© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, good day, and welcome to HDFC Asset Management Company Limited Q1 FY '21 Earnings Conference Call hosted by IIFL Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Devesh Agarwal from IIFL Securities. Thank you, and over to you, sir.
Thank you, Nirav. Good evening, everyone, and welcome to 1Q FY '21 earnings call of HDFC Asset Management Company Limited. Today, from the management, we have Mr. Milind Barve, the Managing Director; Mr. Piyush Surana, the Chief Financial Officer; and Mr. Simal Kanuga, the Chief Investment -- Investor Relations Officer. Now I hand over the call to Simal for opening comments. And thereafter, we will open the floor for Q&A. Over to you, Simal.
Thanks, Devesh, and everyone at IIFL Securities for hosting this call. We really appreciate the same. Good evening, everyone, and we hope that everyone here is doing well. As usual, I'll start off with an overview of the industry and our company, in particular. We'll be happy to take questions thereafter. The industry started off the quarter with lower base AUM of INR 22.3 trillion, principally attributable to fall in equity markets in month of March 2020. Despite the lower base, quarterly average AUM ended up at INR 24.6 trillion, which is a marginal degrowth of 3% over that of June 2019. The quarter that went by saw healthy inflows to the tune of INR 1.24 trillion across asset classes. Equity-oriented QA AUM stood at INR 9 trillion for June quarter and ended the quarter with AUM of INR 9.8 trillion. Equity-oriented AUM has seen a degrowth of 7% year-on-year, despite positive net new flows in every quarter. The pertinent thing to note here is that industry started this quarter with a AUM of INR 8.3 trillion and ended the quarter with AUM of INR 9.8 trillion, with flows of only INR 63 billion -- net new flows of only INR 63 billion during the quarter. The current quarter, that is July to September, is starting with a base of INR 9.8 trillion as against INR 8.3 trillion in the quarter that went by. SIP flows for the month of June 2020 added up to INR 79 billion as against INR 86 billion in March of 2020. Now moving to us. Our market share in quarterly average AUM stood at 14.5% for the last quarter as against 14.2% for June 2019 and 13.7% as of March 2020. QA AUM for the quarter ended June 2020 was INR 3,562 billion as against INR 3,624 billion and closing AUM was, more or less, flattish over the past 12 months at INR 3,575 billion.In terms of actively managed equity-oriented AUM, our QA AUM market share stands at 14.5%. QA AUM for June 2020 adds up to INR 1,293 billion as against INR 1,645 billion for quarter ended June 2019. The fall can be predominantly attributed to fall in markets in March 2020, which has been partially compensated by rise in April to June quarter and even then after. The closing AUM as of June 2020 is INR 1,378 billion against the closing AUM of INR 1,200 billion for March 2020. We would like to reiterate that 70% to 75% of our fee income is dependent on our equity AUM. As of June 2020, equity AUM was 39% of our total AUM as against 48% in June 2019. This can be attributed to 2 things: large inflows in our liquid fund -- liquid and debt funds and mark-to-market loss in our equity AUM. Individual AUM is 51.7% of our total AUM as against 50.5% for the industry. We continue to be the most preferred choice for individual investors with market share of 14.6% in individual AUM. Our unique investor count is 5.6 million as against total of 21.1 million in the industry. Systematic transaction flows for the month of June 2020 was INR 9.6 billion across 3.11 million transactions. The number we are referring to here is based on actual cash flows received. We continue to be #2 player in B30 market with 11.7% share. We have 145 branches in B30 centers. We have seamlessly moved to our digital infrastructure in these lockdown times. During the quarter that went by, 90% plus of our transactions were processed digitally. It would be pertinent to share that we have further enhanced our digital capabilities, including WhatsApp transaction services and also e-KYC or, for that matter, video KYC. A first-time investor in mutual fund can now transact in our fund without any paperwork. We -- during the quarter, we addressed more than 10,000 partners through webinars and other forms during the quarter and have more than 90,000 participants attend our various programs. We continue to operate out of 221 branches, service over 9.4 million live accounts and have a workforce of 1,192. Coming to financials. The quarter of the previous financial year saw a growing uncertainty due to the emergence of COVID-19 pandemic and its effect on markets across the globe. The fall in equity markets and consequent lower equity AUM affected revenues negatively, since a large proportion of the investment management fee, earned by the company, is from equity schemes. The operating profit for the quarter ended June 30, 2020, was INR 3,006 million as compared to INR 3,815 million for the quarter ended June 30, 2019. This is a decrease of 21%. Profit before tax for the quarter ended June 30, 2020, was down by 12% to INR 3,804 million as compared to INR 4,299 million for the quarter ended June 30, 2019. Profit after tax for the quarter ended June 30, 2020, was INR 3,024 million as compared to INR 2,917 million for the quarter ended June 30, 2019, resulting in an increase of 4%. PAT for the quarter ended June 30, 2019, was arrived at by applying higher tax rate since the option of lower tax rate under Section 115BAA of the Income Tax Act was introduced during the quarter ended September 30, 2019. Our operating profit margin, as a percent of average AUM for the quarter ended June 30, 2020, is 34 basis points as against 41 basis points for the year ended March 31, 2020. We also showcased that slide giving breakup of our investment book in the presentation. What we announced last quarter, the Board of Directors had proposed dividend of INR 28 per share for the financial year ended March 31, 2020, which was approved by the shareholders in today's AGM. Thank you for patient hearing. Stay safe, everyone. We'll open it up for questions now. Milind and Piyush would take -- would be happy to take questions, if any. Nirav, you may go ahead and open for questions now.
