Asset Management Companies: Play On The Financialization Of Investments

Published by Sharekhan Education | March 27, 2023

Amit Pathak | Sharekhan Education

Introduction:

Asset management companies (AMCs) invest pooled capital from clients into a range of assets and securities. AMCs include mutual fund companies, portfolio management service (PMS) providers, alternative investment funds (AIF), and real estate investment trusts (REITs). Mutual funds offer Equity, Debt, and Hybrid Funds. PMS providers manage customized portfolios for high-net-worth individuals and AIFs offer alternative investment options like venture capital, angel funds, social venture funds, infrastructure funds, private equity, debt funds, fund of funds, private investment in public equity funds, and hedge funds. REITs manage investment trusts that own income-generating real estate assets.  SEBI, the capital market regulator, regulates AMCs in India.

Growth Prospects:

The AMC sector in India has grown at 20% CAGR over FY 15-22. Still, the sector is materially underpenetrated in India vis-a-vis global peers. The assets under management (AUM) to GDP ratio is 16% for India compared to the world average of 63% and 140% for the USA. 41% of household savings are invested in financial assets in India, while MF allocation is a mere ~2%. India has more than 435 million PAN cards, while MF’s unique investor base is only 34 million. Mutual funds are gradually gaining acceptance as a preferred investment vehicle. The sector has tremendous growth potential, considering India remains an untapped market.

According to CRISIL, the sector is expected to grow at a CAGR of 13-15% over FY22-26E driven by economic recovery propelling fund flows, growing investor base, and higher disposable income levels. The structural growth drivers for the sector are increasing preference for financial assets within household savings, increasing investor awareness, the rising risk appetite of households, democratization of access to information, digitization facilitating ease of investing, and expanding distribution of AMCs in smaller towns and cities across India.

About HDFC AMC:

Let us discuss HDFC AMC in this space. The company is the third largest AMC in India with an AUM of Rs. 4,481 billion as on 31st December 2022.   Its AUM is estimated to grow at a 14% CAGR over the medium term. It has around 75,000 empaneled distribution partners through 228 branches spread across more than 200 cities in India. Its competitive edge lies in strong parentage & brand name, continuous focus on equity-oriented funds, and expansive distribution network. The estimate suggests that distribution through HDFC Bank will significantly increase over the medium term following the merger of the bank with HDFC. The estimates suggest that the income and PAT of the AMC will range between 35-36 bps and 26-27 bps of AUM over FY23-25E.

Source – Company Presentations and Consensus Analyst Estimates.

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