I am told that AMC stocks of mutual funds can give good returns. Can I by HDFC AMC stock after its latest quarter results?

HDFC AMC is the manager of the HDFC Group of mutual funds which has the largest assets under management (AUM) in India. HDFC AMC was the second AMC to be listed on the bourses after Reliance Nippon AMC.

How HDFC AMC performed in the fourth quarter March 2019?

For the fourth quarter ending March 2019, the HDFC AMC reported 64% growth in profits to Rs.276 crore. The AMC’s total income was also up by 10% at Rs.547 crore. The AMC basically derives its income from the total expense ratio (TER) charged to fund units for the funds managed by them. As on the close of March 2019, the HDFC AMC manages close to Rs.3,45,000 crore of AUM and the revenues in the form of fees are directly related to the AUM. The company has also paid Rs.24 as dividends for the full year.

Is it worth buying HDFC AMC at current valuations?

The company quotes at a P/E of 42X earnings but that may not be too relevant in an industry that does not have any benchmark. A better way to look at the stock valuation would be the market cap as a ratio to the assets under management. With a market cap of Rs.34,000 crore, the market has assigned a valuation of around 9-10% the AUM. Normally an AMC with a strong equity franchise gets a buy value of 7-8% of its AUM. From that perspective, the stock is still reasonably valued. However, there are 2 points to be kept in mind. SEBI has taken steps to reduce the costs of fund management and that will show up in the form of lower revenues this year. Also the issues pertaining to cases like the FMPs where HDFC AMC has also invested in promoter debt is likely to be sentimentally negative. While we believe that there could still be upsides on the stock, one must assess the impact of the SEBI announcement on fees and the FMP issue before taking an investment call.