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Ladies and gentlemen, good day, and welcome to 2Q FY '22 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 over to Mr. Simal Kanuga, who will give us a brief following which we will proceed with the Q&A session. Thank you, and over to you, Simal.
Thanks, Mehra. Good evening, everyone, and thank you very much for joining this call. As always, I'll start off with a quick take on the quarter as far as the year has gone by. Industry AUM has crossed INR 36 trillion with INR 16.8 trillion in equity-oriented assets, INR 10.7 trillion in debt and INR 4.2 trillion in liquids of overnight funds. There is another INR 5.1 trillion in what we kind of classify as others, that is ETF, arbitrage funds and fund of fund investing [ overseas ]. To put things in perspective, if you look at our presentation of, say, September 2018, that is post our listing in August of 2018, AUM of the industry was INR 22 trillion and equity-oriented assets were at INR 9.8 trillion. We, as an industry, have seen material growth over these 3 years. In terms of equity flows, post losing approximately INR 627 billion in FY '21, the first 6 months of the current financial year has been net positive growth, adding up to INR 936 billion. The one thing that we need to point out in terms of equity flow is that INR 459 billion or for that matter, 49% of the net new flow has coming through new fund offers, the NFOs. Majority of these NFO have been offered at margins, which are materially lower from the AMP perspective as compared to existing schemes. We have seen this happen in past too, especially when the overall market sentiment tends to be positive. In terms of debt and liquid team, flows has been more or less flat this year. That has debt has seen outflows of INR 45 billion, while liquid fund housing inflows of INR 26 billion. The so-called others category has been healthy flow, adding up to INR 778 billion, of which INR 345 billion is in arbitrage fund and INR 79 billion in international fund of fund, while balancing numbers of INR 354 billion is in ETF, which includes both equity as well as debt ETF. SIPs continue to scale up, month of September saw SIP flows of INR 104 billion as against INR 92 billion for June of 2021. Now we are moving to us. We closed the quarter with an AUM of INR 4,357 billion, of which 46% is in equity-oriented assets. Over and above this, we managed INR 115 billion through our portfolio management services to separately managed account business. In terms of overall market share, based on quarterly average AUM, we closed the quarter at 12.1%. And if one looks at the same, excluding exchange traded funds or ETFs, our market share is 13.3%. Our market share is at 12.2% when it comes to actively managed equity-oriented assets, 14.6% in terms of debt and 15.3% for liquid. All of these are based on quarterly average AUM. We continue to have a favorable asset mix as compared to that of the industry. And at 12.8% are the highest market share in terms of individual AUM. Furthermore, we continue to be second highest in terms of B-30 market share. 58.8% of our total AUM is contributed to by individual investors. Comparable number for the industry is 54.5%. We processed over 3.22 million systematic transactions in month of September '21, resulting in flows of INR 10.8 billion. We have successfully built a top-of-the-line digital infrastructure. We continue to invest further and enhance our digital capabilities. Over the past few quarterly calls, we've been mentioning that we are working on filling up product gaps across categories. During the financial year, we launched the hybrid fund. That is an asset allocation fund of fund, a thematic fund, that is banking and financial services fund. A passive smart beta fund called NIFTY 50 Equal Weight Fund. We recently concluded our first international fund, which is the HDFC Developed World Index Fund of Funds and are currently, as we speak, in midst of our NFO, of another passive funds with the NIFTY Next50 Fund. We filed a few more documents with the regulator, and we launched those products, a month after those are in play. Our team is also working on some products in fixed income side. We have launched an aggressive investor awareness program, where medium- to long-term endeavor is to let people to change their old age habits and evaluate mutual funds as an option. I'm sure most of you would have seen this campaign with the tagline, Barni Se Azadi. We are also running a parallel investor awareness program shortlisting benefits of hybrid and asset allocation funds. We ran an aggressive marketing campaign for our Developed World Fund of Funds, which did see a very healthy response. Now to financials. The company has shown improved performance during the quarter ended September '21 as compared to the corresponding quarter in year 2020. Revenue from operations increased to -- sorry, revenue from operation increased due to an increase in AUM as well as a more remunerative mix with higher percentage of equity AUM. However, this increase was tempered by a dilution in margin in some of the schemes. Other income for the quarter ending September '21 is lower than quarter ended September '20 since the comparative quarter had some amount of MTM gains on the Group NCDs. During the quarter, there has been an increase in business promotion expense as business moves towards normalization. Other expenses like travel, printing and stationery, et cetera, also has ticked upwards. As mentioned earlier, we are also in the process of expanding our product bouquet and consequently, there is an increase in expense on new fund offers. In February of 2021, a grant of ESOP was made to certain employees and the expense had employee benefit expenses including a pro rata amortization of the fair value of these ESOPs as required by the India's accounting framework applicable to the company. This is a noncash chart, which is not tax deductible, and is book value neutral. In quarter 2 FY '22, this noncash charge amounted to INR 167 million. As communicated last quarter, employee benefit expenses have increased as the company resumed its practice of annual increments in employee remuneration this year after taking a break from the practice last year due to the COVID-19 pandemic. Financial highlights for the quarter ended September 2021. Operating profit for the quarter ended September '21 was INR 3,954 million as compared to INR 3,491 million for September 2020, an increase of 13%. Profit before tax for the quarter ended September '21 was down by 0.3% to INR 4,615 million as compared to INR 4,628 million for September '20. Profit after tax for the quarter ended September '21 was INR 3,445 million as compared to INR 3,379 million for the quarter ended September '20, resulting in an increase of 2%. Financial highlights for the half year ended September 30, 2021. The operating profit for the half year ended September '21 was INR 7,606 million as compared to INR 6,497 million for September 2020, an increase of 17%. Profit before tax for the half year ended September '21 was INR 9,276 million as compared to INR 8,432 million for September '20, an increase of 10%. Profit after tax for the half year ended September 30, '21 was up by 8% to INR 6,899 million as compared to INR 6,403 million for September 2020. Our operating profit margin now stands at 36 basis points for the quarter ended September 30, 2021 as compared to 35 basis for the quarter ended June 30, 2021, and 36 basis for the year ended March 31, 2021. Thank you very much for a patient hearing. We'll now open for questions. We have both Navneet and Piyush with us. So Mehra, we can just start taking questions.
