AMC Sector - HDFC Sec-201901111558114702001 PDF

INITIATING COVERAGE 31 DEC 2018
Asset management companies

Financial summary table
Miles to go…
RNAMC With a total penetration level of just 11% (equity 4%, monthly pace of Rs 76bn. Recent market uncertainties
(Rs bn) FY18 FY19E FY20E FY21E debt 7%), we believe that India’s mutual fund industry (global and local) have hit stock prices. We believe CMPs
Revenues 15.9 15.9 14.8 16.4
remains under-penetrated. We expect financialisation of provide attractive entry points for investors.
Growth (%) 21.3 0.0 -6.8 11.3
EBITDA 5.3 5.5 6.8 8.3 savings to grow at 9.7% CAGR over FY18-30E. This
EBITDA margin provides Asset Management Cos (AMCs) and investors a In this report
33.4 34.6 45.8 50.5
(%)
structural growth opportunity. Industry dive + two leading Indian AMCs
Growth (%) 13.7 3.3 23.3 22.9
PAT 5.2 4.8 5.7 6.9 Interestingly, AMCs’ earnings depend more on their
PAT growth  RNAM: We appreciate Reliance Nippon Life Asset
29.6 -8.4 18.6 20.9 stock of assets than from flows (which can be cyclical).
(%) Management’s (RNAM) focus on building granular,
EV/EBITDA (x) 9.3 8.1 8.0 7.0 AMCs deliver high return ratios and do not consume stickier retail assets (34% of AUM, best in the
P/E (x) 18.7 20.6 17.3 14.3 incremental capital beyond a critical mass. RoICs for industry). We also expect RNAM to win offshore
RoE (%) 25.1 20.4 22.6 24.9
RNAMC/HDFCAMC were a staggering 84.7/330.6% in investment mandates through Nippon Life’s (AUM
HDFC AMC FY18. Distribution, brand and long term performance US$529bn) global reach. FY19E-21E profit growth can
(Rs bn) FY18 FY19E FY20E FY21E serve as key entry barriers. These factors have led to hit 19.8% p.a. as some discretionary overheads fall off
Revenues 17.6 18.9 19.1 21.4 India’s top five AMCs grabbing as much as 56% market and scale benefits kick in. We initiate coverage on
Growth (%) 18.9 7.3 1.0 12.1
share. Their revenue/profit share is even higher at RNAM with a BUY and a TP of Rs 227/sh (+42.0%).
EBITDA 9.7 11.8 13.1 15.4
EBITDA margin 57.7/69.9%. Our TP implies a FY20/21E P/E of 24.8/20.5x.
54.9 62.6 68.9 72.1
(%)
Growth (%) 37.3 22.3 11.2 17.3 Several tailwinds for AMCs fired AUM growth over FY16-  HDFCAMC: We recently met with the management of
PAT 7.2 8.6 10.0 11.7 18. The industry has recently run into regulatory HDFC Asset Management Company (HDFCAMC).
PAT growth upheaval. We have attempted to de-mystify the impact Brand equity, distribution strength (17% HNI assets,
31.1 19.3 15.6 17.2
(%) 13% retail assets) and equity leadership position (15%
EV/EBITDA (x) 31.3 25.0 22.1 18.4 of recent changes like re-categorisation of schemes, no
market share) are key positives here. This is despite
P/E (x) 44.1 37.4 32.4 27.6 up-fronting of commissions and reductions in Total
relatively weak performance in recent times (only
RoE (%) 40.3 34.3 32.0 31.9 Expense Ratio (TER). The impact of these changes on
52% of rated AUMs are 4-star or higher). Our fair
Madhukar Ladha AMCs will become clear over 1-2 quarters. We expect value of the stock is Rs 1,708, implying a FY20/21E
madhukar.ladha@hdfcsec.com 75-85% pass through of the reduction in TERs to P/E of 36.6/31.3x.
+91-22-6171-7323 distributors by the larger AMCs.
 Key risks: Macro weakness in equity markets,
Lastly, despite 44.7% YTD decline in equity inflows from disproportionate rise in alternatives, increased sales
Keshav Binani
keshav.binani@hdfcsec.com the cyclical highs of FY18 (net equity inflows of Rs 2.6tn, of ULIPs by distributors, inability to pass on the
+91-22-6171-7325 +154% YoY), SIP inflows have continued at an average proposed reduction in TERs to distributors.
HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters
ASSET MANAGEMENT COMPANIES : INITIATING COVERAGE
Contents
Industry .................................................................................................................................................................. 3
India is a savings driven economy .......................................................................................................................... 5
Evolution of Mutual funds in India ........................................................................................................................ 7
MF Industry Overview ............................................................................................................................................ 8
Types of Mutual Fund investors ........................................................................................................................... 18
Distribution Mix .................................................................................................................................................... 22
SIPs ....................................................................................................................................................................... 24
Fund Performances .............................................................................................................................................. 26
Asset managers vs. life insurers ........................................................................................................................... 28
Rise of ETFs ........................................................................................................................................................... 30
Recent Regulatory changes .................................................................................................................................. 32
Industry Valuations .............................................................................................................................................. 39
Regulatory structure for mutual funds in India ................................................................................................... 41
Appendix: Comparison of top 5 asset management companies in India ............................................................ 42
Companies
HDFC AMC ............................................................................................................................................................. 48
RNAMC .................................................................................................................................................................. 71
Page | 2
Industry
Global average AUM to GDP
Penetration
and average equity AUM to
GDP ratio is 62% and 35 %  With a penetration of just 11% of GDP the Indian  Macro conditions will impose short term cyclicality on
respectively. Mutual funds industry has multi-year headroom to flows, but we believe that this opportunity is more
grow. Penetration is extremely low, even compared structural than cyclical.
to developing nations like South Africa (49%) and
Brazil (59%).  The total AUM of the Indian Mutual Fund industry
has grown at ~20% CAGR over FY09-18.
 Additionally, unlike more developed markets (where
generally equity assets/GDP is higher than  There is also huge scope for fixed income funds to
debt/GDP), for India equity assets are 4% of GDP. This absorb part of the bank deposit base as fixed income
is lower than debt assets which are at 6% of GDP. AUM (including liquid) is only 20.6% of bank deposits
(FY18). This has increased from 6% in FY13.
Industry AUM has grown 6x in last 10 years MF AUM as a % of GDP

Total AUM(bn) 120 %
30,000
24,031
101
100
21,360
25,000
76
17,546
80
65 62
Industry AUM has grown 3x 20,000 59 57
54
12,328
60 49
from FY14 as net inflows
10,828
15,000
picked up meaningfully.
8,252
40 30 26
7,014
6,140
5,923
5,872
5,499
10,000
4,173
3,236
20 11 11
1,827
1,505
1,400
1,092
5,000
840
765
631
0
-
Brazil
Japan
UK
World
Germany
US
India
Canada
France
S Africa
China
Korea
Nov-18
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Source: HDFC sec Inst Research Source: HDFC sec Inst Research
Page | 3
Developed nations generally have higher Equity AUM/GDP

% Equity AUM to GDP Debt AUM to GDP
MF AUM is only 20.6% of total
70
bank deposits.
60
50
40
30
20
10
0
Brazil
Japan
UK
World
Germany
US
India
Canada
France
S Africa
China
Korea
Source: HDFC sec Inst Research
MFs are underpenetrated in India

Debt AUM(Rs tn) Mutual Fund AUM(Rs tn) Bank deposits(Rs tn)
Debt AUM as % of Bank deposits - RHS MF AUM as % of Bank deposits - RHS
120.0 25.0
104.0
100.0 91.9 20.6 20.0
80.0 67.2 15.0
60.0 13.4
12.0
10.4 10.2 10.2 10.0
40.0
21.4
20.0 12.3 5.0
8.1 7.0 9.4 10.6
- -
FY13 FY16 FY18
Note : Debt AUM includes liquid AUM Source: HDFC AMC IP, HDFC sec Inst Research
Page | 4
India is a savings driven economy

Traditionally large part of Total industry AUMs can grow 15-20% over  RBI data also indicates that households are
financial savings were FY18-30E channelising higher percentages of their savings to
financial assets.
invested in bank deposits.  Gross savings rate and household savings rate remain
However share of shares and high despite low per capita income  In the near term the AMC industry will encounter
debentures have increased in cycles, but the bigger picture of low penetration, high
 Like many other Asian countries, India continues to
savings rate and the decisive move towards financial
FY18. be savings driven with net financial savings of the
assets will ensure realisation of a large structural
household sector at 6.5-8.0% of gross national
growth opportunity.
disposable income since FY12.
 We believe that sluggish macros and uncertain equity
 As a percentage of GDP household savings have
inflows make for an interesting cyclical opportunity
declined from ~24% in FY12 to ~20% in FY15 to ~16%
Total industry AUMs can grow for investors to enter the sector. This weakness
in FY18.
15-20% over FY18-30E. provides a good entry point in a structurally growing
 Despite this decline, household investments in market, where investors have just started allocating
financial assets have grown at 9.6% CAGR from FY12- higher percentages of savings to financial assets.
18 rising from 31% to 42% in the mix.
 Driven by growth in financial savings and investment
 Over FY18-30E we expect a modest 9.7% CAGR in income total industry assets can grow 15-20%pa until
financial savings. FY30E and beyond.
Financial Savings to Grow at a Fast Clip
CAGR
FY09 FY12 FY15 FY18 FY19E FY20E FY21E FY25E FY30E FY12- FY18-
18 30E
India nominal GDP current
54,592 87,363 124,680 167,517 185,944 206,398 229,101 341,568 550,098 11.5% 10.4%
prices (Rs bn)
Growth % 15.7% 11.0% 9.8% 11.0% 11.0% 11.0% 10.5% 10.0%
Household savings (as % of
24% 24% 20% 16% 16% 15% 15% 14% 13%
GDP)
Financial Savings as (% of
43% 31% 36% 42% 40% 41% 43% 45% 48%
Household savings)
Financial savings (Rs bn) 5,634 6,500 8,977 11,257 11,677 13,032 14,876 21,519 34,326 9.6% 9.7%
Growth (%) -12.9% 11.0% 9.8% 3.7% 11.6% 14.1% 9.7% 9.8%
Source: World Bank, RBI
Page | 5
Financial Savings of the Household Sector

(%) FY12 FY13 FY14 FY15 FY16 FY17 FY18
Gross Financial Savings 10.4 10.5 10.4 9.9 10.8 9.1 11.1
Financial Liabilities 3.2 3.2 3.1 3 2.8 2.4 4
Net Financial Savings 7.2 7.3 7.3 6.9 8 6.7 7.1
Note: These are as a % of Gross National Disposable Income (GNDI)
Source: CSO, RBI
Break up of Gross Financial Savings (%)

FY12 FY13 FY14 FY15 FY16 FY17 FY18
Currency 1.2 1.1 0.9 1 1.4 -2 2.8
Deposits 6 6 5.8 4.8 4.6 6.3 2.9
Shares and Debentures 0.2 0.2 0.2 0.2 0.3 0.2 0.9
Claims on Government -0.2 -0.1 0.2 0 0.5 0.4 0
Insurance Funds 2.2 1.8 1.8 2.4 1.9 2.3 1.9
Provident & Pension Funds 1.1 1.5 1.5 1.5 2.1 2 2.1
Total 10.5 10.5 10.4 9.9 10.8 9.2 10.6
Note: These are as a % of Gross National Disposable Income (GNDI)
Source: CSO, RBI
Page | 6
Evolution of Mutual funds in India

The mutual fund industry in India started in 1963 with the funds. At the end of 1993, the mutual fund industry
formation of Unit Trust of India, at the initiative of the had assets under management of Rs 0.5tn.
Government of India and Reserve Bank of India. The
history of mutual funds in India can be broadly divided Third Phase : 1993-2003 (Entry of private sector
into four distinct phases. funds)
 With the entry of private sector funds in 1993, a new
First Phase : 1964-1987 (Unit Trust of India – era started. First mutual fund regulations came into
single public sector monopoly) effect from 1993, under which all mutual funds,
We believe asset except for UTI were to be registered and governed.
management businesses offer  Unit Trust of India (UTI) was established in 1963 and
Many foreign asset management companies set up
long term compounding was set up by the Reserve Bank of India. The first
mutual funds in India and the industry witnessed
scheme launched by UTI was Unit Scheme 1964. At
opportunity, although several mergers and acquisitions. As at the end of
the end of 1988 UTI had Rs 67bn of assets under
cyclicality is a risk. January 2003, there were 33 mutual funds with total
management.
assets of Rs 1.2tn. UTI continued to be the leader
with Rs 445bn of assets under management.
Second Phase : 1987-1993 (Entry of public
sector mutual funds) Fourth Phase : since February 2003 (Growth
and expansion)
 1987 marked the entry of non-UTI, public sector
mutual funds set up by public sector banks, Life  Post the consolidation and with a bull run in equity
Insurance Corporation of India (LIC) and General markets people started to consider mutual funds as a
Insurance Corporation of India (GIC). SBI Mutual Fund savings option. Over time a number of new asset
was the first non-UTI Mutual Fund established in June managers have set shop taking the total number of
1987 followed by other bank sponsored mutual mutual funds to 42.
Page | 7
MF Industry Overview
 Indian Mutual Fund industry has a total of 41 AMCs MF industry profitability
Top 5 asset managers derive comprising private sector companies, joint ventures  Industry profitability is further skewed in favor of top
significantly higher with foreign entities and NBFC/bank sponsored 5 AMCs as 71.4% of industry profit pool is earned by
percentage of revenues and AMCs. them.
earnings of the industry.  The industry has registered a more than 6 fold
increase in AUMs over the last 10 years as mutual
 HDFC MF is the most profitable AMC followed by
ICICI Pru MF.
funds emerged as one of the preferred investment
choices for retail investors. PAT Share : FY18
 The Indian mutual fund industry is concentrated, with
the top 10 AMCs having ~81% AUM share, which has
increased from 75% in FY14.
 Total industry revenues and PAT have grown at an
impressive rate of 27.4% and 28.1% respectively
during FY14-18.
 Bulk of Industry assets come from T-30 cities (85% of
total AUM). Share of T30 cities in Individual AUM is at
78% as of Nov-18. This highlights the geographical
penetration opportunity of B-30 cities.
 In the past, there has been some consolidation within
the industry. Foreign players such as Goldman Sachs Source: Respective company financials, HDFC sec Inst Research
and JP Morgan have sold their AMC businesses to
Indian companies.
Revenue Share : FY18
ICICI Pru
AMC
13.6
Others HDFC AMC

42.3 13.4
RNAMC
12.5
ABSL AMC SBI MF
9.0 9.1
Source: Respective Company, HDFC sec Inst Research

Page | 8
Industry Financials
Particulars FY14 FY15 FY16 FY17 FY18 CAGR 14-18
Total income (Rs bn) 53 66 87 107 139 27.4
FY18 industry revenues at Rs
Growth YoY (%) 21.0 25.3 31.5 22.9 30.3
139bn grew at FY14-18 CAGR PAT (Rs bn) 13 15 21 26 36 28.1
of 27.4% while earnings at Rs Growth YoY (%) 44.0 15.6 35.5 25.0 37.3
36bn grew at 28.1% FY14-18 AUM (Rs bn) 8,220 10,803 12,309 17,529 21,346 26.9
CAGR. Growth YoY (%) 17.5 31.4 13.9 42.4 21.8
Revenue Yield (bps) 64 61 71 61 65

PAT yield (bps) 16 14 17 15 17
Source: Value Research, HDFC sec Inst Research
Top 10 AMCs Revenues and PAT for FY18

Particulars (Rs mn) Revenue PAT PAT Margin (%)
ICICI Prudential 18,970 6,260 33.0
HDFC 18,670 7,220 38.7
Reliance Nippon 17,460 5,050 28.9
SBI 12,720 3,310 26.0
Aditya Birla Sun Life 12,610 3,220 25.5
UTI 10,580 3,760 35.5
Axis 7,530 - -
DSP Mutual Fund 7,520 2,010 26.7
Motilal Oswal 6,680 1,310 19.6
Kotak Mahindra 5,190 810 15.6
Note: Data pertains to FY18
AUM shares
 Large sized AMCs are gaining AUM share but losing  Kotak and ABSL AMC have gained 262 and 236bps
equity market share. equity AUM share, while HDFC and RNAM AMC have
lost 534 and 369 bps respectively.
 SBI and Kotak MF have gained maximum AUM share
of 221 and 175 bps respectively, while UTI (149bps)  Bank backed AMCs AUM share has increased from
and Reliance MF(80bps) have lost the most 37.4% in FY04 to 49.2% as of Sep18.
 Bank/financial institution group led AMCs have taken
the top position in the industry at the expense of
corporate group led AMCs.
Page | 9
Large sized gaining AUM share AMCs AUM share: Sept-18

Share of top 5 (%) Share of next 5 (%) Others (%) Franklin Axis AMC ICICI Pru
DSP
Templeton 3.60% AMC
100.0 3.93%
AMC 12.76%
Share of equity AUM in total 90.0 22.3 21.2 20.5 19.2 19.2 19.2 4.54%
AUM has consistently 80.0
70.0 23.9 23.7
improved since FY14. 24.0 23.4 23.9 24.4 Kotak
60.0 Mahindra HDFC AMC
50.0 AMC 12.60%
40.0 5.53%
30.0 53.7 55.4 55.6 57.0 57.1 56.3 UTI AMC
20.0 6.83%
10.0
- RNAMC ABSL AMC
10.07% 10.46%
FY14
FY15
FY16
FY17
FY18
Sep-18
SBI MF
10.44%
Source: Company AUM disclosures, HDFC sec Inst Research Note: Based on MAAUM as of Sep-18
Share of top 10 AMCs have Source: Respective company AUM disclosures, HDFC sec Inst
Research
increased from 77.7% in FY14
to 80.7% as of Oct18. Bank led AMCs have gained AUM share
Bank led AMC's Share (%) Other AMCs Share (%)
100.0
90.0
80.0
55.7 53.2 51.0 50.8
70.0 62.6 65.5 61.7
60.0
50.0
40.0
30.0
44.3 46.8 49.0 49.2
20.0 37.4 34.5 38.3
10.0
0.0
FY04
FY07
FY10
FY13
FY16
FY18
Sep-18
Source: Respective company AUM disclosures, HDFC sec Inst

Research
Page | 10
Market share change (FY14-18) Equity AUM Market share change (FY15-18)
Large sized AMCs are gaining bps 400 bps
250 262
total AUM share but losing 221 236
200 175 185
equity AUM share. 157 146 200 145
150
89
100 55 -
50 21
- (200) (128)
(50)
(100) (51) (400)
(80) (369)
(150)
(149) (600) (524)
(200)
Birla
Franklin
ICICI
RNAM
HDFC
SBI
Motilal
RNAM
Kotak
HDFC
Birla
UTI
DSP
Kotak
SBI
ICICI
Axis
Source: Respective company AUM disclosures, HDFC sec Inst Source: Respective company AUM disclosures, HDFC sec Inst
Research Research
Share of equity has consistently increased from FY14

Kotak and Birla MF have Equity(including balanced) (Rs bn) - LHS Total AUM (Rs bn) - LHS Equity as % of AUM - RHS
gained most equity AUM 25,000 62 70
share. 55 60
20,000
42 42 43 50
40 40
15,000 38 35 36 36
34 34 35 40
9,489
9,219
27 29 27
Share of equity within the mix 26 25 30
6,283
10,000 21
leads profitability as net
4,255
3,715
20
2,311
2,154
2,138
2,079
1,983
1,888
yields are highest in equity
1,374
1,189
5,000
736
10
476
388
348
316
300
295
schemes.
- 0
Nov-18
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Source: AMFI, HDFC sec Inst Research
Page | 11
Equity drives profitability

FY17 FY18
Fund house
Share of Equity AUM (%) PAT as a % of AAUM Share of Equity AUM (%) PAT as a % of AAUM
Motilal Oswal AMC 95.3 0.31 93.8 0.43
Profits are most correlated to
HDFC AMC 40.2 0.25 50.4 0.26
Equity assets percentage in
ICICI Prudential AMC 37.2 0.22 45.8 0.22
total assets SBI MF 29.9 0.16 33.8 0.17
RNAMC 27.4 0.21 35.4 0.22
ABSL AMC 26.8 0.13 34.8 0.14
Source: Respective company AUM disclosures, HDFC sec Inst Research
Correlation of Equity mix and Profitability : FY18

