HDFC Asset Management Co. Ltd (HDFC AMC) saw its actively managed equity assets under management (AUM) benefiting from significant mark-to-market gains, which far outpaced fresh flows, contributing to a strong performance in the December quarter (Q3FY25). Actively managed equity AUM is crucial for an AMC, as it generates the highest yield.
For HDFC AMC, the yield on overall equity AUM stood at 58 basis points (bps) in Q3, notably higher than the 28 bps from debt and 12 bps from liquid funds. However, the closing equity AUM dropped quarter-on-quarter for the first time in at least seven quarters, falling to ₹4.79 trillion amid the broad sell-off in equity markets. Sure, average actively managed equity AUM increased, but that was because the markets started falling in the later part of Q3.
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Although the sequential decline in closing actively managed equity AUM was a modest 2%, if the markets continue to decline as they have in the first two weeks of the current month, Q4 could see a larger drop in both closing and average figures. This would, of course, have an impact on Q4 earnings, as lower AUM leads to lower revenue. Additionally, there could be further repercussions from mark-to-market losses on the AMC’s own investments in mutual funds, which are required under the Securities and Exchange Board of India’s ‘skin in the game’ rule.
The company’s other income fell 46% sequentially to ₹93 crore in the December-ended quarter. Its investments, amounting to ₹7,617 crore, are primarily in mutual funds. The value of investments in equity mutual funds dropped from ₹621 crore to ₹606 crore, signalling a mark-to-market loss, although the exact quantum cannot be determined as the data on fresh equity mutual fund investments during the quarter is unavailable.
Despite these challenges, HDFC AMC’s core operating revenue in Q3 remained resilient.
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Revenue from operations grew 5% sequentially to ₹934 crore, driven by the average actively managed equity AUM, which increased by 2% quarter-on-quarter to ₹4.78 trillion. Total expenses, including depreciation, fell 6% sequentially to ₹187 crore, primarily due to a 14% drop in other expenses. The reduction in other expenses was partly due to fewer new fund offers launched during the quarter, which typically incur significant marketing and administrative costs. As a result, operating profit from the core asset management business rose 9% quarter-on-quarter to ₹747 crore. However, pre-tax earnings slipped by 2%, as the company faced a hit to other income.
Looking ahead, the potential for growth remains substantial.
There are currently only 53 million unique mutual fund investors in India, a country with a population of 1.4 billion. This is up from 23 million at the end of March 2021, meaning that more than 50% of today’s investors have never experienced a bear market.
It will be important to track their behaviour if the market continues to slide, particularly in terms of whether they maintain their equity investments. While a temporary downturn in equities may not significantly impact HDFC AMC, prolonged market weakness could pose greater challenges. A clearer picture may emerge after Q4FY25.
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Shares of HDFC AMC are down about 4% so far in 2025. Despite the vagaries of market fluctuations, the company remains well-positioned to benefit from the growing equity culture in India. Its valuation appears reasonable, with the stock trading at a price-to-earnings multiple of 27x FY27 estimates, according to Nuvama Institutional Equities.