[Operator Instructions] The first question is from the line of Amit Nanavati from Nomura Securities.
Just a question on market share. At least, if I look at FY '21 versus first half this year, right, the market share loss that we are seeing is a little more at a faster pace, at least in this first half, especially where the industry close have turned positive versus last year, and this is coming despite the performance improving, right? So if you can give some qualitative comments around last year versus this year, how has the flow market share for you? I understand you don't give out numbers there, but at least from a trend perspective, how are you seeing things?
I move over market share fallen from 13.6% to 12.1% over the last year. And to get a better perspective, let's talk of numbers asset class wise, that is actively managed equity, passive equity, debt and liquid. So partly, we have discussed reasons to actively managed equity over the past couple of quarters. We would like to mention a couple of more things here. One that our redemption share has been more or less constant over the last, say, 3 years or so. The impact that you see in market share is due to lower share in gross inflows. And the lower share in gross inflows may be attributed to a couple of reasons. One is that a large part of inflows in recent past has been thrown as there were no NFOs. To put it in perspective, during the quarter, net new flows were INR 68,497 crores, of which INR 42,591 crores came in through NFOs. So I'm sure you all have heard the margin at which this business is doing in. There are times when one has to be more prudent rather than just be part of what is happening in the market. We have been selective in terms of launching NFOs and diversified active equity space. A couple of product gaps that we had in the category like dividend yield fund, which we announced in last quarter of calendar 2020. The other one is multi-cap. We have filed for the same with the regulator and will progress with the launch post getting necessary approvals. Further, if you look at prudent flows during the last 1 year, INR 23,000-odd crores have flown into thematic/sectoral funds as against total equity net flows of INR 41,000 crores. So well over 30%. And the feedback that we are getting from our partners are of further measure will be direct investors is that investors, MFDs, advisers, they won't take an active call on sector or a theme for a part of their portfolio. Till recent past, we have abstained from launching sectoral/thematic funds. But based on the feedback received from our partners and also based on our belief in the theme, we've launch the sectoral/thematic fund during the quarter, that fund was BFSI which saw very healthy response. We had a very large number of new investors. It was very well participated by a large number of our distributor, partners. And currently as we speak, our investment and the product teams are working on creating a couple of other themes, and you will hear more from us in this space. So anyways, we are going to be selected as we were launching only those themes that we believe will create value for our investors over the medium- to longer-term. We have mentioned that in the past and would like to reiterate that the decision of launching a new product at HDFC AMC investment teams prerogative, and we work together with the product teams to ensure that we don't launch products for the sake of it, unless we strongly believe that there is a segment of investors who would have need for that product from a long-term perspective. So unless we see a sustainability and longevity of the theme, we won't be launching a product just for the sake of it. Another thing I would mention that it will be interesting for you to know that almost all the top 4, 5 players, excluding SBIMF, would have lost market share over the last year or 2. And the interesting thing that I think the market is that the allocations are much broader based. And of course, there is some extra bit of performance chasing. If you analyze in data AMC wise, I'm sure you will get it to what I'm trying to say. And we are on the topic of equity oriented strategies. There is a market, which is emerging, which is international points, investing internationally, a lot of domestic investors are now allocating money towards international points. The size of the market is almost INR 35,000 crores and growing. The industry has lined up the number of launches in the space. We didn't have a product in that space earlier. We just did our first international fund recently. That's the kind of fund which in MSCI World Index. So we look at a couple of other strategies in this space over the next few quarters. The one other reason for falling when you look at overall market share, and I'm referring to that. So other reason falling overall market share is mark-to-market increase in the ETF business and as you know, exiting ETF business in India is dominated by 1 investor and ETF AUM overall has moved up from little over INR 2 lakh crores to close to INR 4 lakh crores now. And I'm sure many of you have caught up on the recent news, which talked about HDFC AMC filing for 9 ETF. We have also filed for a couple of Index funds. The idea is to offer full booking of products. And as mentioned over the last couple of quarters, looking at filling up product gaps across other classes. So at the same time, I must mention this. We are very mindful of the risk associated on taxes and selected indices, which our products must have. So this was on the equity side. When it comes to the debt side, our market share has been constant quarter-on-quarter. In fact, it has actually moved up on a Y-o-Y basis. So when you look at our market share on the debt side, 14.6%, it's reasonably high, especially in space which is dominated by corporate and institutional investors. We are also evaluating debt index fund, and will update you once we progress on that front. The third component, the liquid fund, it has been more or less constant Q-o-Q, but has fallen Y-o-Y last September. This year was at 18.7%. And even at that time, we communicated that this was very high. In fact, it has actually has moved up sharply over the previous 1 year. So it has got, I would say, more normalized, and we won't expect an increase in market -- I mean a significant increase in market share in that space from where we are currently. I hope that's understood.
Yes, I think basically, it almost seems like last year's market share loss was more performance -- underperformance-led market share loss, right, where, say, our performance would have been at, let's say, for example, just hypothetically be 1 percentage point lower than the industry average and which is basically the market share loss which was visible. But this half, it is this year, it seems more like a low market share loss, especially because now flows have come back for the industry. Now even if I look at unique investors, it's not been growing in the unique investor form. And should one look at SIP market share as a lead indicator for where equity market share would trend towards?
So, Amit, I think you've summarized it well when it comes to the market share movement over the last 1 year. Your point is right. I think when you look at the unique investor addition and value addition over the last couple of quarters, the way values have got added in the industry, particularly driven by the fintechs. And I think we have our work cut out on that front. And we believe that over the next couple of quarters, I think with increased engagement with some of the other initiatives that Simal talked about earlier, whether it was on the marketing side, whether it is the digital offering side. I think, hopefully, over a period of time, you would see us gaining market share in SIPs as well as on the new value addition. You will appreciate that historically, I mean, HDFC AMC has always been a leader in SIPs, it's been a leader in B-30 markets. That's where the higher growth is there, and we don't see any reason given our performance, the long-term track record and all the other initiatives that the team has taken that we won't continue to remain a leader on that trend.