PAT as % of AAUM Linear (PAT as % of AAUM)
0.5 Motilal Oswal AMC

y = 0.0043x + 0.0289
0.43
0.4 R² = 0.9377
HDFC MF
PAT as % of AAUM
0.3 Reliance MF 0.26

0.22
0.2 SBI MF ICICI MF
0.17 ABSL AMC 0.22
0.1
0.14
0
20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0 100.0
Share of equity (%)
Page | 12
Revenue yields: FY18 Core Profitability : FY18

bps Revenue/AAuM NOPAT/AAuM
bps
Motilal Oswal AMC has 152 60
160
49
highest revenue yields as it 140 50
manages only equity assets. 120 40
100
Share of high yielding 80 67 64 63
30
23
62 20
alternates is high in AUM mix 60
54 20 16 15 13
for Motilal. 40 10
20
0
0
SBI
RNAMC
HDFC
Birla
I-Pru
Motilal
HDFC
Birla
I-Pru
SBI
RNAMC
Motilal
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
Equity AUM share : FY18 Return on core capital employed : FY18

Equity AUM share (%) % ROIC (%)
600
97%
100%
478
500
80%
400
331
60%
47% 45% 300
39% 36%
40% 32% 197
200
118
20% 85
100
0%
-
HDFC
Birla
SBI
Motilal
Reliance
ICICI
HDFC
I-Pru
SBI
RNAMC
Motilal
Page | 13
Overall AMC comparison

Scheme Equity AUM Share of direct Overall
Brand Distribution Profitabity RoIC
performance CAGR in equity Rank
ICICI Pru MF 1 3 3 4 1 3 3 1
ICICI Pru AMC receives highest
HDFC AMC 1 5 6 3 1 2 2 2
rank based on our weighted
Motilal 6 1 1 1 6 1 4 3
average ranking system
SBI MF 3 2 4 6 3 4 5 4
ABSL AMC 4 4 2 2 4 6 1 5
RNAM 5 6 5 5 5 5 6 6
Note: Rank of Scheme performance is on basis of Value research rating. Equity AUM CAGR during FY14-18.
Source: Value Research, AMFI, HDFC sec Inst Research
Page | 14
Industry flows asset class wise and AUM

 FY14-FY18 has been an excellent time for the industry  Over FY14-18 Equity AUM has also grown at a CAGR
as equity asset flows have grown to Rs2.6tn in FY18 of 36.1% to Rs 9.2tn.
(CAGR: 89%)
Equity (including balanced) Equity (including balanced)
Net Inflows(Rs bn) M2M(Rs bn)
2,608
3,000
1,000
1,500
950
890
828
2,500
1,000
576
340
328
2,000
500
102
48
1,028
Equity AUM grew more than 1,500
938
-
871
4x from Rs 2.1tn to Rs 9.2tn
809
1,000
(12)
during FY14-18.
(159)
(500)
203
(397)
500
(118)
62
(144)
47
41
(601)
16
15
(1,000)
FY10 (1,163)
8
5
-
(1,500)
(500)
YTD19
FY09
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
Dec-05
Dec-06
Dec-07
YTD19
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
Dec-04
Dec-05
Dec-06
Dec-07
Source: AMFI, HDFC sec Inst Research Source: AMFI, HDFC sec Inst Research
Equity (including balanced)

Strong growth in equity AUM
Equity AUM (Rs bn)
during FY14-18 was led by
9,489
9,219
inflow growth as total equity 10,000
inflow at Rs 5.3tn comprises
8,000 6,283
~75% of AUM growth.
4,255
6,000
3,715
2,311
2,154
4,000
2,138
2,079
1,983
1,888
1,374
1,189
2,000
736
388
-
YTD19
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
Dec-04
Dec-05
Dec-06
Dec-07
Page | 15
Debt
Inflows were extremely Net Inflows(Rs bn) AUM (Rs bn)
1,680
7,994
7,606
9,000
strong in FY18 both for debt 2,000
7,002
8,000
and equity. 1,500
5,835
966
7,000
830
5,316
1,000
4,677
6,000
414
4,041
151
500 5,000
3,151
51
2,954
2,945
Debt oriented schemes - 4,000
2,038
1,993
continue to face redemption 3,000
(55)
(500)
(185)
(322)
2,000
(367)
884
pressure as YTD outflows are
(1,228)
523
443
(1,000) 1,000
at Rs 1.1tn.
(1,500) -
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
Dec-04
Dec-05
Dec-06
Dec-07
Oct-18
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
YTD19
Page | 16
Sensitivity of flows
 Our analysis revealed that inflows in equity schemes  Good markets tend to bring in higher equity flows.
are most sensitive to last 12 months index
performance (see chart).  Equity inflows are also positively correlated to M3
growth (r=0.729) and GDP growth (r=0.762).
Equity inflows positively
related to TTM returns
Net Inflows in equity schemes(Rs bn) -LHS Net Inflows in equity schemes(Rs bn) -LHS
NIFTY PE Ratio - RHS
Nifty TTM return (%) - RHS
350 60.0 350 30.0
300 50.0 300
25.0
250 40.0 250
30.0 20.0
200 200
20.0
150 150 15.0
10.0
100 100
- 10.0
50 (10.0) 50
- 5.0
(20.0) -
(50) (30.0) (50) -
May-14
May-15
May-16
May-17
May-18
Sep-14
Sep-15
Sep-16
Sep-17
Sep-18
Jan-15
Jan-16
Jan-17
Jan-18
Aug-14
Aug-15
Aug-16
Aug-17
Apr-14
Apr-15
Apr-16
Apr-17
Dec-14
Dec-15
Dec-16
Dec-17
Page | 17
Types of Mutual Fund investors

Individual
 Individual investors AUM grew at a CAGR of 31%  Institutional investors AUM grew from Rs 5,031bn to
from Rs 3,993bn to Rs 11,665bn during FY14-18. Rs 11,000bn during FY14-18 at a CAGR of 22%.
Share of individual AUM improved from 44% in FY14
to 51% in FY18.
Rising individual participation

T30 cities have a lion share in Individual Investor AUM(Rs bn) Institutional Investor AUM(Rs bn)
AUM at 85.2%, but share of Share of Individual (%) Share of Institutional (%)
B30 cities has been 25,000 56 55 54 51
60
54
increasing. 50
20,000 46 49
46 45 11,000 40
44
15,000
10,051
30
10,000 7,393
6,496 20
5,031 11,665
5,000 8,527 10
5,581 6,158
3,993
- -
FY14 FY15 FY16 FY17 FY18
Rise of B30 cities AUM is
encouraging investor base Source: AMFI, HDFC sec Inst Research
increases and becomes more
granular
Page | 18
Individual investor allocation

Individual investors allocation
in equity has increased over  Individual investors are further sub-divided into retail  Allocation to equity has increased over time while
years from 44.4% to 67.4 as of < Rs 0.5mn and HNI > Rs 0.5mn. share of debt has decreased drastically from 48.7% as
Oct18. of FY14 to 26.1% as of Oct-18.
 The most preferred asset class for retail investors is
equity and more than 2/3rd of retail assets are
allocated to equity.
Individual Investor Allocation
Equity (%) Debt (%) Liquid/Money Market (%) ETF/FOF (%)
2.1 1 1 0.8 0.6 0.5

100 3.4 4.1 4.0 3.8
4.8 6.0
80 27.7 26.1
38.2 37.5 34.6
48.7
60
40
60.6 67.9 67.4
57.4 57.4
HNI assets growth of 31% 20 44.4
CAGR have outpaced retail
investor AUM growth of 20% 0
FY14 FY15 FY16 FY17 FY18 Oct-18
during FY09-18
HNI and retail equity assets

HNI AUM (Rs bn) - LHS Retail Individuals AUM (Rs bn) - LHS
8,000
7,000
6,000
5,000 3,989
3,795
4,000
3,000 2,864
2,000 1,923 2,046
2,614 2,764
1,000 710 1,333 1,323 1,235 1,187 1,275 1,743
226 1,048 1,232
- 398 409 373 337 408
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 Jun-18
Page | 19
RNAM is the leader in Retail assets HNI assets: Top 5 AMCs have 62.3% market share.
We believe bank backed
% %
AMCs have an edge over 16.0 13.9
13.0 20.0 17.5 17.0
corporate backed AMCs
12.0 10.2 10.0 16.0
8.5 10.9
8.1 12.0 9.6
8.0 5.9 7.3 6.4
4.7 8.0 5.4
3.7 3.4 3.8 3.8 3.5
4.0 4.0
-
-
Birla
ICICI Pru
DSP
Kotak
SBI
Reliance
HDFC
Franklin Templeton
AXIS
L&T
SBI
Reliance
HDFC
Franklin Templeton
Share of top 5 AMCs in retail
Birla
ICICI Pru
UTI
Sundaram
AXIS
DSP
assets has come down from
60.7% as of Mar15 to 55.6%.
 Share of Top 5 AMCs in retail assets has reduced from  ICICI Pru MF tops HNI assets market share, followed
60.7% in Mar15 to 55.6% in Oct18. by HDFCAMC. Market share of both these AMCs have
largely remained stable around 16-17% during last 4
DSP MF has lost the maximum  Reliance MF is the leader in retail assets and its years.
retail assets share among top market share has improved from 10.3% in March15
AMCs. to 13.9% in Oct-18.  Reliance MF has lost ground in HNI assets as its
market share fell sharply from 11% in Mar15 to 5.4%
 The shares of HDFCAMC and UTI MF have reduced by in Oct18.
200 and 270bps respectively during Mar15 to Oct 18.
 Birla, SBI, and Kotak MF continue to gradually gain
market share in this category.
Page | 20
Institutional investor allocation  Individual investors now own 45% of debt schemes
AUM whereas institutional investors own 55% of debt
 Institutional investors allocate more to fixed income
funds AUM.
and liquid products. Although share of debt has come
down from 54.6 in FY14 to 36% as of Oct18.  Debt funds are priced very competitively and TER
charged in most debt schemes is less than statutory
Institutional investors invest  Share of equity has increased gradually from 4.6% to
allowed. Credit risk schemes are an exception.
12% from FY14 to Oct18.
primarily in debt oriented and
Top Liquid Funds
liquid schemes Institutional Investor Allocation
Scheme AUM (Rs bn) Direct TER (%)
Equity (%) HDFC Liquid Fund (G) 907 0.15
ETF/FOF (%)
8.0 12.0 Aditya Birla SL Liquid Fund - (G) 623 0.12
ICICI Pru Liquid Fund - Regular (G) 661 0.15
SBI Liquid Fund (G) 554 0.13
Reliance Liquid Fund (G) 428 0.14
Note: AUM as on Nov-18. Source: Respective Company AUM
disclosures, HDFC sec Inst Research
Liquid/Money Debt (%) Institutional ownership is higher

Market (%) 36.0
44.0 Debt oriented schemes
Individual
Note: Data pertains to October 2018
(%)
Source: AMFI, HDFC sec Inst Research 45
Institutional
(%)
Debt funds are largely institutional 55
 Individual investors allocation towards fixed income

schemes have reduced over time. Share of debt in
Individual AUM has fallen from 48.7% as of Mar14 to
26.1% as of Oct18. Note: As of Oct-18 Source: AMFI, HDFC sec Inst Research
Page | 21
Distribution Mix
Bank backed AMCs rely on
their sponsored bank for Trends for equity (For Equity + Balanced) AUM
distribution  Bank backed AMCs comparatively have more  Among bank backed AMCs, Axis MF (47.6%) and SBI
reliance on associate distributors for distribution in MF (35.2%) have the most reliance on associate
comparison to other AMCs. distributors.
Distribution share of AMCs
HDFC MF ICICI MF SBI MF ABSL MF RNAM AXIS MF KOTAK MF UTI MF Franklin MF Motilal Oswal
Associate (%) 11.3 18.2 35.2 3.7 0.5 47.6 8.8 0.4 0.2 6.4
Non-Associate Distributors (%) 72.7 66.7 50.5 78.1 85.2 44.9 65.7 90.9 81.5 57.0
Among the bank backed Direct (%) 16.0 15.2 14.3 18.2 14.3 7.4 25.5 8.7 18.2 36.6
AMCs, AXIS MF has the most Note: Data as of Sep-18
reliance on associate (Axis Source: AMFI, HDFC sec Inst Research
bank) for distribution
Dependence of bank sponsored AMC’s on banks for distribution.
Associate led AUM (%) FY16 FY17 FY18 Sep-18
HDFC MF 8.4 11.6 12.5 11.3
ICICI MF 12.1 16.1 18.0 18.2
SBI MF 17.8 19.7 31.9 35.2
KOTAK MF 12.7 11.6 8.9 8.8
AXIS MF 46.6 49.6 50.0 47.6
Page | 22
Direct on the rise

 Share of Equity AUM sourced via direct channel has  Rise in share of direct reduces dependence on
picked up but the pace has been slow. Direct has distributors and leaves higher margins for asset
picked up from 11% as of Mar15 to 16% as of Sep18. managers.
Rise of direct is favorable for

 40% of debt AUM is sourced through direct channel
as institutions invest directly.
AMCs as it reduces their
dependence on distributors
and allows AMCs more Direct AUM share picking up
bargaining power. Direct AUM (%) FY16 FY17 FY18 Sep-18
Motilal Oswal 39.9 35.2 36.5 36.6
Kotak MF 21.3 23.6 28.5 25.5
Franklin MF 13.9 16.4 17.7 18.2
Aditya Birla MF 12.0 15.9 19.0 18.2
HDFC MF 11.4 14.4 15.3 16.0
ICICI MF 9.8 13.2 15.7 15.2
RNAM 11.1 12.4 14.3 14.3
SBI MF 11.5 14.0 14.2 14.3
But at the same time AMCs
UTI MF 33.2 8.4 9.6 8.7
haven’t promoted direct
Axis MF 5.8 6.2 7.6 7.4
channel as it can upset Source: AMFI, HDFC sec Inst Research
distributors.
Page | 23
Upfront commission can be SIPs

paid to distributors on SIP
 SIP has brought about a structural change in the  Total SIP contribution increased 52% from Rs 439bn
subject to some conditions predictability of asset flow for asset managers. in FY17 to Rs 671bn in FY18.
 Investors can invest as little as Rs 500 per month via  Average industry SIP ticket size has largely remained
SIPs. stable at around Rs 3,200 per folio.
 Monthly SIP flows have grown ~2.5x from Rs 31bn in  In 2017, AMFI had launched a media campaign
We believe due to upfront Apr-16 to 80bn in Nov-18. SIP folio counts have “Mutual fund sahi hai” as a part of investor
commissions allowed only on grown 2.6x from 9.4mn in Apr-16 to 25.2mn in Nov- awareness program. This campaign has been
18. extremely successful in attracting flows to the
SIPs now, distributors will be
industry.
more interested in pushing
SIP products
SIP flows have grown more than 2.5x

Monthly SIP Contributions (Rs bn)
90.0
80
80
77
77
76
76
80.0
73
71
67
66
64
70.0
62
59
56
55
60.0
52
49
47
46
50.0
43
43
41
41
40
39
37
35
40.0 34
33
33
32
31
30.0
20.0
AMFI campaign has been 10.0
successful in educating 0.0

Sep-16
Feb-17
Sep-17
Feb-18
Sep-18
Jan-17
Jan-18
Mar-17
Mar-18
Jun-16
Dec-16
Jun-17
Dec-17
Jun-18
Jul-16
Aug-16
Jul-17
Aug-17
Jul-18
Aug-18
Oct-16
Oct-17
Oct-18
Apr-16
May-16
Apr-17
May-17
Apr-18
May-18
Nov-16
Nov-17
Nov-18
investors
Page | 24
Percentage of SIP inflows is substantial

SIP as % of Total Equity inflows
140.0
121.6
120.0
89.5
100.0
77.7
72.7
65.0
80.0
64.5
72.6
52.7
53.1
50.0
60.0
69.5
43.5
56.0
SIPs will continue to lead
30.1
30.6
25.6
28.8
40.0
26.0
49.6
52.2
20.3
21.1
equity AUM growth, as they
17.8
42.1
37.9
36.7
20.0
28.3
30.2
26.9
contribute ~10% to equity
25.0
23.8
24.0
AUM growth -
Jul-16
Aug-16
Jul-17
Aug-17
Jul-18
Aug-18
Oct-16
Oct-17
Oct-18
Apr-16
May-16
Apr-17
May-17
Apr-18
May-18
Nov-16
Nov-17
Nov-18
Sep-16
Feb-17
Sep-17
Feb-18
Sep-18
Jan-17
Jan-18
Mar-17
Mar-18
Jun-16
Dec-16
Jun-17
Dec-17
Jun-18
SIP inflows to lead AUM growth

SIP Flows (Rs bn) - LHS Beginning equity AUM (Rs bn) - LHS SIP as % of beginning equity AUM (%) - RHS
Keeping mark to market

10,000 9,219 12.0
gains/(loss) and lump sum 10.3 10.7
inflows aside, Equity AUMs 8,000 10.0
can still grow at 10% because 6,283
8.0
of SIP contributions. 6,000 8.5
4,255 6.0
4,000
4.0
2,000 2.0
439 671 458
- -
FY17 FY18 YTD19
Note: SIP as % of beginning equity AUM is annualized for FY19.

Page | 25
Fund Performances
 Value research indicates that Motilal Oswal AMC  HDFCAMC has grown equity assets at a FY14-18 CAGR
(MOAMC) has the highest percentage of assets which of 38.4% to Rs 1,497bn while RNAM has grown equity
are rated 4 stars and above. MOAMC is closely assets at a FY14-18 CAGR of 29.6% to Rs 768bn.
followed by Kotak MF (82.8%) and SBI MF (75.6%).
 The above also indicates that flows continued to be
 At the bottom of the table are RNAMC at 53.1% and strong despite weak performance else asset growth
HDFCAMC at 52.1% of rated AUMs. would be even stronger.
 We believe that fund performance is important but is  Both HDFCAMC and RNAM have lost market share in
not the most determining factor to attract flows; this the equity segment but so have the other top 5
is evident from the fact that fund houses have grown managers.
assets despite low ratings.
Performance comparison of top AMCs

ICICI Pru HDFCAMC RNAMC Birla-Sunlife SBI MF Kotak MF MOAMC
5 Star 3.3 - 8.2 10.5 26.3 38.2 6.6
MOAMC and Kotak are the
4 Star 70.3 52.1 44.9 59.1 49.3 44.6 85.6
best performing AMCs among
3 Star 25.2 14.9 9.4 25.9 9.8 13.3 -
our coverage universe AMCs.
2 Star 1.3 31.0 22.4 - 12.6 3.8 7.9
1 Star - 2.1 15.1 4.6 2.0 - -
Total 100 100 100 100 100 100 100
Rated AUM (as % of total AUM) – a 82.2 62.3 89.2 82.7 86.6 90.8 82.9
Not rated schemes (% of equity AUM) - b 17.8 37.7 10.8 17.3 13.4 9.2 17.1
Balance advantage/multi asset/dynamic schemes 7.6 24.0 - 3.5 - - 9.4
Kotak MF has the highest
Theme based/global/retirement funds 4.6 0.1 - 3.8 4.2 - -
share of 5 star rated AUM.
Others 5.6 13.6 10.8 10.0 9.2 9.2 7.7
Total (a + b) 100 100 100 100 100 100 100
Total actively managed equity AUM (Rs bn) 1,471 1,602 935 934 869 503 195
As a percentage of Rated AUM
Outperforming Schemes- 4 star plus (%) 73.6 52.1 53.1 69.6 75.6 82.8 92.1
Underperforming Schemes- 1 to 3 star (%) 26.4 47.9 46.9 30.4 24.4 17.2 7.9
Rated AUM (Rs bn) 1,209 998 834 773 753 457 162
Rank Outperforming schemes- 4 star plus 4 7 6 5 3 2 1
Source: Value Research Nov-18, HDFC sec Inst Research
Page | 26
Underperformers losing equity AUM share

AUM Market Share (loss)/gain (bps) % of AUM rated 4 star+
Value research doesn’t rate 400
equity schemes with less than 300 262 236
3 years of history. 200
185
145
82.8 69.6 92.1 75.6 73.6
100 53.1 52.1
-
(100)
(200) (128)
(300)
(400)
(369)
(500)
(600) (524)
Kotak Birla Motilal SBI ICICI RNAM HDFC
Motilal and Kotak AMC are performing the best.