[Operator Instructions] The first question is from the line of [ Nitin Jain ] from [ SK Capital ].
So I have 3 questions actually...
[ Nitin ], sorry to interrupt you. May I request you to speak a little louder, please.
Hello? Can you hear me now?
Yes.
Yes. So the equity portion of your AUM, it has seen a serious fall, like, from approximately 50%, almost 2 years ago, to just 37% now. And also the company has lost market share of almost 1.5% in just the last 1 year in the equity segment. So given that equity AUM is the main driver of the management fee, what corrective actions have you thought of to address this concern? And my next question is that your annual report talks of your investment style in equity-oriented schemes? So you mentioned that you're mindful of the fact that there can be long phases in the market when alterative approaches to investing perform better and that you are building capabilities in other styles by hiring appropriate resources. So if you could please elaborate further on that.
Yes. So just to take the first question, yes, it is true that the equity AUM, which at one time, say, 1 year back was about 46%, 47% has come down to 37%. But you'll appreciate a large portion of this is really the mark-to-market fall and most of that actually happened in the month of March when the market had very, very steep fall. You will be happy to know that the -- our equity AUM, which was about INR 1,20,000 crores in March has been steadily recovering and has recovered to almost INR 1,45,000 crores over the last -- latest figure. As on 30th June, it may be a little lower than that. It may be closer to -- Simal, is it INR 1,39,000 crores or INR 1,40,000 crores?
That's right, yes.
Right. So -- but it continues to grow. So we are in the midst of a very clear recovery of the AUM as markets have recovered, as you know, in the months of April, May and June, and our equity AUM has been a part of that recovery. While we agree with the fact that there has been some fall in market share, and I think I'll come to the second question. So the first point is that, we believe that given the medium-term outlook on equity and the recovery that we are hoping to see in markets, in general, and we are looking at where we will be eventually, and we don't know when exactly and very accurately, but we are looking at a market scenario, which is post-COVID and so on. And we believe that the equity AUM has a very strong sensitivity to how markets do, apart from having sensitivity to the flows. While if you see, historically, those have added to the book by about 5% or 6%, if you go by the last year. Most of the increase in the book size of the year really comes from the mark-to-market movement. So we remain optimistic that we would -- we are positioned reasonably well to be a part of this recovery in the markets, which we have already seen from the months of April onwards to June and some of it even going after that. Having said that, yes, it is true that as we have dealt with it very candidly in our management discussion on investment performance, it is fair to say that our investment performance in some of our large equity funds has been less than what people expect of us. We do believe a couple of things. Number one, we do believe that investment like market cycles, also investment performance goes through some cycles where for some period of time, some of your key calls will not go right or it will take longer for them to actually result in positive performance. Having said that, what we recognized on a more broader basis is that what we need to bring about in our equity book of about INR 1,40,000 or thereabouts is our effective diversification of investment styles. So while some of our funds have followed our particular style, which has not delivered performance, as we have said in our note, we do believe and we are very careful and very mindful of the fact that we need to build a diversified style eventually. We are in the midst of that. So what have we done to in that direction? Number 2 -- number 1, we have hired actually 2 new fund managers, 3 actually in the team and 1 of them is in the PMS, who are already on board, and we believe and we're happy to say that we have got good feedback from the market about these 2 hires. They are very high-quality resources. They come with different perspectives in the market, different from what we have been following so far in some of our large funds. And we do believe that as they manage money over a period of time, bring their differentiated approach to investing from what we have been following, it will result in improved performance in some of the funds that we are managing. The other thing, of course, is that even in our existing funds, where there is no change in fund manager, we will be endeavoring towards an effective diversification. Right now, we seem to have reasonable overlap in our equity holdings across a number of our funds. And what we will do progressively over a period of the next 2 or 3 quarters is to reduce the overlap so that the -- each of these funds has a more distinct style and positioning in the marketplace and our portfolio construct so that the idea -- so what are we trying to achieve? We are really trying to achieve that in a large fund book that we have in equity, which is about INR 1,40,000 crores, you must have clearly at least 4 or 5 distinct strategy, reasonably low overlap of holdings of stocks. So I think we are moving in that direction, and I think, remain confident that in the next few quarters, you will see evidence of the different construct in the portfolios. New fund managers are already hired, bringing their skills to the team, will create a more differentiated call. So we are mindful of the performance. We are -- while we do believe that the part of it will recover through the holdings that we currently have, but we are also preparing the portfolio on an overall basis. And I'm looking at it as the more CEO and how the Board looks at it and how the INR 1,40,000 book, we will have differentiated efforts, which will deliver better investment outcomes. There are different phases of the market. There are sometimes certain types of stocks or certain sectors that are incredibly highly valued, and certain stock sectors, they can go back deep into value. So we will have a differentiated approach, which we think will help us in the long run or even in the medium term.