Got it. Last thing, if you -- I'm not too sure, but if you can share your market share in the fintech space, what percentage of distribution comes to you?
So we won't be sure. You know that granular data on distributor or segment wise. But as I said that I think we -- there is a lot of scope for us to grow in that segment more than what we have been so far.
So Amit, just 1 thing I can add, if you look at industry as a whole, so can fintech really distort the market share, not beyond the point because the equity mutual fund industry is close to INR 15 lakh crores, INR 16 lakh crores. All fintech put together, the size of the market is somewhere around -- when we talk about equity oriented funds, we have close to around INR 35,000 crores, INR 36,000 crores. So it is 2% of the size of the industry as we see.
The next question is from the line of Kunal Thanvi from Banyan Tree Advisors.
Congratulation on decent set of numbers. I have 2 questions. One was on the side. As you have mentioned in the opening remark that you've lost -- We have a long pipeline for ETFs and index funds. And when did you understand the though process for the detail -- from where the aggression in terms of launching a significant number of NFO funds. And as you also mentioned that the pricing for the NFOs has been very aggressive, what's our strength in the NFO that we're launching. And given the fact that we'll be launching so many as NFOs and then does it make sense to look at the historical margins before moving forward. Like price, will it lead to softening of our overall margins over the next 3 to 5 years? And second -- yes, you can answer this, then i can ask second question.
So, I mean, we recently have been highlighting over a period of time that over a period of time, margins will see some level of dilution. This, of course, depends on various factors, assets which are going out, the assets which are coming in, mark-to-market component and then variety of things, it's difficult to quantify. Also, as you rightly mentioned that there is competitive pressure directly. The kind of NFO pricing, which is happening. And as we mentioned earlier, that a large part of the flows are driven by the NFOs by the competition. We've seen this in past 2, and in our history of the company, but our experience is that it lessens down over a period of time at HDFC AMC, as we've always been saying the 3 most important aspects for us, building scale, building with the quality and profitability of business, not 1 at the cost of the other. We would always be very, very mindful of that. Market share, of course, is important, but profitability is also equally important for us over a period of time. So we will navigate through this period, and we are hoping that this will settle down. Investors would appreciate the long-term performance track record of our funds. Money would come into the existing products, which are much longer term performance track record. These would surely be filling the product gaps wherever we have. I mean we have mentioned in the past, I think on the passive side, both in equity and fixed income, both the core products as well as its smart beta products. We had our first beta products, NIFTY fund in this quarter. I mean we had the product gap on the international side, and we are a highly successful NFO on the sector and thematic side, which we talked about earlier, we had a BFSI fund. Again, this was a very highly successful NFO. And fund of fund, the NFO that we did in April and it's been getting positive flow since then. So these are some of the categories where we had lesser presence, which we are filling the product booklet. In our core categories, more or less, we have been there in all the categories given our long-term mystery. The 1 category, which has opened up is Multi Cap and maybe over the next couple of months, we would be launching that product apart from the categories that I just mentioned.
Sure. And second question was on the bit more on the adoption of the technology. So what we understand is 1 or 2 quarters like we had a contest understand on a political basis. Can you help us understand on a political basis, what are the initiatives that are being taken in the last few months in terms of controlling the entire ecosystem?
So I mean it's a journey, we always had best-in-class digital assets, which need cost in upgrades, which we have been upgrading. And the world is changing, our focus on technology has been increasing for every industry and asset management business is no different. With a new city and an excellent digital team that we have in place. We are working on various initiatives, recently I would advise you to download our mobile app, HDFC Investor App. I think we have refreshed our mobile app, it's simpler and more powerful. And the feedback we are getting on the same is truly encouraging. We continue our journey in creating a state of the art digital infrastructure and leveraging on the same part for enhancing the customer experience, we enabled the voice search on our corporate website, we enabled the BI gateway for third-party integration with some of the tax levy distributors. We've got an RM tool to build access on mobile solution to partners. And I think I should go on this topic. But overall, what we are trying to do is have the culture of automation, a culture of customer centricity, which is like the hallmark of the HDFC group in removing every possible friction in their journey, moving from -- as we would say, KYC to UYC, I mean know your customer to understand your customer, enabling our partners to scale up their business, so how do we use data and analytics in every part of our business? How can we automate our processes? So digital is like going to the backbone of everything that we do, our entire ecosystem. And so it's about a variety of things, and all of this will help within the organization, which vary. So we have good digital assets. Over the years, we have been investing in all of them. We'll be investing a lot more in that as we speak.
The next question is from the line of Shubhranshu Mishra from Systematix.
First off, my sincere thank you to the admitting CFO, Mr. Piyush Surana, it's been great at HDFC AMC and wish you all the best for your future endeavors. I've got 2 questions here. The first 1 is on the others income. The time that most of the investment book is in debt. And there's been -- there hasn't been much of hardening that has been hardening, there has been hardening but not much. The drop in the other income has been significant if i look at it model. And the other part is as I look at the market share, especially in the hybrid funds. You have dropped off significant market share in the hybrid front versus maybe 2 years ago, where we were around 21%, 22% to versus where we are, we would be around 18% or 19%. So it's a drop of almost 200 to 250 bps. So if you could dwell up on these 2 questions, that would be very helpful.
Okay. I'll take the 1 on the other income, and then Navneet can talk about the second question. So on the other income, see, Shubhranshu, because of these SL NCDs, we've had this fluctuation in the other income over the last 2 years, every once in a while. So for example, September 30, 2020, the other income had a component of around INR 56 crores of MTM gain in the SL NCDs. So that was why the other income in that quarter was so high. And similarly, this year in June, as we talked about the disposal of the Dish shares which were collection for the NCD. We booked a gain of around INR 14 crores on that. So that's essentially the reason why there has been this up and down in other income. And now that it's out of the system, I think we'd probably see a more normalized number. If you go back to the transcript of the last quarter, I actually mentioned that please don't take this number as a normalized number going forward.The question was on the market share in the hybrid funds. I think one is obviously the recent NFO has been very, very large. The SBI did NFO, which then, as you're aware, collected close to around INR 15,000-odd crores scenario. And I think Navneet kind of gave a perspective earlier on loss on market share. So the same things apply also for what has happened in the hybrid category.