5 Star 4 Star 3 Star 2 Star 1 Star
100.0 -
1.3 2.1 4.6 2.0 3.8
- 7.9
15.1 12.6 13.3 -
25.2
80.0 31.0 25.9 9.8
22.4
60.0 14.9 9.4 44.6

49.3 85.6
40.0 70.3 59.1
44.9
52.1
20.0 38.2
26.3
8.2 10.5 6.6
- 3.3 -
ICICI Pru HDFC AMC RNAMC Birla-Sunlife SBI MF Kotak MF MOAMC
Note: Outperforming schemes are 4 and 5 star rated schemes

Page | 27
Asset managers vs. life insurers

Distributors prefer ULIP over  As avenues of investment/long term wealth creation, and balanced mutual funds are competitive with that
life insurance is the largest alternative to asset of ULIPs and additionally with the upcoming TER
mutual funds owing to higher
management companies. reductions the charges will get even more
commissions, but selling ULIP competitive. Lastly, the direct option in mutual funds
products are difficult than  Life insurance companies are managing an AuM of Rs is the best for investors.
MF. 33.1tn as of March 2018 vs. Rs 21.4tn for asset
management companies. Life insurance AUMs have  Recent regulatory changes disallow payment of
grown at a FY12-18 CAGR of 13.1%. upfront commissions by mutual funds to distributors.
Insurance companies on the contrary are allowed to
 Given life insurance contracts are longer term in pay high upfront commissions. This makes insurance
nature, inflows to the industry are comparatively less products more attractive for distributors to sell.
volatile vs. the mutual fund industry. See chart
comparing net inflows to life insurers vs. asset
managers. Valuation arguments
 We believe both life insurance and asset
 Underwriting mortality/morbidity risk is a key driver management companies can trade at high earnings
AMC business is easier to to the profitability of life insurance companies. Eg: multiples as both industries have the opportunity to
build and scale up as For 1HFY19 SBILIFE has reported that the company scale profitably.
compared to Insurance has earned ~30% of its VNB through sale of
business. protection which is only ~5-6% of APE. This is  For life insurance companies our target prices imply
indicative of the large margin potential in the FY21E P/Es of 20-37x while we our TP for RNAM
business. works out to a FY21E P/E of 20.9x and our fair value
for HDFCAMC works out to a FY21E P/E of 31.2x.
 ULIPs are a source of competition to mutual funds as
they provide savers the combination of low charges  Given the accounting nuances of the life insurance
along with protection. However, charges for equity industry- P/E is not the best way to value them.
Page | 28
Key differences
Parameter AMCs Life insurance
Lower capital intensity allows for higher dividend
Capital intensity Higher capital intensity, lowers payout potential
payouts
Can have a higher share in financial savings given that
Financial savings Will largely be focused on longer duration products =>
companies can target both long and short term
share 5 years.
savings need of investors.
Regulator is lowering TERs and making the product Commission payouts and other charges remain high
Product cost more attractive for consumers. Direct as an option compared to AMCs. Products are more expensive
cuts all middlemen and is the cheapest way to invest. compared to mutual funds.
Liability risk Stock business with no liability risk. Stock business with liability risk.
Open architecture allows distributors to sell any Restrictions on the number of insurance companies
Distribution
number of products from any fund houses. whose products distributors are allowed to sell.
Profitability is lower compared to insurance given that Profitability is higher principally due to risk
Profitability
the companies do not take mortality/morbidity risk. underwriting and also due to high surrender charges.
Competitive Risk from insurance companies, bank deposits,
Risk from asset managers, and passive products.
landscape passive products.
Insurance vs MF AUM Insurance inflows are more stable

Insurance/MF AUM has Insurance AUM (Rs tn) MF AUM (Rs tn) Insurance Inflows (Rs bn) MF Inflows (Rs bn)
33.1
grown at FY12-18 CAGR of 35.0
2,880
2,827
28.5
13.1/24.0%. 3,500
30.0
25.0
3,000
22.5
1,821
1,818
1,960
21.4
1,796
2,500
1,625
25.0
1,498
19.6
1,354
17.5
17.4
1,342
2,000
1,148
15.8
20.0
1,033
961
1,500
939
12.3
831
765
10.8
15.0 1,000
541
(220)
8.3
(494)
(283)
500
7.0
10.0
5.9
-
5.0
(500)
- (1,000)
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY12
FY13
FY14
FY15
FY16
FY17
FY18
Source: IRDAI, AMFI, HDFC sec Inst Research Source: IRDAI, AMFI, HDFC sec Inst Research
Page | 29
Rise of ETFs
 India already has started showing signs of significant  Although globally ETFs have gathered pace, but in
rise in ETF activities. Share of ETF (ex gold ETFs) in India we believe active management still has a long
total industry AUM has grown from 0.5% as of Mar14 way to go as Indian asset managers have been able to
to 4% as of Nov18. beat benchmark returns consistently in the past.
 But still in India, institutions continue to dominate  Any substantial rise in ETFs continues to remain a risk
ETF space. Individual participation is extremely low, for India asset managers
only 7% of ETF AUM is owned by individuals.
 ETF AUM globally has grown at a CAGR of 22.3%
 ETFs are also cost efficient as fees charged are as low during FY08-18.
as 0.1% as against large cap mutual fund scheme
which has expense ratio anywhere between 1.5-
https://www.bloomberg.com/news/articles/2018-08-
2.25%.
09/fidelity-bets-on-zero-fee-index-funds
ETF/FOF Global ETF landscape

AUM (Rs bn) Inflow (Rs bn) Global ETF AUM ($tn)
1,200 4.0
3.5
992
1,000 3.5
ETFs are also cost effective as 3.0
777
3.0 2.7
TER charged is much lower 800
2.5 2.3
499
mutual funds. 600
1.9
2.0
400 224 1.5
194
191
1.4
147
132
131
115
1.5
109
200 1.1
71
69
82
34
76
47
31
26
25
14
1.0 0.7
-
0.5
(5)
(7)
FY10 (29)
(200)
-
YTD19
FY09
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
Dec-07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
Source: AMFI, HDFC sec Inst Research Source: Morningstar, HDFC sec Inst Research
Page | 30
Largest ETF funds

Scheme AUM(Rs bn) TER (%)
SBI ETF Nifty 50 398 0.069
Globally ETFs have gathered SBI ETF SENSEX 127 0.069
pace as active funds struggle UTI-Nifty ETF 94 0.069
to beat index returns. ICICI Bharat 22 ETF 53 0.008
Kotak Banking ETF 50 0.21
Reliance CPSE ETF 41 0.07
Reliance ETF Bank BeES 34 0.19
Reliance ETF Gold BeES 22 1.00
Reliance ETF Liquid BeES 19 0.60
Page | 31
Recent Regulatory changes

Categorization and Rationalization of Mutual Fund Schemes
 In October 2017, SEBI decided that all Mutual Funds  The schemes would be broadly classified in the
must be ‘true-to-label’ and share uniform following groups:
Recategorization of schemes characteristics with other schemes in the same
category. The new rules state that mutual fund  Equity Schemes
have led to reduction of
confusion for investors and houses can only have one mutual fund offering under  Debt Schemes
allows better comparison of each category. As a result in early 2018, most mutual  Hybrid Schemes
schemes across fund houses. fund schemes were either consolidated, re-  Solution Oriented Schemes
categorized, terminated and/or renamed.  Other Schemes
 The objective of the circular was to reduce confusion
around scheme names across fund houses and to  Only one scheme per category would be permitted, except:
make schemes managed with similar mandates easily  Index Funds/ ETFs tracking different indices;
comparable across fund houses.
 Fund of Funds having different underlying
schemes; and
 Sectoral/ thematic funds investing in different
sectors/ themes
Equity schemes are categorized as:

Category Criteria : Minimum Investment
Multi Cap Fund 65% in equity
Large Cap Fund 80% in large cap companies
Large & Mid Cap Fund 35% in large and 35% in mid cap companies
Mid Cap Fund 65% in mid cap companies
Small cap Fund 65% in small cap companies
Dividend Yield Fund Invest in dividend yielding stocks
Value Fund/Contra Fund Scheme should follow a value investment/contrarian strategy
Focused Fund A scheme focused on the number of stocks (maximum 30)
Sectoral/Thematic 80% allocation in a particular sector/ particular theme
ELSS 80% in equity (in accordance with Equity Linked Saving Scheme, 2005)
Source: SEBI, HDFC sec Inst Research
Page | 32
Total expense ratio (TER) reduction

 SEBI on its board meeting held on 18th September  The reduction in TERs will be applicable from 1st April,
TER reduction will majorly 2018 has decided that the TERs of various schemes 2019.
impact equity schemes as will be reduced as per the asset class, style of
TERs charged on debt management and longevity of schemes.
schemes are already below
the threshold limits. 1. For open ended schemes
Revised TERs
TER for other schemes(excl. Index, ETFs and
AUM Slab (Rs bn) TER for equity oriented schemes
Fund of Funds)
0-5 2.25% 2.00%
5-7.5 2.00% 1.75%
7.5-20 1.75% 1.50%
20-50 1.60% 1.35%
50-100 1.50% 1.25%
TER reduction of .05% for every increase in TER reduction of .05% for every increase in
100-5,000
AUM by 50bn or part thereof AUM by 50bn or part thereof
>5,000 1.05% 0.80%
Existing TERs
TER for other schemes
AUM Slab (Rs bn) TER for equity oriented schemes
(excl. Index, ETFs and Fund of Funds)
0-1 2.50% 2.25%
1-4 2.25% 2.00%
4-7 2.00% 1.75%
>7 1.75% 1.50%
The above changes translate to an AUM based reduction in TERs as per the table below:
Equity AUM and corresponding reduction in TER
Scheme AUM (Rs bn) Increase/(decrease) in TER (bps)
TER change will impact large 20 1
sized schemes more than 50 (9)
smaller sized schemes. 100 (17)
200 (25)
300 (31)
400 (36)
500 (41)
Page | 33
2. Close Ended and Interval Schemes: expenses etc.) shall compulsorily be paid from the
scheme and not from the
Fund houses argue that ban  Revised TERs: TER for equity oriented schemes shall AMC/Associate/Sponsor/Trustee books, or any other
on upfront commissions will be a maximum of 1.25% and for other than equity route.
lead to lower churning of oriented schemes shall be a maximum of 1%.
 A carve out has been provided for up fronting of trail
assets  Existing TERs: TER allowed same as for open ended commission in case of SIPs. Up-fronting of trail
schemes commission is allowed for SIP inflows of upto
Rs.5,000 per month, per investor, across all schemes
3. Index schemes, ETFs, FOFs of a mutual fund. For this purpose, unique investor at
MF level should be identified based on PAN.
 Revised TERs:
 Additionally the above up-fronting of trail
a) Index Funds and ETFs: Max TER 1.00%.
commission is up to 1% of the total SIP inflows for a
b) Fund of Funds (FoFs): Max TER = 2 x TER of maximum period of 3 years. The commission will be
underlying fund. paid from the AMC’s accounts.
i) FoFs investing primarily in Liquid, Index and ETF
schemes: Total TER (including the TER of  The additional expense permitted for raising assets
underlying schemes) shall be maximum of 1.00% from B-30 cities, shall be based on inflows from retail
investors (not institutions). The definition of ‘retail
ii) FoFs investing primarily in active underlying investors’ shall be determined in consultation with
schemes: Total TER (including the TER of the the industry. Pending such clarification, the additional
underlying schemes), shall be maximum of 2.25% incentive shall be permitted for inflows from
for equity oriented schemes, and maximum of 2% individual investors only and not on inflows from
for other than equity oriented schemes corporates and institutions. Additionally even the B-
 Existing TERs: 30 incentive shall be paid only as trail.
a) Index Funds and ETFs: TER max. of 1.5%.  The above regulations have come into force from
b) Fund of Funds (FoFs): TER max. of 2.5%. 22nd October 2018.
Other regulatory changes

 SEBI has mandated that the mutual fund industry Additional disclosure requirements
compulsorily adopt the full trail model; this means  SEBI has mandated fund houses to disclose every
that asset management companies will not be scheme’s average total Expense ratio (in percentage
allowed to pay upfront commissions to distributors terms) along with the break up between investment
and all commissions will be paid out as trail. and advisory fees, commission paid to the distributor
and other expenses for the period for each scheme’s
 Additionally SEBI has mandated that all commission
applicable plan (regular or direct).
and scheme related expenses (fund accounting, RTA
Page | 34
Impact of regulatory changes

 The reduction in TERs mean a significant reduction in  Our calculations indicate a weighted average
expense ratios charged by schemes to mutual fund reduction of TER of ~25bps for HDFC’s equity
investors. schemes and ~16bps for RNAM’s equity schemes.
 TER reductions will largely impact equity schemes as
fund houses are charging expense ratios which are Wtd. avg. reduction in TER for Equity assets (bps)
below what is mandated by SEBI for debt (except for
Aditya Birla
Sundaram
credit risk) and ETF/index schemes.
Reliance
Franklin
Motilal
Kotak
HDFC

IDFC
Tata
ICICI
As scheme sizes increase TERs reduce, hence negative
Axis
DSP
L&T
UTI
SBI
TER change will impact large impact will be higher for fund houses with larger -
equity schemes. Thus operating leverage reduces as
sized schemes more than (5.0)
compared to earlier i.e. it was more advantageous to
smaller sized schemes.
(6.5)
scale up in the earlier TER structure than it is now. (10.0)
(7.7)
(9.7)
(10.5)
Impact is more on AMCs  The new TER slabs also increase ability of smaller (15.0)
(12.4)
(13.7)
(14.8)
(15.0)
which have more large sized asset management companies to make higher
(15.8)
(15.9)
(16.8)
(20.0)
(18.4)
schemes. commission payouts to distributors.
(20.8)
(25.0)
(22.3)
 Reduction of TERs also means a smaller pie for all
(24.3)
interested parties- manager, distributor, fund (30.0)
accountant, registrar, and other service providers.
Page | 35
Impact on AMCs forward as upfront commission payment is allowed

only for SIPs. We thus expect substantial reduction in
 TER reduction: Our discussions with AMCs indicate prepaid expenses, thereby also reducing working
that reduction of TERs on the book will be reasonably capital need of the business.
easier to pass through to distributors.
 However, on incremental flows the pass through to
distributors may not work out, because the ability to Impact on distributors
pass the hit to distributors will depend on the
 TER reduction: Our discussions with distributors
competitive intensity of the industry.
indicate that they will be ready to absorb a
 Thus at times when fund flow is strong, asset reasonable portion of the TER reduction but not the
managers will tend to pay more in distributor full impact.
commissions while when fund flow is weak managers
 Distributors will also negotiate intensely with asset
will withhold paying higher commissions.
managers on the extent of the hit that each party
 HDFCAMC plans to pass on at least 80% of TER would be willing to take.
reductions to distributors for the book portion.
 Distributors will sell products which offer higher trail
 No up-fronting of trail commission: Our commissions (more likely to be that of smaller asset
understanding from distributors and asset managers managers), especially where performance is not that
is that most AMCs have increased the trail different from that of other large fund houses.
commission over the first couple of years of inflows.
 No up-fronting of trail commission: Distributors are
Thus no-payment of upfront commission does not
intensely negotiating for higher trail commissions.
necessarily translate into higher profits for AMCs.
Some fund houses are also paying reasonably high
 As upfront payments are banned we expect a commissions- upto 80-85% of TERs in the first year
reduction in the propensity of distributors to and then gradually reducing trail commissions.
recommend scheme/fund house churn to investors.
 As discussed previously distributors are unlikely to
This would make assets stickier for fund houses
recommend churning of schemes as they are not
thereby increasing profitability.
rewarded immediately. However distributors may
 In the past regime, AMCs paid upfront commissions recommend churning of schemes after the trail
and amortized these expenses over a year. AMCs commissions drop.
now are not allowed to pay upfront commission. This
 Additionally these new regulations are increasingly
reduces the asset manager’s working capital
making it difficult for the industry to recruit new IFAs
requirements.
as upfront payouts have reduced and it takes a
 Prepaid expenses for HDFCAMC and RNAMC for FY18 reasonably long period of time for distributors to get
were Rs 1,964mn and Rs 2,306mn respectively. Going compensated.
Page | 36
 Insurance a more lucrative product to sell: IRDAI still insurance broking licenses. Geojit Financial Services
allows much higher commission payouts to Ltd. and Motilal Oswal Financial Services Ltd. have in
distributors of insurance. The current regulatory their recent calls indicated their strategy to increase
changes are incentivizing distributors to take up their product suite to include insurance.
Commission/remuneration payout on regular premium policies:

Maximum commission/remuneration
No. Category of life insurance product
First year premium Renewal premium
Commission payouts on 1 Individual Pure Risk products 40% 10%
specific life insurance 2 Individual other than pure risk:
products is as high as 40%. A) Premium paying term term 5 to 11 years 3% X premium paying term 7.5%
B) Premium paying term term 12 years or more 35% 7.5%
3 Individual Deferred Annuity / Pension 7.5% 2%
Group Pure Risk (incl Group credit) and
4 7.5% (only on pure risk premium) 7.5%
Group Savings Variable Life
5 Government Scheme-Life-Health As per government notification
Source: IRDAI, HDFC sec Inst Research
Page | 37
Impact on financials of AMCs