Just a follow-up on that, sir. Could we see, like, new project launches as well from the company?
See, product launches is quite -- it's easy to say, we will have new product launches, but the reality is that SEBI has now bucketed different strategies by different name, like value, you can have only 1 value fund or multicap fund, you can have only 1 multicap fund. So we have more or less filled up with our existing product range most of the buckets which are available. If I'm not wrong, the only thing that we don't have is, like, a dividend yield fund. So that is something that we will look at, if we feel dividend yields are strong. But having said that, we are, as a team, looking at whether we must do, which we have not done much, is more thematic funds. So the thematic fund segment is more open in terms of not having existing thematic funds, and we could look at thematic or sector-biased thematic funds in the future. But otherwise, most of the equity types of products that are allowed by SEBI, we already have a product in those -- each of those markets.
Next question is from the line of Manish from Nippon.
This is Manish Poddar from Nippon AIF. Just wanted to get your thoughts on -- will there be a change in the structure of operating post-COVID because if you look at it, we -- in the kind of AUM mobilization in the channel, that hasn't changed much. So just wanted to get your sense in terms of, let's say, you've mentioned sometimes the research part or the investment part of the business in the first question. Just on the sales structure, branch network, let's say, from a 3 to 5 years perspective, will there be any change? Or is there any thought process there?
Okay. First, in the branch, we have 221 branches. And as you know that when the COVID happened and then the lockdown started, our first priority was safety of our employees and our customers. So we had very, very few branches open. So we were open to transact on the electronic channels. That is we have very strong properties like HDFC MF online and there's one for HDFC Partners, which is for our distributors. Over a period of time, we had, as you know, about 221 branches. As we speak now towards the end of June and middle of July, we have about 140-plus branches, which are opening with very few employees in each of the branches, manning critical functions only, and we are holding the rules of the local regulations on what we can and cannot do. If you ask me in this quarter, there hasn't been anything structurally different, except the fact that simply if I see transactions on -- HDFC MF online, which was 12%, 13%, is now at 20% plus. If you see new registrations on our platform, which is, again, HDFC MF online, it has doubled in terms of users registering on our HDFC MF platform as compared to the previous quarter. So there is a shift clearly seen of people who may be a little reluctant in the past when you could still go to the office or send somebody to the office with a form and a check are now having, to some extent, being pushed by circumstances to use online channels, and they are doing that. And I'm happy to say that our -- the properties that we have, the facilities that we have to transact online, we are committing more resources and time, and that is helping us and will probably continue to help. But going forward...[Technical Difficulty]
Sir, can you hear us? Mr. Barve, can you hear us. Participants, please stay connected, while we rejoin Mr. Barve back to the call.Ladies and gentlemen, thank you for your patience. We have line from Mr. Barve connected back to the call. Sir, you may go ahead.
Yes. So as you are seeing, there is no structural change in distribution channel, per se, except that people are using electronic modes of investing in funds or whether it is a redemption or a purchase. I think that was my answer. You can go to the next question.
Just another one, if I may. So the basic one. So when you say unique visitors, let's say, are about 5.6 million, so how do you define unique as such?
Unique is decided by unique permanent account number. So sometimes if you have 2 or 3 folios -- so we have, for example, 9.5 million -- 9.4 million or 9.5 million customer accounts, but there may be some duplication in that. So if you reduplicate those accounts and find -- count one PAN number only once, then those are the 50 lakhs, 52 lakhs customer that we have.
Sir, but this 5.6 million is the -- is still also live number? So this is live number. It won't be of any individual, let's say, an individual will open that portfolio in, let's say, 2010, and he redeemed his portfolio in 2012. Would -- that would not be part of this number at all?
No, no, this is live. These are people who are -- these are who are our customers today.
So just a corollary to this, would you be having any idea then, let's say, in this universe of 21-odd million, what would be the lapse rate or some consumer would have used HDFC product, in the MF products, in the last 3 years or so, some sort of idea that this is the kind of number you can attain to?
No. No. No. So we calculate -- we keep calculating unique customers as long as that we are -- as a unique customer count is net of people who are going out. So finally, I'm concerned with, let's say, 5,000, 10,000 people joining and maybe 2,000 people leaving. But I will then say my net number is 8,000. So the unique investor count is a net number. So we are not separately counting additions minus deletions. I mean, we have that data which maybe we can answer that offline. But effectively what you are seeing and targeting is that there is an effective addition to new customers, net of the people who are going out.
Next question is from Haresh Kapoor from IIFL Asset Management.
