HDFC Asset Management Company Ltd

NSE:HDFCAMC

Earnings Call Transcript 2022-Q4

[Operator]

Ladies and gentlemen, good day, and welcome to Q4 FY '22 and 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 with us Mr. Navneet Munot, MD and CEO; Mr. Naozad Sirwalla, Chief Financial Officer; and Mr. Simal Kanuga, Chief Investor Relations Officer.

I now hand the conference over to Mr. Simal Kanuga. Thank you, and over to you, sir.

[Simal Kanuga, executive]

Thanks, Nirav. Good evening, and thank you so much, everyone, for attending this call. As always, we'll start off with a quick update on what all is happening at this end and take questions from there on. The presentation is available on our website as well as that of the exchanges.

Firstly, on the industry. Equity net sales number for the financial year is INR 2.68 trillion and is INR 968 billion for the last quarter. One caveat here, INR 2.68 trillion includes INR 448 billion index funds, and INR 968 billion includes INR 230 billion of index funds. As yet, AMC publishes one single number when it comes to index fund. By one single number, I mean index funds include funds tracking equity indices, as well as debt indices. AUM of all debt index funds add up to INR 276 billion [crores] as of 31st March 2022. The corresponding number as of 31st March 2021 was INR 8.8 billion.

On QA AUM basis, industry growth this year has been backed by equity, both flows as well as mark-to-market; ETFs, again, both flows as well as mark-to-market; liquid funds have grown by 10% to 11%, while debt has lost INR 0.8 trillion, 7% to 8% of the AUM. In anticipation of rates moving higher and some bit of corporate expenditure, both capital and otherwise on table, large corporates have taken some money of the debt fund. To get a fair picture of the debt fund flows, we need to also factor in the flows into debt ETF and debt index funds. As mentioned earlier, net flows data for debt index fund is classified into Index fund, while debt ETF into ETF.

So let us just look at the AUM for both these set of funds as of 31st March '21 and 31st March '22. It was INR 383 billion in March of '21, which has grown to INR 833 billion, an increase of INR 451 billion. SIP flows, we would request you to look at numbers for the quarter that is closed in Jan, Feb, March. It was INR 353 billion as compared to INR 328 billion for quarter October to December '21. When you look at quarterly numbers, it's smoothens out the impact of large working day being a holiday or, for that matter, a shorter month like February.

I now get on to us. Our total market share in QA AUM is at 11.3%, and the same excluding ETF is at 12.5%. Our systematic transaction for the month of March add up INR 12.3 billion across 3.6 million transactions. Systematic transactions for us includes both SIPs, as well as STPs. Systematic flows for us for the quarter, that is Jan, Feb, March was INR 35.6 billion. We have set ourselves, for ourselves and our solution to be the most respected asset manager in the world, and the mission is to be the wealth creator for every Indian.

The tone across the organization is constant. Everybody, and by everybody, I mean every single employee, is working with one vision, one mission. You will hear more on this in our annual report. Systematic flows for us, I mentioned, sorry. There are multiple factors which would aid in taking up a step further towards our audacious vision. Maybe for this time, I would like to definitely expand on 2 or 3 of them.

Firstly, we've been asked about our performance or actually lack of performance. We've been saying the same thing, that our investment style has worked over long periods of time and there are periods in between when it does test our patience. Easier said than done, but our investment team stuck to their conviction, and we are now seeing rewards of the same. In key categories like flexi cap, large cap, large and mid-cap, focus, balanced advantage, hybrid equity aggressive or hybrid equity conservative, et cetera, our funds are in top decile, top quartile in 1- to 5-year period, albeit some funds might not be in a specific, say, a 3- or a 4-year period. But I'm sure you get what I'm trying to state here. The numbers are in public domain and you all anyway track it as closely as we do.

Secondly, we have further enhanced engagement with our partners. We have expanded our training team and also increased level of centralized communication. We've engaged multiple external trainers too, who get altogether a different perspective when it comes to partner or for that matter, even client engagement. We have in past spoken about expanding our product range. In terms of thematic sectoral funds, we have filed for 4 products with the regulator. We have filed for an M&C fund, business cycle fund, defense fund and noncyclical consumption fund. On back of our success on the developed world indexes fund of funds, we have filed for a fund that would track the MSCI Emerging Market Index.

These 2 funds put together should give domestic investors an optimal solution to get global exposure. We'll be further expanding our product book on the passive side. We already have a large number of passive funds, and in fact, have started publishing a dedicated monthly fact sheet on our passive solutions. The same is available on our website and would request for the feedback on the same. We hope to file a category to AIF, PPM with the regulator during the course of this week. It would be fund of funds investing across the entire spectrum, right from the early seed stage to late stage. Our team is also working on filing for a category 3 AIF. We'll update you as we progress further on this front.

As we mentioned on the last call, we have hired a new resource for managing our PMS. We already started speaking of this service and hope to see some traction over the next few quarters. We are awaiting regulatory approvals for setting up a wholly owned subsidiary in GIFT City. We hope to build on our international business and subsidiary in GIFT City would be a big help.