 Regulatory changes brought about by SEBI essentially example some companies charged registrar and
In our interaction with fund imply a reduction of income and expenses for asset transfer expenses directly to scheme accounts, while
houses, they believe they will managers. others charged higher management fees and passed
be able to pass on at least the expenses through their books. Ambiguity existed
85% of the TER reduction to
 As SEBI has mandated that the mutual fund industry for several such expense heads.
compulsorily adopt the full trail model and not pay
distributors.  In the current regime no pass through of expenses
any upfront commission (except for upfront
commissions on retail SIPs). will be allowed. This implies a reduction in revenues
and expenses.
 In the earlier regime asset managers paid upfront
commissions from their books and recouped the  The reduction in TERs will be implemented from
same from the schemes’ accounts as income. This April, 2019 and would imply a dip in revenues if AMCs
bloated both income and expenses for AMCs. are unable to pass on the impact fully to distributors.
Currently AMCs are estimating a pass through of this
 In the current regime distribution commissions will reduction in TERs to distributors at least to the extent
be paid out as trail commissions directly from the of 85%. We have built in a 75-80% pass on of this
schemes accounts and not from the AMC’s books as reduction in TER to distributors.
asset management companies are not be allowed to
pay upfront commissions to distributors. This would  As these changes have been implemented from 22nd
mean a compression of revenues and expenses. October, 2018, they imply ~5 months change in FY19
financials and full changes coming through in FY20E.
 Additionally SEBI has mandated that all commission This will result in muted revenue growth for FY19E
and scheme related expenses (fund accounting, RTA and FY20E.
expenses etc.) shall compulsorily be paid from the
scheme and not from the  As expenses also reduce both margins and
AMC/Associate/Sponsor/Trustee books, or any other profitability will improve.
route.
 The joker in the pack remains how the TER pass
 In the earlier regime: No uniformity of practice was through takes place- which will be intensely
observed across asset managers in this regards. For negotiated between AMCs and distributors.
Page | 38
Industry Valuations
Precedent transactions
 Valuations of asset management businesses vary significantly depending on the asset class, management style, control,
and market conditions. Below table briefly summarizes some of the past transactions within the space.
Precedent transactions (M&A)
Stake
Estimated Derived Derived
Stake AUM Acquisition
Acquirer Target Year deal value valuation valuation
(%) (Rs bn) /Scheme
(Rs bn) (Rs bn) (%) AUM
Purchase of stake by Nippon Acquisition
Life in RNAMC has been the Societe Generale AMC SBI MF 37 2004 56 1.6 4.4 0.2 Stake
Robeco Canara MF 49 2007 22 1.2 2.4 10.7 Stake
largest transaction in recent Pioneer Baroda MF 51 2007 NA. NA NA 10.0 Stake
times. IDFC Standard Chartered 100 2008 146 8.3 8.3 5.7 Stake
Religare Lotus AMC 100 2008 55 0.5-1.5 0.5-1.5 NA Stake
L&T Finance DBS Chola MF 100 2009 30 0.5 0.5 1.5 Stake
Nomura LIC MF 35 2009 324 2.8 8.0 2.5 Stake
T Rowe Price UTI AMC 26 2010 694 6.5 25.0 3.6 Stake
Goldman Sachs Benchmark 100 2011 32 1.3 1.3 4.1 Stake
BOI AXA MF 51 2011 NA. NA NA NA Stake
Amundi SA SBI MF 37 2011 417 NA NA NA Stake
Nippon Life Reliance 26 2012 843 14.5 56.0 6.6 Stake
Schroders Axis AMC 25 2012 NA. NA NA NA Stake
L&T Finance Fidelity India 100 2012 89 5.5 5.5 6.2 Stake
Invesco Religare 49 2012 146 4.7 9.5 NA Stake
HDFC MF Morgan Stanley 100 2013 33 1.5-1.7 1.5-1.7 4.5-5 Scheme
SBI MF Daiwa MF 100 2013 3 0.03-0.04 0.03-0.04 1 - 1.5 Scheme
Nippon Life Reliance 9 2014 1,289 6.6 73.0 5.7 Stake
Kotak AMC PineBridge 100 2014 7 NA NA NA Scheme
Birla Sunlife ING MF 100 2014 11 NA NA 1.5 Scheme
Dewan Housing Pramerica 50 2014 21 0.2 0.5 2.4 Stake
Pramerica Deutsche 100 2015 224 4.0 4.0 1.8 Stake
Reliance Goldman Sachs 100 2015 71 2.4 2.4 3.4 Scheme
Nippon Life Reliance 14 2015 1,510 12.0 85.4 5.7 Stake
Union Bank KBC AMC 49 2015 27 NA NA NA Stake
Invesco Religare 51 2015 216 7 to 10 NA NA Stake
Edelweiss JP Morgan AMC India 100 2016 75 1.12-1.50 1.12-1.50 1.5 – 2 Scheme
LIC Nomura 35 2016 112 0.3 1.4 1.3 Stake
Essel Finance Peerless MF 100 2016 10 NA NA NA Stake
Source: RNAM RHP, HDFC sec Inst Research
Page | 39
Industry comps
 AMCs resemble consumer staples in many ways- low  We argue that given the multi-year growth
RNAMC is trading at a steep capital requirement, lean balance sheets, and high opportunity AMCs should trade at multiples closer to
discount to HDFCAMC. profitability. Infact one may argue that the growth consumer staples than to other financial services
potential offered by AMCs is higher than that of companies.
consumer companies.
 Amongst the listed pure play AMCs RNAMC and
 Higher cyclicality will be one of the points of HDFCAMC trade at a FY21E P/E of 14.4x and 27.8x
difference between the two businesses. respectively.
3Y EPS P/E P/B ROE
Upside/
Company Name Rating TP/FV (INR bn) (USD bn) Expected
(downside) 19E 20E 21E 19E 20E 21E 19E 20E 21E
CAGR
AMCs
HDFC AMC NR 1,708 13% 322 4.6 16.8 37.7 32.6 27.8 11.3 9.6 8.2 34.3 32.0 31.9
RNAMC BUY 227 43% 98 1.4 9.2 20.4 17.2 14.2 4.1 3.7 3.4 20.4 22.6 24.9
Life Insurance
SBI Life BUY 735 23% 595 8.5 20.2 9.7 7.6 5.7 2.6 2.3 1.9 19.0 18.5 18.1
ICICI Prudential BUY 397 22% 466 6.7 6.8 8.6 6.7 5.0 2.2 1.9 1.7 17.5 17.4 17.4
Max life BUY 577 30% 120 1.7 21.1 55.3 40.3 27.7 2.0 1.7 1.5 20.3 20.4 20.4
Brokerages
ICICI Securities BUY 318 22% 84 1.2 6.9 15.0 14.0 12.3 6.7 5.7 4.8 53.8 44.2 42.2
Retail Banks
Kotak Bank BUY 1,377 10% 2,393 34.2 22.4 37.2 29.4 23.9 4.7 4.1 3.4 12.7 13.9 14.6
Indusind Bank BUY 1,954 22% 960 13.7 24.3 23.3 17.9 13.9 3.7 3.1 2.7 16.3 18.3 20.0
Exchanges/Depositories
BSE BUY 871 46% 31 0.4 0.3 15.7 14.3 12.8 1.0 1.0 0.9 6.2 6.8 7.4
CDSL BUY 380 70% 23 0.3 11.2 21.1 18.5 16.4 3.5 3.2 2.9 16.8 17.3 17.6
Consumer
Hindustan Unilever NEU 1,855 2% 3,930 56.2 22.1 63.0 52.0 42.0 47.0 10.2 9.6 79.7 30.8 23.6
Britannia Industries NEU 3,044 -2% 748 10.7 21.0 61.6 50.9 42.1 24.7 20.6 17.0 37.7 44.1 44.2
Marico BUY 380 1% 483 6.9 22.9 48.9 37.7 31.9 17.8 16.0 13.6 37.7 44.8 46.0
Godrej Consumer Products NR 773 -5% 831 11.9 17.2 48.1 40.5 34.3 16.5 15.7 14.3 45.0 51.2 54.5
Page | 40
Regulatory structure for mutual funds in India

Regulations stipulate that a mutual fund must be a the Chief Investment Officer, fund managers and
three-tiered structure comprising: analysts, who together are responsible for managing
various schemes launched by the fund.
1. A Sponsor
2. A Trustee  Capital requirement: The net worth of the AMC
3. An asset management company (AMC) should not be less than Rs500 mn. The sponsor of the
mutual fund is required to contribute at least 40% to
 Fund Sponsor – The sponsor is the main body that the net worth of the AMC. Further, any person who
establishes the Mutual fund. A sponsor is comparable holds 40% or more of the net worth of an AMC is
to a promoter of a company. The responsibility of the deemed to be a sponsor and is required to fulfil the
sponsor includes appointing the trustees with the eligibility criteria for sponsors under the SEBI Mutual
approval of SEBI and setting up the asset Fund Regulations.
management company.  Seed investment requirement: For each open ended
 Trustee – The main role of a trustee is to ensure that scheme of the mutual fund, the sponsor or the AMC
the interest of the unit holders is protected while is required to invest in the growth option of the
making sure that the mutual fund complies with all scheme an amount which is lesser of (a) 1% of the
the regulations of SEBI. Key responsibilities of the amount (i) raised in the new fund offer for a new
trustees include entering into an investment scheme or (ii) the assets under management of an
management agreement with the asset management existing scheme, or (b) Rs 5mn, and such an
company and to define its functioning. Investor’s investment cannot be redeemed unless the scheme is
money is held in the Trust (the mutual fund). wound up.
 Asset Management Company (AMC) – The AMC is  Termination of AMC: The appointment of the AMC
the investment manager of the trust. It takes care of may be terminated by majority of the trustees or by
the day to day operations of the mutual fund and 75% of the unit holders of the schemes of the mutual
manages the money of investors. The AMC is fund. However, any change in the appointment of the
appointed either by the trustee or the sponsor after AMC is subject to prior approval of SEBI and the unit
obtaining approval from SEBI. The AMC consists of holders of the schemes of the mutual fund.
Page | 41
Appendix: Comparison of top 5 asset management companies in India

ICICI Pru AMC is the biggest
AMC in the country with
ICICI Prudential Mutual Fund
respect to AUM size.
Asset class mix
(Rs bn) FY14 (%) FY15 (%) FY16 (%) FY17 (%) FY18 (%) Nov-18 (%)
Debt oriented Schemes 834 79% 1,034 67% 1,182 66% 1,544 62% 1,584 52% 1,546 50%
Equity oriented Schemes 216 20% 484 31% 574 32% 841 34% 1,119 37% 1,189 39%
Overtime share of equity Balanced schemes 7 1% 18 1% 26 1% 83 3% 276 9% 269 9%
AUM has increased from 21% ETF's/FOFs 4 0% 5 0% 7 0% 14 1% 69 2% 68 2%
in FY14 to 48% as of Nov18, Total 1,060 1,541 1,789 2,482 3,048 3,072
resulting into rise in revenue Source: Company, HDFC sec Inst Research
yields.
ROAAuM tree
(bps) FY14 FY15 FY16 FY17 FY18
Revenues 56 62 59 59 64
Total Exp 29 35 31 28 33
EBITDA 28 28 29 32 31
EBIT 27 27 29 31 31
EBIT(1-tax) 18 18 19 20 20
PBT 29 28 30 33 33
PAT 19 19 19 22 22
Source: Company, HDFC sec Inst Research
(%) FY14 FY15 FY16 FY17 FY18

C/I Ratio 51 56 51 47 52
Tax rate 34 34 35 35 34
(%) FY14 FY15 FY16 FY17 FY18

ROE 63.8 68.1 60.5 70.1 80.4
ROIC 142.0 83.0 87.7 260.1 477.8
Page | 42
HDFC Mutual Fund

HDFC MF is the leader in Asset class mix (Rs bn) FY14 (%) FY15 (%) FY16 (%) FY17 (%) FY18 (%) Nov-18 (%)
equity assets. Debt oriented Schemes 734 64% 953 58% 1,134 64% 1,426 59% 1,477 49% 1,841 54%
Equity oriented Schemes 325 29% 562 34% 500 28% 664 28% 914 31% 921 27%
HDFCAMC is most cost Balanced schemes 69 6% 127 8% 137 8% 301 13% 594 20% 618 18%
efficient and has the least C/I ETF's/FOFs 11 1% 9 1% 10 1% 8 0% 8 0% 8 0%
Total 1,138 1,651 1,780 2,399 2,993 3,389
ratio among similar sized
AMCs.
ROAAuM tree
Income from operations 80 70 83 68 63
Total expenses 35 30 45 36 29
EBITDA 45 40 39 32 35
EBIT 44 40 38 32 34
EBIT(1-tax) 30 26 26 22 23
PBT 49 42 41 37 38
PAT 33 28 28 25 26
(%) FY14 FY15 FY16 FY17 FY18

C/I Ratio 44 43 54 53 46
Tax rate 32 33 33 31 32
Return ratios
(%) FY14 FY15 FY16 FY17 FY18
ROE 45 41 42 43 40
ROIC 327 123 140 272 331
Page | 43
Aditya Birla Sun Life Mutual Fund

Asset class mix
(Rs bn) FY14 (%) FY15 (%) FY16 (%) FY17 (%) FY18 (%) Nov-18 (%)
Debt oriented Schemes 741 86% 957 78% 1,042 76% 1,445 73% 1,596 65% 1,552 64%
Balanced schemes 7 1% 14 1% 24 2% 75 4% 172 7% 167 7%
Share of equity AUM has
ETF's/FOFs 3 0% 4 0% 4 0% 6 0% 5 0% 5 0%
increased from 14% in FY14 to
Total 863 1,227 1,370 1,980 2,453 2,430
36% as of Nov18. Source: Company, HDFC sec Inst Research
ROAAuM tree
(bps) FY14 FY15 FY16 FY17
Income from operations 61 56 57 56
Total Exp 46 42 35 39
EBITDA 16 15 23 17
ABSL MF has the highest EBIT 14 14 23 17
share of debt AUM among EBIT(1-tax) 10 9 15 11
top AMCs. PBT 17 17 23 19
PAT 11 11 15 13
Note: Consolidated financials are not available for FY18
(%) FY14 FY15 FY16 FY17

C/I Ratio 76 75 60 70
Tax rate 33 32 35 34
Return ratios
(%) FY14 FY15 FY16 FY17
ROE 21 24 30 26
ROIC 72 87 186 369
Page | 44
Reliance Nippon Life Asset Management

RNAM is India’s largest AMC Asset class mix
is terms of total assets (Rs bn) FY14 (%) FY15 (%) FY16 (%) FY17 (%) FY18 (%) Nov-18 (%)
managed as it manages Debt oriented Schemes 767 73% 939 66% 1,109 69% 1,412 66% 1,421 59% 1,291 55%
assets for EPFO and CMPFO. Equity oriented Schemes 239 23% 445 31% 453 28% 539 25% 728 30% 779 33%
ETF's/FOFs 40 4% 31 2% 28 2% 145 7% 135 6% 145 6%
Total 1,051 1,426 1,610 2,145 2,409 2,348
RNAM’s cost income ratio
hasn’t improved over the ROAAuM tree
years. (bps) FY14 FY15 FY16 FY17 FY18
EBITDA 25 28 27 25 23
EBIT 23 28 27 24 21
EBIT(1-tax) 18 21 21 16 15
PBT 33 37 34 31 31
PAT 25 28 26 21 22
(%) FY14 FY15 FY16 FY17 FY18

C/I Ratio 66 59 66 66 69
Tax rate 24 24 24 31 28
Return Ratios
(%) FY14 FY15 FY16 FY17 FY18
ROE 17 23 24 22 25
ROIC 153 92 66 65 85
Page | 45
SBI Mutual Fund

SBI MF is the largest ETF Asset class mix
player in India. (Rs bn) FY14 (%) FY15 (%) FY16 (%) FY17 (%) FY18 (%) Nov-18 (%)
Debt oriented Schemes 521 76% 546 69% 725 65% 921 56% 1,040 48% 1,257 47%
ETF's/FOFs 21 3% 16 2% 88 8% 223 14% 405 19% 559 21%
Total 686 788 1,107 1,632 2,183 2,678
ROAAuM tree
Share of equity assets in the Investment Management Fees 60 58 55 52 62
Total Exp 27 29 32 33 39
lowest for SBIMF among top 5
EBITDA 35 31 26 22 25
AMCs.
EBIT 34 31 25 21 24
EBIT(1-tax) 23 21 17 14 16
PBT 37 33 26 24 26
PAT 25 22 17 16 17
(%) FY14 FY15 FY16 FY17 FY18

C/I Ratio 44 48 56 61 62
Tax rate 33 33 34 32 34
Return ratios
(%) FY14 FY15 FY16 FY17 FY18
ROE 35 33 28 32 37
ROIC 129 96 74 95 118
Page | 46
Motilal Oswal Asset Management Company

Asset class mix
MOAMC manages only equity (Rs bn) FY14 (%) FY15 (%) FY16 (%) FY17 (%) FY18 (%) Nov-18 (%)
assets thus its yields are high. Debt oriented Schemes 1 18% 1 3% 1 3% 3 3% 10 6% 5 2%
Balanced schemes - 0% - 0% - 0% - 0% - 0% - 0%
ETF's/FOFs 3 49% 3 12% 1 3% 1 1% 1 1% 1 1%
Total 5 24 48 87 179 187
PMS business (50% share) is
high yielding contributing to ROAAuM tree
higher revenue yields. (bps) FY14 FY15 FY16 FY17 FY18
Staff cost 70 42 25 19 17
Admin & Other Opex 204 182 145 149 137
Total Exp 278 226 171 168 155
EBITDA (11) 15 41 48 68
EBIT (15) 14 41 47 68
EBIT(1-Tax) (15) 14 30 31 49
PBT (8) 14 40 48 69
PAT (8) 14 30 32 50
(%) FY14 FY15 FY16 FY17 FY18

C/I Ratio 106 94 81 78 72
Tax rate - - 25 34 28
Return ratios
(%) FY14 FY15 FY16 FY17 FY18
ROE (3) 13 37 45 76
ROIC (18) 50 128 107 230
Page | 47
VISIT NOTE 31 DEC 2018
HDFC Asset Management Company

NOT RATED
INDUSTRY AMC Brand & distribution leader
CMP (as on 31 Dec 2018) Rs 1,505 We recently met with HDFC Asset Management share, HDFCAMC’s loss at 524bps is the worst.
Company (HDFCAMC) and noted the brand equity, Despite this, HDFCAMC is the equity market leader
Fair Value Rs 1,708 distribution strength (HNI/Retail AUM market with 15% market share.
Nifty 10,863 share 17/13%) and equity leadership position (15%  Driven by FY18-21E AUM CAGR of 18.3%, we expect
Sensex 36,068 market share) that it enjoys. Despite relatively HDFCAMC to post a FY18-21E revenue/PAT CAGR of
KEY STOCK DATA weak fund performance recently (only 52% of rated 6.7/17.4%. The business does not need incremental
Bloomberg HDFCAMC IN
equity AUMs are 4-star+), HDFCAMC will be a key capital. RoICs will improve from 331% in FY18 to
beneficiary of the rising financialisation of savings. 855% in FY21E. We value HDFCAMC on a DCF-based
No. of Shares (mn) 212 multiple of 31.2x on its FY21E post tax operating
 Brand: With no exposure to ‘suspect papers’ in the
MCap (Rs bn) / ($ mn) 320/4,578
recent turmoil in fixed income markets (post the profits and plus investments/cash to arrive at our
6m avg traded value (Rs mn) - IL&FS default), HDFCAMC’s liquid funds market share 1yr forward Fair Value of Rs 1,708/sh. Our FV value
STOCK PERFORMANCE (%) more than doubled to 17.2% (Oct-18) over two implies a FY20/21E P/E of 36.6/31.3x, while the stock
months. Our interactions with distributors indicate is currently trading at FY20/21E P/E of 32.0/27.3x.
52 Week high / low Rs 1,970/1,248
that it is relatively easier to sell HDFCAMC products.  Key risks: Weakness in equity markets, increased
3M 6M 12M
We believe this ensures durable AUM growth across sales of ULIPs vs. mutual funds, pick up in
Absolute (%) 13.4 - - market cycles. alternatives, inability of the company to pass on the
Relative (%) 13.8 - -  Distribution leadership: Despite having a large proposed reduction in TERs, continued under-
SHAREHOLDING PATTERN (%) associate distribution network (HDFC Bank), performance of HDFCAMC’s schemes, and any
Promoters 82.8 HDFCAMC derives only 11.3% of assets from it. With negative developments impacting brand.
FIs & Local MFs 1.9 over 210 branches and 65k empanelled distributors
Financial Summary
(national distributors, banks and IFAs) it has captured
FPIs 3.8 (Rs mn) FY17 FY18 FY19E FY20E FY21E
17% and 13% of HNI and retail markets, respectively.
Public & Others 11.5 Revenues 14,800 17,598 18,874 19,058 21,359
HDFCAMC enjoys a healthy and rising annual SIP
Growth (%) 2.6 18.9 7.3 1.0 12.1
Source : BSE as of Sep 30 pipeline of Rs 138bn.
EBITDA 7,039 9,665 11,816 13,137 15,410
 Performance is a concern: Of the rated AUM, the 4- EBITDA margin (%) 47.6 54.9 62.6 68.9 72.1
Madhukar Ladha star and above rated category is just 52.1% vs. 70%+ Growth (%) 5.4 37.3 22.3 11.2 17.3
madhukar.ladha@hdfcsec.com for most other top 5 AMCs. This is the lowest PAT 5,502 7,216 8,611 9,958 11,669
+91-22-6171-7323 amongst the top 5 AMCs. 1&2 star rated AUM at PAT growth (%) 15.1 31.1 19.3 15.6 17.2
33.1% is second last in top 5. EV/EBITDA (x) 44.0 31.3 25.0 22.1 18.4
Keshav Binani  Equity market share loss: Equity AUM has grown at a P/E (x) 55.2 44.1 37.4 32.4 27.6
keshav.binani@hdfcsec.com CAGR of 38.4% during FY14-18 vs. industry CAGR of RoE (%) 42.8 40.3 34.3 32.0 31.9
+91-22-6171-7325 36.1%. While all of the top 5 funds have lost market Source: Company data, HDFC sec Inst Research
HDFC AMC : VISIT NOTE
Strong brand drives leadership

HDFC has a strong brand
recall in the financial services  The “HDFC” brand carries great strength and raising  The reach of its associate distributors and the
industry. capital has been relatively easier for the company. recognition of the brand “HDFC” enable the company
to raise a higher share of assets. HDFCAMCs share in
 Post Sep, 2018 when the IL&FS debt crisis came to total Industry AUM is 12.6% as of Sep-18.
the fore, the company actually benefitted. This is
evidenced by the fact that while the industry as a  Strong brand name builds confidence amongst
whole lost liquid fund assets to the tune of Rs investors. Our interactions with distributors also
1,498bn (Sep-Oct, 2018), HDFC Mutual fund’s liquid indicate that they find it easier to sell HDFCAMC
fund gained in assets over that period by Rs 288bn. products.
 Even post market stabilization HDFC MF’s liquid  We believe this demonstrates the company’s strong
funds’ continue to gain in AUMs. In Nov-18 the fund investment management processes and the trust that
HDFCAMC has the lowest C/I added Rs 147bn in AUM (14.8% of incremental the brand enjoys.
industry AUM).
ratio among similar sized  Given share of equity assets is one of the highest
AMCs.  This was possible as the mutual fund schemes did not profitability of HDFCAMC is highest amongst the top
own any of the negatively perceived paper primarily 5 AMCs.
DHFL and IL&FS- which sparked of the crisis.
 Motilal AMC has higher profitability since they have
higher share of PMS in total AUM (~50%) which is
high yielding.
Higher core profitability compared to peers. Most cost efficient AMC

bps
NOPAT/AAuM %
80 74
60 69
49 70 62
50
HDFCAMC is the industry 60 52
leader in equity assets, 40 50 46
followed by ICICI Pru AMC. 30 23