Just in continuation to the last question, just want to get some sense on this unique investors and even the SIP pool, maybe together or individually as you would like. Now if you just look at the details that you're giving out for the unique investors to your company, obviously, the industry number is going up. But if I just look at March, maybe it's a shorter time frame, but even then, there is no real change for you, per se, in terms of unit to -- you compared to the industry. So the industry has grown, but you have not really grown in that. So maybe if you can just talk through that. And if you just look at the SIP number, I do understand, and I think Mr. Simal has also, initially, in his SIP comments, has emphasized on the cash flow on the SIP part. And we do know that some money doesn't come through and there is some rationalization required there. But even then, if you kind of just look at the flow of data from SIP number from March to June, maybe the industry is down 10%, you're kind of down, like, approximately 15% or so. So obviously, you're losing market share on the SIP side. I know the data that you gave is for the entire transaction pool on the SIP side, which can have STP and SIP. So maybe if you can just talk through what's really happening there because that's an important customer aspect that I would like to understand on the unique customers and also the SIP side.Second, if you can just talk through a little bit on the cost side? So obviously, Q4, you had rationalized some cost on the employees. So maybe some normalization on the bonus front, et cetera, based on how the year had panned out, and you're seeing in Q1, some of those numbers normalizing on the employee expense front. Also, there has been some rationalization on the other expenses, maybe the discretionary part, et cetera, travel expenses, et cetera, that you are doing. So if you can just talk through what levers you have because your AUM on a closing AUM though really looks better. Even on the average for the quarter, per se, it's more or less similar, but the mix has changed meaningfully than what we had seen previously, which will have some implications on the revenue line, though the closing number is similar. So maybe for some time, you might need some cost lever to kind of accelerate that profitability. So maybe if you can just talk through this part. And I'll just come to one part maybe later on.
Yes. So first on the SIP, it is absolutely undeniable that we are a part of an industry, which has seen degrowth in the SIP flows, and we are very much part of that. I think the simple reason is that today we are in the midst of, or in at, hopefully, I can say, peak or hopefully ahead of the peak on the pandemic. So there is a certain degree of -- we are looking at -- if you look at 3 year returns, even of the benchmarks, they are fairly low single-digit returns. And what has happened in SIP is that while the merits of SIP has a way of investing for small or new investors does not remain unchanged, the reality also has been that investor returns, right, when we are evaluating in the midst of a pandemic is actually negative or low single-digit even after 3 years. So basically, what investors are saying is that -- and see, this is not the right way to look at it, is that this year, it's actually the time to actually sign up a new SIP or increase your SIP contribution. But people actually react based on more recency of their experience. And based on that, there is the new SIPs or the SIP cancellations have gone up and new SIPs are not getting signed, which is for the industry. Now within that, it is quite possible when you have a very dominant market share, you -- and if you have some sort of slight pushback on investment performance sometimes in a few quarter or even sometimes even a little longer, you will have some small -- you will have some drop in the market share. So it is true, and I agree with your comment, and I answered that in the earlier question that on a year-on-year basis, the market share fall is slightly higher. But if you see on a quarter-on-quarter basis, the market fall is, if I'm not wrong, on closing AUM is 14.8% becoming 14.4%. So I think we have now embarked a number of steps that we are seeing to correct the fundamental of what we are doing, which is fixing the investment performance, apart from simply being patient about -- we are not being complacent about it. I think the investment team, the CIO and the investment team as well as the Board has had a very constructive discussion on performance today morning, as they had in the earlier meetings. So we believe that we will fix investment performance as some of these slippages on market share will, at least in the medium term -- may not be in the short term, but in the medium term, will get fixed. Because once you diagnose the problem and when you apply the solution, we believe that the results will be there for people to see. But it will be difficult to predict these outcomes in very short periods, like 1 or 2 quarters. The second question was on operating cost logics.
Sir, before that, the question was also on the unique investors. Maybe it's a shorter time period, but that's not improving and the market improving? So is just that -- we should just look through because of a shorter time period or is there something to comment on that?
There is no meaningful change in our market share. We still have 26%, 27% of the unique investors. You could have a quarter in which the new investor addition could have been slightly higher or lower. But as a book and as a -- if you see the industry numbers, which we have given, it is 2.06 crore unique investors. We have about 5.6 million unique investors, which gives you about 26%, 27%. Now I don't think there is a trend of a 27% becoming 26% or 25.5%. I don't see that as a trend. As I said, as investment performance gets fixed, we will see a reversal of this as much, but I do not see that as a big trend in losing new investor addition shares in any meaningful manner. But obviously, it is a variable that you would like to monitor, and we'll do everything that it takes to fix that. And that will happen in the next 2 or 3 quarters as we see going forward. The second question on operating leverages remains reasonably good as we have demonstrated. If you look at our total cost, there is a saving. One of the saving is, of course, more regulatory driven, which is savings in commission, but you are seeing a drop in our employee cost. Last year, we had projected a certain level of employee cost and a certain level of variable payer bonus that was rationalized last quarter. Senior employees have taken a cut of 25% and the junior employees have taken some other cuts and a large number of very junior employees have taken no cuts in the performance pay. But effectively, we have created almost an INR 8.5 crores to INR 9 crores savings last year on performance-related pay. That is reflected. Now that has been assumed as to remain consistent, and that's why you see a saving in employee cost. The third part is that even on operating, what you see as other expenses, this quarter, we had a slightly disproportionate spend actually on CSR. And the reason for that is that we spent -- I won't say spent, we donated INR 7.5 crores to the PM CARES Fund in the very first week of April as soon as the lockdown was announced. So our pro rata cost of CSR should actually be about INR 6.5 crores, while what you see, which is already in the P&L, is about INR 9.5 crores. So there's a -- so if you had -- if the CSR cost is slightly higher than pro rata, CSR cost will not be there in the other quarters -- subsequent quarters. So you'll see some savings. But our endeavor is to try to reduce operating expenses on a 12-month basis, anywhere between INR 35 crores to INR 40 crores. And that's what we are targeting, which is what we'll do. And therefore, if you see the presentation deck, our operating expenses to AUM has actually reduced by 1 basis points. Our top line of revenue from AUM has come down because of the product mix, I think, deteriorated. But let me tell you this. When you're talking of AUM or equity AUM going down as a percentage of AUM, it is true for the whole industry. We are not the only ones. Because we had a large book and a large market share, for us, it's more visible in terms of the fall in equity AUM and the consequent loss of revenues that are coming from that. But as it recovers for the industry, so it will recover for us also. So I think -- so we'll try to keep our operating expenses amongst the lowest in the industry as a percentage of AUM. They are barely 6 basis points. And as you can see, there is some saving in that, even in this quarter, on a quarter-to-quarter comparison. So our -- we'll keep an hawk's eye on operating cost, and that, as you can see, INR 10 crores savings in this one quarter. We think between INR 35 crores to INR 40 crores savings is what we would like to achieve on a 12-month basis.
