY21E

AUM (Rs bn) 1,656 2,306 2,478 2,920 3,459 3,925 4,558
EPS (Rs) 20 23 26 34 44 57 64
RoE (%) 37 42 36 32 30 28 24
Valuation technique Profitability projections

• Future product mix is being projected along with TER,
60
which drives operating revenues of the firm
55
• There is a proportion of hidden charges – including 50
distribution expenses, trading costs etc. being 45
distributed from TER. We have assumed that proportion 40
to be 32% (history + commission payout). 35
• The PAT (bps of AUM) is an output of cost and revenue 30
assumptions 25
• The Intrinsic value = Book value + Present Value of future 20
FY21E
FY28E
FY27E
FY19
FY23E
FY20E
FY22E
FY24E
FY26E
FY30E
FY25E
FY29E
profits
• Discount rate = Bloomberg discount rate of 11.0%. Operating revenue (bps of AUM) PAT (bps of AUM)
• Terminal growth rate = 5% (higher than NAM, as

historically it has grown at a faster pace) Source: B&K Research
• Based on the above valuation, target price comes to be

WACC
Rs 2927 with a 10% downside from Rs 3,239 (17th February). Sensitivity Analysis
9.0% 10.0% 11.0% 12.0% 13.0%
Risks to valuation: We have not factored in a market crash
during the period of evaluation – expecting a bounce back 3.0% 4147 3297 2703 2273 1951
after crash. We have not factored in a recession or mass 4.0% 4455 3465 2799 2330 1986
job loss – as larger population is self employed, job loss is Terminal
less impactful compared to recession. Since, these are 5.0% 4918 3699 2927 2403 2029
Growth
corner solutions and the probability is low in the near term, 6.0% 5688 4050 3105 2500 2085
we have not factored it in. A lower than expected AUM
growth of ELSS would impact stock price. 7.0% 7229 4636 3373 2637 2160
157
HDFC AMC – Financials
Income Statement Balance Sheet
Year ended 31 Mar (Rs mn) FY19 FY20E FY21E FY22E Year ended 31 Mar (Rs mn) FY19 FY20E FY21E FY22E
- Revenue From Operations 19,152 20,137 22,835 25,815

Total Financial Liabilities 1,131 1,518 1,477 1,375
- Other Income 1,816 1,910 2,085 2,259
Total Non-Financial Liabilities 400 421 464 489
Total income 20,968 22,047 24,921 28,074
-Equity Share Capital 1,063 1,063 1,063 1,063

Growth % 12.1 5.1 13.0 12.7
- Employee Benefits Expense 2,063 2,295 2,559 2,857 -Other Equity 29,644 41,761 55,380 70,661
- Depreciation and amortisation 129 115 118 119

Total Equity 30,707 42,824 56,443 71,724
- Brokerage/Incentives/Fee/
2,400 392 456 526
Mutual Fund expenses
Total Liabilities 32,238 44,763 58,384 73,589
- Promotion 403 675 826 976
-Cash and Cash Equivalents 320 9 10 11
- Others 2,227 2,413 2,804 3221
Total Expense 7,221 5,891 6,762 7,698 -Receivables 1,029 992 1,017 1,012
Growth % (11.0) (18.4) 14.8 13.8 -Investments 29,350 41,466 55,085 70,367
PBT 13,747 16,155 18,158 20,376

-Other Financial Assets 280 295 295 295
Growth % 17.5 12.4 12.2

29.9
Total Financial Assets 30,978 42,762 56,406 71,685
Tax 4,441 4,039 4,540 5,094
Non-Financial Assets 1,260 2,001 1,978 1,904
PAT 9,306 1,2117 13,619 15,282
Growth % 30.8 30.2 12.4 12.2 Total Assets 32,238 44,763 58,384 73,589
158
HDFC AMC – Financials
Key Ratios
As % of AUM (bps) FY19 FY20E FY21E FY22E Product mix - Avg Q4 AUM (%) FY19 FY20E FY21E FY22E
Revenue from operations 55 51 50 49 AUM (Rs bn) 34,588 39,248 45,576 52,605
Fees and Commission Expenses 7 1 1 1

-Equity 47 46 46 45
Employee Benefit Expenses 6 6 6 5

-Income 28 29 28 27
Other expenses 8 8 8 8
-Liquid 25 24 25 27
PBT 4 4 4 4
-Others 1 1 1 1
Tax 1 1 1 1
AUM Growth (%)
PAT 27 31 30 29
-Equity 5 11 15 15
PAT (excluding other income) 22 26 25 25
-Income 47 14 19 18
Profitability ratios
-Liquid 97 11 24 21
Operating margin 66 73 73 73
-Others 14 14 16 16
PAT margin 44 55 55 54
TOTAL AUM 15 13 16 15
RoE 30 28 24 21
Weighted Average TER (%)
Valuations ratios
-Equity 1.2 1.2 1.1 1.1