40
20 30
20 16 15 13
20
10
10
0 -
SBI
RNAMC
HDFC
Birla
I-Pru
Motilal
SBI
RNAMC
HDFC
I-Pru
Motilal
Source: Respective company, HDFC sec Inst Research Source: Respective company, HDFC sec Inst Research
Page | 49
HDFC AMC’s liquid funds have gained AUM share

HDFC Liquid funds AUM (Rs bn) Industry Liquid Funds AUM (Rs bn) Share (%)
7,000 20.0
Liquid funds saw huge 6,043 17.2 5,935
outflows during September as 6,000 15.6
Industry Liquid funds AUM 13.5 15.0
5,000 4,544
dropped from Rs 6,043bn to 3,948
4,000
Rs 3,948bn. 8.2 10.0
3,000
2,000
5.0
HDFC AMC had no exposure 781 928
1,000 493 533
to DHFL and IL&FS in any of
its funds. - -
Aug-18 Sep-18 Oct-18 Nov-18
Source: Company MAAUM disclosure, AMFI, HDFC sec Inst Research
Page | 50
Fund performance is of concern

 Only 62.3% of total equity AUM of HDFCAMC has Only 52.1% of rated AUM is rated 4star and above
been rated by value research; this is because % of AUM 1 Star 5 Star
HDFCAMC’s balanced advantage fund has a sizeable 2.1 -
AUM (24% of total equity AUM) and is not rated.
 Of the rated AUM, the 4star and above rated AUM is
just 52.3% vs. 70%+ for most other top 5 AMCs.
2 Star
4 Star
 Of the rated AUM, the 1-2 stars rated AUM is just 31.0
52.1
33.1% which is significantly higher than that of other
AMCs.
3 Star
14.9
Performance comparison of top AMCs

ICICI Pru HDFCAMC RNAMC Birla-Sunlife SBI MF Kotak MF MOAMC
5 Star 3.3 - 8.2 10.5 26.3 38.2 6.6
4 Star 70.3 52.1 44.9 59.1 49.3 44.6 85.6
3 Star 25.2 14.9 9.4 25.9 9.8 13.3 -
2 Star 1.3 31.0 22.4 - 12.6 3.8 7.9
1 Star - 2.1 15.1 4.6 2.0 - -
Total 100 100 100 100 100 100 100
Rated AUM (as % of total AUM) - a 82.2 62.3 89.2 82.7 86.6 90.8 82.9
Not rated schemes (% of equity AUM) - b 17.8 37.7 10.8 17.3 13.4 9.2 17.1
Others 5.6 13.6 10.8 10.0 9.2 9.2 7.7
Total (a + b) 100 100 100 100 100 100 100
Rated AUM (Rs bn) 1,209 998 834 773 753 457 162
Page | 51
High 1 and 2 star rated schemes RNAM and HDFC AMC are worst performing
2 Star 1 Star Outperforming Schemes- 4 star plus (%)
40.0 Underperforming Schemes- 1 to 3 star (%)
35.0 2.1 100.0 7.9
30.0 15.1 24.4 17.2
26.4 30.4
25.0 80.0 46.9
47.9
20.0
15.0 31.0 2.0 60.0
HDFCAMC’s schemes have 10.0 22.4 92.1
- 40.0 82.8
underperformed as only 5.0 -
1.3
12.6
- 7.9 73.6 69.6 75.6
4.6 3.8 52.1 53.1
52.1% of rated equity AUM is - - 20.0
Birla-Sunlife
RNAMC
HDFC AMC
SBI MF
ICICI Pru
MOAMC
Kotak MF
4 and 5 stars rated. -
Birla-Sunlife
RNAMC
HDFC AMC
SBI MF
ICICI Pru
MOAMC
Kotak MF
Source: Value Research, HDFC sec Inst Research Source: Value Research, HDFC sec Inst Research
Page | 52
Equity leader despite loss in market share

HDFC AMC has been the  HDFCAMC has been the leader in equity oriented  Rise in flow towards equity schemes has resulted in
leader in equity oriented assets since 4QFY11 while being amongst the top 2 company losing market share as competitive intensity
assets for over 6 years now. asset managers for more than a decade now. to garner these assets also increased.
 Equity AUM has grown at a CAGR of 30.8% during  This is despite the fact that HDFCAMC has also paid
FY13-18 vs. industry average CAGR of 37.3%. higher distributor commissions over FY14-18.
 Share of Equity AUM is 51.9% which is higher than Distribution costs as % of AAAUM went up from 11.8
the industry average of 44.4%, as of Sep-2018. bps as % of AUM to in FY15 to 26.3 bps in FY16
before falling back to ~13.2bps in FY18. (See chart).
Leader in equity assets Total AUM share

Rs bn MF AUM (Rs bn) - LHS AUM Market share (%) - RHS
2,000 3,500 14.5
14.1 14.1
1,539 3,000
1,600 1,458 14.0
13.6
2,500 13.3
1,200 13.5
912 873 13.1
862 2,000
800 12.4 13.0
1,500 13.1
12.5
400 1,000
1,076
1,465
1,734
2,177
2,789
2,926
500 12.0
984
-
SBI
Reliance
HDFC
Birla
ICICI
- 11.5
FY13
FY14
FY15
FY16
FY17
FY18
Sep-18
Note: AUM as of Nov-18. Source: Company, HDFC sec Inst Research
Source: Respective company, HDFC sec Inst Research
Page | 53
Equity market share change : FY15-18 Dist’n cost grew disproportionately as inflows
Other large sized AMCs are picked
gaining total AUM share but bps Distribution cost (Rs mn)- LHS
400 262 As a % of AAUM(bps)- RHS
losing out on equity AUM 185
236
26.3
200 145 5,000 30.0
share.
4,000 25.0
-
20.0
13.2
During FY15-18, total
14.0
3,000
12.3
11.8
(200)
19.3
distribution costs grew at a (128) 15.0
2,494 8.0
2,000
1,009
CAGR of 28.6% as against (400) 10.0
(369)
1,734
4,566
4,193
3,687
540
1,506
1,000 5.0
FY13 1,211
23.5% rise in revenues. (600) (524)
2.8
1.3
- -
Birla
SBI
RNAM
Kotak
ICICI
HDFC
Motilal
FY14
FY15
FY16
FY17
FY18
FY19E
FY20E
FY21E
HDFCAMC’s Balanced
advantage schemes (24%
Equity AUM share) are not
rated, hence not included in
our performance
measurement.
Page | 54
De-levered distribution
Over time bank backed AMCs  Associate distributors i.e. HDFC Bank and HDFC  As of September 2018, the company also has 8.6mn
have gained AUM share - it Securities contribute only ~11% of equity AUM as of live accounts vs. 4.4mn in Mar-14.
has increased from 37.4% in 2QFY19. Even historically this number has been low
with only ~7-8% of equity assets coming from  For domestic fund raising the company also intends
FY04 to 49.2% as of Sep-18. to engage with new distribution partners, such as
associate distribution network.
PSU banks, online platforms and robo-advisors.
 Other asset management companies have a higher
share coming from associate distributors- AXIS MF at  Direct: Direct’s contribution to total equity AUM is
45%, SBI MF at 35% (see chart). ~16% which has grown from ~11.4% in FY14.
 HDFCAMC is well entrenched with other national  Offshore: In 2QFY19 HDFCAMC has also received
distributors and IFAs and has over 65,000 empanelled commitment of US$ 450mn. Towards the end of
distributors across IFA’s, National distributors and 2QFY19 HDFCAMC has received $150mn with the
IFAs have the least pricing Banks. balance yet to be received in 2HFY19. The company
power thereby receiving the has not disclosed the terms of these funds. HDFCAMC
lowest commissions as  HDFCAMC also has ~210 branches of which 134 in B- intends to work closely with its promoter Standard
30 locations. Life to leverage on Standard Life’s global distribution
compared to other
presence.
distribution partners.
Total AUM Equity AUM

% Other Banks Other Banks Direct
%
7 7 17
HDFC Bank Direct HDFC Bank

9 35 11
National
IFA's Distributors
29 24
National
IFA's
Distributors
41
21
Page | 55
 Bank backed AMCs has done well. HDFC group has a unique advantage and puts them into a sweet spot to
HDFCAMC’s reliance on strong presence across financial products and leverage upon groups wide distribution network.
associate distributors like services. HDFC’s brand name gives HDFCAMC a
HDFC Bank and HDFC
Securities has remained stable Bank backed AMCs have gained AUM share Comparison of Bank/FI backed AMCs
over years. Bank led AMC's Share (%) Other AMCs Share (%) HDFC MF ICICI MF SBI MF KOTAK MF AXIS MF
100.0 60.0
49.6 50.0
50.0 46.6 47.6
80.0
50.8
51.0
53.2
55.7
35.2
61.7
62.6
65.5
31.9
40.0
60.0
30.0
19.7
18.2
18.0
17.8
16.1
40.0
12.7
12.1
20.0
11.6
12.5
11.3
11.6
8.9
8.8
49.2
49.0
46.8
8.4
44.3
38.3
20.0 10.0
37.4
34.5
-
0.0
FY16
FY17
FY18
Sep-18
FY04
FY07
FY10
FY13
FY16
FY18
Sep-18
Source: Company, HDFC sec Inst Research Source: Respective Company, HDFC sec Inst Research
Page | 56
Rise of direct
HDFCAMC’s share of equity
assets sourced directly is at Equity AUM: HDFC AMC’s direct share at par with Equity AUM : Direct share for the industry
par with the industry average industry
of ~16%. Direct AUM (%) %
18.0 37
16.0 40
16.0 15.3
14.4
14.0 30 26
11.4
12.0
18 18
10.0 20 16 15 14 14
8.0 9 7
10
6.0
4.0 -
SBI
Reliance
Motilal Oswal
2.0
HDFC
Franklin
UTI
KOTAK
ICICI
Aditya Birla
AXIS
- FY16
FY17
FY18
Sep-18
Source: Company, HDFC sec Inst Research Source: Respective company, HDFC sec Inst Research
Page | 57
High share of individual assets

 HDFCAMC holds second position both in HNI assets  Share of HNI assets in overall mix has increased from
(folio size > Rs 0.5mn) and Retail assets with market 32% in FY15 to 36% as of Oct-18. Share of retail
shares at 17% and 13% respectively. assets have largely remained stable at ~38%.
Having a bank distributor and  Currently annualized SIP inflows at Rs 138bn,

strong brand recall helps contribute ~10% to equity AUM.
HDFCAMC to garner more HNI
assets.
Leader in individual assets market share Individual share has increased from 69% to 74%
% Retail Corporates HNIs Other Institutions (Banks/FI/FII/FPI)
16 15.1
14 %
14 100 6 5 4 3
7
12
9.8 9.4 32 31 33 37 36
10 9.1
8
50
6 37 41 39 35 38
4
2 25 25 24
22 23
0 -
SBI
Reliance
ABSL
ICICI
Oct-18
FY15
FY16
FY17
FY18
HDFC
Note: Based on MAAUM for Sep-2018 Note: Based on MAAUM for Sep-2018
Page | 58
Rising Individual participation

Rising share of Individual AUM Share of Equity AUM by investor segment, based
on maturity
60% of Retail and 44% of HNI
Individual AUM (Rs bn) Share in total AUM(%) - RHS 0-1 Month 1-3 Month 3-6 Month
AUM stays invested for more %
2,500 62 65 70 6-12 Month 12-24 Month >24 Month
than 12 months.
55 56 56 100
53 60 12 22
2,000
80 39 18 42 41
50
22
1,500 60 15
40 20 16 19
21
40 32
30 17 15 15
1,000 14
20 9 11 10
Investors holding more than 20 9
11 0 9
7
11 17 12 8
77% of current SIP book have 500 - 6
1,350
1,863
1,985
10
624
931
945
Retail
FIIs
Banks/FIs
High Networth
Corporates
committed for monthly SIP
Individuals
- -
contribution for over 5 years.
FY14
FY15
FY16
FY17
FY18
Sep-18
Note: Individual AUM includes both retail and HNI Note: Data as of June-18.
Source: Company, HDFC sec Inst Research Source: Company, AMFI, HDFC sec Inst Research
SIP inflows Long tenure SIP Book

Rs bn %
14.0 80
Strong and growing SIP book 11.5 11.5 78
77.3
12.0
will lead to predictability and 76
consistency in equity flows. 10.0 74
8.0 72
6.8
70
6.0 4.7 4.9 68
4.0 3.1 66 64.9
64
2.0
62
SIP Book has grown more - 60
than 3x during FY14-18.
Sep-18
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
58
Over 5 years Over 10years
Page | 59
Risks
Industry/macro HDFCAMC related
 Macro slowdown especially when the industry  Continued under-performance: Continued under-
seems to have made a cyclical high: The Indian performance will have a negative impact on fund
mutual funds industry has had a spectacular run in raising and will impact earnings.
the last few years and especially FY18 where equity
inflows touched an all time high of Rs 2.6tn. This  Inability of the company to pass on TER reductions
seems like a cyclical high given the equity flows to distributors: The profitability of the company will
FY19TD are Rs 0.98tn. Any significant slowdown in be negatively impacted in case it is unable to pass on
flows will have a serious consequence to profitability. the proposed reduction in TERs to distributors.
 Sales attractiveness of ULIP as investment products:  Brand: Brand strength is key in this business.
The new proposed reduction in TERs effective from Negative news around the brand may have severe
01/04/2019 will mean a significant reduction in trail consequences in the company’s ability to retain
commissions for distributors. This along with the fact assets.
that up-front commissions have also been curtailed
means that ULIP will become a much more attractive
product for distributors to sell.
 Disproportionate growth in ETFs/index funds: ETFs
and index funds command significantly lower fees.
Any disproportionate rise in AUMs on the alternatives
side may result in cannibalization of revenues and
growth prospects.
Page | 60
Balanced funds may see loss in AUM

Balanced advantage schemes  HDFCAMC’s balanced schemes have an AUM of Rs  Given change in taxation laws the relative
were being sold aggressively 620bn- 18.3% to total AUM with the largest scheme attractiveness of balanced funds has reduced.
by distributors during FY17 being HDFC Balanced advantage fund which has an
and FY18. AUM of ~Rs 380bn.  Over FY15-18, HDFCAMCs balanced schemes AUM
have grown at 67% CAGR as against 25% for total
 As equity contribution is >65% of assets, balanced AUM and 30% for equity AUM.
advantage funds are classified as equity funds; this
leads to the left over 35% of assets- the debt  Change in rules may impact HDFCAMC more severely
component, to be also taxed at equity taxation rates. than other fund houses.
HDFC AMC has highest share of Balanced AUM
 Earlier equity funds sold after 12 months of holding,
did not attract capital gains tax; Debt funds on the Share of Balanced schemes in total AUM (%)
Now with the introduction of
other hand have a holding period of 36 months 20.0 18.2
capital gains tax on equity
before they can be classified as long term and attract 18.0
oriented mutual funds, taxation at 20% with indexation. Short term capital 16.0
balanced schemes may lose gains for both equity and debt products would be 14.0
some steam. 30% (assuming individual is at maximum marginal tax 12.0 10.3
10.0 8.8
rate). 6.9
8.0 5.7
 Taxation laws have changed and now even equity 6.0
4.0
funds held for more than 12 months are charged to
2.0 0
tax @10%- thereby reducing the attractiveness of the -
product.
HDFC
Birla
RNAM
MOAMC
ICICI
SBI MF
 Earlier balanced advantage funds were pushed by
distributors as there was the tax benefit on debt
portion was not charged to taxation (as sighted Source: Respective company AUM disclosure,
HDFC sec Inst Research
above).
Page | 61
Rise of alternatives
The company has not focused
on growing in alternative PMS HDFC AMC PMS AUM
space.  As of October 2018, there are 285 portfolio managers 70 Rs bn 65
(including AMCs) registered under the SEBI. This 59
60 54
avenue has seen sharp rise in assets from Rs 6,001bn 46
50
PMS/AIF in India is still at a as of March-13 to Rs 14,880 bn as of October-18. 39
nascent stage but has started 40
to pick-up. Industry PMS AUM
 HDFCAMC has not focused on growing its PMS
30 24
vertical.
has grown at CAGR of xx% 20
during FY13-Oct18. AIF 10
 AIF market in India is still at a very nascent stage, but -
FY13
FY14
FY15
FY16
FY17
FY18
is has gathered steam in recent years as total
commitments in AIFs increased from Rs 14.4bn as of
Participation in alternatives is
March-13 to Rs 1,796bn as of Oct-18. Source: Company, HDFC sec Inst Research
more from HNIs as compared
to retail.
Page | 62
Assumptions, Financials and Valuation

 We have built FY18-21E MF equity assets growth of look weak, however margins FY20E onwards will
18.3% and total MF AUM growth of 13.9%. improve significantly to 68.2% from 54.3% in FY18 as
expenses shift from the books of AMCs to the various
 Given the changes in TER to be implemented from schemes run by them.
01/04/2019 we estimate HDFCAMC equity fund TERs
to decline 24 bps. Most of this reduction in TER is  Return ratios improve significantly: Core RoICs are
expected to be passed on to distributors. expected to improve from 331% in FY18 to 855% in
FY21E.
 Given the new rules around expenses, and up-
fronting of commissions we expect asset  We value the company on Adj. EBIT post tax.
management companies to benefit as 1) companies
are not allowed to incur foreign travel, and other  We have applied a DCF based multiple of 31.1 x on
entertainment expenses towards distributors and 2) FY21E Adj. EBIT post tax to value the core business at
capital invested in business will reduce as working Rs 332bn. Our DCF assumes a 16% overall AUM
capital blocked for up-front commissions will be freed growth until FY30E, a stabilized operating margin of
up. HDFCAMC is now paying an increased trail around 26bps as percentage of AAAUM, a terminal
commission to distributors for fresh money raised. growth rate of 4% and cost of equity of 10.8%.
This amount does not pass through the financials of  We have added FY20E projected net cash and
AMCs as it is directly paid out by the respective investments of Rs 32bn to the above
schemes.
 As a result of the above changes revenue growth for
 Our total equity value works out to Rs 364bn or Rs
1708/share.
FY19E and FY20E at 7.3% and 1.0% respectively will
Impact on TER of large sized equity schemes.

Scheme AUM (Rs mn) Old TER (bps) Proposed TER (bps) Change (bps)
HDFC Balanced Advantage Fund 376,039 176 140 36
We have built in ~24bps HDFC Hybrid Equity Fund 201,665 176 148 28
weighted average reduction HDFC Equity Fund 203,105 176 148 28
in base TERs of equity HDFC Mid-Cap Opportunities Fund 199,889 176 152 24
schemes. HDFC Top 100 Fund 148,892 177 156 21
Note: AUM is Monthly Average AUM for Nov-18.
Source: Company TER disclosures, HDFC sec Inst Research
Page | 63
Return ratios
Core Capital Employed (Rs mn) LHS ROIC (%) ROE (%)
2,500 900.0
We have factored in a 48% 854.9
2,073 800.0
dividend payout ratio for
2,000 1,850 700.0
FY18-21E. 1,749
590.2
600.0
1,500
416.5 1,248 1,180 500.0
330.6 400.0
1,000 272.4
300.0
500 200.0
42.8 40.3 34.3 32.0 31.9 100.0
- -
FY17 FY18 FY19E FY20E FY21E
Source: Company, HDFC sec Inst Research estimates
Page | 64
Assumptions
Company won an equity FY17 FY18 FY19E FY20E FY21E
Closing AUM (Rs bn)
mandate from a foreign Mutual Fund 2,306 2,920 3,259 3,743 4,345
portfolio investor of $450mn PMS 59 65 78 92 108
in 2QFY19 which is included in Offshore advisory - - 213 363 445
offshore advisory. Total 2,365 2,985 3,549 4,198 4,897
MF AAAUM (Rs mn)

Equity 806 1,323 1,548 1,826 2,192
Debt 942 1,056 929 1,041 1,165
Liquid 419 397 616 677 745
ETFs 10 13 14 15 17
Total 2,177 2,789 3,106 3,560 4,119
Share (%)
Equity (%) 37 47 50 51 53
Debt (%) 43 38 30 29 28
Liquid (%) 19 14 20 19 18
ETFs (%) 0 0 0 0 0
Total 100.0 100.0 100.0 100.0 100.0
Growth (%)
Equity 18 64 17 18 20
Debt 33 12 (12) 12 12
Liquid 25 (5) 55 10 10
ETFs 13 21 8 13 13
Total 26 28 11 15 16
As a % of AAuM (bps)
Revenue 68 63 61 54 52
EBITDA 32 35 38 37 37
EBIT 32 34 38 37 37
PBT 37 38 41 41 42
PAT 25 26 28 28 28
EBIT(1-tax) 22 23 26 25 25
C/I Ratio (%) 53 46 38 32 29

Tax rate (%) 31 32 32 32 32
Page | 65
MF AUMs to grow at 14.2% CAGR during FY18-21E.