Sir, and lastly from my end was largely on the CEO front. So anyone can answer that, whoever is comfortable. So regarding -- certainly, you're retiring. So in terms of that process of transition and getting someone on board, where we are on that front? And have you assessed candidates? And if you could just throw some color to get some clarity will be helpful. By what time line, maybe we can expect something?
At this stage, it will be only fair to say that the Board has -- so we have a Nomination and Remuneration Committee, which is called the NRC. That committee is now seized with the task of finding my successor. That -- work on that has already begun. There is a search firm that has been appointed, and that search firm has already significantly -- has progressed on that front. It would be premature and inappropriate for me to comment exactly at which stage we are. But that search is very much on, and it is the committee, the Board with external search firm is also working closely with the NRC and looking at prospective candidates, internal and external, and will then eventually come up to the recommendation for the final candidate or a final few candidates, which will be approved by the Board. It would not be appropriate because the timing for me to comment on when we can make an announcement because I don't think we have reached far enough in that process to be able to say that in this month or by this date we will have an announcement. But I think my tenure ends in end of January, and I think within a reasonable time before that we should have an announcement on that.
Next participant is Nischint Chawathe from Kotak.
Yes. Two questions. One is a micro one, which is on what has really happened on the other income line item, where there is a big growth this quarter? And the other one is a broad view on what's really happening with retail investors because this was a quarter where we saw market doing quite well, but from an inflow point of view, it was a very weak quarter. So what is it that you are looking at over the next 9 months?
Yes. So the first -- your first question was on other income. Now basically, if you see the March year-end, we had INR 1,262 crore net profit. And the dividend payout was slightly lower in terms of percentages. But in absolute terms, it's higher than last year. So we are paying out about INR 590 crores -- INR 595 crores of dividend and the rest is added back. So basically, what will happen and will continue to happen is that from the profits we make, although we will try and keep a reasonably higher or a good payout ratio, there will always be surplus money, which will get added to the AUM of the AMC, added in the mutual fund AUM. So for example, on a year-to-year comparison, the total surplus that is lying in the AMC balance sheet has grown by almost INR 900 crores or 33%, while a lot -- all of it or almost all of it is in debt mutual funds within our own direct mutual funds and in tax-free bonds. So I think effectively what has happened is 3 things. It is, there is an increase in other income because the total AUM that we manage is higher by 33%. Number two, there has been benefit of mark-to-market gains because of lowering interest rate across the yield curve on debt products where we have invested. And the third thing, which we have mentioned is that on our exposure to the SL promoters, the value of the collateral went up from INR 36 crores to INR 77 crores, but we have conservatively revalued our exposure only by INR 9 crores from INR 29 crores to INR 38 crores. So that INR 9 crores also has come on a pretax basis into the other income. These are the 3 reasons why other income has gone up. And your broader question about what's happening with retail investors, well, definitely, we have to be mindful that you're having this conversation in the midst of a pandemic. So people are seeing last 1-, 2- or 3-year returns either in the negative or in low single digit. And therefore -- and also have seen there are good flows in the month of April, but the flows began to taper in May and were negative in June. And so I think people would want to wait to see some visibility of market and economy post the COVID. The market is factoring a world without or post-COVID, which may -- which is difficult to predict when it will happen. The retail investors are not committing new funds at this time when we, as a fund house, at least, believe they should be looking at what returns you are getting on debt, on bank deposits or any other asset class. The only exception where you have made huge returns is gold. So I think there will be some more time before retail investors reap -- I mean, sort of reposition their faith in the equity funds in specific. But flows into mutual funds, debt products continues to happen both from institutional as well as retail investors, and that's good for the industry. But we have to live through this period where equity as an asset class is going through some little redefinition where people will be ready to rebuild the confidence of retail investors in this product category, and flows will indeed come back. In the past also, we have seen where because of market situations, new buying into equity funds goes down or is neutral or even negative, but it builds back eventually as markets normalize and to come back to accepting equity as an asset class as what they have to invest or how is share of their wallet.
Just to take this forward, now when I compare this with some of the brokerages, I guess, they are reporting record volumes or one of the best quarters for last several years. I'm talking about the retail brokerages. So it looks like people are sitting at home and kind of betting directly in equity market. So do you think between the 2...