Lastly, before I move to financials, let me talk about digital trends. Well over 75% of the transactions we have done have been executed digitally. We now have over 1.3 million users on our investor portal and have added 350,000 in FY '22 without dropping engagement levels. Our app is now rated above 4, both on iOS, as well as on Android. Our digital initiatives have resulted in reduction of redemption to the extent of 2.5%; and on the other hand, our analytics-based campaign has seen 2.5x more effective conversion rates. Connect, which is a new age digital marketing app for our partners to help leverage the power of digital marketing, has been a substantial growth of 2x in its user base last year, an active weekly engagement rate of 50%. We have 48,000-plus registered partners on our website with active engagement rate again of 34%.

Now move to financials. The profit after tax for the year ended March 2022 grew by 5% to INR 13.93 billion or INR 1,393 crores. Revenue from operations grew by 14%, while operating profit from core asset management business grew by 10%. The employee benefit expense for year ended March '22 stood at INR 3,122 million as against INR 2,268 million, an increase of 38%. INR 3,122 million includes INR 633 million of noncash charge towards amortized cost of outstanding employee stock options. The corresponding number in the previous year was INR 73 million. Ex this noncash charge, employee cost has increased by INR 294 million or 13.4%.

Operating profit from core asset management business, excluding noncash charge towards amortized cost of outstanding employee stock options, grew by 14% from INR 14,069 million to INR 16,008 million. In terms of other expenses, we have seen an increase of 27%. This can be attributed to low base effect due to lockdown during the last part of the previous financial year, coupled with the expenses that we have incurred for our NFO launches as well as other regular business promotions in current year. We have an optimistic view on our business, and would not want to shy away from these expenses, which, in our opinion, would lead to future growth. We are also investing further into technology and digital infrastructure, of course, in a calibrated manner.

For the quarter ended March 2022, profit after tax grew by 9% to INR 3,435 million as compared to INR 3,159 million for the quarter ended March '21. Finally, our Board earlier today has approved a dividend of INR 42 per share as against INR 34 per share last year which, of course, is subject to shareholders' approval. At INR 42 per share, it translates into a dividend payout ratio of 64%. Thank you once again for joining the call. Navneet, Naozad and I are very much available for questions.

[Operator]

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

[Ravi Naredi, analyst]

My request, give at least 1 hour time to study result and con call, then you start con call, so we can discuss everything. Before 2 minutes, you have highlight -- you have posted the highlights of investment, investor highlight and now you are making con call. So how is it possible to make the question and ask you, firstly.

Second, we have 2 main intelligent person of mutual fund industry, Mr. Prashant Jain and Navneet Munot. In spite, we do not make any growth in AUM and growth in company. Where we are weak? Will you elaborate your working?

[Simal Kanuga, executive]

So sir, I appreciate the feedback. Our Board meeting got extended slightly longer. We would be -- we would take care of this in the future. Of course, the challenge is we are trying to also meet the -- meet the deadline for the investors sitting on the Southeast Asia part of the world. So for them, it gets a bit delayed if we start to call later. But it's the feedback taken, and hopefully, next time we'll take that into account.

[Navneet Munot, executive]

And if I can add on the growth side, you are absolutely right that over the last couple of quarters, we have seen a bit of decline in our market share. But I think as we have been mentioning over the last several calls that significant efforts have been made to stem the fall in market share. And we are quite hopeful that with everything that we have done, including the help from the improving performance, what we have done on the new product launches over the last year, we have done 8 NFOs. This would be more than what we would have done over the last several years. We have significantly announced our marketing efforts, our engagement with our distributors, several of the digital initiatives that Simal talked about, also enhancing the customer service and a lot of new initiatives that we have taken. We are pretty sure that over the next several quarters, we should start seeing better market share.

But a bigger thing, what Simal touched upon briefly is about our vision as well as the mission. The mission we have set for ourselves is to be the wealth creator for every Indian. Over the last 20, 21 years, I think we have created a great franchise in the Asset Management business, which has scaled, which has quality and which has high profitability. But mutual fund industry, of course, has scaled new high this year. We have almost INR 37 crores, INR 38 lakh crores of overall AUM. The number of volumes have gone above INR 13 crores, whether you look at equity, fixed income, money market. I mean, industry has done well. But still, if you look at the unique account, there are only INR 3-odd crores or a little over INR 3 crore investors. In fact, a good number of them have got added only in the last 12 months.

We believe over the next several years, industry is poised for multifold growth and the franchise that we have built with our people, with our processes, with the pedigree that we have, with the presence both on the physical side, as well as on the digital side, with our platform that we have built, I think the relationship we enjoy with all the partners, I think with all of that, over a period of time, we believe that we would not only be having a higher market share compared to where we are, but will also contribute a lot to the industry to expand its footprint, to increase its reach across every nook and corner of the country.

And in last 1 year, just like, I mean, we would have done over the last several years, I think we are making significant effort, not only for our growth, but overall industry growth, particularly on the investor et cetera, there is a significant campaigns you would have also noticed.

[Operator]

The next question is from the line of Prayesh Jain from Motilal Oswal Financial Service.