Equity Debt Liquid ETFs
Rs bn
5,000
4,500 8
4,000 7 717
3,500 6 652
6
3,000 592 1,140
6 382 1,018
2,500
330 909
2,000 6 1,032
6
1,500 158 256 967
8 7 2,480
1,000 60 116 659 739 1,752 2,067
475 555 1,497
500 1,000
391 408 679 652
-
FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E
Rising share of equity

Equity (%) Debt (%) Liquid (%) Others (%)
100
6 11 11 14 13
15 18 17 17
80
51 44 35 28 27 26
51 45 42
60
40
51 54 55 57
20 42 45 39 43
38
-
Page | 66
Company background
 HDFC Mutual Fund is one of the largest mutual funds  Standard Life Investments Ltd.: Standard Life
Top level management team and well-established fund house in the country with Aberdeen is one of the world’s largest investment
has broadly remained stable – focus on delivering consistent fund performance companies. . Standard Life re-entered the Indian
MD and CIO have been in the across categories since the launch of the first market in 1995, launching an insurance joint venture
scheme(s) in July 2000. with HDFC. The company has a substantial global
role since 2000 and 2004
presence with clients across 80 countries and AUM of
respectively.  HDFCAMC operates as a joint venture between HDFC £575.7bn.
Limited, India’s leading housing finance company and
Standard Life Investments Limited, one of world’s Management Team
largest investment companies.
 CEO: Milind Barve serves as the Managing Director of
HDFCAMC Ltd. He joined the firm in July 2002.
Evolution of HDFCAMC Previously, he served as the General Manager of
Year Particulars Treasury at HDFC Ltd. and headed the department for
1999 Company was incorporated 14 years. He was responsible for the management of
Received SEBI’s approval. AUM reached Rs 6.5 bn by HDFC's Treasury portfolio and for raising funds from
2000 Financial Institutions and Capital Markets. Previously,
September.
Standard Life Investments became company’s he was also the Head of Marketing for retail deposit
2001
shareholder. products. He is an Associate Member of the Institute
Acquired Zurich AMC having an AUM of Rs 34bn. of Chartered Accountants of India. He received a
2003
Combined AUM reached Rs 118bn. Bachelor’s degree in Commerce.
2009 Crossed AUM of Rs 1tn.
 CFO: Piyush Surana, CFP has been the Chief Financial
Acquired Morgan Stanley fund schemes, having an
2014 Officer at HDFCAMC Ltd. since February 25, 2013. He
AUM of Rs 19bn.
has previously has held various managerial roles at
2017 Equity AUM crossed Rs 1tn. Total AUM crossed Rs 3tn. Daiwa Asset Management (India) Private Ltd, Shinsei
2018 Listing of shares on stock exchange Bank in India, Alliance Capital Asset Management
Source: Company RHP, HDFC sec Inst Research (India) and Reliance Capital Asset Management
Limited. He holds a Chartered Accountant degree and
a Certified Financial Planner designation. He received
Promoters and sponsors
a Bachelor of Laws from University of Jodhpur
 HDFC Ltd: HDFC was incorporated as a public limited
Investment management team
company on October 17, 1977 under the Companies
Act, 1956 HDFC carries on the business of financing  CIO: Prashant Jain, CFA is the Chief Investment
by way of loans for the purchase or construction of Officer, Executive Director, and Fund Manager at
residential houses, commercial properties and certain HDFC Asset Management Company Ltd. and
other purposes, in India. All other activities of HDFC previously, from June, 2003 to June, 2004 served as
revolve around the main business carried out by it. the Head of Equities. Prior to this, he was the Chief
Page | 67
Investment Officer, Head of Funds Management, and  Promoters hold 82.9% stake. As per SEBI rules,
Fund Manager at Zurich Asset Management Company company needs to increase its public shareholding to
(India) Private Limited. Before that, Jain worked at at least 25% within 3 years from listing.
SBI Mutual Fund as Fund In-Charge. He is a Chartered
Financial Analyst from AIMR. He has an extensive  So promoters have to cut their stake by at least by
experience in fund management and research. He 7.8%.
received a PGDM from the Indian Institute of  Thus we should see an additional offering of 7.8%
Management Bangalore and a B. Tech degree from until Aug 2021. At current market price the stake will
the Indian Institute of Technology, Kanpur. be worth Rs 24.8bn.
Shareholding pattern Top Institutional Shareholders (%)

KKR India Financial Services 0.59
Public and
others SBI Funds Management 0.30
11.5 Ameriprise Financial Inc 0.25
FPIs
3.8 AFFIN Hwang Asset Management 0.21
Mirae Asset Global Investments 0.16
MFs and
FIs/Banks William Blair & Co LLC 0.15
1.9 Reliance Capital Trustee Co. 0.15
Motilal Oswal Asset Management 0.12
IDFC Mutual Fund 0.08
Goldman Sachs 0.08
Source: Bloomberg, HDFC sec Inst Research
Promoters
82.8
Page | 68
Income Statement Balance Sheet

(Rs mn) FY17 FY18 FY19E FY20E FY21E (Rs mn) FY17 FY18 FY19E FY20E FY21E
Net Revenues 14,800 17,598 18,874 19,058 21,359 SOURCES OF FUNDS
Growth (%) 2.6% 18.9% 7.3% 1.0% 12.1% Share Capital 252 1,053 1,067 1,067 1,067
Employee benefits expenses 1,576 1,749 1,959 2,155 2,371 Reserves 13,978 20,547 27,585 32,566 38,480
Operating expenses 6,186 6,183 5,098 3,766 3,578 Minority Interest - - - - -
Operating Profits 7,039 9,665 11,816 13,137 15,410 Total Shareholders Funds 14,229 21,600 28,653 33,634 39,548
Operating Profit Margin (%) 47.6 54.9 62.6 68.9 72.1 Long-term Debt - - - - -
Other Operating Income - - - - - Short-term Debt - - - - -
EBITDA 7,039 9,665 11,816 13,137 15,410 Total Debt - - - - -
EBITDA Margin (%) 47.6 54.9 62.6 68.9 72.1 Other Financial Liabilities &
806 991 940 949 1,062
EBIDTA Growth (%) 5.4% 37.3% 22.3% 11.2% 17.3% Provisions
Depreciation 120 114 110 131 148 Other Non Current Liabilities - - - - -
EBIT 6,919 9,550 11,706 13,006 15,262 Net Deferred Tax Liability (94) (97) (97) (97) (97)
Other Income (includes treasury ) 1,079 1,075 958 1,638 1,897 TOTAL SOURCES OF FUNDS 14,942 22,493 29,495 34,485 40,513
Interest & Financial Charges - - - - - APPLICATION OF FUNDS
PBT 7,998 10,625 12,663 14,644 17,160 Net Block 336 388 430 387 343
Tax 2,496 3,409 4,052 4,686 5,491 Non current Investments 12,367 19,506 19,892 20,726 21,610
RPAT 5,502 7,216 8,611 9,958 11,669 Loans & Deposits 2,318 2,671 1,541 1,138 1,217
APAT 5,502 7,216 8,611 9,958 11,669 Other Non Current Assets - - - - -
APAT Growth (%) 15.1% 31.1% 19.3% 15.6% 17.2% Total Non-current Assets 15,020 22,565 21,863 22,251 23,170
AEPS 27.3 34.3 40.3 46.6 54.7 Current Investments - - - - -
EPS Growth (%) 15.1% 25.4% 17.7% 15.6% 17.2% Debtors 851 903 982 940 995
Source: Company, HDFC sec Inst Research Cash & Equivalents 13 21 7,011 11,660 16,758
Loans & Advances - - - - -
Other Current Assets 19 121 155 157 176
Total Current Assets 882 1,044 8,149 12,756 17,928
Creditors 961 1,116 517 522 585
Other Current Liabilities - - - - -
Total Current Liabilities 961 1,116 517 522 585
Net Current Assets (78) (71) 7,632 12,234 17,343
TOTAL APPLICATION OF FUNDS 14,942 22,493 29,495 34,485 40,513
Page | 69
Cash Flow Key Ratios

(Rs mn) FY17 FY18 FY19E FY20E FY21E FY17 FY18 FY19E FY20E FY21E
Reported PBT 7,998 10,625 12,663 14,644 17,160 PROFITABILITY (%)
Non-operating & EO Items (1,033) (1,074) (958) (1,638) (1,897) EBITDA Margin 47.6 54.9 62.6 68.9 72.1
Interest Expenses - - - - - EBIT Margin 46.8 54.3 62.0 68.2 71.5
Depreciation 120 114 110 131 148 APAT Margin 37.2 41.0 45.6 52.2 54.6
Working Capital Change 43 (93) 401 459 43 RoE 42.8 40.3 34.3 32.0 31.9
Tax Paid (2,579) (3,372) (4,052) (4,686) (5,491) Core RoCE 272.4 330.6 416.5 590.2 854.9
OPERATING CASH FLOW ( a ) 4,549 6,201 8,165 8,910 9,962 RoCE 42.8 40.3 34.3 32.0 31.9
Net Capex (134) (179) (153) (87) (104) EFFICIENCY
(Purchase)/sale of net Tax Rate (%) 31.2 32.1 32.0 32.0 32.0
- - - - -
operating financial assets Asset Turnover (x) 44.9 48.6 46.1 46.6 58.5
Free Cash Flow (FCF) 4,414 6,023 8,012 8,823 9,858 Inventory (days)
Investments (1,728) (6,149) (387) (834) (884) Debtors (days) 21 19 19 18 17
Non-operating Income 102 (20) 924 1,636 1,878 Other Current Assets (days) 0 3 3 3 3
INVESTING CASH FLOW ( b ) (1,760) (6,347) 384 715 891 Payables (days) 24 23 10 10 10
Debt Issuance/(Repaid) - - - - - Other Current Liab & Prov (days) 20 20 18 18 18
Interest Expenses - - - - - Working Capital (days) (22) (22) (6) (7) (8)
FCFE 4,414 6,023 8,012 8,823 9,858 Debt/EBITDA (x) - - - - -
(Buyback)/Proceeds From
1 4,235 2,497 - - Net D/E (0.0) (0.0) (0.2) (0.3) (0.4)
Issue of Share Capital
Interest Coverage - - - - -
Dividend (2,787) (4,055) (4,055) (4,977) (5,755)
PER SHARE DATA
Others - (26) - - -
AEPS (Rs/sh) 27.3 34.3 40.3 46.6 54.7
FINANCING CASH FLOW ( c ) (2,785) 154 (1,558) (4,977) (5,755)
CEPS (Rs/sh) 27.9 34.8 41.1 47.6 55.7
NET CASH FLOW (a+b+c) 3 8 6,991 4,649 5,098
DPS (Rs/sh) 11.5 16.0 19.5 22.5 26.4
Opening Cash & Equivalents 9 12 21 7,011 11,660
BV (Rs/sh) 66.7 101.2 134.2 157.5 185.2
Closing Cash & Equivalents 12 21 7,011 11,660 16,758
VALUATION
P/E 55.2 44.1 37.4 32.4 27.6
P/BV 22.7 14.9 11.2 9.6 8.2
EV/EBITDA 44.0 31.3 25.0 22.1 18.4
OCF/EV (%) 1.5 2.0 2.8 3.1 3.5
FCF/EV (%) 1.4 2.0 2.7 3.0 3.5
FCFE/MCAP (%) 1.4 1.9 2.5 2.7 3.1
Dividend Yield (%) 0.8 1.1 1.3 1.5 1.7
Page | 70
INITIATING COVERAGE 31 DEC 2018
Reliance Nippon Life Asset Management Company

BUY
INDUSTRY AMC Betting on retail growth
CMP (as on 31 Dec 2018) Rs 159 We appreciate Reliance Nippon Life Asset  Recoverability of ICDs: RNAM has outstanding
Management’s (RNAM) focus on building granular, advances to troubled ADAG companies of Rs 4.25bn
Target Price Rs 227 stickier retail assets (34% of AUM). RNAM has also (FY18). While these advances are being serviced we
Nifty 10,863 recast its investment management team to improve are not valuing them as a matter of precaution.
Sensex 36,068 performance. We also expect the company to win  Driven by FY18-21E equity AUM CAGR of 19%, we
offshore investment mandates through Nippon expect RNAM to post a FY18-21E Revenue/PAT CAGR
KEY STOCK DATA
Life’s (AUM US$529bn) global reach and believe of 1.2/9.5%. RoICs are expected to improve from 85%
Bloomberg RNAM IN in FY18E to 215% in FY21E. We value RNAM on a DCF-
FY19E-21E profit growth to improve to 19.8% pa, as
No. of Shares (mn) 612 based multiple of 20.9x on its FY21E post tax
scale increases and high one-time spends fall off.
MCap (Rs bn) / ($ mn) 97/1,391 operating profits (NOPLAT) and add value of
We initiate coverage with a BUY and TP of 227.
6m avg traded value (Rs mn) 45
investments and cash to arrive at our 1-yr forward
 Retail assets to drive growth: At 13.9% RNAM has target price of Rs 227/sh (+44.2%). Our TP implies a
STOCK PERFORMANCE (%) the highest share of retail assets in the industry. FY20/21E P/E of 24.8/20.5x.
52 Week high / low Rs 335/127 Growing at a CAGR of 47% retail assets now Key risks: Weakness in equity markets,
3M 6M 12M contribute 34% of RNAM’s AUM (Oct-18) vs. 10% in disproportionate rise in alternatives, increased sales
Absolute (%) (9.1) (30.8) (47.1) FY13. This is the highest in the industry. RNAM also of ULIPs by distributors, inability of the company to
has a strong annualized SIP book of Rs 96bn. We pass on the proposed reduction in TERs, further
Relative (%) (8.7) (32.6) (53.0)
believe retail assets are stickier and higher yielding, negative developments in ADAG companies
SHAREHOLDING PATTERN (%) providing stability to AUMs and boost to earnings. impacting brand or recoverability of ICDs.
Promoters 85.8  Fund performance uninspiring, changes afoot: Low
FIs & Local MFs 7.4 (1&2) star rated AUM is 37% of total rated AUM, Financial Summary
FPIs 2.8 worst among the top 5 asset managers. RNAM has (Rs mn.) FY17 FY18 FY19E FY20E FY21E
recast its investment management team. Revenues 13,074 15,857 15,851 14,769 16,443
Public & Others 4.1
Source : BSE as of Sep 30
 Nippon Life’s global presence: Nippon Life (AuM Growth (%) 9.0 21.3 0.0 -6.8 11.3
US$529bn) owns stakes in various life insurance and EBITDA 4,665 5,304 5,480 6,758 8,306
asset management entities across the world. RNAM EBITDA margin (%) 35.7 33.4 34.6 45.8 50.5
Madhukar Ladha over time will have the advisory access to this AUM. Growth (%) 12.0 13.7 3.3 23.3 22.9
madhukar.ladha@hdfcsec.com  Profits hit in FY18 and 2QFY19: Elevated expenses PAT 4,026 5,219 4,782 5,674 6,858
+91-22-6171-7323 (staff, IPO-related and marketing) have resulted PAT growth (%) 1.2 29.6 -8.4 18.6 20.9
lower earnings. We conservatively expect NOPLAT to EV/EBITDA (x) 15.1 9.3 8.1 8.0 7.0
Keshav Binani improve from 15bps of AUM in FY18 to 17bps in P/E (x) 23.3 18.7 20.6 17.3 14.3
keshav.binani@hdfcsec.com FY21E. Increase in profitability will be a key trigger for RoE (%) 21.9 25.1 20.4 22.6 24.9
+91-22-6171-7325 re-rating of the stock. Source: Company data, HDFC sec Inst Research
RELIANCE NIPPON : INITIATING COVERAGE
Retail led AUM growth

RNAM is the industry leader  RNAM is concentrating on building a retail (folio size  A higher share of retail assets also means higher
in retail assets with 13.9% < Rs 0.5mn) business as retail assets tend to be equity assets, as more than 2/3rd of industry
market share as of Oct-18. stickier than HNI assets. individual assets are invested in equities which carry
a higher yield for RNAM.
 This is also evidenced by aging analysis of equity
assets at an industry level. As seen in the chart- 60%  This strategy has also resulted in RNAM now having
of retail equity assets are with fund houses for more the highest share of retail assets amongst the top 5
than 12 months, within these assets ~2/3rds are with AMCs. RNAM has 13.9% retail asset share as against
the industry for more than 24 months. ~13.0% for HDFCAMC vs. ICICI Pru- 10%, SBI MF-
8.5%, and Birla- 8.1%.
 RNAM has grown its total retail assets at a CAGR of
47.2% pa from April 2013 to October 2018 to Rs  Retail assets cost more: RNAMC has built 298 offices
802bn- taking the contribution of retail assets in total at various locations across the country in order to
assets to 34.2% as of Oct 2018 from just 10% in FY13. garner more retail and more B-30 assets.
Clear focus on positioning as a

retail franchise. Retail growing, HNI falling in the mix Rising retail share
Retail Corporate HNI Other Institutions (Banks/FI/FII/FPI) Retail assets AUM (Rs bn) - LHS
% Retail AUM as % of total AUM- RHS
100 4 4 5 5 6 4 4 34.2
1,000 40.0
20 17 16 15
30 26 29.9
37 800 25.0 30.0
19.9 21.5
49 47 600
RNAMs share of retail assets 50 54 52 20.0
53 50 400 837
732
has grown from 10% in FY13 49
527 10.0
200
to 34% as of Oct-18. 31 34 273 341
19 21 25
10 14 - -
-
FY15
FY16
FY17
FY18
Sep-18
FY13
FY14
FY15
FY16
FY17
FY18
Oct-18
Page | 72
60% of industry’s retail AUM Retail assets are most sticky in Indian MFs RNAM has highest retail share among top 5 AMCs
stay invested for more than %
0-1 Month 1-3 Month 3-6 Month Retail (%) Corporates (%) Banks/Fis/FIIs (%) HNIs (%)
24 months. 6-12 Month 12-24 Month >24 Month 100 3 4
100 90 15 25
12 22 31
80 36 39
80 39 18 42 41 5
70 2
22
60 15 60 4
47
20 16 21 19 50
40 32 38 47 51
17 15 15 40 38
14
20 9 11 10 30
11 0 9
9 17 12 7 20
- 6 11 8 34
10 24 20 19 19
Retail
FIIs
Banks/FIs
High Networth
Corporates
-
Individuals
SBI
RNAMC
HDFC
Birla
ICICI Pru
RNAM’s retail AUM market
share has improved from Source: Company, AMFI,HDFC sec Inst Research Note: On basis of MAAUM of Oct-18.
10.3% as of Mar13 to 13.9% Source: Respective company disclosures, HDFC sec Inst Research
as of Oct18.
Retail AUM market share
%
16.0 13.9
13.0
12.0 10.2 10.0
8.5 8.1
8.0 5.9
4.7
3.7 3.4
4.0
-
SBI
Reliance
HDFC
Franklin Templeton
Birla
ICICI Pru
UTI
Sundaram
AXIS
DSP
Note: On basis of MAAUM of Oct-18.