That's an interesting question. It is true that retail participation in the market in the turnover has significantly increased. But if you look very closely at the delivery volumes in the market, they have actually come down, which means that the retail investors are probably being more speculative buy, sell, trade. They are not necessarily putting medium or long-term money into equities by buying long -- going long into equity necessarily. That is my understanding from some of the data points that I have gathered. The delivery volume, as a percentage, have come down, which means that people are doing more short-term investing or more speculative investing. But there is -- yes, I agree. I mean, there is data to show that the retail investor transaction volumes have been very, very high. I also, I think, they are able to do that sitting at home from the comfort of the house in terms of the daily trading or things like that. But I think this is a period of time when the market momentum has been upwards. So then this typically happens when you have a one-way upward move in the market where people tend to do this daily trading. Eventually, people will come back to medium- and long-term investing through funds. So we as a fund house, and I personally do believe we have to make through this period. And eventually, people will come back to buying equities through mutual funds.
Next question is from the line of Akash Singhania from Motilal Oswal.
My question is for our surplus money, which has been invested into our mutual fund schemes, I wanted to understand like what has been the amount in, let's say, in March and June? So what has been the change? And as you mentioned, most of it is in the debt funds or the tax-free bonds. So is any part into equity also? And what kind of yield are we looking in the debt funds?
Piyush, you want to take that?
Yes. So the difference between the March and June numbers would be roughly in the region of around INR 300 crores and INR 350 crores, in terms of the book size, Akash. The other thing that you asked was -- sorry, can you repeat that?
So what is the book size and what is the yield we expect? And is there any equity component also?
So the book size currently is around INR 4,200 crores. During the quarter, this grew by around INR 300 crores, INR 350 crores. And the equity exposure is very small. It is the mandatory investments that we have to make in our own equity mutual funds and some other marginal equity exposure that we have in things like the industry platform that AMFI has launched, MFU and things like that. So totally, it's around 1.6%, all things combined, around INR 60 crores, INR 70 crores, roughly.
Okay. And what kind of yields have we earned in the last 1 year in our debt investments?
So over the last one year, we would have earned in the region of around 6%, 6% odd -- 6%, 6.5%. And this quarter, we would have had a little bit of a higher yield, particularly because of the point that Milind mentioned earlier.
Next participant is Sameer Bhise from JM Financial.
Just wanted to get some sense on credit funds as a product, given that, that piece of the puzzle has just come out of a bit of turmoil. So how are you seeing customers react, distributors react, and what's your sense on that side going forward?
So on the credit funds, it is true, there was -- there were events in the industry, which you are fully aware of, that happened around the last week of April. And that did trigger a bit of a panic generally in debt fund, but more specifically in credit risk funds. So it is true that credit risk funds, across industry, including ours, and we had one of the larger credit risk funds of about INR 13,500 crores, all of us in the industry have saw a reasonably high degree of redemptions through the first few weeks of May. But after the first week of May, just after the announcement of an event by one of the fund houses, the redemptions began to taper quite significantly. So there are periods when the redemptions were as large as INR 400 crores, INR 500 crores of size or even higher than that in a week. They have now tapered very significantly. I mean now our outflow or redemptions are almost as low as INR 120 crores to INR 150 crores a month. So we are down to hardly INR 7 crores or INR 8 crores of redemptions per day.So I think the environment from credit risk fund has improved significantly. What is more important is that our credit risk fund, yes, we did have a redemption which was -- which brought that AUM down from INR 13,500 crores to about INR 6,300 crores in the month of June end. Having said that, during this time of redemption, we actually were very conservative. We actually increased our AAA exposure in our credit risk funds from 24%, 25% to actually 34%, 35%. So if you include cash and net current assets, our credit risk fund today has 38%, 39% or close to 40% exposure in AAA cash and net current assets. So the profile of our credit risk fund has improved significantly, but I'm happy to say that the panic has almost completely subsided and now the redemptions in these funds are very, very low and fairly comfortable to manage.
But how do you feel the reception of this product coming back? Or how are customers reacting incrementally?
I think it's a matter of time where confidence will get built back in credit risk funds. And the reason I'd say that is because the safety of AAA funds can never be denied. That the AAA funds are having YTMs of 5.5% or sometimes even lower, if you look at medium term, which are AAA -- only AAA funds. So the yield gap between a credit risk fund, for example, our credit risk funds as of YTM or yield to maturity of the portfolio of about 9.5%. So for taking what kind of process -- and not that the non-AAA credit is something which is bad. It is -- we believe it is reasonably sound quality. It is very, very diversified and so on. So I think it's a matter of fact that people will start beginning to hurt on the current yields that they are seeing on AAA portfolios. And we'll, therefore, in a measured way, build up back some confidence in credit risk fund, at least, the credit risk fund where in fund houses they have faith in or where they have faith in the underlying portfolios -- or the quality of the portfolio and the liquidity of those portfolios. And what surprises me -- I mean, in a way, one is, in a way, surprised that the yield gap between a AAA and credit risk fund with a 40% AAA is almost like 400 basis points. And my sense is that gap will narrow, and people will come back. But we are in the business, and we are in this phase where confidence needs to be built back into these product categories, and we'll have to live through those product and be part of that build-back process.