The next question is from the line of from Abhishek Saraf from Jefferies.
Am I audible?
Yes.
So I have 3 questions. One in the, I would say, on our diversification strategy. So just wanted to know, how are we sitting on the diversities style in terms of news and management, managing how much our equity fund. And if you can share some number on that, that would be helpful. And is it as per your expectations? Secondly, on the cost to income side, I see that we have a switching up the cost. So -- but on a steady basis, what should one expect cost to income to be, like this quarter, it was around 24%. Going forward, what would you kind of indicate one should be in cost to income ratio.
So the cost-to-income ratio is more or less be the same as this. It might be -- the cost might be a little bit higher because we are looking at some additional investments in technology. Also this quarter, probably had some part of increase in travel and the other normal costs that go along with normalization of business. So that will intensify a little bit. So it will go up a little bit from here. But I think the ballpark that you're taking is more, right. You probably add 4%, 5% to that, that should be it.
I mean, your question on diversity is not only in terms of the core product, but also as we mentioned about launching newer products of , they are there with us for a long time now managing INR 2,000 crores in the BFSI funds, other analysts who manages infrastructure and the fund and then, of course, the other 2 fund managers. I think if you look at overall, would be around 15% or so of the overall equity.
So Navneet, would they have increased now because now that lot of NFOs have happened under some managers, those who have and now have . Would this have not gone up because if I recall it last quarter also, we were almost in the ballpark.
Yes. So I think in that last couple of quarters, the trajectory would have been from around 10% to now 15% or so.
So Abhishek, if you look at the data as of say, March of 2020, the number between was close to around 87%. And that number is now some 85%. So -- and you would appreciate to what has also happened is the mark-to-market increase in the AUM has been very, very sharp over March 2020. And we are talking about a base of nearly, like whatever, INR 180,000 crore, INR 190,000-odd crores or for that matter in INR 2 lakh crores. So 1%, 2% is a fair bit of delta.
The next question is from the line of Kaushik Agarwal from Haitong Securities.
Sir, I have 2 set of questions. Sir, firstly, on the AUM mix for the company. So we have seen -- as highlighted during the call also, we have launched -- like we have filed for 9 ETFs. So is there anything from being more on the strategy level, like is there any cap on which we are going to see the AUM mix for the company in the medium- to longer-term? That is my first question. And second question is more on the OpEx part for the company. So as we are seeing a lot of EPS, we are increasing basically the component of EPS in our overall AUM mix. So how are the operating expenses for the company going to move around over the period of time?
First of all, let me clarify and say it's very, very clear. While we have filed a large number of price products. There's no change in strategy. We are big believers of active fund management. In terms of active fund management, if it comes to it, we strongly believe we will be the last man standing. Our funds have created huge wealth over the past many years. In fact, very recently, we celebrated HDFC Flexi Cap Fund nearly crossing INR 1,000. So the capital has grown by 100x over the last 25 years, and that has far outlined over 6% CAGR for 25 years. HDFC top 100 funds and delivered CAGR of over 19% for 25-year and that also informed over 5%. Our advantage size for that matter, hybrid equity addresses have delivered 18% plus CAGR over 26, 27 years. And hybrid equity aggressively has 15.9% for over 21 years. So definitely, we are a strong believer in active fund management, and we believe, as I mentioned, that we have been the last man standing. But in our dialogue with the MFDs, with RIAs, with investors, looking at the world, what's happening in the asset management industry, we see in India also that part of the equity allocation is now being allocated to passive strategies. So an adviser who is allocating equity asset, does allocate both, both to active as well as passive. And we want to be a full stop shop when it comes to offering investment management solutions for product. Keeping that in perspective, we have identified suitable set of indices and will be launching products based on these indices. In fact, I think I mentioned earlier that we do understand just surrounding certain set of indices in terms of liquidity, et cetera. And then infact chosen those indexes where the risk is well contained. So again, I mean to reiterate, there is no change in strategy. We will leave no stone unturned in terms of resourcing, time, energy. When it comes to active fund management, there is enough and more these days being spoken about passive. In fact, not long back -- In fact, if I remember the year 2017 or so and consider it to be a given. And nowadays assume that there is no alpha but it should lie somewhere in between, look at the returns of some of our funds over the last 1 year and the amount of alpha that have got generated. And in our opinion, an active manager will be able to add value over a period of time. And the only way for going towards value is to go away from the benchmark and to do so, you do some level of underperformance. At times, it is worth taking that risk and you should believe in fundamentals of businesses one has invested in. So in our opinion, Indian market, we do offer a reasonable opportunity to add value one at a time by their side. So if you exploit the time arbitrage into search arbitrage. Optimally, there is still lot of alpha to be captured for the next several years. So as I mentioned earlier that if you look at our HDFC Flexi Cap Fund has outperformed its benchmark by a significant amount in last 1 year, and there is opportunity to generate alpha by their side. So we want, as I mentioned that we gain a leading asset manager. I mean scale is important for us. And then that's why I want to provide all office solutions to each segment of the -- of our partners as well as investors.
Okay. And sir, around the second question of operating expenses, like are we going to see whatever would be the proportion of ETF? How are we going to see the operating expenses part for the company over the period of time?
So the ETFs won't really change the OpEx much because there would be probably some degree of expenditure on business promotion in terms of advertising, but we don't really think it's going to be a material number from here.
Okay. So sir, can we expect the cost-to-income ratio, which you were highlighting to the previous question to that will mostly be remaining in these line only.
More or less here, I mean, I can't give you exact numbers, but it probably go up a few basis points here -- a few percentage points from here, given the factors that I mentioned earlier.