Source: Company, AMFI,HDFC sec Inst Research
Page | 73
RNAM’s SIP book is more Strong SIP Flows

granular compared to  RNAM’s SIP book is more granular than that of the time when industry flows have grown 2x since Sep-
industry average. industry as its avg. ticket size at Rs 2,924 is lower than 16.
the industry average of Rs 3,250.
 Given current environment where pressure exists on
 It is commendable to see that RNAM’s SIP market wholesale flows, the SIP book is expected to prevail
share has stayed stable within the 10-11% range at a and ensure stability in new flows.
SIP book has grown more than 3x Market share has remained stable
SIP book (Rs bn.) - LHS SIP (Rs/folio) - RHS SIP Market Share (%)
3,500 2,924 9.0 11.2
2,885 11.0 11.0
3,000 2,625 8.0 11.0 10.9
2,329 7.0 10.8
2,500 2,108 10.7 10.6
6.0 10.6
2,000 10.5
5.0 10.4 10.4
8.5 4.0 10.5
RNAM’s SIP market share 1,500 7.5 10.2 10.2
3.0
has remained stable over 1,000
4.4 2.0
10.0
3.4 9.8
last 2 years. 500 2.7 1.0
9.6
- 0.0
Sep-16
Sep-17
Sep-18
Jan-17
Jan-18
Mar-17
Mar-18
Jul-17
Jul-18
May-17
May-18
Nov-16
Nov-17
FY15
FY16
FY17
FY18
Sep-18
Source: Company, HDFC sec Inst Research Source: Company, AMFI,HDFC sec Inst Research
SIP contribution to lead Equity AUM growth

SIP Inflows (Rs bn)
Equity QAAUM (Rs bn)
SIP as a % of Equity QAAUM - RHS
1,000 11.2 12.0
10.2
9.3
800 8.6 10.0
569 906 8.0
600 882
477 6.0
400
4.0
200 53 90 102 2.0
41
- -
FY16
FY17
FY18
Sep-18
Note: SIP inflows are annualized on the basis of year end SIP
book size. Source: Company, HDFC sec Inst Research
Page | 74
B30 cities are relatively High share of B30 assets Brand impacting HNI assets growth
underpenetrated and have
room to grow.  RNAM sources 17% of its assets from B30 cities,  The “Reliance” brand to a certain extent has been
whereas the industry average is 15%. tainted by negative news surrounding some of its
promoter ADAG companies. This we believe has
 The company is focusing on growing its ground made fund raising from HNI clients (folio size >
Share of B30 assets is higher presence by adding new offices in B30 cities. Over the 0.5mn) difficult.
for RNAM compared to the last year the company has added more than 120
industry. offices taking the total branch count to 298.  HNI share in total assets has dropped from 37% in
FY13 to 15% as of Oct-18. In absolute terms HNI
 Industry B30 AUM has a higher proportion of equity assets have grown just 0.9%pa from FY13 to Oct-18
assets at 64% as compared to 37% for T30. This to Rs 358bn.
Higher share of B-30 leads to means that higher proportion of assets will be high
better stickiness and higher yielding in this segment.  In fact over FY15-18, HNI assets have actually
equity share declined from Rs 364bn to Rs 358bn.
 As of Sep-18, RNAMs B30 MAAUM was Rs 413bn,
HNI assets have grown at whereas retail MAAUM was Rs 837bn.  We believe any increase in stake by Nippon Life in
RNAM or any resolution of the issues in group
mere 0.9% CAGR from FY13 to
companies will go a long way to ease the “brand”
Oct-18. overhang on the business.
Page | 75
Fund underperformance, change initiatives

 RNAM’s funds have underperformed compared to  RNAM is aspiring to build a faceless fund
In FY18, RNAM has gone peers. This is evidenced by 4 star+ rating for just management organization. The company intends not
through investment 53.1% of rated AUM. This number is significantly to create star fund managers who become the face of
higher for other AMCs (SBI 75.6%, MOFSL 92.2%, Birla the company. Additionally, the company has also
management team rejig.
69.6%, Kotak 82.8%, and ICICI Pru 73.6%). added new talent within the investment
 Further still, 1&2 star rated AUM as % of rated assets management team across various levels.
is at 37%, worst among the top 5 AMCs.  We expect these changes to result in better
 Further, most of AUM has been built under the performance over time. Additionally with no “large
erstwhile fund management team comprising brand” fund managers, the company should be able
industry veterans who have exited. A new CIO, to (1) Retain a higher proportion of assets on the exit
Manish Gunwani has been roped in from ICICI of any manager, and (2) Keep a tighter control on
Prudential MF. He has 21 years of work experience. fund management staff costs.
Manish Gunwani has been

appointed as the CIO.
Page | 76
RNAMs share of 1 and 2 star Performance comparison of top AMCs

rated AUM is highest amongs ICICI Pru HDFC AMC RNAMC Birla-Sunlife SBI MF Kotak MF MOAMC
5 Star 3.3 - 8.2 10.5 26.3 38.2 6.6
similar sized AMCs.
4 Star 70.3 52.1 44.9 59.1 49.3 44.6 85.6
3 Star 25.2 14.9 9.4 25.9 9.8 13.3 -
2 Star 1.3 31.0 22.4 - 12.6 3.8 7.9
1 Star - 2.1 15.1 4.6 2.0 - -
Rated AUM Total 100 100 100 100 100 100 100
Rated AUM (as % of total AUM) – a 82.2 62.3 89.2 82.7 86.6 90.8 82.9
Not rated schemes (% of equity AUM) – b 17.8 37.7 10.8 17.3 13.4 9.2 17.1
Others 5.6 13.6 10.8 10.0 9.2 9.2 7.7
Total (a + b) 100 100 100 100 100 100 100
Rated AUM (Rs bn) 1,209 998 834 773 753 457 162
RNAM has underperformed compared to peers Only 53.1% of AUM is rated 4 star and above.
Outperforming Schemes- 4 star plus (%) 5 Star
1 Star
Underperforming Schemes- 1 to 3 star (%) 15.1 8.2
100.0 7.9
24.4 17.2
26.4 30.4
80.0 47.9 46.9
Share of equity in the asset
mix has improved from 27% 60.0
ifnFY14 to 33% in FY18. We 92.1

40.0 75.6 82.8
73.6 69.6 2 Star
expect this to improve further 52.1 53.1 22.4
20.0
to 40% by FY21E. 4 Star
-
44.9
Birla-Sunlife
RNAMC
HDFC AMC
SBI MF
ICICI Pru
MOAMC
Kotak MF
3 Star
9.4
Source: Value Research, HDFC sec Inst Research Source: Value research, HDFC sec Inst Research
Page | 77
Higher equity assets have not necessarily led to higher profits

 As per the table below for FY18 and 2QFY19, earnings FY17 and FY18 respectively. Management states
(EBITDA) for the company have not kept pace with that marketing and publicity expenses were
revenues despite a significant increase in proportion higher partly due to FY18 being an IPO year for
of equity ex-arbitrage assets. the company. Part of the increased marketing
and publicity expenses were also due to benign
 FY18 vs. FY17
equity market conditions which led to increased
 Proportion of equity ex. arbitrage has grown marketing spends to attract flows.
significantly to 29.8% (+356bps) and yields have
 Management attributes increase in brokerage
declined by ~2bps on an overall basis. Revenue
and incentive costs to benign equity market
growth at 21.3% YoY has kept pace with asset
conditions which led to increased payouts to
growth.
distributors. This is in line with what has
 Staff costs have grown at 17.6% YoY while transpired in the industry at large.
administration and other expenses have grown Yields have remained flat despite rise in equity
27.9% YoY. Increase in expenses is on account of
share
focus on new branches openings across India-
increased network to 282 locations as of March Blended calculated yields (bps) Share of equity(%) - RHS
2018 from 171 branches as of Jun-17. 80.0 34.0
Within equity assets, 32.0
32.6
arbitrage funds have gained  Within administration and other expenses, 32.0
marketing and publicity expenses have grown 75.0
AUM share. Arbitrage funds
have lower revenue yield as 33.0% YoY and brokerage and incentives at 38.4% 28.9 30.0
70.0 28.1
YoY. 27.5
compared to core equity 28.0
funds, contributing to flattish  Management attributes increase in staff costs to 65.0
increased hiring as a result of opening of branch 26.0
blended yields. 66.0 65.9 75.6 66.8 65.6
offices. 60.0 24.0

FY14
FY15
FY16
FY17
FY18
Marketing expenses have gone up from Rs
632mn (4bps of AAUM) in FY16 to Rs 1,298mn
(7bps of AAUM) and 1,726mn (7bps of AAUM) in Source: Company, HDFC sec Inst Research
Page | 78
2QFY19 vs. 2QFY18 locations in the last one year. We expect these
 Proportion of equity ex. arbitrage assets has expenses to start bearing fruits as most of these
grown significantly to 33.4% (+567bps), however additions are done we should start seeing
cash moved out of debt funds (-850bps) to liquid operating leverage play out on this. We are
funds (+250bps). Overall yields declined by ~3bps building staff costs to stabilize at around 12bps of
partly also as a result of reduction of exit load by AAUM.
In our analysis we found out
15bps 2QFY19 onwards.  Marketing expenses grew from Rs 352mn (4bps
RNAM doesn’t pay higher of AAUM) in FY14 to Rs 1,726mn (7bps of AAUM)
commissions to distributors  Staff costs grew by ~30.3% YoY denting EBITDA
growth to just 2.7% YoY. Management attributes in FY18. Now that the IPO is behind us, we expect
than its competition. moderation in marketing expenses from 7 bps in
the sharp rise in costs to (1) increased people
hiring at branches and (2) phantom share FY18 to 6 bps in FY21E.
expense provisions. Both these amounts have not  As discussed in industry section, due to
been quantified by the company. restriction on payment of upfront commissions,
 Management has not quantified the additional there will be substantial reduction is brokerage
expenses for the two time periods making it difficult expenses. However upfront commission changing
to ascertain recurring profitability. to trail may not help profitability substantially.
 We expect some of these costs to stabilize and  Admin and other expenses grew at a CAGR of
operating leverage to play out and accordingly have 15.2% from Rs 1,668mn in FY14 to Rs 2,937mn in
built in:- FY18, going forward we expect moderation in
 Staff costs and other operating expenses are such expenses as some of them will be expensed
expected to stabilize- RNAMC headcount have directly from the scheme account. Admin
increased from 971 as of Jun-17 to 1,210 as of expenses/AAUM is expected to fall from 12bps in
Sep-18. RNAM has added offices around 120 FY18 to 7bps in FY21E.
C-I Ratio (%) FY18 C/I Ratio: Higher cost base compared to peers
% %
80 74
80 72 69
66 66 66 69 68 70 62
70
59 57 60
60 52
52 46
50 50
40 40
30 30
20 20
10 10
- -
72 66 59 66 66 69 68 57 52
SBI
RNAMC
HDFC
I-Pru
Motilal
Source: Company, HDFC sec Inst Research estimates Source: Respective company, HDFC sec Inst Research
Page | 79
Within equity assets, Financial summary

arbitrage funds have gained IGAAP IGAAP IND-AS IND-AS IND-AS IND-AS
YoY (%) YoY (%) YoY (%)
FY17 FY18 1HFY18 1HFY19 2QFY18 2QFY19
AUM share. Arbitrage funds
Revenues 13,074 15,857 21.3 7,547 7,856 4.1 3,868 3,911 1.1
have lower revenue yield than
Staff cost 1,957 2,301 17.6 1,156 1,415 22.4 566 738 30.3
core equity funds,
Admin & Other Opex 6,451 8,253 27.9 3,917 3,647 -6.9 1,960 1,795 -8.4
contributing to flattish Total Exp 8,408 10,554 25.5 5,073 5,062 -0.2 2,526 2,533 0.3
blended yields. EBITDA 4,665 5,304 13.7 2,474 2,794 12.9 1,342 1,378 2.7
Depreciation 179 336 87.3 186 179 -4.0 83 87 4.2
EBIT 4,486 4,968 10.7 2,288 2,616 14.3 1,259 1,292 2.6
Other Income 1,326 2,289 72.7 838 629 -24.9 329 329 0.1
PBT 5,812 7,257 24.9 3,125 3,244 3.8 1,587 1,620 2.1
Tax 1,786 2,038 14.1 1,000 1,005 0.5 550 490 -11.0
In our analysis we found out PAT 4,026 5,219 29.6 2,125 2,240 5.4 1,037 1,131 9.0
RNAM doesn’t pay higher
commissions to distributors Yield (bps) 69 67 66 65 67 64
than its competition.
AAUM (Rs bn, for the period) 1,899 2,357 24.1 2,272 2,426 6.8 2,314 2,448 5.8
AAUM Mix (%)
Equity 26.2 29.8 356 27.3 33.5 624 27.7 33.4 567
Arbitrage 1.9 2.8 93 2.7 3.5 75 3.3 3.6 33
Debt 49.5 44.1 -536 46.5 40.7 -577 47.0 38.5 -850
Liquid 19.1 17.9 -120 18.0 17.3 -73 17.0 19.5 250
ETF 3.4 5.4 207 5.5 5.0 -50 5.0 5.0 0
Page | 80
Fund expenses to be directly paid from scheme Employee expenses growth to remain steady
Management attributes rise Admin & other Opex(Rs mn) - LHS Staff cost(Rs mn) - LHS
in staff expenses to branch As a % of AAUM (bps) - RHS As a % of AAUM (bps) - RHS
additions and additional 3,500 17 18 4,000
15
16
hiring in the investment team. 3,000
15 14 13
16 3,500 13 13 12 14
12 14 11 12
2,500 3,000 10 12
11 12 10
2,000 2,500 10
10
7 7 2,000 8
1,500 8
6 1,500 6
1,000
4 1,000 4
1,668
1,810
2,159
2,559
2,937
2,640
2,011
2,131
1,512
1,613
1,923
1,957
2,301
2,830
3,255
3,743
500 2 500 2
- 0
- 0
FY14
FY15
FY16
FY17
FY18
FY19E
FY20E
FY21E
FY14
FY15
FY16
FY17
FY18
FY19E
FY20E
FY21E
Now that the IPO is behind us, Source: Company, HDFC sec Inst Research estimates Source: Company, HDFC sec Inst Research estimates
we expect marketing and
publicity expenses to
moderate going forward. No upfront commissions beginning 22 Oct 18 Marketing and publicity expenses
Brokerage/ incentives(Rs mn) - LHS Marketing and publicity expenses(Rs mn)- LHS
As a % of AAUM (bps) - RHS As a % of AAUM (bps) - RHS
4,000 25
3,500 2,000 7 8
7 7 6
20 20
3,000 6 7
2,500 1,500 6
15 15 5
14 4 5
2,000 13 4
1,000 4
Effective 22nd October 2018, 1,500 10
3
8 7
AMCs can’t pay upfront 1,000 500 2
5
1,298
1,726
1,726
1,761
1,849
3,120
2,594
3,589
3,175
commissions to distributors 4
352
573
632
500
754
927
985
414
1
except on SIPs (subject to 1 - 0
- 0
some conditions)
FY14
FY15
FY16
FY17
FY18
FY19E
FY20E
FY21E
FY14
FY15
FY16
FY17
FY18
FY19E
FY20E
FY21E
Source: Company, HDFC sec Inst Research estimates Source: Company, HDFC sec Inst Research estimates
Page | 81
De-risked distribution Model

RNAM is focusing on growing  RNAM has tie ups with 71 banks, 98 National  Additionally IFA’s (who have not tied up with
its IFA base. distributors and 70,000 IFAs with no single distributor wholesale distributors) have lower bargaining power
contributing more than 4.5% of RNAM’s AUM. and charge comparatively lower commissions.
 RNAM has focused on growing its IFA base, as IFAs
have deeper retail penetration. B-30 reach is also
important as this category is most underpenetrated.
RNAM has diversified High share of IFAs Building low cost IFA AUM
distribution model, where no IFA AUM (Rs bn)
Distribution Mix (%)
distributor contributes more 700 613
585
than 4.5% of AUM. ND 600
19 484
500
350 373
400
300 260
IFA
50 200
100
Despite the focus on growing -
Banks
IFA base, share of IFAs AUM
FY14
FY15
FY16
FY17
FY18
Sep-18
31
in total AUM has remained
stable at around ~25% over
Note: Company does not disclose its total direct AUM share. Source: Company, HDFC sec Inst Research
years. Source: Company, HDFC sec Inst Research
Direct hasn’t meaningfully picked up RNAM lags its peers in direct share
Equity oriented schemes (%) %
40 37
20.0
30 26
14.3 14.3
15.0 12.4 18 18
11.1 20 16 15 14 14
9 7
10.0 10
In the absence of proprietary
-
bank channel, we believe 5.0
SBI
Reliance
Motilal Oswal
HDFC
Aditya Birla
Franklin
UTI
AXIS
KOTAK
ICICI
growing IFA base is the right
-
strategy to garner equity
FY16
FY17
FY18
Sep-18
assets.
Source: Company, AMFI, HDFC sec Inst Research Source: Company, AMFI, HDFC sec Inst Research
Page | 82
Nippon Life’s global presence to aid in further AUM expansion

RNAM aims to leverage on  RNAM is also expected to lever upon Nippon Life’s Nippon’s global presence
Nippon’s global presence for global presence and is expected to become the go-to Insurance and insurance related Country
company for Nippon Life associates when investing in
its offshore advisory business. Reliance Nippon Life Insurance India
India.
Great Wall Changsheng Life Insurance China
 Currently RNAM is advising two Japan based funds of Bangkok Life Assurance Public Thailand
Nippon Life.
PT Asuransi Jiwa Sequis Life Indonesia
 Apart from managing US$ 529mn Nippon Life has MLC Limited Australia
substantial stakes in several global insurance and
asset management companies. A brief list is provided
below. Asset Management
PanAgora Asset Management, Inc. USA
 Over time we may see some benefit accruing to the
company on account of advisory mandates from Post Advisory Group, LLC USA
these entities. Source: Nippon Life Annual Report, HDFC sec Inst Research
Page | 83
ICDs remain a concern

RNAM continues to receive
interest income on these ICDs.  ICDs to Reliance capital group companies (ADAG We remain skeptical of recoverability of these
group companies) amount to Rs 4.25bn as of March deposits
2018. Intercorporate deposits (Rs mn) Reliance
Securities
 Historically RNAM continued to give advances to 150
ADAG group companies despite the entry of Nippon
Life. ICDs had dropped to Rs 2bn in FY15 from a high Reliance
Reliance ARC
of Rs 7.8bn in FY12; however advances to group 850
Infrastructure
companies again rose to Rs 4.25bn in FY18. 1,750
 Group companies continue to service the ICDs at an

ICDs were given first in FY11. attractive rate of interest. See chart below.
 Management has asserted that no additional deposits Reliance
will be made out to group companies and it remains Power
1,500
optimistic of recoverability of existing advances.
 We have not factored these deposits in our valuation. Source: Company, HDFC sec Inst Research
Intercorporate deposits
Despite Nippon’s entry, Intercorporate deposits (Rs mn) Interest on ICDs (Rs mn) Calculated Interest rate (%)
RNAM has given 10,000 14.5 14.1 16.0
7,800
intercorporate deposits to its 7,000 13.2

14.0
11.6
6,250
group companies. 8,000
10.7 12.0
10.0
4,265
4,250
6,000 11.0 9.9
8.0
3,150
2,800
4,000
2,000
6.0
1.8 4.0
817
2,000
658
597
565
563
523
297
2.0
25
- -
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
Page | 84
Risks
Industry/macro RNAM related
 Macro slowdown especially when the industry seems  Under-performance
to have made a cyclical high
 Continued under-performance will have a negative
 The Indian mutual funds industry has had a impact on fund raisings and hence even on
spectacular run in the last few years and especially performance.
FY18 where equity inflows touched an all time high of
Rs 2.6tn. This seems like a cyclical high given the  Inability of the company to pass on TER reductions to
Distributors prefer ULIP over equity flows FY19TD are Rs 0.98tn. Any significant distributors
Mutual Funds owing to higher slowdown in flows will have a serious consequence to  The profitability of the company will be negatively
commissions. profitability. impacted in case it is unable to pass on the proposed
reduction in TERs to distributors.
Sales attractiveness of ULIP as investment
products Brand
 The new proposed reduction in TERs effective from  Any additional negative news emanating from group
01/04/2019 will mean a significant reduction in trail entities may further tarnish the brand making future
commissions for distributors. This along with the fact fund raising more difficult.
that up-front commissions have also been curtailed  Non recoverability of ICDs or any further deployment
means that ULIP become a much more attractive of capital in ICDs
product for distributors to sell.
 As discussed in the earlier section as of March 2018 a
total of Rs 4.25bn was still given out as deposits to
group entities. Any further deployment as ICDs or
non-recoverability of currently deployed sums would
create an an adverse impact on investor perception
and stock price performance.
Page | 85
Estimates and Valuation