Next participant is Saurabh Kumar from JPMorgan.
Just 2 questions. One is on this market share loss, is either fees or incentives or maybe M&A, any part of this could you address that? And second is on the dividend payout, any thoughts to increase that given the cash which just keeps building on the balance sheet?
Sorry, your first question was on...?
Sir, would you be open to either reducing your expense ratio in some of your larger schemes or increasing payout to distributors to address the market share or probably look at any M&A, merger or acquisition? And the second was on the payout, sir.
So we are not really looking at repricing anything on our equity book as of now. We may, practically, if you are promoting some schemes, which are reasonably small in size, you may look at it. That's something that we periodically keep reviewing.We do not have anything active as a strategy that is being considered to reduce the TER or increase the payout because, obviously, it has a impact. Both of these actions reduce share margins and the profitability of the product in the company. So you would be careful in terms of reducing TER below what you are allowed to charge. We also believe that investors who particularly come in direct plans are now not sensitive to the TER because investment performance significantly override the TER considerations. And I think as long as we focus on the investment performance and get that right, there is not much sensitivity to TER. And I would say, also, not as much sensitivity to payout as your payout has to be competitive, but it is not necessarily it has to be at the highest of amongst the competitors. So I don't think there is any active strategy under consideration on repricing that TER or the commission payout. The second thing is that we would look at anything strategically available from an M&A point of view. Having said that, there is nothing that is under active consideration where we are looking at any particular target as of now. But, yes, given the fact that we are listed company, which gives us a currency to actually use in an M&A situation actually adds to the ability to do an M&A. But we have to be careful because we have a fairly efficient, low-cost structure and high-operating profit margin business. And we'll be very careful that we don't dilute that criteria just for building size. But if you're able to bring size and economies of scale with it, we would look at it. I'm just giving you a little color to some of your thinking. But having said that, the short answer is there is nothing actively under consideration. In terms of cash, look, I agree that cash will continue to get built up in the balance sheet of the AMC. Having said that, the cash also gives -- for example, now we've got, actually, if you ask me one of the questions that we answered, our yield on our book is as high as 7.7% net of tax in this quarter. So if you use it efficiently, the book -- the surplus does yield you very efficiently returns without taking too much risk. Having said that, it does dilute return on equity. So the Board, I'm sure, will be mindful of the fact when it considers more normalized market environment when it decides the payout in the future.
Next question is from Nishant Chandra from Temasek.
I have 2 questions. Sorry, am I audible?
Yes, you are.
Okay. So on Page 14 of the presentation, right, I don't know if you had covered in your opening remarks, but there has been a sharp reduction in physical investments by the customers or physical transaction. So is that -- should we interpret it as a pent-up potential to be captured in the rest of the year? Or is it significantly captured already because of -- under electronic -- because of your digital initiatives?
Yes. So I must say that -- see, there are 2 ways in which people transact. One is online and other is physical. And during these last 3 months of the lockdown, clearly, even after the end of the quarter, we have just barely 140-plus branches, which are opening with skeleton staff out of 221. So clearly, people's ability to move out of the houses, with an application form and a check to do a physical transaction, is seriously constrained. So it is right -- you're right in assuming that basically these physical transactions will increase and go back to more normal levels once the lockdown environment eases in different parts of geographies that we deal in. Right now, we are actually working where physical transactions are severely constrained because of the lockdown and I think it is not at all at the normal level that we should normally see. Overall, as you see, as I did mention, we are at about 65% to 70% transaction volumes, overall. And the percentage of online has gone up because the physical has gone down. So I would think that the physical has really gone down because of the lockdown situation and should normalize as and when the lockdown are lifted across the country. Hello? Am I audible?
Nishant, do you have any follow-up questions? Next question is from the line of Dhaval Gada from DSP Investment Managers.
Just a couple of questions. First, if you could comment a little bit about the net yield currently in equity, debt and liquids versus last year, and if you could relate this to the fall in yield? I'm sorry if I have missed this earlier, but if can you repeat that and put some context in these 3 product segment. Then the second part was, in the initial part you mentioned about some change in terms of thought process on diversifying your investment style. Just I wanted to understand, on a conceptual level, what's the benefit that we might lose by sort of diversifying, which was working so far over the last 15-odd years, where the earnings volatility was quite low at a pretax level? So any thoughts around that? And the last question was related to 2 product segments. One is the dividend yield product and the second is overseas feeder funds. Any thought on these 2 products?