EPS 44 57 64 72
P/E 35 57 51 45 -Income 0.5 0.5 0.5 0.5
BVPS 145 202 266 338 -Liquid 0.2 0.2 0.2 0.2
P/B 11 16 12 10 -Balanced 1.2 1.2 1.1 1.1
159
Investment Assessment
Investment assessment Key Points
Investment thesis
B&K View
160
Key Points
Pros
• Strong brand image: The strong parentage and brand image of ‘HDFC” lead to the firm reporting superior AUM growth
when compared to industry. The flow into liquid and income funds have been pretty strong in recent months implying
the faith of the corporate customers.
• Ability to capture market at the right time: HDFC AMC was smart enough to introduce HDFC Ultra Short Term Fund in FY19.
It quickly mopped up Rs 39.26 billion by the last quarter. Currently, it holds assets worth Rs 82.04 billion, more than
doubling its AUM in less than a year. This has been the ability to understand the market and introduce products at the
right time.
• Steady growth in direct stream: 77% of equity schemes are being sourced through distributors as of now. This is lower
than industry’s 89%. Though there is no direct impact on profitability due to the method of sourcing, direct schemes gives
the option for the AMC to increase TER since it is below regular schemes. This also increases the hold of the AMC on these
firms.
• Strong performance in debt: Debt instruments have been a stronghold of HDFC AMC. There has been consistent
outperformance versus the benchmark over a long term (10 year) horizon. This performance gives investors confidence
in diverting flow towards HDFC AMC during periods of volatility.
• Individual investors’ growth remains strong: The number of Individual accounts grew at a CAGR of 15% during the last 5
years. These are more sticky and most of the assets are into equity funds. Therefore, the profitability of the firm is higher
than competitors.
• Most profitable firm on PAT to AUM basis: The firm has been able to retain a PAT/AAUM ratio over 30 bps. This is a good 10
bps higher than competition. HDFC AMC is operationally efficient firm and this will help the firm expand margins with
improving scale.
Cons
• Few funds dominate: Top 3 Equity funds contribute 77% of total Equity AUM. Thus, any weakness in performance could give
rise to outflows and redemptions. There were net outflows (marginal) seen in the top 2 funds this fiscal.
161
B&K View
1. Though HDFC AMC had been reporting strong growth in history (20%, 10 year average), the recent rally was majorly
driven by non-equity flows and the base has been built. Therefore, the non-equity flows over the next 10 year horizon is
expected to flow slower than earlier.
2. However, we do expect the equity growth to remain fairly strong and above historical average. Particularly the ELSS AUM
is expected to report an annualized growth of 20% (flows + expected return) due to flow from SIP.
3. We expect HDFC AMC to report a CAGR of 14%, slightly above NAM’s 13% over the next 10 years. We have extrapolated this
assumption to our terminal growth rate as well, where HDFC AMC will be growing at 5% vs NAM’s 4%.
4. On the profitability front, we have assumed a similar trajectory, however, the PAT/AAUM will be roughly 10bps higher than
NAM at 31 bps in FY20 and 30 bps in FY21. Our terminal profitability lies at 28bps, 10 years from now and remains stable
then on. Though, this is an aggressive assumption, we feel that HDFC AMC will be able to maintain profitability due to
mix at those levels.
5. We have valued the firm at 46x FY21 EPS of Rs 64, giving it an 12% premium over NAM. The target price comes out to be Rs
2,927, and we have not factored in the ‘HDFC’ premium through our model.
162
Thank You
B&K Universe Profile - by AMFI Definition
140
116
120
no. of companies
100
74 78
80
60
40
20
0
Top 100 Next 150 Residual
(Large Cap) (Mid Cap) (Small Cap)
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SECTOR UPDATE

Ajox Frederick, CFA, FRM

AUM (Rs trn) Customer mix

Source: AMFI Source: AMFI, Dec 2019

Asset class mix Market share (Total AUM)

Liquid/Money Market GILT Debt Oriented Franklin Templeton Mutual Fund

Equity Oriented Balanced Gold ETF Axis Mutual Fund

Source: AMFI, Dec 2019

• Factors that might affect assumptions

o Sudden spike in unemployment rate will be a major deterrent to SIP flow.

Retail market sizing 06 Sector Introduction 46

Growth Themes 10 Top players and valuation 61

Market Money flow

Wealth and income

• As of now Bank deposits hold a large

Rs 3.9 trn Rs 1.7 trn

Source: RBI (FY2018)

Distribution of households – Mid affluent and Conservatively, there are 70 mn potential

Source: CCI City Income Database; BCG analysis 9

Shift towards mutual funds

Consolidation of Top AMCs

Millennials not wanting to own physical

Mobile and internet penetration helps in

Next big trigger – New Pension Scheme

Income and education contribute to

40 mix of financial assets, the shift of flow from FDs/RDs into

Shift to Financial Assets (% Household Assets)

Gross Financial Savings Savings in physical assets (inc Gold)

Reliance Mutual Fund SBI Mutual Fund

Less than 25 years

0% 10% 20% 30% 40%

Source: U.S. Census Bureau Source: Anarock Property Consultants

products by customers who are below the age of 35. 15

• The large ticket size houses, decreasing returns, job 10

Transactions through mobile (mn) Digital payments continue to surge

• We expect this to go up further in the coming days.

• % share of overall flow through mobiles/digital mode

• B15 cities saw a 16x increase in search volumes for SIP

• B&K’s view: Mobile will be playing a major role in the

2,000 • Thus, mutual funds are bound to be part of every

Income continues to be a driver of positive

Source: International Journal of Research and Review

Unemployment and salary

Structural dip in Total Expense

Unsecured loans (Rs trn) Credit card usage on the rise

transactions nudges the customer to spend more than

Source: Strategic insight – Simfund, AMFI, BCG analysis Source: AMFI

Retail investors’ average ticket size stabilises

Equity mix to normalize

Source: CMIE Source: IIM Ahmedabad Placement Reports

Direct – TER % (history) Distribution commission remained strong (%)

Source: Reliance AMC DRHP

0.6 • Distribution commission (TER of Regular – Direct) was on

Deposits decline as % of household savings • FD profiling

AUM (Mutual Funds) Life insurance (Private) No. in '000s

Source: AMFI and IRDA Source: IRDA and AMFI

Household savings vs Individual

Equity market vs individual AUM

Financial savings rate

Equity flow driver

Debt AUM vs corporate savings

Debt AUM vs interest rate