Estimates  As a result of the above changes revenue growth for
 We have built FY18-21E MF equity assets growth of FY19E shall remain flat whereas it shall be -6.8% for
18.7% and total MF AUM growth of 10.8%. FY20E. However margins FY20E onwards will
improve significantly to 43% from 31% in FY18 as
 Given the changes in TER to be implemented from expenses shift from the books of AMCs to the various
01/04/2019 we estimate RNAM equity fund TERs to schemes run by them.
decline 17 bps. Most of this reduction in TER is
expected to be passed on to distributors.
Valuation
 Given the new rules around expenses, and up-  Return ratios improve significantly: Core RoICs are
fronting of commissions we expect asset expected to improve from 85% in FY18 to 215% in
management companies to benefit as 1) companies FY21E.
are not allowed to incur foreign travel, and other
entertainment expenses towards distributors and 2)  We value the company on Adj. EBIT post tax. We
capital invested in business will reduce as working have adjusted EBIT for the Goldman Sachs mutual
capital blocked up-front commissions will be freed fund acquisition amortization of Rs 250mn and used a
up. RNAM is now paying an increased trail tax rate of 30% to arrive at an adj. EBIT post tax.
commission to distributors for fresh money raised.  We have applied a DCF based multiple of 20.9x on
This amount does not pass through the financials of FY21E Adj. EBIT post tax to value the core business at
AMCs as it is directly paid out by the respective Rs 121bn. Our DCF assumes a 13% overall AUM
schemes. growth until FY30, a stabilized operating margin of
 We expect marketing and publicity expenses which 17.8bps as percentage of AAAUM, a terminal growth
have grown from 4bps of AAAUM in FY14 to 7bps of rate of 4% and cost of equity of 12.3%.
AAAUM in FY18 principally as a result of IPO and a  We have added FY20E projected net cash and
conducive capital market cycle, to reduce back to investments of Rs 19bn to the above but have
~6bps of AAAUM by FY21E. excluded ICDs to group companies.
 Our FY20E equity value works out to Rs 140bn or Rs
228/share.
Page | 86
Incremental capital requirement is negligible

Incremental capital Core Capital employed(Rs bn) - LHS ROIC (%) - RHS ROE (%) - RHS
requirement is negligible in 6.0 250
the business.
5.0
4.6
215
4.5
5.0 200
3.8
4.0 153 151
3.3
150
2.5
2.7
3.0 103
92 85 100
We have built in a dividend 2.0 66 65
1.3
payout of 60% for FY19E-21E. 1.0 25 23 25
50
17 23 24 22 20
- -
FY14
FY15
FY16
FY17
FY18
FY19E
FY20E
FY21E
Going forward we expect flat We expect flat revenue growth due to pricing pressure
revenue growth despite the Income from operations (Rs bn) - LHS Adj. NOPLAT Margin(%) - RHS PAT Margin (%) - RHS
expected growth of 10.8%
18.0 41.8 41.7 45.0
CAGR during FY18-21E in MF 38.4
16.0 37.0 40.0
AUM due to pricing pressure. 33.2 32.9
34.9
14.0 31.4 30.8 30.2 31.6 35.0
12.0 26.1 26.2 30.0
24.3 23.7 24.2
10.0 25.0
8.0 20.0
6.0 15.0
4.0 10.0
2.0 5.0
6.8 8.5 12.0 13.1 15.9 15.9 14.8 16.4
- -
FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E
Page | 87
We expect profitability to improve going further

Revenue Adj NOPLAT PAT
bps
90.0
78.3
80.0
Because of expected 68.1 68.0 68.9 67.3
70.0 63.5
moderation in expenses, core
60.0 52.5 51.3
margins are expected to
improve from 23.7% in FY18 50.0
to 36.8% in FY21E. 40.0
28.4 26.0
30.0 25.2
21.2 22.1 19.2 20.2 21.4
20.0
10.0 21.3 20.5
17.8 16.7 15.9 15.4 16.6 17.9
-
Page | 88
Impact of TER reduction

 We are building in a weighted average reduction in TER on equity AUM of ~15bps.
Top Equity Scheme(s) AUM (Rs bn) Old TER (bps) Revised TER (bps) Change (bps)
Equity remains the most Reliance Equity Hybrid Fund 132.7 177 156 21
profitable segment with Reliance Large Cap Fund 110.6 177 156 21
highest TERs charged. Reliance Tax Saver (Elss) Fund 97.8 178 161 17
Reliance Multi Cap Fund 96.7 178 161 17
Reliance Small Cap Fund 71.5 179 162 17
Note: AUM is MAAUM for Nov- 18and TERs as on 30th Nov18.
Source: Company TER disclosure, HDFC sec Inst Research
Expect fall in yields due to TER changes

Revenue/AAUM (bps)
90
78
80
Going forward fund related 68 68 69 67
70 64
expenses paid directly from
60 53
scheme will impact revenue 51
50
yields by ~5 bps going
40
forward.
30
20
10
0
FY14
FY15
FY16
FY17
FY18
FY19E
FY20E
FY21E
Page | 89
We expect MF AUM to grow Assumptions

at a CAGR of 10.8%, whereas FY17 FY18 FY19E FY20E FY21E
equity AUM at 18.7% during Closing AUM (Rs bn)
Mutual Fund 2,036 2,261 2,394 2,698 3,075
FY18-21E. Managed Accounts 26 32 35 38 41
Offshore funds and advisory 19 28 29 32 34
Pension 1,425 1,643 1,840 2,024 2,227
Total 3,506 3,964 4,298 4,792 5,377
MF AAUM (Rs bn)
Equity 533 768 914 1,069 1,283
Debt 939 1,040 977 1,075 1,183
Liquid 362 421 476 524 576
ETFs 64 128 128 145 164
Total 1,899 2,357 2,495 2,813 3,205
Growth (%)
Equity 9 44 19 17 20
Debt 34 11 (6) 10 10
Liquid 12 16 13 10 10
ETFs 250 101 - 13 13
Total 24 24 6 13 14
Share (%)
Equity 28 33 37 38 40
Debt 49 44 39 38 37
Liquid 19 18 19 19 18
ETFs 3 5 5 5 5
Total 100 100 100 100 100
As % of MF AAUM (bps)
Total operating expenses 44 45 42 28 25
EBITDA 25 23 22 24 26
EBIT 24 21 21 23 25
NOPLAT 16 15 15 16 17
PBT 31 31 27 29 31
PAT 21 22 19 20 21
C-I Ratio (%) 66 69 68 57 52

Tax Rate (%) 31 28 29 30 30
Source: Company, HDFC Sec Inst Research estimates
Page | 90
Rising share of equity to support yields

Equity (%) Debt (%) Liquid(%) ETFs (%)
100 2 2 1 3 5 5 5 5
90 21
22 23 19 18 19 19 18
80
70
60 37
46 44 39 38
50 48 46 49
40
30
20 37 38 40
27 29 32 28 33
10
-
Total AUM to grow at 10.7% CAGR during FY18-21E.

Mutual Fund Pension Managed Accounts Offshore funds and advisory
Rs bn
6,000
34
5,000 32 41
29 38
28
4,000 19 35
32
26 2,227
3,000 43 2,024
60 1,643 1,840
24 1,425
2,000 21
994 1,223
2,698 3,075
1,000 2,036 2,261 2,394
1,294 1,461
-
FY15
FY16
FY17
FY18
FY19E
FY20E
FY21E
Page | 91
Company background
 RNAMC is India’s largest AMC in terms of total assets  RNAMC has a total MF folio count of 8.6mn as of Sep-
under management- which includes. 18, with a market share of 11%. Company has
added 1.3mn folios in past 12 months.
 It ranks 4th when it comes to Mutual fund assets with
assets of Rs2.4tn, as of Sep-18.  RNAM acts as the advisor for India focused Equity
and Fixed Income funds in Japan (launched by Nissay
 It is also involved in managing: Asset Management) and Korea (Samsung Asset
 ETFs Management)
 Managed Accounts, including PMS, AIFs and  First AMC to have launched ETF jointly in partnership
pension funds. with GOI as part of disinvestment program.
 Offshore fund management.
Evolution of RNAMC
Year Particulars
1995 Company was incorporated
1995 Received SEBI’s approval. Launched Reliance Growth Fund and Reliance Vision Fund.
2004 Commenced portfolio management services and offshore operations in Mauritius.
2003 Executed agreement to provide PMS service to EPFO
2012 Received first tranche of investment from EPFO.
2013 Nippon Life bought 26% stake in the company from Reliance Capital.
2015 Nippon Life increased stake to 35%, bought additional stake from Reliance capital. QAAUM crossed Rs 1.5 trillion.
2016 Nippon Life further increases stake to 44.5%. RNAMC acquired asset management rights of 12 schemes from Goldman Sachs.
2017 Sale of stake by Nippon Life and Reliance Capital via IPO at Rs 252 per share.
2017 Listing of shares on stock exchange. QAAUM crossed Rs 2 trillion.
Source: Company RHP, HDFC sec Inst Research
Page | 92
Management team Investment management team

 CEO: Sundeep Sikka is the Executive Director & Chief  CIO-Equity Investments: Manish Gunwani is CIO -
Executive Officer of Reliance Nippon Life Asset Equity Investments at Reliance Mutual Fund. Manish
Management Limited(RNLAM). Sundeep has held graduated from IIT Chennai with a B.Tech and has a
both Vice-Chairman and Chairman positions of the Post Graduate Diploma in Management from IIM
industrial body AMFI. He joined RNLAM in 2003 and Bangalore. Manish has 21 years of work experience
has handled various positions through which he has primarily in equities spanning roles in equity research
been instrumental in building domestic and and fund management. He has also co-founded a
international operations of the company. technology company in the document management
space.
 CFO: Prateek Jain has over 16 years of experience in
finance. Prior to this, he worked with AIG Global  CIO-Fixed Income: Amit Tripathi has more than 20
Asset Management Company as CFO & Head Risk years of experience in Financial Services. He has been
Management. He has also been associated with with RMF for around 14 years.
organizations like Howden Insurance Brokers India
Pvt Ltd. and ICICI Lombard General Insurance
Company Ltd.
Page | 93
Shareholding pattern
 Reliance Capital Ltd and Nippon life Insurance hold Top Institutional Shareholders (%)
42.9% each. HDFC Asset Management 3.13
IIFL Asset Management 2.49
 As per SEBI rules, company needs to increase its
public shareholding to at least 25% within 3 years Valiant Mauritius Partners Ltd 1.76
from listing. Thus we should see an additional Aditya Birla Sunlife AMC 0.58
offering of 10.8% until Oct 2020. At current market UTI Asset Management 0.34
price the stake will be worth Rs 10.6bn. Bank of New York Mellon 0.24
Newton Investment Management 0.18
 So promoters have to cut their stake by at least by
10.8%. IDFC Mutual Fund 0.18
Dreyfus Corp 0.13
ICICI Pru Life Insurance 0.13
Shareholding as of Sep-18. Source: Bloomberg, HDFC sec Inst Research
% Public and
FPIs others
2.8 4.1
MFs and
FIs/Banks
7.4
Promoters
85.8
Page | 94
Income Statement Balance Sheet

(Rs mn) FY17 FY18 FY19E FY20E FY21E (Rs mn) FY17 FY18 FY19E FY20E FY21E
Net Revenues 13,074 15,857 15,851 14,769 16,443 SOURCES OF FUNDS
Growth (%) 9.0% 21.3% 0.0% -6.8% 11.3% Share Capital 415 6,120 6,120 6,120 6,120
Employee benefits expenses 1,957 2,301 2,830 3,255 3,743 Reserves 18,311 16,748 17,848 20,040 22,766
Operating expenses 6,451 8,253 7,541 4,756 4,394 Minority Interest - - - - -
EBITDA 4,665 5,304 5,480 6,758 8,306 Total Shareholders Funds 18,726 22,868 23,968 26,160 28,886
EBITDA Margin (%) 35.7 33.4 34.6 45.8 50.5 Long-term Debt - - - - -
EBIDTA Growth (%) 12.0% 13.7% 3.3% 23.3% 22.9% Short-term Debt - - - - -
Depreciation 179 336 331 349 367 Total Debt - - - - -
EBIT 4,486 4,968 5,149 6,409 7,939 Other Financial Liabilities & Provisions 216 298 296 304 336
Other Income (includes treasury ) 1,326 2,289 1,587 1,697 1,857 Other Non Current Liabilities - - - - -
Interest & Financial Charges - - - - - Net Deferred Tax Liability (37) 35 35 35 35
PBT 5,812 7,257 6,736 8,106 9,797 TOTAL SOURCES OF FUNDS 18,904 23,201 24,298 26,498 29,256
Tax 1,786 2,038 1,953 2,432 2,939 APPLICATION OF FUNDS
RPAT 4,026 5,219 4,782 5,674 6,858 Net Block 2,512 2,327 2,123 1,921 1,719
APAT 4,026 5,219 4,782 5,674 6,858 Loans & Deposits 1,488 1,414 1,227 639 679
APAT Growth (%) 1.2% 29.6% -8.4% 18.6% 20.9% Other Non Current Assets 74 3 - - -
AEPS 6.9 8.5 7.8 9.2 11.1 Total Non-current Assets 4,074 3,743 3,349 2,560 2,398
EPS Growth (%) 1.2% 24.4% -9.1% 18.6% 20.9% Current Investments 9,465 8,716 9,482 10,301 11,201
Source: Company, HDFC sec Inst Research Debtors 432 404 434 405 450
Cash & Equivalents 397 6,062 6,975 8,938 10,927
Loans & Advances 5,840 6,461 5,219 5,316 5,423
Other Current Assets 268 326 359 395 434
Total Current Assets 16,402 21,969 22,469 25,354 28,435
Creditors 1,083 1,154 217 202 225
Other Current Liabilities 489 1,358 1,303 1,214 1,351
Total Current Liabilities 1,572 2,511 1,520 1,416 1,577
Net Current Assets 14,830 19,457 20,949 23,938 26,858
TOTAL APPLICATION OF FUNDS 18,904 23,201 24,298 26,498 29,256
Page | 95
Cash Flow Key Ratios

(Rs mn) FY17 FY18 FY19E FY20E FY21E FY17 FY18 FY19E FY20E FY21E
Reported PBT 5,813 7,258 6,736 8,106 9,797 PROFITABILITY (%)
Non-operating & EO Items (1,339) (2,161) (1,587) (1,697) (1,857) EBITDA Margin 35.7 33.4 34.6 45.8 50.5
EBIT Margin 34.3 31.3 32.5 43.4 48.3
Interest Expenses - - - - -
APAT Margin 30.8 32.9 30.2 38.4 41.7
Depreciation 179 336 331 349 367
RoE 21.9 25.1 20.4 22.6 24.9
Working Capital Change 2,474 364 376 388 (40) Core RoCE 65.1 84.7 103.0 151.3 214.6
Tax Paid (1,580) (1,883) (1,953) (2,432) (2,939) EFFICIENCY
OPERATING CASH FLOW ( a ) 5,547 3,913 3,902 4,714 5,327 Tax Rate (%) 30.7 28.1 29.0 30.0 30.0
Net Capex (2,572) (151) (127) (148) (164) Asset Turnover (x) 9.9 6.6 7.1 7.3 9.0
(Purchase)/sale of net operating Debtors (days)
- - - - - Other Current Assets (days) 12 9 10 10 10
financial assets
Free Cash Flow (FCF) 2,975 3,762 3,775 4,567 5,163 Payables (days) 7 8 8 8 8
Investments (1,002) 2,047 (766) (819) (900) Other Current Liab & Prov (days) 30 27 5 5 5
Working Capital (days) 14 31 30 30 30
Non-operating Income 632 953 1,587 1,697 1,857
Debt/EBITDA (x) (24) (41) (18) (18) (18)
INVESTING CASH FLOW ( b ) (2,942) 2,849 694 731 793
Net D/E (0.0) (0.3) (0.3) (0.3) (0.4)
Debt Issuance/(Repaid) - - - - - Interest Coverage - - - - -
Interest Expenses - - - - - PER SHARE DATA
FCFE 2,975 3,762 3,775 4,567 5,163 AEPS (Rs/sh) 6.9 8.5 7.8 9.2 11.1
Proceeds From Issue of Share CEPS (Rs/sh) 7.2 9.1 8.3 9.8 11.7
- 5,869 - - -
Capital DPS (Rs/sh) 4.2 5.0 4.7 5.6 6.7
Dividend (3,003) (6,686) (3,683) (3,482) (4,132) BV (Rs/sh) 31.9 37.4 38.9 42.4 46.8
Others - (280) - - - VALUATION
FINANCING CASH FLOW ( c ) (3,003) (1,097) (3,683) (3,482) (4,132) P/E 23.3 18.7 20.6 17.3 14.3
NET CASH FLOW (a+b+c) (398) 5,665 913 1,963 1,989 P/BV 5.0 4.3 4.1 3.8 3.4
EV/EBITDA 15.1 9.3 8.1 8.0 7.0
Opening Cash & Equivalents 795 397 6,062 6,975 8,938
OCF/EV (%) 6.3 4.7 4.8 6.0 7.0
Closing Cash & Equivalents 397 6,062 6,975 8,938 10,927
FCF/EV (%) 3.4 4.5 4.6 5.8 6.8
Source: Company, HDFC sec Inst Research FCFE/MCAP (%) 3.0 3.8 3.8 4.6 5.3
Dividend Yield (%) 2.6 3.1 2.9 3.5 4.2
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ASSET MANAGEMENT COMPANIES : INITIATING COVERAGE : INITIATING COVERAGE
RECOMMENDATION HISTORY
HDFC AMC FV RNAM TP

2,200 350
2,000
300
1,800
1,600 250
1,400
1,200 200
1,000 150
800
600 100
Dec-17
Dec-18
Oct-18
Aug-18
Apr-18
Jan-18
Nov-18
Feb-18
Sep-18
May-18
Jun-18
Jul-18
Mar-18
Dec-18
Oct-18
Aug-18
Nov-18
Sep-18
Rating Definitions
BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period
NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period
SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period
Page | 97
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INITIATING COVERAGE 31 DEC 2018

Asset management companies

Industry AUM has grown 6x in last 10 years MF AUM as a % of GDP

Developed nations generally have higher Equity AUM/GDP

MFs are underpenetrated in India

India is a savings driven economy

Financial Savings of the Household Sector

Break up of Gross Financial Savings (%)

Evolution of Mutual funds in India

Others HDFC AMC

Source: Respective Company, HDFC sec Inst Research

Revenue Yield (bps) 64 61 71 61 65

Top 10 AMCs Revenues and PAT for FY18

Large sized gaining AUM share AMCs AUM share: Sept-18

Source: Respective company AUM disclosures, HDFC sec Inst

Share of equity has consistently increased from FY14

Source: AMFI, HDFC sec Inst Research

Equity drives profitability

Correlation of Equity mix and Profitability : FY18

0.5 Motilal Oswal AMC

0.3 Reliance MF 0.26

Source: Respective company AUM disclosures, HDFC sec Inst Research

Revenue yields: FY18 Core Profitability : FY18

Equity AUM share : FY18 Return on core capital employed : FY18

Overall AMC comparison

Industry flows asset class wise and AUM

Equity (including balanced)

Source: AMFI, HDFC sec Inst Research

Types of Mutual Fund investors

Rising individual participation

Individual investor allocation

2.1 1 1 0.8 0.6 0.5

HNI and retail equity assets

Source: AMFI, HDFC sec Inst Research

Liquid/Money Debt (%) Institutional ownership is higher

 Individual investors allocation towards fixed income

Direct on the rise

Rise of direct is favorable for

Upfront commission can be SIPs

SIP flows have grown more than 2.5x

successful in educating 0.0

Source: AMFI, HDFC sec Inst Research

Percentage of SIP inflows is substantial

SIP inflows to lead AUM growth

Keeping mark to market

Note: SIP as % of beginning equity AUM is annualized for FY19.

Performance comparison of top AMCs

Underperformers losing equity AUM share

Source: Value Research Nov-18, HDFC sec Inst Research

Motilal and Kotak AMC are performing the best.

60.0 14.9 9.4 44.6

Note: Outperforming schemes are 4 and 5 star rated schemes

Asset managers vs. life insurers

Insurance vs MF AUM Insurance inflows are more stable

ETF/FOF Global ETF landscape

Largest ETF funds

Recent Regulatory changes

Equity schemes are categorized as:

Total expense ratio (TER) reduction

Other regulatory changes

Impact of regulatory changes

Impact on AMCs forward as upfront commission payment is allowed

Commission/remuneration payout on regular premium policies: