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Does HDFC AMC deserve High Valuation ? Review

April 13, 2019

HDFC Asset Management Company – HDFC AMC has a strong brand pull (benefitting from parentage), relatively higher proportion of equity assets and continued delivery on fund performance make it one of the best plays to capitalize on the financial savings opportunity in the country.

Big Opportunity
MF AUM is just c.12% of GDP (vs global average of 62%). Long term AUM growth rates have been healthy (18% CAGR over last 19 years) and we see them sustaining in the future. Importantly, share of individual investors in the AUM has been inching up and the uptick in “sticky retail flows’ should shield the industry from cyclical whipsaws in the market. HDFCAMC is one of our preferred plays on the financial savings opportunity.

Brokerage Views on HDFC Asset Management Company

Morgan Stanley said,

We value HDFC AMC stock using a base case target P/E multiple and cross-check our valuation with a discounted cash flow model. For our DCF, we use a cost of equity of 13.6%, computed using a beta of 1.1. We value the business over three phases – a 10-year high-growth period, a 10-year maturity period, and a terminal period. We assume a terminal growth rate of 6%, similar to that for other financials in our coverage. Our base case valuation of Rs1,765 is our price target.

Citi said,

Our target price of Rs1,850 is based on two-stage Gordon Growth Model, which assumes a high-growth period of 15 years, stage-1 growth of 20% (5% in steady state), and dividend payout of 50% (70% in steady state). At our target price, the shares trade at 42x Sep 2019E P/E, 39x FY20E P/E and 13.7% / 9.6% of FY18 / FY20E AuM.

JM Financial analysts Sameer Bhise, Karan Jain and Akshay Jain in a report said,

We expect HDFCAMC to deliver 17% earnings CAGR over FY18-21E despite a reset of industry profitability in FY20 driven by new regulations. Structurally, we expect this company to deliver 20%+ earnings growth over a cycle. We value HDFCAMC at 34 FY21E P/E resulting into a target price of INR 1,850 (+21% upside). Initiate with BUY.

Our Take: Valuations appear stretched but then there is tremendous market that need to be captured. HDFC is the Strongest Brand in Indian Financial Industry. We have got allotment in IPO and are HOLDING the same with Long Term View. Please consult your Financial Advisor & think before making your move.

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