[Prayesh Jain, analyst]

Sir, just wanted to check firstly on the integration of the merger between the -- between HDFC Limited and HDFC Bank. How do you see that helping the business going ahead over the medium to longer term? And secondly, would appreciate your thoughts on overall expenses where and how does HDFC AMC expenses pan out? Earlier, you had guided for around 12 to 13 basis points of AUM to be there for -- in terms of costs that would stay. So yes, those would be my first 2 questions.

[Navneet Munot, executive]

Yes. So your first question on the impact of HDFC Bank merger on HDFC AMC. So the merger announcement stated that upon the scheme becoming effective, the subsidiaries and associates of HDFC Limited will become subsidiaries and associates of HDFC Bank. This will facilitate more efficient cross-selling of banking and financial services products, that includes insurance and mutual funds. I'm sure you would have heard Keki Mistry on the analyst call. He mentioned that the bank has also requested RBI to permit the bank to hold equity in the subsidiaries and associated companies of HDFC Limited. These requests are under consideration by RPI in terms of the letter they have sent on April 1. So I think let us wait to hear further on this.

Your second question was on the operating expenses. So we have been guiding -- I think they have been around 13 basis points, which has been the trend over the last several years. And I think despite the fact that we will spend more money on, let's say, business promotion, on marketing, the 8 NFOs that I talked about that we had during the year, and of course, slightly higher CSR expense, despite all of that, I think we have been able to maintain that.

[Prayesh Jain, analyst]

All right. Just one more on the alternate assets. There has been a few quarters that we've been speaking about them -- about the segment. Could you give some more thoughts on as to how do you see this alternative assets growing going ahead? And what kind of aspirations do you have with respect to AUM size and contribution to profitability and revenue for the overall entity?

[Navneet Munot, executive]

So we have been saying that we are a dominant player when it comes to active equity, active fixed income and money market. We want to be a relevant player because keeping the profitability aspect in mind on the passive side, but want to have the full product book, and that's why we launched a couple of products and we are launching more. But the third, which is alternative business will also be important for us for future growth, more on the profitability side than the overall AUM. And we are doing multiple things on this front. Let me try and expand on that. I think Simal did cover some bit of it in his opening remarks.

Firstly, on the PMS, as we mentioned in the last call, we have got a portfolio manager on the Board. We started talking of our services to key partners and clients. We have started seeing some interest and hope to grow in this space over the next few quarters. Secondly, on the Category 2 AIF, we are filing PPM with SEBI soon. This would be a fund of fund investing into category 1 and category 2 AIFs. Our team has already interacted with over 40 funds and are reaching out to more. With several of them, there would be a second round of meetings or diligence going on. This should go live sometime in quarter 2 of the current financial year, of course, subject to all the regulatory and the other approvals. Thirdly, on the category 3 AIF, we hope to file PPM for this fund over the next few weeks, and we'll keep you posted on developments on this front.

So definitely see enough level of activity in the alternative space. We have it very much on our radar and look forward to building a state-of-the-art alternate business.

[Prayesh Jain, analyst]

All right. That's pretty helpful. And just lastly, if I can slip one more in. Your thoughts on equity is, they have been trending down for the entire industry. Do you see that the intensity of this fall are reducing going ahead? Or how do we see this movement over the next couple of years?

[Navneet Munot, executive]

So I think in the last call, we had addressed this issue in detail, and I would like to request you to refer to that. I remember giving a detailed answer with some illustrative numbers to explain this drop in margin. But let me expand further. Let us keep the focus on the revenue margin. That is what comes as revenue into the books of the AMC. The fall in this margin can be on account of 2 reasons. And here, I'm talking mainly of equity oriented funds margins. We haven't really seen any material change in margin on the nonequity side of the business.

So drop in PR, one is due to increase in the AUM of that scheme. As you know, I mean, the sliding scale on the TR. So back of the envelope, competition shows that 2 to 3 basis point drop on the entire AUM once it crosses INR 5,000 crores in terms of multiple. To explain that better, when the fund AUM rises from, say, INR 24,000 crores to INR 26,000 crores, say, by market movement, the TR drops by 2, 3 basis points on the overall AUM of INR 26,000 crores. So as and when one or more of our larger funds go through this change, there is a visible impact in margin in terms of basis points. If you ask me, this is not a bad problem to have, let me put it this way. I mean, it is as per regulations.

So for example, we make, let's say, 80 basis points on INR 24,000 crores, that is INR 192 crores. And say, margin drops to 77 basis points on INR 26,000 crores, they will make INR 200 crores. So -- and further, this problem tends to even out to an extent over a period of time as we generally modify distribution cost on new flows in that particular product. It is neither desirable nor practical to keep changing brokerages on existing assets as and when the funds AUM keep moving up and down. So further flows get aligned to our overall planned margins and with a lag. There is a catch-up to an extent. But yes, there is a drop as and when we cross the hurdle as is defined by regulation.

