HDFC Asset Management Company Ltd

NSE:HDFCAMC

Earnings Call Analysis

HDFC AMC Q2 Revenue Rises with Strong Profit Growth

HDFC Asset Management Company's second quarter saw an 18% year-over-year increase in revenue from operations, reaching INR 6.43 billion, while other income grew to INR 1.22 billion due to a strong mark-to-market performance. Operating profit for the quarter rose 20% year-over-year to INR 4.67 billion. The company has improved operating margin to 35 basis points, a slight increase from 34 basis points in the previous quarter.

Innovation and Fund Launch

The company successfully launched a new fund, emphasizing innovation as a key aspect of their investment strategy, and aiming to continue a legacy of distinctive financial products since the first fund launch back in 2011.

Debt Segment Performance

On a year-over-year basis, the debt segment of the business demonstrated a flat market share of 14.5% for the quarter ending September 2023 when excluding index funds. This stability is attributed to strong performance in actively managed debt funds, despite the loss being mainly due to lower participation in index funds compared to industry peers.

Equity Segment and Yield Improvement

The equity segment saw a significant increase in the quarterly average AUM by 35%, accompanied by an incremental yield improvement. The yields for equity stood at 67 basis points, which includes the performance of the index fund as well.

Diverse Revenue Sources and Bank Partnerships

The company's strategy to diversify revenue has been effective, with the direct plan book share reaching the late-20s percent. A material improvement in engagement with HDFC Bank, a key partner, is also observed, resulting in a flow market share in the bank's book that is higher than the overall book market share for recent months.

Cost Management and Efficiency

The company is managing costs efficiently, expecting an annual increase in staff costs in the high-single-digit to low-double-digit range. Furthermore, total costs related to the issuance of employee stock options (ESOPs) amounted to INR 55 crores, with the expectation that non-cash compensation will decrease as 60% of costs have already been incurred in the first issuance year.

Folio Growth and Economies of Scale

The company has witnessed a significant addition of unique investors and managed to pass on the benefits of economies of scale to investors, as evidenced by a reduction in the Total Expense Ratio (TER) of their largest equity-oriented fund, HDFC Balanced Advantage Fund, from 1.78% to 1.45% over the last few years.

Market Position and Customer Retention

With a market share of folios comparable to levels seen in March '21, the company suggests that average AUM per portfolio has remained steady rather than decreasing, which could be a positive signal for maintaining or even increasing revenue market share. The average holding period for investments is slightly better than the sub-three-year industry average, indicating favorable customer retention for the company.

Outlook and Strategic Advantage

While the company refrains from providing forecasts due to the dependency of their business on equity market movements, they are confident in their brand, presence, partnerships, product range, and performance track record as key factors for future growth. The company continues to remain optimistic about the potential for growth within the financial markets and with individual investors.

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to Q2 FY '24 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, Mr. Naozad Sirwalla and Mr. Simal Kanuga.I now hand the conference to Mr. Simal Kanuga.

[Simal Kanuga, executive]

Yes, thanks. Good evening, and thank you for joining us today.Before we dive into specifics, we would like to highlight a change in reference to some of the data points in our presentation. As against our usual schedule, our results have been advanced by a week or 2. The change was made to ensure synchronization with the quarterly results reporting of HDFC Bank. It is important to note that as of now, not all the necessary industry data for September is made available. In instances where September data is still pending, we have substituted it with August data. We have done this to present the most accurate and timely information possible. We'll refresh our presentation in the forthcoming days once necessary data for the month of September is released and the same will be made available on stock exchanges as well as our website.Let us start with some level -- industry level information. The quarterly average assets under management continued its impressive growth, reaching INR 47 trillion, marking a 20% Y-o-Y increase. Actively managed equity-oriented funds are getting nearer to the 50% mark of the total AUM with QAAUM of INR 23.1 trillion, a notable uptick of INR 18.4 trillion recorded a year ago, signifying 26% Y-o-Y growth. During the same period, the NIFTY 50 price return was 15% and the NIFTY 500 price return was 17%. This indicates that the industry growth outpaced the benchmark indices and attracted significant inflows.Debt funds displayed healthy interest with QAAUM surging to INR 10.3 trillion in the quarter ending September '23, up from INR 8.8 trillion in quarter ending March '23. B30 MAAUM category continues to exhibit a healthy growth rate. This highlights the high level of acceptance of mutual funds even in B30 markets. The share of B30 in the overall MAAUM and equity MAAUM remained steady at 17% and 27% respectively. Systematic investment plan continued their upward trend, recording close of INR 160 billion in September 2023, a notable increase compared to INR 130 billion in corresponding month of the previous year. Over the quarter, SIP flows totaled to INR 471 billion, constituting 27% of industry's total gross equity flows.Now we'll move to our company's performance. Our quarterly average AUM crossed INR 5 trillion for the first time and reached INR 5.25 trillion, a growth of 22% Y-o-Y. Our market share demonstrated positive momentum with overall QAAUM market share of 11.2%. And when we exclude ETF, the number is 12.5%. Our actively managed equity-oriented funds AUM based on closing basis crossed the figurative milestone of INR 3 trillion and saw an increase of 40% Y-o-Y as against 28% for the industry, resulting in increased market share.Our quarterly average AUM for debt funds moved to INR 1.37 trillion, up from INR 1.18 trillion in March '23, a growth of 16% or INR 0.19 trillion. Our quarterly average asset mix continued its tilt towards equity with equity-oriented funds now constituting 58% of our AUM, significantly higher than that of industry at 51%. Furthermore, even in terms of customer profile, we have remarkably higher tilt as compared to that of the industry in favor of individual investors. As for August '23, individual investors' MAAUM accounted for 68% of our total monthly average AUM, higher than the industry average of 58%.Our unique investor base continues to expand, reaching 7.9 million unique investors at the end of September '23 as against 40.4 million for the industry. This suggests that nearly 1 out of every 5 investors have repose their faith in HDFC Mutual Fund. Over the last 1 year, industry did add 4.4 million unique investors. During the same period, we added 1.8 million unique investors. In September '23, we processed 5.86 million systematic transactions, amounting to INR 22.4 billion. For sake of comparison, the corresponding amount in June was INR 18.9 billion and for September '22 was INR 14.3 billion. We have seen a growth of over 50% on a Y-o-Y basis.We have further expanded our product portfolio, especially in the sectoral/thematic space. During the quarter, we launched non-cyclical consumer fund, transportation and logistics fund, technology fund and pharma and healthcare fund. We also launched the NIFTY 1 Day Rate Liquid ETF. Our wholly owned subsidiary in GIFT City has secured all necessary approvals and licenses. We have filed documents and plan is to launch first set of funds during the current quarter, subject to necessary regulatory approvals.Finally, moving to financials. Our second quarter revenue growth from operations came in at INR 6.43 billion, reflecting 18% Y-o-Y growth, while other income amounted to INR 1.22 billion as we did experience a healthy mark-to-market growth on our investment portfolio during the quarter. Our operating profit for the second quarter came in at INR 4.67 billion, a growth of 20% Y-o-Y. Operating margin for the first 6 months increased to 35 basis points as compared to 34 basis points in the first quarter of the current fiscal. The effective tax rate has rationalized in this quarter. Last quarter, many of you would remember, it was lower, primarily due to increase in deferred tax charge attributed to holding certain period -- holding a period of certain investment transitioning from short-term to long-term.So thank you so very much. Navneet, Naozad and I are very much available to take questions. Nirav, I think we can open up for questions.

[Operator]

[Operator Instructions] The first question is from the line of Sandeep Agarwal from Naredi Investments.

[Sandeep Agarwal, analyst]

My question is regarding SIP flow, it's approx INR 16,000 crores and increased by 36% year-on-year basis. And sir, HDFC SIP flow is increased by 56% year-on-year basis. So any specific reason you want to share for this higher growth?

[Navneet Munot, executive]

So overall, I think it's been helped by a variety of reasons, including the improvement in performance, products getting approved across all wealth managers, our focus on all -- each and every channel, be it the mutual fund distributors, be it RIA, fintechs, banks, and of course, HDFC Bank. I think it's been quite helped by a variety of other initiatives, be it on the marketing side, on digital side, product communications side, et cetera. And this continues to remain a very high focus area for us. And we remain quite focused as a team on continue to build our systematic transaction book.

[Sandeep Agarwal, analyst]

And sir, my next question is, what percentage of growth you expect in next 2 years in SIP flow? Any further number for industry and HDFC AMC?

[Navneet Munot, executive]

Yes. So I mean, over the last several years, you have been seeing continuing improvement in the overall SIP flows in the industry. I think a combination of factors, I think a great track record of the industry over a long period of time, which is acknowledged by a lot of investors. I think it's focused on transparency, increased transparency of the product relative to any other investment vehicles for people, that's giving more confidence. I think it's technology, making it easier for people to invest, easier to get more information. And of course, the tremendous focus of the industry and all of us, the players in the industry on investor education. So I think a couple of these factors have led to this growth.And despite the volatility in the market over the last 4 or 5 years, the most heightening feature in our industry has been continuing to step up in the SIP flows month-after-month. And we have always been highly focused. I think over the last 5, 7 years, industry has grown a lot on that front and we have grown. But even much, much before SIP or systematic transactions became a household name, at HDFC AMC, we have always been very, very focused on promoting the concept of disciplined investing and long-term investing through SIP and systemic transactions.Before we take any other question, I thought I'll take this opportunity to mention something which is very, very close to our heart at each and everyone at HDFC AMC. During the course of this quarter, we launched our HDFC Cancer Cure Fund. As everybody would know, the returns from the fund are shared with Indian Cancer Society. We could raise over INR 1.8 billion in this fund from over 1,600 clients. And we remain very, very thankful to each and every one of them. So I'm very thankful to SEBI, to our distribution partners, to our investors, and of course, the entire team at HDFC AMC and all the well wishers.We are very proud that the first fund that got launched in 2011 and then second series was in 2014 followed by 2017. And after a gap of a few years, we finally have been able to launch the fund and continue the great legacy. This has been one of the greatest innovation by any AMC in the world. And we are very proud that we are continuing that legacy. So I thought I'll take this opportunity to thank everyone.

[Operator]

Next question is from the line of Kunal Thanvi from Banyan Tree Advisors.

[Kunal Thanvi, analyst]

So I had 2 questions. One was on the debt side of the business. When we look at Y-o-Y growth for the industry in HDFC AMC, we have grown at a slower rate compared to the industry. Can you talk about what's happening on the debt side for the industry and for us? What is the mix of growth in active versus passive also on the shorter duration versus longer duration? So that's on the debt.And the second was on the yield. So when we look at our yield improvement, we have seen like there has been a sequential improvement in the yield. Can you break this up for us what was the yield for the equity book and for the debt book separately? These are the two questions I had.

[Navneet Munot, executive]

Sure. So on the debt side, your first question, the debt market share has increased on a Q-o-Q basis. The loss that you see on the Y-o-Y basis is mainly due to our lower participation in that index fund. We have mentioned it earlier that our market share is lower there. Some of the funds that got launched earlier have been able to raise much more money than what we have been able to raise. But I wouldn't read too much into this. Our market share in debt, excluding index fund on quarterly average AUM basis for quarter ending September '23 stood at 14.5% and was flat year-on-year. In actively managed fund, we continue to enjoy very healthy market share which has been pretty stable. I think the loss is on account of the debt index fund.

[Simal Kanuga, executive]

He was looking for simple equity debt and liquid yield. So I think, Kunal, on equity, we are at 67 basis points. We are at 27, 28 on debt. And around 12 basis points on liquid.

[Kunal Thanvi, analyst]

Sure. And Simal, on the incremental flows that you're getting, like it will be lower than this? Have you seen any improvement in the incremental yields as well for the equity?

[Simal Kanuga, executive]

No, no, of course, it is lower than the book. So if we are not able to obviously get in flows at 67 kind of basis points. Those -- the NFOs that we did, all of them were at 90, 100 basis points kind of yield, you can see the direct plan expense ratio. They are all in that kind of a range. But flows into our larger schemes that is still in the band that we have mentioned in the past, in that 50 to 60 kind of range.

[Kunal Thanvi, analyst]

Sure. No, it makes sense. Okay. And on the debt side, what I wanted to understand more about was on the overall industry. How the debt as the category is doing? And how do we look at it from both shorter and the longer duration side of the thing? And active debt from a longer term perspective, because like in 2, 3 quarters back, we had talked about passive gaming growing at much faster rate. How do we look into the debt side of the business from a longer term perspective?

[Navneet Munot, executive]

So over a longer period we have seen that in an environment where interest rates are flat to declining, we see greater flows into the fixed income versus the environment where rates have been going up in the last couple of years. And that's why in the last 2 financial years, we have seen net outflows from fixed income. Last quarter was positive, but most of that money was at the short end of the curve.Over the next several years, if you ask me, there is a lot of potential for us -- when I say us, meaning industry as well as HDFC AMC, for us to go on the fixed income side, both at the short end and the long end. In the last couple of years, the greater growth has been on the equity side. But on the retail side as well, there's a lot of opportunity. If you look at the overall fixed income AUM of the industry as a percentage of bank deposits, it has actually come down in last 4 or 5 years. So I clearly see an opportunity. Of course, as an industry, we would have liked the tax regime to continue, which underwent a change, as you are aware, in the last budget. But even -- I mean, notwithstanding that, we would continue to work hard to promote fixed income funds among larger set of investors. There's tremendous potential.

[Operator]

Next question is from the line of Swarnabha Mukherjee from B&K Securities.

[Swarnabha Mukherjee, analyst]

Congrats on a good set of numbers, sir. So first, I think on the yield side, a couple of quick questions. One is that you were mentioning 67 bps on the equity side, the yield is. So just wanted to clarify, does that also include index fund or would that be classified separately under passive? And if so, then what would the yields be for the passive side of the portfolio?

[Simal Kanuga, executive]

Actually, Swarnabha, that includes index fund. See, index fund is a very small part of the overall pie, right? It is like INR 15,000 crores, INR 16,000 crores on a INR 3 lakh crores kind of a number. The index funds, like if you look at the larger index funds, the NIFTY 50 and the Sensex 30, they would be around at whatever 12, 13 basis points kind of a yield. And the equal rates and et cetera would be at around 25 basis points kind of a yield. But that would not really move the needle. It's a small part of the overall equity book.

[Swarnabha Mukherjee, analyst]

Right, sir. And also just wanted to confirm that -- what you mentioned that the yields for the flows in the existing schemes in that 50, 60 bps kind of a range. So does this hold steady or because there has been flows that have come in over this quarter, particularly, I mean, if you see the balanced advantage funds also maybe traction additionally, I mean it is think now INR 60,000 crores plus. So is there some dilution because of increased flow and subsequently sizes of this funds are moving up one notch higher. If you can throw some color on that? And also, I mean -- so this kind of yield which we have seen this quarter, what would be your view? Should it sustain in when the security market continues to remain strong or would you still guide for some slow contraction in this?

[Simal Kanuga, executive]

So I'll just answer your question on balance advantage and then Navneet can give a bigger picture. So on the number that I mentioned of 50 to 60 basis points, that's on fresh flows. So what we do is, when the expense ratio drops because of the change in AUM, for future sales, we also reduce the commissions that we pay. So our yield thereby would be in that broadband that I mentioned of 50 to 60 basis points. So that was on your specific question. On overall yield, I think Navneet can throw a better light.

[Navneet Munot, executive]

Right. So we have always mentioned that book margin is higher than the flow margin, that continues. But of course, the flow margin is now better than where it was, but still lower than our book margin, the industry dynamic that most of you are aware of. Also you have to keep in mind the whole sliding scale structure. So we have seen our quarterly average equity AUM increased by 35% over the last 1 year. Many of the schemes have jumped multiple so-called hurdles and the TERs are lower than where they were. So this, if you ask me, is a good problem to have.In fact, we have been mentioning this on every call because the absolute revenues are rising. But of course, as the size increases by multiple of INR 50 billion, you'll see a real pressure on margins. But the other important point is that the pace of dilution has slowed down due to rationalization of the distribution cost. And I think Simal mentioned earlier that you would have seen the direct plan TERs of some of the recently launched NFOs, not only for us, but even others in the industry.And I must appreciate. I mean, if I look at the Bajaj Finance AMC where their first scheme one would have thought that they would pay out the maximum to build a size, but their direct plan TER, if I remember correctly, is close to 70 basis points. So we applaud them for standing ground. And at our end, I think some of our recent NFOs you would have noticed has come at a much higher margins.

[Swarnabha Mukherjee, analyst]

Understood, sir. Very clear. I just had -- I wanted to know your thoughts on the expense side also. I think cost structure has slightly increased this quarter, both on the employee expense side and on the other expense side. So if you could highlight in employee expense side, so is this because of increase in manpower that is largely playing out? And then which parts of the scheme are you argument if it is an increase in manpower? And on the other expense side, is there anything else to read apart from maybe the marketing expenditure coming due to imports?

[Navneet Munot, executive]

So on the employee side, it has grown by 11% Y-o-Y for quarter ended September '19, which is pre-COVID. Our employee cost was INR 57-odd crores. As against that, the employee cost for this quarter was INR 92.9 crores. If we take out the non-cash cost of ESOP, then the number is INR 79.8 crores. So this is a CAGR of 8%.On the other expenses, so they have grown by 22% Y-o-Y. But if you look at in absolute amount terms, and this is a point that Naozad and I have been making in the last couple of calls that it's about INR 12 crores of additional spend. You would appreciate that the percentage looks higher on a lower base and the increase is primarily due to increase in general business-related expenses, including travel, we had a couple of NFOs, business development, trademark license fee, CSR expense, of course, and we continue to spend on technology and digital. We think this is necessary and will benefit business materially over a period of time.

[Swarnabha Mukherjee, analyst]

Sure, sir. Sir, just wanted to know your thoughts that the employee...

[Navneet Munot, executive]

I think from the pre-COVID period -- I think that this point was made in the last quarter that from quarter ended September '19, the CAGR on this front is 9%.

[Naozad Sirwalla, executive]

If I might just tell you one thing. I think you need to look at also the 6 monthly numbers. So I think 11% employee cost growth has September quarter '23 over '22. But if you look at a 6 monthly number for the current financial year, the people cost has kind of inflated by 9% on a Y-o-Y basis.

[Swarnabha Mukherjee, analyst]

Sir, I was actually looking at a little bit sequentially. So first quarter versus this quarter, assuming that all the increments, et cetera, were baked in first quarter. So from there also, the number came in slightly higher. So just trying to delineate that.

[Naozad Sirwalla, executive]

So between the previous quarter and this quarter, the ESOP cost was -- is higher by about INR 2 crores. That itself adds additional element of cost. And we did mention that the employee headcount has also gone up, of course this was front end level -- at the sales and front end and distribution level. But that also has added a bit.

[Operator]

Next question is from the line of Prayesh Jain from Motilal Oswal.

[Prayesh Jain, analyst]

Just a couple of questions. Firstly, on the SIP book. Could you give some understanding at the industry level as to what is the -- I understand a large portion or majority will be equity, but some specific as to what is the direct equity or hybrid at the industry level and for HDFC AMC?

[Navneet Munot, executive]

Prayesh, we couldn't get your question.

[Prayesh Jain, analyst]

The SIP share of equity and hybrid. What would be the share of equity and hybrid in SIP at the industry and for HDFC AMC?

[Simal Kanuga, executive]

It is 95% plus in -- it is well into 90%. Definitely well into 90%.

[Prayesh Jain, analyst]

Okay. In pure equity or hybrid will be...

[Simal Kanuga, executive]

It will be mix of both, equity as well as hybrid.

[Prayesh Jain, analyst]

Okay. Got that. And just extending the point of what previous guy was asking about the employee cost. See, sequentially, we have seen an increase of 10% in employee cost. But you mentioned that there is some additional ESOP cost which was I think closer to INR 2 crores, INR 2.5-odd crores. Apart from that, headcount increase which caused 8% kind of an increase. So what was the total headcount that went up during this quarter? I'm just trying to -- the reason why I'm asking this question is to understand when do we see the scale benefits really benefiting the EBITDA margin, profitability and we've been investing into expenses for the last two or three years now. So when do we really see the scale benefits benefiting the profitability at the company level?

[Navneet Munot, executive]

It's clearly benefiting. You are seeing the increase in market share, you are seeing tremendous amount of the new products. Over the last 2.5, 3 years, we have done almost 40 new products. We are investing in our active -- continue to invest in our -- continue to expand our systematic transaction book. We have continuously been investing into like developing all possible channels. So I think it's clear the results are very, very visible I guess.

[Simal Kanuga, executive]

Actually, Prayesh, on a lighter note, we've been kind of asked by some of the global shareholders saying that how are you guys managing 229 offices, 1,500 people, INR 5 trillion assets under management by spending under INR 700 crores a year?

[Navneet Munot, executive]

Servicing tens of thousands of distributors.

[Simal Kanuga, executive]

Yes. So if you look at it, I think our -- I think even on people costs, I think our inflation, if you look at it, it's been in that just about double-digit kind of number, right? If you look at both 10%, 11%, 12% is what the people cost we are talking about. See, we would request you to not look at it Q-on-Q because there are certain things that kind of get accounted for. We kind of looking at how the dynamics of the business are playing out. We kind of provision for bonuses because of course people are the key to our business and we need to be fairly sensitive of that.

[Navneet Munot, executive]

Also, you would have noticed that our operating expenses as a percentage of AUM is now 13 basis points against 14 and thanks to higher growth in AUM as compared to growth in cost.

[Prayesh Jain, analyst]

Great, great. Just one more question. We have almost closer to INR 6,000 crores of investments and [ balance ]. Any thoughts of utilization of that?

[Naozad Sirwalla, executive]

Yes. So our dividend payout ratio for financial year '23 was increased to 72%, right? We obviously can't second guess what the board will decide, but we should continue to see an upward sloping into our dividend payout ratio. We of course need capital for significant compliance. Currently, that number is about INR 500 crores is skin in the game investments from -- We are intending to see some upcoming funds in GIFT City. From our balance sheet, we already invested a lot of capital from our managed -- in the AIF study that we have launched. And we do look at all acquisition opportunities that come by. So having cash on hand does help at that point.

[Operator]

Next question is from the line of Lalit Deo from Equirus Securities.

[Lalit Deo, analyst]

So just wanted to understand, sir like, if we see the equity AUM channel mix, so we see that the share of direct plan originated equity AUM has increased. So just wanted to know your thoughts on the channel-wise market share on the flow side, like where we are seeing the most improvement in our market share across which channels? That would be my first question.And the second question will be, so now with the change of control to HDFC Bank now. So what are the changes which we have done at the ground level to improve the mix to move the contribution from HDFC Bank to HDFC AMC?

[Simal Kanuga, executive]

So I think I'll just take the first part of your direct plan. So I think we have always maintained. The direct plan book share is around whatever, 22%, 23%. But as against that, the flow share is in late-20s. So you are seeing the one reason for tilt towards more and more towards direct plan is because of that. Secondly, even if you assume flat markets, flat -- no flows, the direct plan does have a lower expense ratio. And thereby, you will see a 20 to 30 basis point positive impact on the share there on an annual basis. So that is one part. And Navneet would address the whole HDFC Bank part.

[Navneet Munot, executive]

So we are seeing the material improvement in the engagement with HDFC Bank and we'll continue to work on strengthening it further. The kind of support we have been getting from the bank is encouraging. We are deeply involved with them and alignment of interest after the merger is definitely a tailwind. You all know, I mean, the bank is a formidable distribution machine and we will put in enough and more efforts to capitalize on it.We have now created a dedicated vertical to look after HDFC Bank channel. While bank has been maintaining an open architecture approach, the distributor, but given the range of products across various asset classes, given the long-term track record that we have built and the brand familiarity and all the other efforts we are making, we are confident in gaining share in HDFC Bank system. And I'm happy to state that our flow market share in bank's book is higher than the book market share for the last couple of months. Hope that answers.

[Operator]

Next question is from the line of Sahej Mittal from 3P Investment Managers.

[Sahej Mittal, analyst]

First of all, congratulations on a good set and commendable performance. So if I look at your September -- so I mean, for the first 5-odd months, you have been clearly sweeping the table in terms of net equity flows, right? But if I look at September numbers -- September flows, net equity flows, there seems to be some sharp drop in HDFC AMC's market share. So is there any particular reason for that?

[Navneet Munot, executive]

I think, see, month-on-month, there could always be volatility. It depends on some of the NFOs that get allocated -- allotted in that particular month or some other factors. So I wouldn't read too much into it. But overall, the trend has been a fudge for us. And as I mentioned, it's across channels and across products. And we have been very pleased by the trend that we have been seeing.In a particular month, there could be like always 1 or 2 NFOs of competition that can impact the market share. And flows, as you know, in September were lower than the flows in August. And within that, if there are 1 or 2 large NFOs by some players, that can impact a few basis points here and there. But otherwise, I think whether it's on the systematic side as well as on the gross lump-sum flows, we have been seeing encouraging trends.

[Sahej Mittal, analyst]

Got it. Got it. And on the staff cost, even...

[Navneet Munot, executive]

Thank you for the compliment.

[Sahej Mittal, analyst]

And if I look at your staff cost, even for FY '23, there has been some sporadic movements. So from here on, are we saying that the staff costs will remain at these levels, INR 93-odd crores in the second half as well?

[Naozad Sirwalla, executive]

I think an annual increase of like high-single-digit, low-double-digit type you should expect. And as you mentioned that you would have seen the increase in headcount. We continue to invest in our business. We remain very optimistic about the potential of our business. We mentioned about a new vertical for HDFC Bank and couple of other efforts that we have been making to enhance our reach. So adjusted for both, I mean, increase for the existing set of people as well as the new headcount, it should be, I mean, low-double-digit kind of number or high-single-digit kind of number that should be. And I also mentioned about the last 4 or 5 years, I think it's been pretty reasonable.

[Sahej Mittal, analyst]

Got it. And some guidance on ESOP bid for the second half and for the next 2 years?

[Navneet Munot, executive]

Actually, we had mentioned this in our call in April when we allotted the stock option with the annual cost, which is basically driven by black shows on the basis of accounting. The first year cost -- the total cost, if I remember correctly, of the entire issue was around INR 55 crores. And it roughly gets spread 60% in the first year, 30-odd in the second and balance in thus far. That's how the vesting schedule summarizes the cost of the option. That will continue. So to your point, next year, for example, the non-cash comp would come down because 60% of the costs would have been taken in the first year of the issue.

[Operator]

Next question is from the line of Madhukar Ladha from Nuvama Wealth Management.

[Madhukar Ladha, analyst]

Congratulations on a good all-round operating performance. And most of my questions have been answered. Just a couple of small ones. One, you've given your active equity AUM. And I think you also mentioned what the industry number was in the beginning, but I missed that. So can you give me what your market share is? And how that has moved in active equity AUM, maybe last couple of years, what has happened there?

[Simal Kanuga, executive]

Yes, it is there in the presentation, Madhukar. So we have gone to active equity September QAAUM at 12.4%. A year back, this number was 11.5%.

[Madhukar Ladha, analyst]

That is -- isn't that the total -- on a total AUM basis?

[Simal Kanuga, executive]

No, that is actively-managed. If you go to Slide #11 on the presentation, it has this detail.

[Madhukar Ladha, analyst]

Okay. Second, if -- you mentioned 67 basis points is Q2 yield on equity that also includes the index fund yield. Can we get the number for the last quarter? What has happened quarter-over-quarter?

[Navneet Munot, executive]

I think it is same. It is -- 67, 68 is...

[Naozad Sirwalla, executive]

And we have mentioned the reasons also. There are 2 main reasons. One is that the book margin is higher than the flow margin. And second, also the sliding scale structure. So if market has gone up and some of the funds have crossed that INR 50 billion hurdle, you will see 1 or 2 basis point impact on margins on those particular products. And in the last 2 quarters, we have seen some -- a couple of our products crossing that hurdle, which is like a good dilution to have. Happy with that dilution, because in absolute terms, we are making more money.

[Operator]

Next question is from the line of Sagar Doshi from [Indiscernible] Investments

[Unknown Analyst]

So I would like to ask what is the approach for ETFs? So HDFC is paying a bit defensive on ETFs and index fund. So don't -- or what is your view of increasing the share of ETFs in our portfolio or what is the structure, like 5 years down the line, how do you see ETFs as a part of the overall book? If you can throw some light on it.

[Naozad Sirwalla, executive]

See, I mean, we have always mentioned that active and passive investment strategies co-exist harmoniously rather than competing at each other's expense. India is substantially underpenetrated. So Indian markets will chart their own course. And I think we don't need to move assets from active to passive the way it may have happened in some of the markets where institutions would have moved their assets.Our stance on active is very well established. We hold a very strong belief in its potential. We see substantial alpha opportunities are still available in India. If you look at all our equity products, I think I remember 2, 3 years back, a lot of people used to say when there was a period of 1 or 2 years where active funds were finding it difficult to generate alpha. But you look at all our products in the last 1 year, 2 years, 3 years, they've been able to generate very good -- very, very decent alpha. But on the passive side, we have significantly expanded our product offering. And now we would have around 20 index fund and almost 20 ETFs.

[Navneet Munot, executive]

We have like 40 products. It's absolutely best-in-class. We continue to invest in the distribution capability on debt side. If you look at our digital journey or the efforts that we are making on content, marketing, everything. So our goal has been to serve as a one-stop destination, offering a complete product range to cater to all our customers' investment needs. So I mean, a customer needs an active product, we have best-in-class portfolio. A customer needs passive, we have an absolutely best-in-class portfolio with best-in-class journey.

[Unknown Analyst]

Okay. So you are not looking to increase your ETF market share, if I say?

[Navneet Munot, executive]

No, sir, large part of the ETF book in India has been built through the flows from pension funds, which as you are aware, goes to a couple of AMCs, which is based on the allocation by the EPFO and some of the exempted funds also follow the same pattern. And then you have some of the other ETFs like the Bharat 22, CPSE and Bharat Bond, et cetera. There, I think none of the other AMCs can participate. But barring that, as I mentioned, that we have done large number of product launches and we have got a dedicated channel with a senior person leading it and people across functions kind of like trying their best to enhance our presence in that share.You've seen like couple of our products, like our Bank X, which was a very small product, less than INR 100 crores or so, is now over INR 20 billion. And then we continue to look at the potential of each and every product on an independent basis and trying our best. We have been also doing a lot of efforts on promoting the concept of ETFs, index funds to set of investors who are looking at that segment.

[Operator]

Next question is from the line of Abhijeet from Kotak Mahindra Bank.

[Abhijeet Sakhare, analyst]

So a question on net flow market share in equities. So if it's possible to quantify how that has trended now versus 12 months back, so that would be a helpful number to look at? But more importantly, given the excellent fund performance, do you think the flow market share, specifically in the non-HDFC Bank channel has sort of reached a stage which largely seems reasonable and appropriate or you think there is still quite a lot of potential for us to improve? And as far as HDFC Bank goes, if you could give some granular details in terms of how the interests are aligning? You mentioned -- you gave some comments earlier on, but when do we really start see that -- when do we start to see that reflected in numbers?

[Navneet Munot, executive]

So first of all, aspirations are always doing more than what we have done, doing better than what we have been doing. And I think the brands we represent, the distribution network given our top-of-the-line digital infrastructure, given the efforts we are making on the marketing side, product content, every single thing, we continue to aspire for higher market share. And on both sides, I think getting greater share of lump-sum flows as well as bigger focus has also been on growing our systematic transaction volume.I'm sure you would have noticed that in September '23 our inflows from systematic transactions, which include both SIP as well as systematic transfer plan, that has reached INR 22.4 billion, which is up from INR 14.3 billion in September '22. So it's a substantial increase. And with everything that we are doing, we continue to aspire for higher market share than where we are.

[Abhijeet Sakhare, analyst]

Got it. And just a follow-up on the SIP investor behavior, sort of an open-ended question. But behaviorally, are you seeing people who come in the last 2, 3 years sort of behaving differently in terms of remaining invested for longer or wanting to still cash-out and book gains given how the markets have been behaving? Any comments there would be helpful.

[Navneet Munot, executive]

So I can't comment for people who have come in last 1 year, how will they behave. But I think the trend is very encouraging. Over the last couple of years, the way -- the concept of SIP, the way it has become a household name and the level of interest among investors from all society is very, very encouraging. And across all channels, we are seeing everyone focusing on building their systematic transaction book.And I think I mentioned earlier that we have always been highly focused on that segment of the market. We have always promoted the concept of the power of compounding, long-term investment, disciplined investing and that has kept us in good stand. And as an industry also, we continue to make efforts that people look at equity investing from a very long-term perspective and don't get afraid by volatility, but take advantage of it by remaining disciplined and SIP is a great tool for that. So of course, I think in last 1 or 2 years, the newer investors who have joined, I think time will tell. But we remain confident that with all the efforts industry is making in terms of investor education and what individual fund houses are doing, the behavior will continue to improve.

[Operator]

Next question is from the line of Dipanjan Ghosh from Citi.

[Dipanjan Ghosh, analyst]

A few questions from my side. First, you alluded to the fact that because of higher AUM growth some of the schemes have changed slab for the past few months or quarters. So I just wanted to get some sense -- and you mentioned this number of 67.5 bps of net yields on your equity fund. Will the exit run rate also be similar? I mean, I would assume that this is the average for the quarter or should we see some more impact over the next few months? Second one...

[Navneet Munot, executive]

Sorry, can you repeat that? I didn't get you.

[Dipanjan Ghosh, analyst]

So you mentioned that your net yields on the equity funds is around 67.5 bps. Now I would assume that this is average for the quarter. But because over the last 3 months, which is July, August, September, most of the equity schemes have changed slab. So has the entire impact of changing slab, reduction in gross TER captured in this net realization number or the exit run rate, let's say, in September or October will be somewhat different from 67.5 assuming mix has not changed?

[Simal Kanuga, executive]

So Dipanjan, if the AUM remains constant where it is for the next 90 days, it would be 67, assuming there are no inflows, no outflows.

[Dipanjan Ghosh, analyst]

Got it. Second question on the distribution part. On the equity mix, we have seen increase in national distributors and decrease in MFDs, considerable global tailing over the last 12 months. I would assume that the flow movement would be even higher or more skewed toward NDs. So just wanted to get some -- and in this context, on your equity-oriented market share gains, if I split it between retail and HNI based on anti-classification, it seems a lot of it is driven by HNI segment. So can you just triangulate this distribution mix change and your equity market share gains and what is really happening out there?

[Navneet Munot, executive]

Not much on that front. I think few basis points here and there, there could also be a possibility. I'm just guessing that some of the national distributors who also do aggregation by kind of the JV or an acquisition of some of the MFDs. And if that AUM shifts from an MFD and get classified as an ND, that could be one reason. But otherwise, not much of a change in the overall trend. I think almost all the channels continue to grow their book.Your other question was on...

[Dipanjan Ghosh, analyst]

Yes, this was the part. I mean, so broadly, you're saying that it is more of a movement of agents towards of a broker, sir?

[Navneet Munot, executive]

I think a few basis points here and there, there could be...

[Simal Kanuga, executive]

Also, I think some large transactions can stay, right? One large private bank with like, say, somebody like a Julius Baer goes into a national distributor and they're getting some large money from one family. Those things can kind of skew things here there, but not -- I think there's no distinct trend as such.

[Dipanjan Ghosh, analyst]

Lastly, one data-keeping question. See, when I look at your employee base movement during the quarter, obviously, it has increased quite a bit. I just wanted to get some sense of whether the entire fixed cost of that has been captured in this quarter's base or some of it might get captured in 3Q or 4Q?

[Navneet Munot, executive]

So yes, you are right. I mean, we were around 1,250-odd in March '21 and now we are at 1,439. So if you look at the overall growth of our business, that's not much. We continue to believe that business has a lot of runway for growth and the headcount increase is on account of -- we are also developing new businesses, but a large number of people would be in sales and distribution where the heavy-lifting is. I think lot of heavy-lifting has already been done. This would have got captured. But of course, I think somebody joined yesterday, their salary will be there for the rest of the year, but I don't think it's really going to substantially move the needle.

[Operator]

Next question is from the line of Saurabh from JPMorgan.

[Saurabh Kumar, analyst]

Sir, just 3 questions. One is on Page 17. So HDFC...

[Operator]

Saurabh, sorry to interrupt you, but we are losing your audio in between. Can you please speak through the handset?

[Saurabh Kumar, analyst]

So basically, on Page 17 of the presentation, so you guys have seem to have added almost 40% of the incremental unique investors in the industry. Can you talk about like what's driving that? Is it just performance or is there something else? Second is based on this HDFC Bank point. How much is bank -- I mean, how much are you as a percentage of bank distribution of mutual funds? And the third is, any thoughts on the revised consultation paper side?

[Navneet Munot, executive]

So on the unique customers, I think you noted it rightly that I think we've been able to capture a very high market share among the new -- I mean, the unique investors that have got added to the industry. And the reasons are, I think a mix of several things. Of course, our performance in most categories is top-notch. That's clearly helping us with all the other efforts that we are making, whether on better engagement with distribution, a top of line digital infrastructure with all the marketing efforts, so on and so forth. And it's across channels. So it's -- whether it's national distributors, banks, MFDs as well as fintechs who have also been growing quite fast in terms of number of new investors that are coming to the industry and we are present across all channels and remain highly focused on that.

[Simal Kanuga, executive]

Second question was HDFC Bank book market share and flow market share.

[Navneet Munot, executive]

So I mentioned earlier that flow market share is higher than the book market share.

[Simal Kanuga, executive]

So of their book, Saurabh, book market share would be in the 25% to 30% range. On flows, we are definitely getting more than that. And lastly was the new TER regulation.

[Navneet Munot, executive]

So there, honestly, I have nothing new to say on that. The status quo is where we are. We have discussed this before, so I won't repeat much on that. But one thing I would like to add that the idea of regulator was to pass the benefit of economies of scale to the investor. And in that regard, we as an Association of Mutual Funds of India as well as individual AMCs have presented the data to regulator. And in fact, it is interesting to cite data for one of our funds for reference that what is that has been presented to the regulator by the industry.So let me give you one example that our largest equity-oriented fund is HDFC Balanced Advantage Fund. The current AUM of that is around INR 64,000 crores, INR 65,000 crores and the regular plan TER as per formula comes to 1.45%. Regulations were modified in April 2009. And at that point in time, this fund had an AUM of INR 40,000 crores and the TER at that point in time was 1.78%. So over the last say 3, 4-odd years, TER has gone down by 33 basis points or for that matter by around 19%, 20%. So economies of scale has actually been passed out to the investor. And I will take this opportunity to sincerely compliment SEBI. They dived into data and heard us out. And you all have heard what Chairperson had to say in the following press conference. But yes, we have nothing more to say on that.

[Operator]

Next question is from the line of Tejas from PEFD.

[Unknown Analyst]

First of all, congratulations on hitting INR 5 trillion in March. My first question is, what will be your guidance for the upcoming financial year?

[Naozad Sirwalla, executive]

Tejas, we don't make any guesses. You appreciate right, our business does kind of depend a lot on how the equity markets move. So we don't want to even hazard against that.

[Unknown Analyst]

Okay. So my second question would be what would be the important factors that would be the biggest reasons in making you hit the cycle in March as well as gaining such a huge market share?

[Navneet Munot, executive]

Variety of things. I mean, I've mentioned maybe in different context, I think the brand that we represent, the presence that we have, the partnerships that we have built over the years, I think our product range, the performance track record that we have, one of the longest running track record of our funds. It's a combination of all of that.

[Operator]

Next question is from the line of Mohit from BOB Capital Markets.

[Mohit Mangal, analyst]

Congratulations on a good set of numbers. Just one question. In terms of unique customers, now we have got good 20%, so just wanted to understand their behavior in terms of how sticky they are? And if you could throw some light in terms of who are these customers in terms of age group, profession, that is salaried or self-employed, that would be helpful?

[Simal Kanuga, executive]

We don't have that data readily available, Mohit. Maybe we'll reach out to you and try and share that information. In terms of staying on equity side, if you look at it, the average holding period, now there is no real science behind it. One way to do that would be based on existing book that does rest with us. But that would kind of get skewed because of large amount of new additions in the last 12, 24, 36 months. The other way to look at it is, look at people who are exiting out of us, but that would kind of ignore people who continue to stay with us. So there is no real science. But some data that NSE has published dictates that the average holding period is sub-3 years.

[Mohit Mangal, analyst]

Okay. So that sub-3 years I think it's for the industry. So that holds true for you as well?

[Simal Kanuga, executive]

It is slightly better for us.

[Operator]

Ladies and gentlemen, we'll leave the last question from the line of Amish, Individual Investor.

[Amrish, analyst]

Congratulations on a fantastic set of results and operational numbers.

[Operator]

Amrish, sorry to interrupt. May I request you to speak little louder, please.

[Amrish, analyst]

Yes. Congratulations. And there's one particular operational number I'd like to get some further input on. So a follow-up to the individual investor -- to the individual customer question, if you look even at our individual folios, this has now really accelerated in the last few quarters, and of course, this quarter has been contracted. Our average AUM seems to be more or less holding steady -- average AUM portfolio. So we are getting more than just what customers are getting multiple folios from them. And this now number looks similar to what we were maybe in March '21. Is this -- is it fair to interpret this that this should therefore then follow on and we should maybe see even revenue market share go up -- AUM market share go up to similar levels at a later date?

[Navneet Munot, executive]

We didn't exactly understand your question. So you are saying AUM per customer is good. That's what you are saying?

[Amrish, analyst]

Yes. So the number of folios is increasing very fast. So our share of folios today is now at a level which was similar to what it was in March '21. And in March -- and you could say folio can go up, but the average AUM portfolio can go down, but that's not happening. So our folio -- also average AUM is staying more or less constant. So it's not just people being added for the sake of it. So if that's the starting basis, which means it's a strong foundation, as a lead indicator, in March '21, we were probably 13.5% or 13.6% AUM market share, we are today slightly less. Is this a fair way to interpret that maybe -- not forward guidance, but is it a way to interpret that some of the markets -- the AUM benefits actually come later after the folio has been added?

[Navneet Munot, executive]

I don't know if you are -- because you are looking at the overall AUM where there could be individual investors and there could be like flows into the ETFs, et cetera and then trying to divide that number and arriving at that conclusion.

[Amrish, analyst]

No, no, individual. Only individual AUM. I'm not looking at institutional.

[Simal Kanuga, executive]

But what happens is, see, when you look at the total AUM and divide that by individual folios, it might not really give you the right data because there are large institutions who are investors in liquid funds and debt funds. Also Navneet earlier mentioned about this whole ETF business.

[Amrish, analyst]

Sorry, individual AUM divided by individual folio. I'm not separating the institutional.

[Simal Kanuga, executive]

Right, because some part of that growth would have also come in from mark-to-market changes in equity, right? So that's the reason you might be kind of getting that data.

[Amrish, analyst]

Yes, of course. But if I look across last 16 quarters, this number have not changed and it is higher than the market average. So our folio -- AUM portfolio is higher than what the market has. So if our market share of folios is increasing and our average revenue per individual folio is higher than the market...

[Simal Kanuga, executive]

Your inference is right saying that this is a positive signal. We agree to that, sir. Absolutely. Let's hope the trend continues.

[Operator]

Thank you very much. I now hand the conference over to Mr. Navneet Munot for closing comments.

[Navneet Munot, executive]

Thank you all for attending the call.

[Operator]

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.