The next question is from the line of Nitin Jain from Fairview Advisors.
So I'll start with a little bit of the historical perspectives. I think is a company with an IPO. And I remember the call where management would rule out [ tax ] from passive investing stating that it is a very small part of the industry. And fast forward to now, it has filed for [ 9 ] ETFs. So what kind of growth are you expecting from the new launches given that even our existing ETF products, we have lagged significantly in AUM with respect to the competition. And my second question is our dividend yield is significantly lower than our peers. So do we have any plans to increase that in the future, if you can elaborate on that. And last question is, if you can provide the amount raised in the recently recruited NFO for the international .
So the first question was active versus passive. I mean markets evolve over the last 21 years and HDFC AMC has been pioneer in various segments. The concept of SIP, I would say, it didn't exist or hardly existed 20 years back, but HDFC AMC were clear and became the large player in that segment. And that's why I mean, our equity here is where it is. Over the years, we would have launched products, which were necessary to provide the right kind of solution to our partners and the investor. And in line with that, as markets evolve and Indian markets have also been maturing, there are needs for products which are -- whether which are suitable for a set of investors. We believe we have the right kind of investment management capability, risk management capability and product capability to manufacture those products and then distribute it. So I think the decision on whether it's passive, whether it's some of the other categories that we have talked about, it has to be seen in that light. So 10 -- few years back, if you ask like whether you would be launching an international product, I think the answer would have been from our side there, there is very little market in India. And then investors are not looking at the global diversification. But in the beginning of the call, I mentioned that now there are lot of investors who are looking at global diversification, and we have the ability to provide that solution as well. So as the passives have started finding the space in some of the portfolios, we believe that we would also be an active player in that segment. But again, I repeat what I mentioned earlier that we want to remain a dominant player when it comes to active equity, active fixed income, active money market, also to be a relevant player in the ETF space. We would never change, I would say, our market share at the cost of profitability. And whether -- we'll never compromise that for scaling the market share. The second question was on the , I think this year, we have enhanced our payout ratio there is something that or keep discussing and in terms of the IDS payout ratio that we should be having. They look at everything, including the cash on the balance sheet, the incremental flows and of course, what kind of ideal payout ratio that we should be having for, of course, fully in that.
The last question is the amount on the international fund allocated.
Over INR 1,100 crores.
The next question is from the line of Raj Jain from Motilal Oswal.
Firstly, when you talk about market share, then we've mentioned that we had a relatively lower market share on the inflow side because of the kind of NFOs that the market has made. But could you shed some light in regards to outflows, how have existing trend regarding the industry have resulting in a higher outflow compared to the industry. That is my first question. Second is what types or what kind of employee cost trend we can expect moving ahead. And lastly, the kind of ETF launches that you are planning, what kind of yield, net leads to the [ A&P ] that we can expect from these ETFs.
The first question was on the inflow share versus the outflow share. Now inflow share hasn't really gone up in last 2, 3 years. The lower share on the inflow side, which has impacted the market share, which we hope to connect over a period of time. On the employee cost, it has gone up this year, last year, given the challenging time, there was a bit of a hit on that trend. Part of it has been the tone, and you will see that maybe it's slightly going up since we have ambition to grow and then market is expanding. On the ETF strategy, I think we have been clear that we want to have all the products and solutions that our partners and investors need. We want to be a one-stop solution shop. And for that, whatever is needed, we would be ensuring that we have a full product bouquet on the ETF side, both in equity as well as on the fixed income. Again, I reiterate that there are -- I mean, we won't keep in mind the liquidity risk taht some of the indices may have. We'd be very, very mindful of that and would look at the products where we believe we can match investors need with our typicality in our risk management view. And of course, we want the key sudden investment there.
Just kind of taking more on the yields that we are targeting to on the ETF, which will be like possibly in the range of 20 bps or around what levels you can expect to put.
So I think our 4 products in India has become highly competitive. In fact, in some of the strategies that we yield in India is much lower than what you find even globally. You might have read this news item a couple of weeks back, which is like the expectation that, globally, the fee on the passive side has bottomed, and there are some signs of that inching up from a very low base. When we compare some of the index funds in India with the similar products outside India, we find that yield actually in India is on the lower side. Of course, this would be -- I mean, if the question is active versus passive, passive would be substantially lower. But we believe that I think there would be certain products where I think right kind of innovation would lead you to have a slightly higher PR than the products which are, I would say, quite commodity kind of eating your product.
On the employee cost, you had a question. So currently, we're running at around [ 7.5 ] bps of AUM on the employee costs. So I guess it'll be roughly around there, maybe inch up a little bit from there, but not very different from that. The noncash bit, which is we keep talking about, which is the cost on the ESOPs.
The next question is from the line of Aditya Jain from Citigroup.
This is Aditya Jain from Citi. Could you clarify the impact of the NFO in the 2 areas. So one is on the OpEx for the AMC and the second is on the yield. And secondly, the yield impact, whatever impact is there, is it locked in for life? Or will there be a tapering of the yield impact in future years?
So they would be tapering over a period of time. But on the cost, it would be happening for the NFO depending on how you market it. Some of the NFOs may need more marketing expenses, some of the Next products, et cetera, may not need that much of expense. I think that would differ from product to product and the kind of sign that one is expecting the kind of market segment that one is targeting. So it would depend on a couple of factors. There's no standard, I would say, an amount that we target to spend on every NFO. But you would have seen -- you would have noticed in this quarter, the overall expenses have gone up and part of that can be attributed to the NFOs that we had in the last few months.
So on the yield side, the commission agreement with distributors during the NFO, so that has some built-in declines in subsequent years. So there is certain commission payout that is issued and it becomes lower in the subsequent years?
Actually, Aditya, there are all sorts of structures. So I think -- different structures. And then there are different other levers that gets used. So without getting into specifics, both yes and no.
Next question is from the line of Hiral Desai from Anived Portfolio Managers.
Just had 1 question. If I look at the operating profit growth for quarter 2 in the that is at about 13%. And if I look at the quarterly average AUM growth, we are at about 17% right now. So what will it take for sort of both of them to be in sync? And how long before that is possible given the noise that we are currently having on the NFO side. And plus the competitive intensity in general with so many new players coming in.
So a variety of things, Hiral, as we mentioned earlier that there would be dilution because incremental money, particularly in the NFO, if you pay that coming at a higher cost than the book that we have today. So over a period of time, margins, will see some level of dilution. And it, of course, also depends as I mentioned earlier, in terms of mix of assets, even within the equity, what kind of products getting more flows versus others. So it's difficult to quantify, but as Piyush has been mentioning for some time and over a bit of time, margins will see some bit of -- for dilution. And the current competitive intensity that we have discussed as part of like a couple of questions before, the competitive pressure, which has got intensified because of the money which is being raised in NFOs. And then as a house, we have seen these periods before, and our experience has been that it settles down over a period of time. So we hope that over a bit of time, it settles down and the competitive intensity kind of makes sales when it comes to the money rating through the NFOs.
Given lastly on this Standard Life for stake sale, have you had a conversation after this 5% stake sale on their sort of road ahead.
So we have no information on Standard Life's plans when it comes to diluting a stake in the carton or selling any stake in the company. As you would know, this 5%-odd stake recently and currently own approximately 16% of the company. We will keep you posted if we get to hear anything further. The good news that I must share is that we got some high-quality shareholders, who acquired the stake, and we really appreciate their faith and trust and confidence in us.
Navneet, just on the website and the mobile app. Obviously, I am an investor with HDFC AMC, our website and app has come out really nice, especially the smart statement bit is very good. I think cheers to the team for that.
Thank you so much, Hiral, and the team is working very hard. And hopefully, we will keep improving your experience as an investors with us at HDFC AMC.
The next question is from the of Anand Shankar, an individual investor.
I have a question for Mr. Navneet. I think that Finity were at a forum last Friday, and it was very useful for retail investors likely. And I also understand that our company is doing a lot of ETFs now. So basically, my question is like what is your strategy for growing big in the passive funds market because it's our module product for one. So the A in faith matters a lot. And then second, there is a lot of competition. Unlike active funds, it is quite difficult to differentiate ourselves with our competitors. And especially the new fintech firms, who have a lot of funding coming in, and they are not listed, so they don't have so much of pressure on the profitability aspect. So they can introduce new funds and offer at much lower cost. As far as for us to do the same because we need to balance growth and profitability. So I just want to know what would be our strategy in the way forward just in the passive side to grow big whilst investments that the market share is absolutely .
So first of all, I mean, because we filed a large number of passive products on 1 single day and it created a , but you should keep in mind that HDFC AMC has actually been a pioneer even in the passive space. We launched our first at index fund way back in 2003 and that's like 18 years back when there was very little discussion around passive products in India, we were doing extremely well on the active side. We had probably one of the best bouquet of active products, but also launched the index fund and it is one of the longest track record. And over the years, of course, in the last couple of years, the growth that industry has witnessed, we believe that there is a distributor segment, there is an RIA segment, there's an investor segment, which is looking at more allocation to passives and in line with our strategy of being a one-stop shop for anything related to asset management. We need to fill that product bouquet as well. In terms of strategy, as you know, I mean, this is like passively managed. Here, it's more about the right kind of -- having the execution skillset and right kind of technology, the right kind of operational ecosystem and of course, the marketing and sales infrastructure is slightly different than what you have on the active side given the margins that are there on the passive side. We've taken a couple of steps over the last few months without deliberating much on that. But we would be, I would say, I think you heard a lot of things from us even on the passive side, given that our ambition has always been and will always be to remain a one-stop shop for everything related to asset management needs of any kind of investors.
Okay. And second and last question, are we currently looking into acquisitions for growth opportunities?
So during past and always open for any opportunity if it is any value to all stakeholders, but I can't say more than that.
The next question is from the line of Mohit Surana from CLS India.
First question from my side is that of the market share offering active, the one that we see especially in as is a lot higher than maybe interest or take some of the things...
Mohit, sorry to interrupt you. Your voice is breaking. We are requesting you to come into the reception area.The next question is from the line of Rohan from HDFC Asset Management.
No, I think there's a mistake. We don't have any such person and you are saying HDFC Asset Management.
[Operator Instructions] The next question is from line of Mohit Surana from CLS India.
Am i audible? My question is on for a higher market share loss in the of the questions as have gone up from the previous quarter to this quarter. So if or...
Mohit, unfortunately, we can't hear you. You're like really cracking.
Sir, I will take it offline then.
Sure. Sure.
Next question is from the line of Manjeet from Solidarity Investment.
My first question was as you have seen some of the large distributors, whether offline or online, who are starting their own mutual funds. Just wanted to get longer term implications of things like big distributors kind of start giving the product out themselves.
We always had -- I mean, our industry has always been very competitive. And in part, I remember the question that was asked of us on how will you, as a domestic player, withstand the global majors. We have a lot of global majors, who are setting up AMCs. Now we have seen some of the people who started with the distribution franchise, and now building a manufacturing franchise. I mean given the growth in the industry over the next several years, where penetration of mutual fund is abysmally low. The industry has grown so much in the last few years. But still, if you look at the unique investors, they are just 2.5 crores. So we have a long way to go. And I'm sure the industry will attract all kinds of players. And some of the people who have a large distribution franchise, if they are able to build a good investment capability and infrastructure. I'm sure they will also bring interesting, I would say, dimension to the industry. So more the merrier, I mean, given the growth potential in the industry.
The other question I had was just crystal gazing a bit, but from your vantage point, someone that has a very long-term view of this industry, 10 year, 15 years and a few. Would it be fair to have a high purposes with the operating margins that the industry enjoys today would actually not sustain and compress, one, because of more competition, probably the newer brands build trust for the next decade who were not as well known as someone like us or SBI ICICI. And also the fact that as the industry growth probably at some point starts falling as the competition further incentivized to go down at the lower price. So that's some broad thoughts, some very long-term operating margins of this industry, how different able they are, not just for you, industry as well?
Since prices become somewhat larger part of the overall [ PAN ], then, of course, margins as you see, they will get diluted. Having said that, I mean, talking about the recent competitive intensity because of the NFOs and the pricing in the NFOs, as we mentioned earlier. We have seen these kind of times earlier and then, of course, it settled down over time. Whether is it fair to say that operating margins would not sustain because of more competition. But as I said, this industry has always been very competitive. When you go back and, I mean, India has its [ 30 ] years or so, and if you see in the last 30 years, 3 decades. At any point in time, you had a good mix of large domestic financial services that also have their asset management company, a lot of global majors who have entered or exited this industry, a lot of other players who entered and exited this industry. Competitive intensity has always been there. Now that I think everybody strongly believe that the penetration is likely to increase very substantially, some more players are entering the industry. But in [ longer ] period of time. I think everybody has to work on their own competitive advantage. I think we believe we have an outstanding franchise when it comes to our investment management capability. Our risk management capability, our product capability, the presence that we have, both the physical products across the country and the digital presence or the digital assets that we have created, the pedigree of our brand, I think the pedigree of our people. I think in all of those, I think the advantage is that we have -- we believe, I think, will continue to grow for a very long period of time and continue to grow very profitably.
Last 2 questions. I'll just plug them. One was I understand the necessity to maintain a strong balance sheet and a certain amount of cash on balance sheet for volatile period like last year. But just where we are in terms of our cost structure in the balance sheet already on cash. What's stopping the board when considering -- paying out incrementally almost all of the profit and dividend or whatever those dividends buyback -- whatever it is, but what's really stopping the board over there? Because we throw out so much cash in the years as well? And second -- the final question was in terms of the new regulation by SEBI for mutual fund employees, in terms of their investments, is there any risk of good talent not wanting to come into the industry or nothing on those.
So on the first, I think the idea level was of cash. I mean, as I said that board sees all that, that's one of the specific discussions we have in almost every board meeting, and we increased the payout. I mean, they increased the payout ratio of this year. And I'm sure that debate in terms of what is the ideal level of cash versus the payout ratio that we should have, I think, goes on. On the second question that was on new regulations for MF employees and the risk of good talent not coming to the industry. I think the regulator's idea is that I think, there should be more skin in the game whether it comes to the investment team or the other leadership team. And I think a similar regulation has also come on, on the higher skin in the game by the asset management companies into their own funds. Over the years, several of these things have enhanced trust and confidence of the investors in the asset management. And we believe that I think, given our franchise and given as our brand, we shouldn't have challenge in attracting the right kind of talent.
The next question is from the line of Sameer Bhise from JM Financial.
Just a quick question. Were the new platforms classified as distributors or the direct route?
Sameer, there are both. So some of them have taken the MFD route. Some of them have taken the RIA route. But if you look at the big names like your Zerodha, Paytm, ETMoney, all of them have taken the direct route. So they basically invest in the direct plan that falls under the RIA.
Okay. Okay. So it's their license-based classification?
That's right. So people who want to do distribution, they opt for the MFD and thereby, they take the ARN and they take that route.
The next question is from the line of Abhishek Saraf from Jefferies.
Just 1 follow-up on the NFO side. So can you explain that, obviously, we have also participated in the NFOs, but it has been largely in the lower-yielding kind of NFO schemes. So if I can just understand what are the product gaps in terms those product gaps on a higher-yielding schemes, what will be those gaps will be. And secondly, just to [indiscernible] it's difficult to say, but in your view, how long did till this NFO will continue? And what could be kind of make it a moderate trend?
So as I mentioned earlier that one of the product categories, which we would be launching is the multi cap, and of course, some of the thematic and sector fund over a period of time. The other products where they need to fill our product gap or there could be more innovation could be on the passive side, on the international investing side,and of course, on the fund-of-fund side. Otherwise from a core category as per the SEBI classification, we are present across all categories, be it in equity, be it in hybrid and fixed income, money market, et cetera. So that was your question right?
Yes, and just on multi cap side it's fine, on the thematic and sectoral side probably, is there more scope to for doing any of the -- kind of coming over to more schemes, so that actually -- we end up getting more TERs or margins, but multi cap will be just one category and once we deposit back then it's over and done with. But in thematic and sectoral probably we can have much more scope to innovate and then come with newer schemes.
So I think there, the intention would be to launch products where our investment team believes in the longevity of the team where we believe in sustainability of that product, both from the adviser, distributor or from the investor's portfolio perspective. If there is a need for a product, we would be launching, again as I am being -- I want to reiterate, we wouldn't be doing a product for the sake of it because it's selling currently, that has never been the case with HDFCAMC and we would never deviate from that. Would there be more scope in thematic sectors. As I mentioned, we did BFSI fund. Our team strongly believed in it. I mean, I'm talking about our investment team strongly believed in terms of the share investments universe, which is available to invest in that category and given the high growth potential of that over a long of time in India. We are looking at another theme, which is like MNCs and of course, over a period of time, there could be other opportunities as well.
Yes, that's quite clear. Secondly, just your sense in how much [indiscernible] do you see this NFO -- NFO inflows that you have seen is how long -- is that -- line of sight to that?
So I think we have seen this kind of period. I think one needs to keep in mind the distribution dynamics, one has to keep in mind, I mean, some of the AMCs, which have kind of started recently, they need to fill their product bouquet, of course, the newer AMCs will come in, and they will be launching product. Having said that, we strongly believe that the product which has been around for a very long time, I talked about our Flexi Cap Fund, where we celebrated crossing the NAV of 1,000. The money has got multiplied 100 times in the last 25 years. We look at our balanced advantage for our top 100 fund or hybrid equity fund. All of them has long-term track record. We strongly believe over a period of time, investors would recognize that. They've always been recognized in it, and that's why they're size is where it is. And I'm sure over a period of time, investors would have faith in those funds, which have displayed good amount of [indiscernible] over a long period of time. And we have been putting a lot of effort on that. So why -- I mean you hear about the NFO or even the NFO that we have done. And we have done like 4 of them in last 5, 6 months and another one is underway to fill the product gap that I said. But at the same time, a larger campaign on our end has been wealth creation equal to [indiscernible] and the assets and the sound investment plus times plus patience. I mean that's a formula for wealth creation and not really buying the ahead of the season.
The next question is from the line of Nikhil from SIMPL.
Am I audible?
Yes.
Just 1 question. It's a continuation of some earlier participant and as over the next 5, 10 years. And you mentioned that competition -- there was competition from MMC even the larger price continue to grow. But sir, if you look at last 10 years from 2011 to 2020, '21, the guys who have cracked on -- cracked the model have taken incremental market share from the incumbent. And this also goes with the theory that we have that generally as the funds become larger, outperformance becomes a lot more difficult. Now if you look at over the next 10 years, what changes or what could be the learnings, which you see can be brought in so that over the next year as the industry grow maybe we being one of the largest incumbents and sustain that 10%, 12% and not grow later than the industry. What has been -- what happened over the last 10 years?
So Nikhil, I mean, around 7 or 8 years back when the bull market started, the overall equity effect that industry was managing as close to 2 lakh crores. Today, we manage more than INR 2 lakh crores of active equity. Even in those days, I remember the question used to be that your funds are very large, would you be able to deliver, but I think funds have delivered. I think, still -- I mean, if you look at the overall size of the industry versus the market cap in India. And of course, over the next several years, a large number of newer segments get listed newer businesses get listing. We are very, very low way to go. Within that, the overall assets, which are managed by the mutual funds in India, it's not as large as some of the other markets, and I'm sure there will be opportunity to generate income. Hope that was the question.And as we said that the newer players have gained market share, but that's been the case every few years, you would see some of the players growing faster than the other players mainly based on the performance and a couple of other initiatives they would have taken. But over a long period, I think for us, like I've said have grown reasonably well. So in the year '99, 2000, the HDFCAMC got set up. This is exactly 21 years back. In September 2000, we were the newer player, right? I mean there was the industry with more than 30 players, consisting of some of the largest global asset manager, consisting of some of the largest public sector banks, private sector banksprivate sector banks, AMCs promoted by different players. But over the next several years, HDFCAMC continue to grow and become a market leader. And even at the current side, as I mentioned that it looks like an absolute [indiscernible] a large amount of money that we have been managing. But if we look at the size of the market cap versus the mutual fund AUM or you look at the size of the GDP and the growth that the country can have. I think still there is a long way to go.
Sure. where I'm coming from is that the benchmark that we have set in terms of market share and what most of the decision revolves around market share loss and all, considering we being a much larger player and the industry growth start being there and the smaller players having some edge over us in terms of growing faster would the benchmark shift to the differential to the industry growth, which we have? Or would you say, even with this size, we can continue to grow at the market rate or even grow faster than the market rate. So is it like our growth for the next 5 years should be more in terms of what the market should grow or the lag will always remain. That's what I'm trying to understand that because of our size and because of a new player being more agile and having a much smaller size, maybe we can attract more fund versus a larger fund. So 1% or 2% incremental growth may go to him rather than coming to us. So that's where I'm trying to understand.
Actually, if you look at globally and look at the growth of some of the largest players that have been growing faster than the overall industry. And there has been a consolidation. Of course, there is a long tail of players with niche categories, but the larger players have been growing pretty well, those who have the right kind of product suite and of course, all the other capabilities to build a good lens. And I think in India, also, we have seen that. Our belief is that, we have all the necessary ingredients in place which are required for growth of an asset management business. At the same time, do we have a particular number in mind in terms of what should be the ideal market share. I think that has to tick a lot of boxes. So it's clearly important for us. The quality of that scale or quality of that market share is also important for us for profitability of that is also important for us. And quality we define in terms of the money that we manage on the active equity, active income side, the AUM that we gather from individuals, the AUM that we gather from B13, the AUM that we gather from the segment. And that's very, very important for us. We -- as I said, that we won't change a certain level of market share at any cost that has not been the philosophy at HDFCAMC ever.
Sure. Just and -- just 1 question I had. Globally, if you look at it, I'm not very clear, but the concept, which I understand is it's a much more institutional -- institutionalized business versus a larger retail business, it is in India. Would you agree with that? Because if it's not institutionalized as we had seen during COVID, the institutions or the larger corporates will always move towards safer name. Or what the construct of the global market is different from what is similar to what it is in India. Just to understand, how the concepts differ?
So in India, when we look at the equity funds, the larger participation is from individuals. In fact, almost the entire market is from individuals when it comes to active equity, of course, on the passive side. You have a couple of institutions. So we started investing into ETS 2015 onwards On the fixed income side, a large part of the market is institutional, which is like corporate territories and some of the other institutions. We have a long way to go in terms of penetrating the individual -- the fixed income market on the individual side. And if you look at the overall size of the bank deposits, all the other investments that individuals would have their holdings of fixed income mutual fund. I think there is a lot of growth potential on that side. On the equity, there is largely, as I mentioned, it's more on the individuals than institution. India doesn't have those kind of like, let's say, the endowment fund, the pension and the provident fund to locate huge amount of money to the equities and alternatives, et cetera. I just evolving. I'm sure over a period of time, that will also happen in India. Globally, the insurance company, the annuity provider, the pension funds, endowment funds, all of them give money to the asset managers to manage that, in India, some of these are regulated by separate regulators and asset managers in India like us, have not been able to tap into that market.
Even retail investors in most foreign jurisdictions come through omnibus accounts, they don't directly come to the fund house. In India, actually, the regulations require the investor to come to -- for the fund house to kind of do the whole KYC of each investor and deal directly with the investor. They may come through the distributor, but the transaction is with the fund house.
Thank you very much. Ladies and gentlemen, that was the last question for today. I will now hand the conference over to Mr. Navneet Munot for closing comments.
Thank you so much once again, and wish you all a very happy Diwali and seasonal greetings, and I wish you a very, very prosper new year. Please take good care of yourself.
Thank you very much. On behalf of HDFC Asset Management Company Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.