HDFC AMC IPO kicks off today; subscribe for listing and long-term gains, say brokerages

HDFC AMC IPO offers up to 2.54 crore equity shares of the fund house through an offer for sale of 85.92 lakh shares (4.08 per cent stake) by HDFC and up to 1.68 crore shares (7.95 per cent) by Standard Life.

HDFC AMC IPO is priced at 10.8x its FY18 book value. Image source: Reuters

HDFC Asset Management Company, the country's second largest mutual fund firm, kicked off its initial public offering (IPO) on Wednesday to raise Rs 2,800 crore at the upper end of the price band. The price band for the IPO has been fixed at Rs 1,095-1,100 per equity share. Most brokerages are recommending 'subscribe' on the issue.

The IPO offers up to 2.54 crore equity shares of the fund house through an offer for sale of 85.92 lakh shares (4.08 per cent stake) by HDFC and up to 1.68 crore shares (7.95 per cent) by Standard Life.

HDFC AMC, which has a total asset under management of over Rs 3 lakh crore as of March-end, is the country's second largest fund house after ICICI Prudential AMC that has an asset base of Rs 3.06 lakh crore during the same period.
It will become the second AMC to hit the markets after Reliance Nippon Life AMC, which had raised Rs 1,542 crore last year.

On Tuesday, the company garnered Rs 732 from anchor investors.

The HDFC AMC IPO will close on Friday.

Here is what brokerages recommend on the issue:

Centrum Broking

At higher end of the price band of Rs 1,100, issue is priced at 10.8x its FY18 book value. While this is higher compared to its only listed peer – Reliance Nippon Life AMC (RNL AMC) which is trading at 5.8x; the high RoE of 33.4% vs. 22.8% of RNL AMC, 19% PAT CAGR, highest market share and higher component of equity in aggregate AUM, justify the valuation. Given the healthy financials, strong parentage, vast distribution network along with operating efficiencies (cost-income ratio at 42%), the company is likely to retain its leadership position and yield higher profits. Hence, we suggest this IPO to investors with “High Conviction Subscribe” rating.

Geojit Financial Services

At upper price band of Rs 1,100 the issue is valued at FY18 P/E of 32x and 8% of AUM which we believe is justified on account of favourable view on HDFC’s brand, higher mix of high-margin equity assets than the industry average, consistent return on equity (RoE) of 40% in the recent past work in the company’s favour. We recommend “Subscribe” to the issue with a long-term perspective.

Angel Broking

At the upper end of the IPO price band, it is offered at 32x its FY2018 EPS and 11x its FY2018 book value, demanding Rs 23,318 crore market cap, which is 7.6 per cent of the MF AUM (Rs 3,06,841 crore for the month of June 2018). Considering that HDFC AMC is the second largest AMC coupled with huge potential of MF industry growth, strong return ratios, asset light business, higher dividend payout ratio and track record of superior investment performance, we are positive on this IPO and rate it as SUBSCRIBE.

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Sharekhan

At a price band of Rs 1,095-1,100 per share, the issue is priced at 31.4x FY18 EPS. It has very healthy RoNW of 33.4 per cent, which is among the highest in the industry. Premium valuations are justified by healthy RoNW, the AMC’s leadership position, reputed pedigree and structural growth trend given the financialisation of household savings in India.

Antique Stock Broking highlights risks involved

High level of cyclicality: Weak capital markets result in slowdown in inflows and markdowns in AUM, which in turn lead to much lower fees in a downcycle. In the longer term, the competition is from competing asset classes like real estate and gold, which have cycles of their own.

Continuous regulatory pressure to reduce fees: The Indian regulator has been very proactive in coaxing AMCs to reduce their expense ratios. in the past few years, the regulator has been tightening screws around the concessions, distributor commissions, scheme nuances, etc.

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