In terms of numbers, during the year, due to strong markets, we saw a large part of our AUM crossed the so-called hurdle. So our largest product balance advantage went up from a little over INR 39,000 crores to INR 43,000 crores. Another product, flexicap went up from INR 23,000-odd crores to INR 27,000 crores so on and so forth. This I'm telling you, March '21 versus March, yes, '22. And nearly like maybe, I think 70%, 75% of our AUM would have crossed this kind of hurdle, resulting in, say, nearly 2, 3 basis point drop in the overall margins in equity-oriented fund.

The second is drop in net revenue due to increased brokerages. And I talked about it in the last call that there is a challenge, industry as a whole is grappling with. And then further to what we mentioned in our last call, recent NFOs have been priced much better. We are seeing competitive intensity in terms of distribution costs settling down to an extent. It's not going to be anywhere close to where we were, say, a couple of years back, but are better off as compared to where we were, say, in the first half of the financial year that went by. So just to reiterate what we stated in last quarter, higher gross sales with not so good gross to net ratio is also a key reason for rapid drop in margins. So gross sales in equity-oriented funds during the last 12 months has been nearly INR 6 trillion. Our starting AUM of INR 13 trillion approx. And as against gross flows of INR 6 trillion, net flows was INR 2.7 trillion.

So honestly, I'm more excited with this kind of gross sales rather than getting bothered about short-term drop in margins. Indian households are quickly adopting to equity culture, which is very heartening. We are a large savers of capital and over a period of time, as a meaningful part of that find its way into equity and equity-oriented mutual funds, in particular. And in the last 18 months or so, we have seen huge interest in direct equity, I mean demat accounts, as you are aware, going from INR 4 crores to INR 8 crores. But I mean, we are also seeing increase in traction through SIPs and the mutual fund as well. Over a period of time, we expect a much bigger traction on that side.

So AUM can go up multiple times over the coming years, and that's the big picture. I don't want my team or me to take eyes off from. And I mean, we discussed it last time, in last 2 calls, that in April 14, the industry AUM of equity was around INR 2 trillion. And now we are well over INR 18 trillion. This is like 9 times in the last 8 years. So this is something that you wouldn't want to keep your eyes on the potential where we can be as an industry.

[Operator]

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

[Kunal Thanvi, analyst]

So I have 2 things. One was on the overall...

[Operator]

Sorry, but your voice is breaking. .

[Kunal Thanvi, analyst]

My first question was on the overall yields. If you look at the industry and HDFC AMC, apart from equity index [Indiscernible] in the mix of the assets that's happening around, which is package also becoming a decent size of the overall industry. Like, in terms of growth, if you see, the incremental growth has been higher on the passive side. And there's been a lot of cost, like even if you look at our offering, most of them would be too very expensive. So from a longer-term perspective, how do we look at the yield or the profitability scenario of the AMC industry itself? Because back in the day, the best way to track the industry was on profits as a percentage of the AUM. However, with taxation becoming larger as a percentage of the total AUM, that number will keep on shrinking. However, actual profit may not. Like any color on how we think about it, how should we think about it from the industry and HDFC AMC point of view?

[Navneet Munot, executive]

I think there will be growth in like all 3 markets. You talked about the active funds. While, of course, passives are growing at a faster rate, but there is tremendous potential, I would say, in India for active funds to grow as well both in equity as well as on the fixed income side. Passive will grow as well over the next several years. Of course, margins would be lower there, while margins would be higher in active. And the third piece, which we referred to in one of the questions earlier is the alternative will be like a low volume, but high-margin business. Active, I would put as moderate margins and moderate growth. And passive, I would put like higher growth and lower margins. And I think we want to build the scale and with profitability in all the 3 spaces. And I see tremendous growth opportunity in all 3 segments.

I mean, if you look at blended, will be a function of a variety of things. I mean, your mark-to-market gain versus the flows. It will be like within the asset classes, what grows more. There could be periods where, let's say, there is higher growth in fixed income and the money market versus equity or the other way around. So I think it will be a factor of a variety of things, but important aspect is, are we getting our right share in all these opportunities that we present?

[Kunal Thanvi, analyst]

Sure, sure. And my second question was on the fact that if you look at the retail participation in India, like last 2.5 years post-COVID, it has done wonders both on the demat side and lately on the equity flow side as well. So how do we see in terms of sustainability? Because in the previous cycles, it has also had a fair share of cyclicality where after making a peak, there is a pause for a while before the next cycle picks up. How do we see from an AMC industry point of view in terms of the retail participation with the market, where it is and -- where it is headed with a lot of uncertainties?

[Navneet Munot, executive]

So I think all the efforts made by the industry, policymakers, our partners, media, everybody put together to kind of -- in terms of the investor awareness that has got created that mutual funds from a long-term savings perspective is one of the best avenue. I think the heartening feature -- most heartening feature in our flows has been the growth in SIP, both in terms of number of accounts, as well as the amount that we have been seeing month after month. And over the last several years, we have seen, I mean, variety of reasons that led to heightened volatility. But still, then, I think that number has consistently been increasing. So of course, there is a cyclical aspect. I mean, you would see market ups and -- I mean, the market up and downs impacting the flows into equity, and just like I mentioned, about the other asset classes as well.

