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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 the Q4 FY '21 and Full Financial Year '21 Earnings Conference Call of HDFC Asset Management Company Limited. [Operator Instructions] Please note that this conference is being recorded.From the management team, we have Mr. Navneet Munot, MD and CEO; Mr. Piyush Surana, Chief Financial Officer; and Mr. Simal Kanuga, Chief Investor Relations Officer. I now hand the conference call over to Mr. Simal Kanuga, who will give a brief, following which we will proceed with a Q&A session.Thank you, and over to you, sir.
Thanks, Margaret. Good evening, everyone, and thank you for getting on to this call. The presentation has been uploaded on our website as well as that of exchanges. As usual, a quick update on the industry, and we'll then follow it up with some specifics on our company. Navneet, Piyush and I are available for taking questions thereafter.Firstly, on equity-oriented flows. For the quarter that went by, industry saw net outflows of INR 84 billion. We would like to break this number into January, February and March. Industry witnessed outflows of INR 149 billion in January, followed by INR 59 billion in February, summing up to outflows of INR 208 billion in the first 2 months. We saw a directional change in March, where industry saw net inflow of INR 124 billion. Debt funds saw outflow of INR 410 billion in the quarter ended March '21. Liquid funds witnessed outflows of INR 422 billion. For the full financial year, debt funds saw inflows of INR 2,199 billion, while liquid fund had outflows of INR 240 billion.Individual folios for the industry continue to rise and is now at INR 97.3 million. B30 AUM is constant at 16% of the industry AUM. One data point that we would like to draw your attention to in regards to the B30 AUM is B30 equity AUM as a percentage of total B30 AUM stands at 66%. That is INR 3.4 trillion of the total of INR 5.2 trillion.SIP flows topped at INR 91.82 billion. We would request you to look at flows for each of the 3 months for the quarter, INR 80.23 billion for January, INR 75.28 billion for February and INR 91.82 billion for March. If you add up all of these, it comes to INR 247.33 billion, which is approximately INR 82.44 billion per month. There might have been some spillovers, which would have -- which would give a different picture if you look at data for a particular month.Now we'll move to AUM. Our quarterly average assets under management for the quarter ended March '21 was INR 4,156 billion, spread across 5.3 million unique customers, 9 million live accounts, service through 227 branches. Despite the kind of the environment we have lived through in financial year 2021, we opened 6 new branches, and our total employee strength increased by 60. Our total employee strength now stands at 1,254. We closed the year with an AUM of INR 3,955 billion, a growth of 24% over March 2020.On QA AUM basis, we saw a growth of 12% for the quarter ended March '21 as against that of March '20. In terms of overall AUM, our market share stood at 12.9% on QA AUM basis and 12.6% on closing AUM basis. If one excludes ETFs, our market share stands at 14.1% in QA AUM and 13.8% on closing AUM. Our rationale for presenting market share excluding ETF, is, as you are aware, that ETF AUM has over 80% of AUM from 2 asset management companies plus government disinvestment program stroke, PSU debt ETF.In terms of actively managed equity oriented AUM, our market share stands at 13.3% on QA AUM basis and 12.9% on closing AUM basis. There have been questions that we have received in past on our performance. Though too short a period to call, we have seen a material improvement in performance over the past few months, actually from October of 2020. Our market share in debt is at 14.4%, both in QA AUM as well as closing AUM, while that in liquid is at 16.7% and 15.7% in QA AUM and closing AUM, respectively.We continue to have a favorable asset mix as compared to that of industry in terms of higher proportion of equity assets. 57.6% of our AUM comes in from individual investors. Comparable number for industry is 53.7%. We continue to enjoy highest market share in individual AUM, and that stands at 13.7%. We processed systematic transactions, adding up to INR 10.4 billion in the month of March of 2021. As stated earlier, the number we report is on actual cash flow basis. We are a distant #2 when it comes to B30 AUM, with a market share of 11.7%. We continue to further our journey in creating a state-of-the-art digital infrastructure and leveraging on the same for enhancing customer experience.We'll now move on to financials. The company's financial performance in the initial period of this financial year had suffered due to effects of COVID-19 on the markets. Subsequently, things started improving as markets recovered and the situation had started looking quite upbeat in January, February 2021.However, due to the onset of the second wave of the pandemic across large parts of the country, things have deteriorated quickly since then. We saw an improving trend of operating revenue through the 4 quarters of this financial year. We worked on cost conservation through the year, and we're able to keep expenses in check, posting a savings of about 8% from previous year's total expenses. These savings were primarily achieved by a reduction in business development, travel, other overheads, et cetera.As we come out of the second wave, we'll have to increase spend on growing our business. In February 2021, a grant of ESOPs was made to certain employees and the expenses had -- employee benefit expenses include the pro rata amortization of the fair value of ESOPs as required under Ind AS accounting framework applicable to the company. A note on this has been provided in the presentation. This is a noncash charge and a book value neutral thing.Our operating margin had gone down to 34 basis points in quarter ended June 30, improved to 37 basis points in September 30, 2020, and to 38 basis points for the quarter ended December 31, 2020. It now stands at 37 basis points for the quarter ended March '21.In terms of financial highlights for the financial year ended March 31, 2021. Operating profit for the financial year, March 31, 2021, was INR 13,996 million as compared to INR 15,129 million for the financial year ended March 31, 2020. This is a decrease of 7%.Profit before tax for the financial year ended March 31, 2021, was up by 6% to INR 17,488 million as compared to INR 16,531 million for the financial year ended March 31, 2020.Profit after tax for the financial year ended March 31, 2021, was INR 13,256 million as compared to INR 12,625 million for the financial year ended March 31, 2020, resulting in an increase of 5%.Financial highlights for the quarter ended March 31, 2021. While we usually compare with similar quarters of the previous year, given the COVID-19 reset, we believe that sequential comparisons are also equally pertinent and hence have provided both in our investor presentation.The numbers for the quarter are as follows: the operating profit of the company for the quarter ended March '21 was INR 3,802 million. This is 7% higher than operating profit of INR 3,562 million for quarter ended March 31, 2020.Profit before tax for the quarter ended March 31, 2021, was INR 4,228 million. This was up by 28% as compared to INR 3,297 million for quarter ended March '20. Profit after tax for the quarter ended March '21 was INR 3,159 million. This was up by 26% as compared to INR 2,500 million for the quarter ended March '20.As this is Navneet's first interaction with all of you, I've requested him to say a few words before we open it up for questions. So Navneet, can you just take it over from here.
Thank you, Simal. Good evening. Thank you, everyone, for being on this call. The country is going through the second wave of COVID, and I hope all of you and your loved ones are safe. We are doing everything possible in our company to make sure that all our people and their families are able to tide over this difficult time.I joined HDFCAMC on 16th of February this year, so it's been a little over 2 months. As an outsider, I always admired this company and what it stood for. So it's a great honor for me to lead this team and serve this organization.My predecessor, Milind, took this company from an ideation stage into a leading asset manager, what it is there today. We have a leadership team, which is highly experienced. And in fact, a good number of them have been with the organization for a long time. In fact, some of them have been with us since inception. The team is bound by a strong set of values that are the hallmark of the HDFC Group. Prashant, who's been a veteran in the industry for almost 3 decades now, he leads a highly talented investment team. Over the last 2 decades, the company has built an outstanding franchise. It has size, it has scale, it has efficiency, as reflected in one of the largest assets under management and an industry-leading profitability. But we are definitely hungry to do more. And we have all the necessary ingredients in place. The pedigree, the brand we represent, HDFC, which is anonymous with trust and confidence, our people, our presence, by presence, I mean, our reach and distribution capability, products with long-term track record and all the necessary resources.The industry that we represent has seen phenomenal growth, especially in the last 6, 7 years. So if we look at long-term growth potential, it looks like we have just scratched the surface. So I feel very optimistic about our industry. I look forward to interacting with all of you in times to come, and we are open to take your questions.
Margaret, can you just start taking questions, please?
[Operator Instructions] The first question is from the line of Saurabh from JPMorgan.
Sir, 2 questions from my side. So one is, sir, you mentioned that from -- in the actively managed equity, performance has gone up since September. But Slide 9, I'm seeing the December '20 market share versus the March '21 is still down. So -- it's not much, but it's still 30 basis points. So I just wanted to understand what's happening there? And the second -- I'll follow-up on the second one.
Saurabh, just one second.
So it could be due to some of the flows into the NFOs into the sector and thematic funds, et cetera, where we may not have the presence. But overall, I mean, as the performance has started improving, we are hopeful that by and large, prospective investors, our partners, everybody started taking note of that, and it should start reflecting in the flows.
Okay, sir. The second is, sir, there was this talk, about 6 months back, you wanted to launch a lot of funds and explore new strategies within the fund. So can you just update as to what's happening there?
Sure. So I mean, in our industry post the SEBI classification, so we are present in almost all the core categories. Now several of them are where we may have lost some market share. So we used to be a leader in large cap, flexi cap, equity hybrid, ELSS, where we are still very large. But there is scope for us to regain the market share there. So as far as the core products are concerned, we have been there, but there are gaps could be there in the passive strategy, which Simal talked about, while a large part of the AUM comes from the government mandates.And then you have those divestment related ETFs, both on the equity as well as on the bond side. But still, there could be opportunity on the passive front. There could be some opportunity on the thematic and sector funds. Off late in last couple of quarters, we have seen Indian investors looking at diversifying globally and international funds have been looked at by investors. There could be opportunity for us there.So over a period of time, we'll gradually fill all our booking. In fact, as we speak, our NFO on the asset allocation product is going on. Most likely in this quarter, we'll have a sector fund, which is banking and financial services funds. There are another couple of funds, which are lined up for the next several quarters in some of these categories. So on the thematic and sector side, on the passive side as well as on the international side, we have some gap, which we would like to fill over the next several quarters.But one thing I must mention, they have always praised HDFC MF as an outsider for not launching a product because it's afraid of the seasons. We will maintain that tradition. So we have quite a bit of NFO lineup, but there will be strategies, which we believe is the right fit for investors or a segment of investors where we believe in scalability and sustainability of that product over a long period.We won't launch a product just for the sake of it or just because it's gathering money at the moment, we won't do it. And also, I strongly believe that a lot of our current products have a lot of potential to grow, particularly on the solutions-oriented funds. But wherever product gaps are there, I think they have been well identified. We did the dividend yield fund, you would be aware, in the month of December, which had a great success. We have current NFO going on, on the asset allocation product. And then the couple of categories that I talked about, I think you will see us in the market over the next several quarters.
The next question is from the line of Aditya Jain from Citi Group.
I just wanted to -- I guess, you've sort of touched upon it. But other than the launch of the new products, which you've mentioned, essentially filling out the product bouquet, any other strategic priorities, which are on your mind, Navneet, after you've taken over, things which you feel need to be changed or improved or how you see it?
Sure. So as I've mentioned that over the last couple of quarters, we have seen loss in market share in some of our key categories. As far as equity is concerned, I think we would like to withstand that fall and start rebuilding that market share. We have grown our market share on the fixed income side, but still, we think, given our brand and the long-term track record and the quality of people we have, still there is scope for us to grow there.The -- of course, I mean, the industry is evolving. There is a lot of growth potential, but still the operating environment is changing, customer preferences are changing. So we would work on whether it's the technology, whether it's providing our customers the state-of-art experience and service. The product gaps that I've already talked about, so I think all of that will keep us busy to ensure that we increase our market share in individual AUM, where we have been a leader. But again, given our pedigree, our product range, our people, our presence, our distribution reach, I think there's a lot of scope for us to grow. On the SIPs, where we have been a leader, I think we have been a pioneer in spreading the concept of SIP in India. We believe the market share that we have currently can go up substantially over the next several years. B30 is another segment. Because we have a very large presence there, I mean, if you look at our overall branches, out of 227, 150 branches are there, whether in terms of our reach with the distributors in those markets, we believe that there's a lot of potential for us to grow there. So all of these things, Aditya.
Got it, sir. And then one clarification on the ESOP. So if you can talk about the total size of the scheme, and how will the amortization be done over the coming years of the expense?
So as you know, we've given a note that the ESOPs are unique to basically spread it across the vesting period. And the -- so you basically value the ESOP on the Black-Scholes model and then you spread that over the vesting period of the ESOP. And these ESOPs, as we've specified, are vesting in 3 tranches over 3 years. So each tranche will get vested over the period for which it is. So the part of it is 1 year, part of it is 2 years, and part of it is 3 years. So the value of the ESOP will get spread across that period. Part of it has come in this year because it was only granted on February 22nd. The coming year will see a larger part of the charge because it will have a portion of all of the 3 tranches, then it will go down in the subsequent year, and in the last year it will be the lowest.
Got it. So I mean, roughly, it should be INR 28 crores per year, but the first year since it has, like you said, all 3 tranches, it will be INR 30 crores or INR 40 crores.
So like I said, in the next year or the current running financial year, there will be a charge of the first tranche, which is to be vested in 1 year, so that will complete. Then the second tranche, which will vest over 2 years, half of that charge will come this year. The third tranche, which is for 3 years, 1/3 of that will come this year. So what you will see is you will see a front-ended loaded charge. This year, you will see a larger charge; next year, it will be less; and the third year will be even less. And you can probably get more material on this once you get our annual report, which will probably happen in 1.5 months or so.
The next question is from the line of Sameer Bhise from JM Financial.
So just wanted to -- so obviously, as you highlighted, some of the key strategic priorities, product launches being one, wanted to get your sense on how the industry is likely to shape up, especially in terms of profitability, how sustainable are current levels? And what are your thoughts around that?
So surely, over the last few years, we have witnessed globally that margins in this industry have been under pressure. A lot of money has been moving towards passive, which has led to like consolidation in the industry. Having said that, I think there is a huge growth runway ahead of us, as far as India is concerned. We haven't really scratched the surface, as I mentioned in the beginning. A long way to go in the overall growth of the market. And obviously, if you look at the overall pie of the investors' wallet, when we look at the total financial assets or the total assets that households have or whether in the incremental flow, the share that our industry gets is still very small, and we have a long way to go when we compare with the rest of the world.But as I mentioned that, globally, we have seen margins under pressure. But I think in India, where we are currently, if you look at our margins and equity, which are like more in the ET -- handle ETs and fixed income, which are like around anywhere between 27, 28 to maybe 32, 33 basis points on the money market. There maybe -- these are the 3 major segments for us, maybe around 12, 13 basis points. At least in the near future, it looks like it could be sustainable. But of course, over longer period as the passives become larger, maybe there could be lower margins on the equity side. And of course, maybe if the passive starts growing in other segments, then it will have its overall impact.
Okay. Okay. That's helpful. And maybe early days, but have you seen any impact on flows, probably we are towards the end of April and how the way things have shaped up on this whole COVID bit? So any comments there.
So I mean, again, as I mentioned in the beginning that the country has been hit by the second wave of COVID. But interesting aspect is that last year, at the same time, when COVID happened, and I think all of us have come a long way, every industry has -- or almost everybody has learned to live with it. And I think the digital is a way of life. In fact, as I mentioned a few minutes back that our NFO is on and last couple of days have been quite encouraging, this is despite the fact that a large number of branches would be closed, large number of, I think, salespeople or whether the client services, everybody would be working from home. But I think digital is the way of life. And I think we've been able to make good progress on that front. So of course, COVID is impacting. But yes, I mean we are seeing everybody getting used to the new environment.
So you would say that April has held up well despite what's happening around?
I don't know about the industry numbers and maybe a couple of other products. I was just saying that the NFO which is on, and the industry has been able to work in this environment. In terms of flows so far, as far as the April month is concerned, one of the interesting trends we have seen, Sameer, in last several quarters counterintuitively that whenever the market has been going up much, I mean, we are seeing some redemptions in the industry. But in the month of March when markets came down, a lot of people who have been waiting on the sidelines, they put money into -- I mean they put money to work and then we saw some flows into the equity funds. I think and -- it sounds a little counterintuitive, but maybe that trend might continue. I think if markets stabilize at these levels, we may see domestic investors coming back. After 9 months of outflows, March was a good month and maybe we'll have to keep our fingers crossed for the next several months.
The next question is from the line of Nischint Chawathe from Kotak Securities.
Am I audible now?
Yes.
Yes. My question is to the ESOPs that you have announced of around INR 300-odd crores -- INR 350-odd crores. Just trying to understand what would be the total cost of the ESOPs that relate the P&L over a 3-year period? Actually, 3.5 years period, I believe.
So Nischint, I think that when the annual report comes out, you will be able to get a better hang of that. Having said that, maybe you could kind of extrapolate numbers from what you see in our current results. But I would wait till the annual report comes out to get a better hang of the total cost.
Fair point. And the current number would be -- I know you explained the logic. But the current would be something like 5% to 10% of the overall vesting that's happened in this quarter.
Somewhere in that region.
The next question is from the line of Malhar Hemal Manek, an individual investor.
My question is about our fundamental business model because I think there can be a conflict of interest. Because often the number of the great investment opportunities decreases as the fund size increases because of the law of large numbers. So it is often in the interest of the unitholder that the maximum fund size should be capped and the lower quality investments are not made and the returns of the funds are higher. But the shareholders would want that the fund size should be as large as possible. So what is your thought on this conflict of interest.
I think given the size of the equity fund, I mean, I assume that you are referring to the equity funds when you said mutual funds as far as the size is concerned. I'm not really sure whether you have a correlation between the size of the fund and its performance over a longer period. And still, if you look at the overall size of the industry, the total equity AUM managed by all the mutual funds put together versus the overall market cap, we are still very small compared to most of the other developed markets. And I think there is still a lot of capacity, particularly in strategies like large cap, multi cap, flexicap, several of them. We have a long way to go.At times, I think whenever you feel that a strategy has lesser capacity or incremental flows may impact your ability to deliver returns in line with the expectations, obviously, fund houses have taken that step and have moderated those flows or may even have stopped those flows. But overall, by and large, if the question is that whether the mutual fund industry should have stopped flows because they have become very large, I don't think we are anywhere close to that. We are very long way from those.
The next question is from the line of Hiral Desai from Anived Portfolio Managers.
Hello? Am I audible?
Yes, sir, you are.
So my question is you've spoken about passive funds and the fact that of any large part of that is the EPFO money that is sitting in there. But if you look at the last couple of quarters, you've seen a lot of these index funds being launched outside the headline indexes. So the NEXT 50, Midcap 150, a lot of these small cap funds are being launched. Now generally, HDFC has been fairly strong in the smaller cap and the mid cap domain. Now my worry is, you know, in an index fund, since there is not too much of a differentiation available, the first-mover advantage could actually be used. So just wanted to get your thoughts on that.
So Hiral, the overall size of all the index funds put together, I guess, is around INR 15,000 crores or so. And within that, we've been a clear leader. We would have market share, I guess, close to 30% or so, right, Simal?
Yes. Yes, 30%.
So we have around 30% market share. In fact, initially, when I discussed about the product bouquet or the plan for product launches over the next several quarters, that includes some of the products even on the index fund side.
So here, if I may just add, we have already filed for a NIFTY NEXT 50 fund with the regulator. We are in the process of maybe adding 1 or 2 of other indices as a part of our index fund offering.
Got it. Got it. No, sir, that is what I wanted to check actually, whether some of these products are actually in the pipeline over the next couple of quarters. So that was the reason why I wanted to ask about that. The other is Navneet, since you've spent so much time in the industry, just wanted to understand some of the fintechs, which are currently out there, so guys like Paytm or ETMONEY grow and a lot of these other fintechs, which are there, are they really helping in terms of improving the penetration beyond, let's say, the large cities? So are you seeing a lot of flows on these platforms coming through from outside, let's say, the top 20 cities?
Yes, Hiral. In fact, the fintechs have been doing very well. Several of them, if I can take the names, the likes of Zerodha, Paytm, ETMONEY, Groww, all of them, they are becoming, I would say, quite sizable when it comes to -- I mean, the investors using them as transaction platforms. In fact, in the last 1 year, almost more than 1/3 of the new brands that the -- the new investors that the industry has added, they have come from these fintechs.And also the another interesting aspect is that, a lot of these new investors are actually less than 30 years of age. So overall, if I remember the number correctly, it's 29-odd lakhs of new SIPs, these fintechs have created, amounting to -- probably roughly 29% of all industry SIPs as well. And their AUM has already crossed INR 20,000 crores. So they are becoming, I would say, quite meaningful. And then they are really helping in expanding the market to newer set of investors.
And our market share within the fintechs would be similar to what we enjoy at an overall level?
Hiral, it would not be very optimal for us to get to those numbers.
No problem. No problem, Simal. Lastly, I just had 1 question on the operating cash flow that you've disclosed with the FY '21 results. Now there are a couple of items within that, which -- one is the loss of sale -- sorry, loss on sale of investment of INR 91 crores. And then there is an MTM on investments of about INR 217 crores. So can you just break this up into any impact related to the SL NCDs and the rest of the investment book? Because I believe in the P&L, we had already taken an impact in Q4 of last year for the SL NCDs. So could you just break that up for me.
Okay. So let me tell you about what's happened -- okay, let me tell you about what's happened of the SL NCDs. You're right that last year, we did take hit on the SL NCDs. And this year, we have, over the first 3 quarters, you would have noted that we had taken MTM gains on those entities because the underlying collateral, which was the shares of the group company of Zee had gone up in value. Now in this quarter, we have, as given in a note, most of those shares have been sold, so net-net, we have a gain of around INR 85 crores, which is why also, you will see the other income of this year being higher.
Okay, okay. No, no. So I just wanted to check from a full year perspective, there are a couple of line items in the operating cash flow. So one is the loss on sale of investment of INR 91 crores, and the other is, I think the MTM on the investment book of about INR 217 crores. So this is all related to the rest of the investment book.
See, that is not a cash flow. It is an adjustment to the cash flow from the starting. If you look at the cash flow statement, you're starting from the PBT, right? So basically, you are -- and you're trying to calculate cash flow from operating activities. Because this is not an operating activity, you have taken it out. So your -- the amount that you're looking at a negative, if you look at the heading, that means profit. Can you see that line, the one where you're seeing the INR 91 crores, that's the profit.
No. But then the INR 1,478 crores number will not add up, no?
It will because if you're starting with INR 1,478 crores and you go down that line, and knock off the pluses and minuses, you'll come to INR 1,478 crores.
No, no. Got it, got it, got it. I understood the fact that it is not related to the operating cash flow. I just wanted to know that this impact is purely because of the investment book, and this has no impact related to the SL NCDs.
No. So see, SL NCDs are part of the investment book, right? There is -- a lot of this does relate to the SL NCDs, so these shares that we sold that I just told you about.
The next question is from the line of Anush Kumar from B&K Securities.
Am I audible?
Yes, sir.
Navneet, congratulations on a reasonably good set of numbers in a tougher circumstance. My question is that we have noticed the shift in mix towards equity and income sequentially, while the yield seems to have been suppressed. Could you enlighten us on this regard?
So last year, given the environment, I think more money has come into the debt as liquidity in the system increased, and there was move towards better quality names. And as a fund house, we were a beneficiary of that, given our product performance and the quality of products. On the debt side, we saw more flows. On equity side, as we have already mentioned that there have been outflows in the industry. Of course, we also got impacted by that. So definitely, the mix has undergone a change this year. Having said that, still, if you compare us overall in terms of the asset mix, we have a higher equity asset than the rest of the industry.
The next question is from the line of Madhukar Ladha from Elara Capital.
So if I notice this quarter's numbers, the share of equity and the share of debt has actually increased in the quarterly AUM mix on a Q-o-Q basis, yet the blended yields are lower, it seems. So any possible explanation for that is what I'm looking for.
Madhukar, can you get us?
Yes, I can hear you, yes.
So Madhukar, the equity percentage has gone up marginally and the operating revenue has also gone up. So why are you saying that?
No. But if I look at it on a yield basis, right? So last quarter, you did about 49.5 bps of revenue to your quarterly average AUM. This quarter, you've done 48.8 bps, so there is a decline of about 0.7 bps, then your share of equity has actually gone up by -- by about 80 bps Q-o-Q, and share of debt has gone up by about 120 bps.
So liquid also would have gone up.
Yes.
I think it also...
No. Liquid is -- no, I'm talking share in AUM.
Madhukar, I think if I can comment here. So I mean you are looking at the overall share of equity, debt and liquid and doing it in a straight line method. But within the equity also, it may happen that money coming in 1 product versus the other and debt money coming into one product versus the other, that can also have some impact. 0.7 is not too high. So maybe I think it's something to do with the internals within the asset class.
Okay. It's more to do with internals within...
The MTM gain that you have in a fund and the flow versus the book, and that can impact the overall margin. So I mean, quarter-on-quarter, you cannot just straight line put that on the model and extrapolate that.
Yes. No, I understand that, but I just wanted to know if there is anything changing over there in a material way.
The picture is almost the same.
The next question is from the line of Shubhranshu Mishra from Systematics.
These 2 questions are for Navneet. Given the fact that in the previous strategic value of sale up of the passive funds up there, any specific passive strategies we have, which extend like more into higher AUMs and spiking an ETF. We also added a little -- a lot of passive funds likely with the launching. That's the first question. Second is that, again, on the performance, so one -- I believe it is an industry wide phenomenon, if I understand it correct, we are more of a distribution led industry than a product-led industry barring a few AMCs? So any thoughts on, again, getting back on the forefront and becoming a product champion than a distribution champion? These are my 2 questions.
So the first question on the passive, I think in India, a large number of people are yet to meet the market and, of course, we have to always worry about how to beat the market. So I think there will be opportunity both on the active and passive side. And within passive, if you look at the overall market today, almost like 80% plus AUM is from like 2 AMCs plus the government disinvestment program. And of course, the PSU debt ETF that we talked about earlier. Rest of the passive from the individual investors or from our other channel partners, which is like our main strength has been still very small and these are early days.As we talked about earlier, the total size of the index fund is 15%, where we have dominant market share. A couple of more products are -- either will be launched in the next few months or are in the pipeline over the next several quarters. And over a period of time, I'm sure there would be opportunity to grow on the passive side as well, and we would participate. And the distribution strength that we have we would like to fully leverage the way we have done it on the active side, on the passive side as well. But we'll always be very conscious about the profitability as well. I mean, we have an industry leading profitability, and we would always be cognizant of that as well.Your second question, I missed, Shubhranshu.
Sure. So my second question is, largely, most of the AMCs have become distribution-led franchisees than product-led with the exception of a few. Now are we going to get on the forefront and then become a product champion, wherein we argue with a lot of performances in our equity funds than the strength of distribution?
If I got it right, if you mean the product versus solutions, I would use that word, providing the right kind of solution to your partners as well as to the investors, which includes all your hybrid funds for meeting specific goals like your children benefit fund or in the retirement category. I think those are likely to grow. And again, given our reach and distribution strength and the pedigree of the brand, I'm sure there is a lot of opportunity on that side as well. I guess that was your question, right?
No, what I'm trying to ask is that when we look at large schemes of ours, the performance is not up to mark when we compare it to the various peers. Now what are the various things or measures that we are taking or have taken, which will bring us back into that game?
Yes. So I think earlier, we mentioned that we have gone through a cycle in performance over the last couple of years. But I think we have seen a material reversal in our performance over the last 6 months that Simal talked about earlier. Are we doing anything different? My answer would be honestly, no. In fact, the same strategy which has created alpha over a long period of time that did not do well in the last couple of years, and the very same thing has started doing well in the recent past. And -- but at the same time, I mean, we have stated earlier that we have recognized the fact that for an organization of our size and scale and aspiration, it would be optimal for us to have style diversity.And keeping that in perspective, as you are all aware, we have added 2 new portfolio managers. Their orientation is very similar to the way we think, that is fundamentals focused as well as having a long term orientation. But they think a bit differently when it comes to valuation. So this was like first step we have taken in terms of style diversity. In fact, the 2 new managers who joined us last year, now they're all managing almost 15% or so of our active equity AUM. In fact, I can share that. Some of those products have been seeing incremental flows at our end. Of course, we don't share the numbers of flow into each product, but we are clearly seeing those products gaining traction with our partners as well as investors. And of course, the product lineup that we have already discussed about to have more diversified product base, particularly in the thematic and sectoral as well as in the fund of funds and the other categories.
The next question is from the line of Sakshi Goenka from Alchemy Capital.
Am I audible?
Yes, ma'am, you are.
Yes. Actually, I just wanted to understand the trajectory of cost overhead going forward. Considering that you made considerable cost savings this year, how much would that of -- how much would that be permanent, and how much could come back as business momentum picks up?
So Sakshi, if you look at the employees and the other cost, we would have seen a reduction of around 8% or so in FY '21 versus FY '20. And primarily, this was achieved by a reduction in business development, travel, other overheads, et cetera, and COVID period gave an opportunity to look at every cost item. Some part of it, or I would say, a large part of it, this cost will definitely come up. And we would not want to hold that on simply because by any way, we will not curtail the growth prospects. But there could be some cost reduction that we could achieve, maybe a small amount, but let's say, in rent and all which may continue for some time, those kind of reductions will sustain. But yes, larger part of the cost that we had reduced will rise again in times to come.I must emphasize at the same time that as an organization, we have been very, very cost conscious. In fact, in my first 2 months, I've seen the frugality, which is like part of the culture of the organization. And I think that will always continue. And that's why we have been able to have, apart from several other reasons, our better quality asset mix or better quality distribution, et cetera, is also that given the cost consciousness, we have an industry-leading profitability. So we will always focus on that. But a lot of cost rationalization that could happen last year, I think I would assume that a large part of that will come up, and we would not like wanted to hold that on.
The next question is from the line of Utkarsh Solapurwala from Damos Capital.
Am I audible, sir?
Yes, Utkarsh.
So my question is a follow-up on the fintech, means the -- now the millennials are now opting for the Zerodhas and Groww apps more frequently as compared to going to the traditional brokers or traditional channels of distribution of financial services products. So if the fintechs like Zerodha gets licensed, wouldn't they disrupt the traditional financial services industry and bring down our share of -- our market share and profitability in the future?
So of course, I mean -- I've been a follower of Andy Grove, Only The Paranoid Survive, we should always be paranoid. At the same time, we also know our strength, I mean, our platform, I think our product range, our people, our presence, our -- I mean, the partnerships that we have built over the years. And of course, when it comes to the overall digital infrastructure, I think our digital assets are right up there. We will continue to build upon it, whether it's the user interface, whether it's the user experience that we would offer. Just the way you took the name of some of the fintechs, I think we would definitely continue to focus on that.So there is no reason for us to lose out because newer players are entering the industry. In fact, I strongly believe that there is so much of growth ahead of us as far as getting a higher wallet of the overall share. I mean, the households' wallet that -- the newer players will actually benefit everybody. And I think the growth opportunity is so big, more the merrier. I am sure everybody will bring in some innovation, which will really help the industry. So I think we would really be -- really keep focusing on our strength and as well as keep building on the customer centricity at our end.
The next question is from the line of [ Shailaja Dongrel ] from [ CONCEPT Investwell ].
My question is, what different are we doing to be this cost efficient? It is considered that HDFCAMC is one of the most cost-efficient AMCs in the world. So what different are we doing? And why is it so difficult for others to achieve?
I wish -- so maybe we should ask others as well. But I would say, I mean, it is part of the culture. I think it's every penny that you are spending on every single thing. I think the processes that have been set to get the highest bang for the buck across all functions. I think that's greatly inbuilt. And also, I think is the way people function, it's the culture that has been set over a period of time.And of course, I think it also is a part of the business model that from day 1, from this company got set up, I think the focus has been on size, scale, quality of business, profitability of business. All of these are very critical. Never tried to really compromise profitability for scale or profitability for any other, I would say, motive. So I think it has been always focused on sustainability of business. And I think that has kept us in good stead over the cycles. Do you want to add anything, Simal?
Yes. I just wanted to add here that, I think, a large part of the credit of this cost consciousness goes to Milind, who set this business up. So it was something that he drove into. We -- all the management team all the time that you need to look at this because this is ultimately what goes into the profitability of the company, so you need to kind of be very careful.And frankly speaking, when I came into this company, which was like 7, 8 years ago, I had worked in other mutual funds. And when I came here, I saw even sales guys and usually, sales guys are guys who you need to rein in. But even the sales guys here were so cost-conscious that it was a little bit of a surprise.
A positive surprise.
The next question is from the line of Dipanjan Ghosh from Kotak.
Sir, just 1 small question. I think in continuation with what one of the participants had asked on the net yields, the revenue line item. So just wanted to understand, you've mentioned that part of the inflows of the product mix, probably inflows were to fund MTM gains wherein funds -- where the yields are low. I'm just trying to understand, is there any change in the distributor commissions that you are charging at the scheme level? Was there a lower passthrough from the scheme accounts to the fund accounts during the quarter?
I don't think any material change. No, no, not really. As we have always mentioned that, I think it's a function of book versus the flows, yes.
The next question is from the line of Kunal Thanvi from Banyan Tree Advisors.
Welcome Navneet for new role and congratulations to you. So my question was, like we've been asking this for a while now, pardon me for repetition. So when we do a channels like -- when we talk to the IFAs and the distribution guys, one common feedback that we have been getting for a few years or so now is that the PRs pass on and the poor performance had led to some kind of discontent within the chain here and they were not very happy with HDFC Mutual Fund. How -- like I wanted to understand, any color that you can give on that? How things are moving now with performance coming back? And also the fact that we are trying to transition some part of our AUM with different strategies. What is the flavor that we are seeing on the distribution side of the business?
So our partners are very important for us. I mean, there are the reason we are here. I mean, our customers and partners are the ones who are -- who have done for us, and that's why we are where we are. And they are very important for us. And in terms of ensuring that we deliver the performance that they would expect from a brand like us, we compensate them well for the assets they bring in. As a part of that, the connectivity, the service that we would provide them, that is very, very critical. And we have always been very, very innovative on that front in terms of how we can serve them better. Of course, the performance that you talked about or maybe some of the other reasons that you talked about in the last few years may have had some impact. But we have corrected, I mean last 2 months or so. A lot of these people are very, very good friends for a very long time. I think they are all -- they have always been very supportive of us, and I have no doubt in my mind that they would be very, very supportive of us in terms of growing the business to the next level.
Sure. And my second portion was on the passive side of business. And it is largely for the industry specific. Like when we look at the global markets, when we see -- when there is a sustained underperformance and there is -- and the size of the particular category goes beyond flexibility too odd from the market, there's a transition from active to passive at a very faster rate. Do you feel -- what's the sense on the large cap as a category in India? Like are we hitting anyway close to the point wherein the large part of the yield would stay the passive side in the next 3 to 5 years?
So in last few years, we have seen huge polarization in market. I think in 2018, '19, '20, these 3 years were almost 80% or so of the returns if you look at NIFTY would have come from top 5 stocks. If I remember correctly, in 2018, that number was over 100%. And all the other stocks, I mean, detracted the overall return. As the rally becomes more broad-based, I've assumed that I think the alpha opportunity will come back again. In fact, it's quite visible, and if you look at the fund performance over the last couple of months or quarters. In fact, you talked about it globally, and I completely agree that money has moved from active to passive over a long period of time last several years globally.But if I look at the rise of ETFs and where they have reached today and also the rise of Robinhood investors, these 2 trends will actually create more alpha opportunity for active investors. I mean, you would have noticed what has really happened when Tesla entered S&P or some of the other events if you have been following. So I think the -- if active managers play their game right, I think, focusing on maybe the time arbitrage, you have a longer-term -- long-term orientation in our money management relative to a lot of other players who get impacted by the noise in the market and the research arbitrage, I mean you put right kind of research sources, a robust research and portfolio construction. I mean, we have seen in India over a long period of time, alpha being generated across all market cap segments. And next several years, still there is opportunity, given the size where we are today. When I say size, meaning like the size of the money managed by all the large care -- or let's say, mid and small care fund managers versus the total market cap. So still there's an opportunity. Of course, I think -- will it become tougher and tougher? Of course. I think the democratization of information, the institutionalization of markets, all of that are leading to shrinkage of alpha. And that's why every fund manager will have to -- or every fund house will have to work harder and harder how do you create a good alpha engine in place. We take pride in the team that we have and the capacity that we have created, the processes we have put in place. When we look at our fund management, our analyst team and the support team, we believe that there is a lot of alpha opportunity over a long period of time.
Sure. And my next question was from both industry and HDFCAMC perspective that if you look at the industry, like it's a very high free cash flow generation kind of business side wherein the CFO to PAT is more than 90%, which is something that we've seen in the FMCG companies as well. And however, the dividend payouts are lower, specifically for HDFCAMC as well. Any thoughts on that particular aspect? Like how do we look at dividend payouts? And do we have a specific policy that we adhere to?
So I think it's something that is we discussed in our Board and our team as well, and that's the reason this year, you would have noticed the dividend has gone up. I mean, even the payout ratio has gone up. And I mean, it's always a debate in terms of the appropriate level of cash that you would like to run on the balance sheet. But of course, you are right because cash beyond a certain level would start dragging your ROE lower. So that's a fine balancing that you have to do. But I agree with you, and I think the Board is cognizant of that, and that's something that keeps getting discussed within the Board, what should be the ideal payout ratio.
Sure. And if I can squeeze a last one was on a broader basis. If you look at the AMC business, there are 4 big pillars, that is brand, distribution, risk management and performance. When you come in as a CEO now, what would be the key areas that you would be looking at if you were to draw parallels from these 4 pillars? What is something that you are looking to pursue with a stronger vigor?
You are right, and over the last an hour or so, we would have discussed about the pedigree of our brand. We would have discussed about our presence, which is reach. We've discussed about our people, about our partnerships, about our platform, about our profitability, all of that. And I'll be very honest with you, if you ask me, I mean, for us to go to the next level, what is that another P? I think all of these are just trying to create an equilibrium. I mean all starting with P. What is even more important P? That would be a purpose. And I think that deep sense of purpose that we share in the team at HDFC Mutual Fund that we want to be the wealth creator for every Indian.After 20 years of -- since our inception, I mean, today, we have, like roughly, Simal talked about, 9 million accounts. If you look at unique investors, they would be a little over 5 million. If you look at overall industry, that is less than 25 million. In a country of our size over the next 5 or 10, 20 years as the economy goes to a much higher level. With that, household savings will always remain very high.If this industry has to go to the next level, I think the deep sense of purpose is more important. And that's where we are going to focus that. We'll be driven by this mission that we want to be the wealth creator for every Indian. So basically leveraging on each of these aspects, the pedigree, you talked about, our brand is synonym with like trust and confidence, the people and the experience that we have got within the team, then whether it's the investment team or all the other teams, the partnerships that we have built over the years, the presence that we have, 227 branches, whether you look at our presence in B30, the digital presence or the digital assets that we have created, all of that.And I think if you keep building on that, a deep sense of purpose that or the customer centricity, that how do we reach out to more and more investors and create wealth for them over a long period, I think that will -- that's something that will take us to a different level, and that's what motivates the management team here every single day.
We'll take one last question, which is from the line of Abhishek Saraf from Jefferies.
So just one area, sir, if you can dwell upon, regarding the other asset management structure. So what is our strategy for PMS and the alternative EIF kind of structure? Given that we are sensing that there is some move away towards passives also on the mutual fund side. So probably if that kind of leads to a bit of dilution in margins at MF level, do you think that means we will be focusing on the PMS and EIF side where we could probably earn equity kind of TERs. And probably at the AMC level, we have margin utilization, means a positive impact on margin. So just your thoughts on how HDFCAMC looks at the alternative structures?
So I think if I go back in history, I think we were one of the early players on the PMS side. And I think given our platform, there is definitely a lot of potential or opportunity that -- for us in building the PMS business. And with some of the other regulatory changes, particularly this draft paper on accredited investors can really open up opportunities on the PMS as well as the alternative side. We'll always remain open to that. I think going back in history, again, as I mentioned, that we used to have a large base of clients who were with us on PMS products. We -- this year, we are looking at maybe expanding that platform.Having said that, I must say this that even in our core products, there is a lot of opportunity for us, I mean, in our core production plus the new product launches that I talked about in the mutual fund space. So while we keep an eye on opportunity in the nonmutual fund space, whether it's PMS or the AIF route, but I think bigger focus, at least in the near term, will continue to remain on the mutual fund side.
Just 1 more question, if you can -- just last one. So we have seen our schemes outperforming over the last 6, 7 months. So is it largely due to the kind of mean reversion that has happened towards value stock or is there other aspects at play as well in the outperformance that our schemes have been able to deliver?
As I mentioned earlier, that has -- there been a change in investment regarding -- has there been a change in investors' time? Not really. I think it's the same strategy, which has created alpha in past over a long period of time, which did not do well in the last couple of years for sure. And the very same thing has started doing well in the recent past. At the same time, as I mentioned earlier, that newer fund managers have been added, who have been managing a couple of strategies. And while I mean overall orientation may be similar, but they think a little differently, particularly when it comes to valuation.
Thank you. Ladies and gentlemen, due to time constraints that was the last question. I now hand the conference over to the management for closing comments.
Thank you all for being on this call. As I mentioned earlier, that the country has been hit by the COVID wave. I hope that you and your loved ones remain safe. I wish you all the very best.
Thank you. On behalf of HDFC Asset Management Company Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.