Yes. So your first question was whether we had, had any meaningful change in margins. We are not -- there's been very small change, movement downward in margins in equity, nothing meaningful. So the margins on product groups have remained broadly same. There has been some fall in the margin on debt because the credit risk fund, which we spoke about earlier, had a very high margin, and that has now depleted by almost INR 7,500 crores in this quarter. So the overall margins and also money is coming in into slightly more lower margin liquid or liquid plus funds, and therefore, the margins on debt have also come down a little bit, but not -- they have come down because of the fall in the flows into the high-margin products. Having said that, the larger reason for revenue to drop is because of the product mix volume, not much of the margin loss. Because debt was anyway 25% -- if you see our last year's presentation on March, debt -- equity represented 76% of the revenue. So debt, even if there is a fall in the margin, all of the debt and liquid is all put together 25% of revenue. So that doesn't impact total revenue. But if there's a fall in the product mix of the equity, that has a sharper impact on the total revenue, which is what is happening. And we believe that it will correct itself as we go forward in the future quarters. I'll be brief because I had a long answer on your other question, as I mentioned, and it is there as a part of our management discussion in our annual report. We have said that, see, we are a large equity fund house. We manage, as you speak, INR 1,45,000 crores of activity managed equity, minus some small amount of index funds. Now what we are seeing is that if we have very similar overlapping strategies across different funds then there can be a period of time when a number of your funds are not delivering good performance. So as a fund house or as a company or as a business we suffer when we go through that phase of the cycle. So what we are doing is actually fairly simple. We want to see that of the INR 1,40,000 crores, INR 1,45,000 crores that we had, we should have a reasonable amount following a particular strategy.So at any point of time, if we have 5 or 6 strategies at play, then maybe 1 or 2 are not doing well, 1 or 2 are doing average, but 1 or 2 are doing very well. And at least because of that, the flows into the business or the AUM gain because of mark-to-market gains will get normalized. What we have diagnosed as one of the things that we need to tackle is that we have reasonably large amounts in similar strategies, and that is the present situation that we are trying to correct. And I did mention in the earlier answer, what we are doing towards it. That is the broad approach that we as a large fund house should have, and that's what we are doing. That's what we have understood as a challenge, that over time, the Board, our investment team, Prashant and all of us are seized with. Sorry, did I miss some other part of your question?
Yes. Yes. The third question was related to the dividend yield and the feeder fund from the overseas products. So that is the third one. And sir, one follow-up on the first answer. On the debt side, so I understand the product mix impact. On the debt side, from 40 basis point net yield, you would have seen like, what, how much decline was the -- like ballpark there?
I think our debt yield for this quarter, if I'm not wrong, Piyush, correct me if I'm wrong, is it about 28, 29 basis points as compared to 37, 38, Piyush?
Yes. We would have lost around 4 or 5 basis points on...
Correct. So see, as I mentioned, we would have lost 4 or 5 basis point in debt, but all our debt and liquid is only 29% of our revenue. So the margin fall doesn't impact the total revenue. But if the equity portion falls down then I would have mentioned that as a different.
I mean just to add there. In the fall in the revenue, if you try and put an attribution, how much is margin fallen and how much is fall due to AUM, almost 80%, 85% is due to the fall in the AUM and the very little is the margin fall. And the margin fall is something which kind of sometimes is a little seasonal because some expenses get debited, sometimes less, sometimes more. And that kind of -- you need to look at the whole year. So I wouldn't read too much into margin fall, as Milind said.
Understood. Yes. And if you could answer the last one, on the products part. Yes, that's it.
Yes. See on the products, as I said, the dividend yield, I don't know we have to engage with our investment team whether we believe this is a -- there are, of course, pockets of the market, which have very high dividend yields. Right now, we are holding some reasonably high dividend yield stocks in our portfolio. Whether we should launch a very specific dividend yield funds, a number of utilities, for example, are having high dividend yields, we will discuss with our investment team whether we need to have a separate fund for that. As far as investing abroad through feeder funds, again, as I mentioned, we must be clear about it. We do not have currently expertise to select stocks. We may have to do a feeder fund of another global fund manager, which we may tie up with. It could be Standard Life. It could be some other fund -- other fund house. We will speak with, of course, our sponsors, Standard Life, first. So we'll approach that. Right now, if you ask me, is there something that we're about to do in the near future? The answer is no. But yes, this is an option that we will look at. There is one fund, which we are filing with SEBI, which is a multi-asset fund, not filling with SEBI, an existing fund, which we are repositioning, which is a multi-asset fund. In that fund, we have kept an enabling provision to invest in international securities.
Thank you very much. Ladies and gentlemen, due to time constraints, that will be the last question for today. I will now hand the conference over to Mr. Devesh Agarwal for closing comments.
Thank you, everyone. On behalf of IIFL Securities, I take this opportunity to thank the team of HDFC AMC for giving us this opportunity to host the call. Before we end the call, sir, would you like to add any closing remarks?
Just a short closing remark. Once again, thank you for your time and your patience for being on this post-results first quarter call. We, as I said in the beginning, as my colleague mentioned, we are going through unusual times as a fund house. And I personally believe that there is -- we have to look at times when things get normalized. We don't know when that will be, but we remain confident that eventually we will be in more normalized environment of the markets and economy. And I think as long-term investors, we remain very reasonably optimistic. I'm quite optimistic about where our business is positioned, the operating leverage that we have in our business, the high level of profitability that we have in the business and the control on cost that we have, as we continue to remain reasonably more profitable than any other fund house. And I think that's something that will remain as the core of our strategy. We have a job in hand on fixing investment performance, which we are very much seized of, and I remain confident that will happen as we go forward. Once again, from behalf of my team and myself, thank you very much for being on the call. And I hope you all stay healthy and safe. Thank you.
Thank you, sir.
Thank you very much. On behalf of IIFL Securities Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.