But there is a structural aspect, which is a lot more important for us to keep an eye on. That as an economy of $3 trillion growing at the nominal GDP rate at which it is growing; I mean, look at the household savings rate, I think which has fallen in the last several years. But we expect as the job creation comes back, income growth comes back, over the next several years to go up, along with that the household savings rate. And a larger and larger proportion of that comes into the financial assets, and mutual fund would be a beneficiary of that. As I mentioned earlier that we've also seen a significant increase in the investor going for the direct equities. But we have seen those cycles before. And I think mutual funds as a product is definitely a superior product for, I would say, most of the retail investors, most of the individual investors. And I see tremendous growth potential for a long time. So that's a structural part.

In between, there would be some cyclical aspect as well, which will impact flows a little bit.

[Operator]

The next question is from the line of Amit Mukerjee, individual investor.

[Amit Mukerjee]

I would really like to congratulate Mr. Navneet because as a customer, as an investor, I can see the difference in terms of fund performance and also in terms of booking [Indiscernible]. And as I mentioned to you last time in one of my calls, that 90% of my investment I keep in HDFC AMC. But there is one specific element which I want to highlight to you. And I really said this -- that I should tell this experience to you so that you know why the growth is not happening. Around 2020, when the COVID time was there, on 23rd March, I invested in multiple small-cap mutual funds. And last year in September, I booked my profit, and the profit was big enough to invest in an AIF fund. That was the size of the profit.

Being an ordinary investor, I immediately called my branch, which is the HDFC AMC, and I told the branch executive that this is the kind of fund I have. I want to invest in HDFC AMC. Please guide me, what should I do? And the first reaction that I got from the branch executive, I won't tell you the branch name because the purpose is not to highlight the branch or the person, I'm highlighting you the process. I called the branch executive and the branch executive gave a very lukewarm response and forwarded me 70 slides PPT and told me this is the kind of funds that you have -- that HDFC AMC offers. You can select whichever you want.

So I told her that okay, please guide me which one should I choose, considering the market situation? But then there was no response. I said, okay, maybe the branch executive is not responsible for sales. Branch executive is not responsible for cross-selling. I thought, let me call the branch manager. And then I gave the call to the branch manager. The branch manager told me that "sir, my executive has already forwarded you the ppt. We can't offer you anything more because each individual is different. They have their own unique needs. So please select any one of the product and invest." After that there was no interaction with the branch manager again. I then thought, let me invest in HDFC portfolio management service, and then I called back again to the branch manager. And I told the branch manager that a couple of months or years back, I had tried to contact portfolio management on this, pms@hdfcmultualfund. But they just sent me a ppt, and after that nobody contacted me. So can you please help me to connect with the portfolio management team.

The branch person told me -- the branch manager, that "Sir, your portfolio is so big in the city that nobody is having such kind of a portfolio. We have small investors and we don't deal in portfolio management service from our branch." I said, okay, then please connect me to someone in Bombay who can -- with whom I can talk. And he said, okay, sir, I will figure that out, and I will let you know. After that, even the branch manager never contacted. So then I understood, okay, even I think the branch manager is not responsible for sales, branch manager is not responsible for profit.

Anyway, I had all that fund. I invested it in the bond fund or the debt part. And I started researching, where should I invest this amount. And then after a few weeks, I again called the branch manager. I took out that money. I thought, let me invest in some other options while I was searching. And called for the branch manager again. And I asked...

[Simal Kanuga, executive]

Sir, if I might just intervene. Sir, I'm sorry for that. But sir, I think what we'll do is somebody senior from RN will reach out to you. Because yes, I think it's the interest of time and it is something where we have like...

[Amit Mukerjee]

No, I completely agree. But I wanted to highlight it to the senior most management so that you know.

[Navneet Munot, executive]

Thank you so much for your feedback, and we really appreciate your trust.

[Amit Mukerjee]

Gains and cross-selling, I think you should make it as a key important KPI for your branch and executive, sir. That's my request. Otherwise, I am very happy with other things that are happening right now.

[Navneet Munot, executive]

No, thank you for the feedback, and I will ensure that somebody gets in touch with you.

[Amit Mukerjee]

Yes. That's okay. This is the only thing that I wanted to highlight to you. Yes.

[Operator]

The next question is from the line of Rohan Advant from Multi-Act Equity Consultancy.

[Rahul Picha, analyst]

Yes. This is Rahul Picha here. I wanted to get some insights on the yield side. A little while back, you spoke about the gap between gross flows and net flows and the pressure on yields that is coming because of that. So I just wanted to understand if the current trends persist and the gross flows continue to be higher, and while the net flows after considering outflows continue to be at the similar rate at which they are in how many quarters, like in 2 quarters, 4 quarters or maybe a couple of years, in exactly what kind of a time frame do we expect the yields to stabilize?

[Naozad Sirwalla, executive]

Yes. Actually, it is very difficult for us to kind of give a number to this because of the very fact, the entire flow outflows that do happen. They don't happen on a P4 basis, right, as you know. We have tried kind of -- tried estimating this, but we have never got that right. So -- but yes, I think if you look at it this way. The industry size was just about INR 13 lakhs crores at the start of the year. We are at INR 18 lakhs crore, INR 19 lakh crores. So -- and of that INR 18 lakhs crores, INR 19 lakh crores, just take out the impact that is from mark-to-market. The balance entire gross flows that have happened, which has resulted in increase of AUM, has happened at a margin which is definitely thinner. So over a period of time, as and when the entire book gets replaced, and as I started off with, right, very difficult to kind of give a time frame to that. But once the entire book gets replaced, that the margin kind of will stabilize.

But it is not something that will happen in the next, say, 2, 3 years. It would happen over a fairly long period of time because what tends to happen, as you would appreciate, is basically the AUM keeps rising, right? So for example, today, industry AUM is at INR 19 lakh crores. Let's assume that the markets go up by 10%. Another INR 2 lakh crores will get added to the number. And that INR 2 lakh would give me the same amount of margin as what is on the existing book. So these kind of dynamics come into play. So very difficult to answer. But yes, you pointed it out very right. If the gross sales are very large than the percentage of the AUM and the net sales are not that large, that means that the AUM is getting replaced. So the lower cost AUM is going out and the higher cost of AUM is coming in.

[Rahul Picha, analyst]

Okay. And as a large part of that churn would have already happened because it would be front-ended, do we expect the intensity of the fall to reduce going forward?

[Naozad Sirwalla, executive]

It theoretically should, but one really doesn't know, right? So what can happen is, if the churn is very fast, rapidly, it might happen in the shortest period of time. If it happens at a slow pace, it might happen back-ended. But yes, you are right, some part of that has already happened.

[Rahul Picha, analyst]

Okay. And one more question. If I look at the quarterly average AUM and the closing AUM, there seems to be a material gap in that -- in this quarter. So can you explain the difference in exactly what segment, like debt or liquid funds, which is leading to that drop in the closing AUM?

[Navneet Munot, executive]

You're right. So that's on the debt and liquid side, and we see some of that and several times in the last quarter of the year in the month of March. There could be significant outflows from some of the corporate investors.

[Operator]

The next question is from the line of Ajay Ramanathan from Informist Media.

[Ajay Ramanathan, analyst]

I just had one question. So recently, we've all seen the market being very hyped up for LIC's IPO. Now given that reports have mentioned -- recent reports have said that LIC itself has increased its stake in HDFC. So I just want to know would HDFC return the favor and look to invest in the coming IPO? What are your plans going forward in that regard?

[Navneet Munot, executive]

No I can't comment on what our investment team will be doing. There are no -- I mean, the investments don't get decided based on who are the shareholders.

[Operator]

The next question is from the line of Dipanjan Ghosh from Kotak Securities.

[Dipanjan Ghosh, analyst]

Sir, 3 questions from my side. The first is, if you can give some color on the share of flows, equity flows that came into the direct channel. I'm more trying to understand how much of gross flows for the year, equity gross, equity flows for the year, but through the direct channel. The second is when we don't get the absolute gross flow number company-wise -- if I see your market share in unique investors over the past 8 quarters, that has come down to around 17% from almost 26% to 27%. Just wanted to understand your -- get some color on how the overall acquisitions were -- new customer acquisition, new to HDFC AMC and what is your strategy around it? The third, which you mentioned that investment in digital capabilities will continue to remain at the current trend, and also, you plan to have more number of NFO and also on the AIF [Indiscernible] fund. So how should we really think one build in the cost numbers from here onwards? That's all.

[Navneet Munot, executive]

So first, on the color on the share of flows, I mean, as you are aware, we don't give granular details on the flows beyond what has been published. On the -- your question on market share -- but in terms of, let's say, the share between direct and distribution or some of those metrics won't have changed much, I mean, if that was a question. On the share in unique customers' market share, so unique investors as identified by PAN have grown to INR 3.37 crores, INR 33.7 million in March '22 as against INR 22.8 million in March '21. This means that industry has added almost 10.9 million new investors, which is a growth of shade below 50%. This is a very, very significant growth this year.

During the same period, we have grown from 5.3 million to 5.8 million. We obviously went ahead and did a deep dive on this data. So our broad estimate state that more than half of these are investors who have invested only in ETFs, say, through fintech platforms or some of the broking platforms. We obviously need to address this market where our presence has been relatively less. Keeping this in perspective, we have filed and have got approval to launch 9 more ETFs.

In today's Board meeting, we have got approval for 3 more, and these documents will be filed with SEBI over the next few days. So all in all, we will have 12 ETFs and our product team is working on expanding this range further. But that's on the product launches side, having the full product booking. But also we are doing a variety of other things in terms of increased engagement at all levels as well as, I think, some of the other efforts in terms of marketing, in terms of creating a separate brand, which we are calling it as HDFC MF Index Solutions. In case we have not seen, we have a separate fact sheet for our passive funds and taking a lot of other efforts to have higher share in the ETF market as well.

Your third question was on...

[Dipanjan Ghosh, analyst]

On the cost side. Given that you'll be coming out with a lot of new funds and investing in some of the digital capabilities, how should one think of [Indiscernible] of cost numbers?

[Navneet Munot, executive]

I mean what I mentioned earlier that around 12, 13 basis points of the AUM that we have been able to maintain over the last several years, I think we would try our best to keep there. Of course, with the new product launches, business promotion, marketing, technology, building our digital assets further, all of those will be the areas where we'll be spending more. That is basically, I mean, our bullish view on the growth of this industry. But we will keep a tight lid on the overall cost side. And I've always mentioned that probability is something that is very much ingrained in our culture. And -- but at the same time, neither in the past nor in the future have we have or will step back from investing in growth of our business.

[Operator]

The next question is from the line of Devesh Agarwal from IIFL Capital.

[Devesh Agarwal, analyst]

The first question is, sir, I just wanted to understand, you did highlight that the performance of this scheme is improving on the equity side. So historically, what has been your experience in terms of lag and getting new flows on the basis of improved fund performance?

[Navneet Munot, executive]

It takes a couple of quarters for the world at large to start noticing it, also depends on the engagement, the product approvals that happen when it comes channels like banking or the initial distributors for most of the other partners, as well as investors. It takes a little bit of time to recognize that. But I think we are clearly getting a feedback from the partners, from investors, from my own sales team that I think everybody is recognizing the sharp rebound that we have in our equity performance. And that's across the board, across most of our products. They are looking pretty good across all time periods. As I think everybody recognizes that, I think incrementally in the new outflows, the share should improve over a period of time.

[Devesh Agarwal, analyst]

Okay. And has over the, say, last 3, 4 months, the share in the net flows or the gross flows have seen an improvement and probably have surpassed the share in the AUM?

[Navneet Munot, executive]

Yes. So there are green shoots, which are very much visible.

[Devesh Agarwal, analyst]

Okay. And sir, on the liquid side, we've been losing market share. Equity, I understand. Liquid, any particular reasons for losing market share?

[Navneet Munot, executive]

No. So we used to be -- if you remember correctly, I mean, a couple of years back, we used to be more like 7%, 8%, single-digit market share. That jumped to almost 20% in FY '20 and then '21. Also, I think the overall risk of environment, I think given the overall environment in the money market, money moves to safe haven and to the fund houses like us. Over a period of time, as the risk appetite comes back and also -- I mean, the money gets distributed to other AMCs as well. The other aspect is that a lot of these investors -- I mean, their own funding need would have led to redemptions as well.

[Devesh Agarwal, analyst]

All right.

[Navneet Munot, executive]

If I remember correctly in the last couple of calls, I would have mentioned that market share of like 18%, 20% may not be sustainable in a product like liquid.

[Devesh Agarwal, analyst]

All right. And sir, if we come to your strategy, basically, how do you think about your AUM growth, the strategies that you plan? Is it more on the market share basis or on an absolute growth basis?

[Navneet Munot, executive]

No, of course, both, as I mentioned, that our mission is to be the wealth creator for every Indian. The only 3 crore investors in India who have invested in mutual fund, and we talked about it a few minutes back. We believe this number is going to go up very substantially. Overall, as the economy grows, within that savings grow, within that higher proportion comes to financial assets and within that, higher comes to mutual funds, and within that we would aspire to have a higher and higher share of HDFC Mutual Fund. We believe we have the pedigree, we have people, we have processes, we have presence, we have the platform, we have the partnerships. And I think as we are very, very, I would say, on a missionary we chose -- not only expand -- I mean, not only grow our share, but I think also grow the overall pie of the industry over the next several years.

[Devesh Agarwal, analyst]

Perfect, sir. One last bookkeeping question. I see that the tax rate for the quarter has been lower. Is there any adjustment that has happened in the last quarter?

[Naozad Sirwalla, executive]

No, it's not material. The effective tax rate remains pretty much the same, and largely, it's slightly higher because of ESOP cost, not necessarily being a tax deductible item, but otherwise, it's pretty much in line.

[Operator]

The next question is from the line of Aditya Jain from Citigroup.

[Aditya Jain, analyst]

I want to confirm on the movement in other OpEx, the INR 57 crore to INR 50 crore decline Q-o-Q. This is largely going away of NFO expenses? Or is there something else also happening?

[Naozad Sirwalla, executive]

Yes, largely that's the cause because of NFO and business promotion being lower in the last quarter, that's what it was about.

[Aditya Jain, analyst]

Got it. And then if you could just talk about the GIFT City subsidiary, what exactly is it intended to achieve? So would you expect it to result in better asset mobilization or maybe a lower fee payout? Or broadly maybe the business plan around why that is being done?

[Navneet Munot, executive]

That would be our vehicle to attract more global money into India through the GIFT City. And of course, over a period of time, there could also be an opportunity to mobilize Indian savings through LRS into the global products.

[Operator]

The next question is from the line of Kunal Shah from [Indiscernible] Asset Management. .

[Kunal Shah, analyst]

You had answered this question in bits and pieces, but more from the industry perspective. There are quite a few challenges. I mean, it's becoming difficult to beat the benchmark. Passive is kind of getting a lot of traction. Even direct schemes are kind of growing. Also, there is quite a few competition from alternatives, PMS, AIFs. And lastly, also the direct equity culture, which we are seeing. There's a number of demat accounts that have been opening up, right? So looking at all of these challenges, what are your thoughts for the industry, per se, right? I mean, I do understand quite a few underpenetration slowed there, right? But looking at all of these challenges for the AMC industry, per se, right? Yields getting challenge is one part. Obviously, there's also the absolute profitability growth historically, what we have seen, right? Could be under challenge going forward because of all of these concerns?

[Navneet Munot, executive]

So I mean, I would look at all that you illustrate both as challenge as well as an opportunity. You mentioned about the rise of passive, but that could also be an opportunity. I think we are expanding our product booking. I think people who are interested in just meeting the market through a passive product, we'll have our offering. Of course, margins will be lower there. But I still see tremendous potential for growth of active funds in India. Our view on active is very well known. We are big believers of active management. And our view is that in India, still there is material alpha for an offer. We need to get our communication right on this front. People have -- I remember a year back, people talking about the last several years, mutual funds have not generated alpha, and in future, are we only going to see massive in selling. And look at the alpha, all our equity funds -- most of our equity funds, almost all, have generated in large money [Indiscernible] people wrote off active managers.

And I think the one thing that we need to kind of get the communication right, that alpha is not something that can be achieved on a daily or annual basis. Our funds have generated alpha over medium to longer period of time, and I would not mind sticking my neck out and stating that this is something we believe we will be able to achieve in future as well. If one believes in wider participation by companies in terms of growth, active management should be their choice and vice versa. We are of the opinion that broad markets over a period of time will outperform, and this makes a strong case for active products. So I mean, we believe that we have the right capability in place. We have the resources in place, right? People have process in place to fully -- I mean, I would say, take advantage of the alpha opportunity.

You talked about the challenges on the alternative side. But again, I would say that, that's an opportunity as well. And earlier, I talked about what we are planning to do on the PMS front, on the AIF front, both category 2 and category 3. You talked about the number of demat accounts that are getting opened up, so people experimenting -- people investing directly versus coming through the mutual fund. Again, I mean, I would look at both as a challenge as well as opportunity, challenge in terms of if people find that investing on their own delivers better results. But I think if some of the recent studies are anything to go by clearly shows that a large number of investors don't have a very good experience or a happy experience of investing on their own. I think professional fund managers add a lot of value. And I then think -- I strongly believe that a good number of those investors would convert themselves into investing through mutual funds.

In fact, if you see the growth of the SIP, there is also a reflection of like several of these investors, while they may be trading on their own, are also looking at investing in a systematic or a more disciplined manner. What else? I think these are the things that we talked about as challenges, but I think I would look to them as opportunities.

Margins, I mean, as I said that -- I mean, it depends on -- I mean, if you look at globally, margins have come down in this industry. A lot of consolidation has happened. But there are advantages on the scale side. I mean, if that happens, then obviously larger players like us with the resources that we have deployed in growing this business over a period of time would be better off. And at the same time, the higher profit segments like alternatives, I think if we are able to build that franchise over a longer period the way we have built a great franchise on the mutual fund side, I'm sure we'll be able to reap the benefits on that side as well.

[Kunal Shah, analyst]

Would you like to share your thoughts basically on the absolute profit growth or operating profit growth historically? What we have seen kind of tapering down now going ahead with all the opportunities and challenges that we talked about. Any thoughts on that absolute profitability growth perspective?

[Navneet Munot, executive]

No, I mean, in a way, you are right. In fact, in the context of some other question on margin, I mentioned that we look at the growth potential over the next several years where the AUMs can gallop manyfold over the next decade or 2 decades. And that's a big picture one needs to focus on. I mean, I was looking at, let's say, a large fund manager in U.S., Fidelity. I mean, late '70s -- or let's say, Capital, which had an AUM of like, let's say, single digit in terms of billion dollars. So Fidelity, I think in mid-70s or so was like $4 billion, $4.5 billion and would be like $4.5 trillion. There's gone up 1,000x. And then in U.S., the mutual fund industry in 70s was like 5 decades old. It wasn't like a nascent industry or it wasn't like a start-up. It was like a 5 or 6 decades in existence with good participation. And still, you look at the growth over the next several years, I think something similar is likely to happen here. And in all the, I would say, forces that led to that kind of growth in the U.S., I think, are very much in play when you look at India today.

[Kunal Shah, analyst]

Fair enough, sir. Fair enough. Sir, just one question, if I may pull in. I mean this you've answered in bits and pieces, but engagement with distributors, I mean, what actions are we taking out there to improve our engagement with distributors? If you could help understand a little bit more because the treatment that we get is that there has been an increase in engagement for sure, but still some resentment. So just wanting to understand, what actions we should look forward as far as engagement increase with distribution -- distributor, global industry distributors and other distributors?

[Navneet Munot, executive]

Yes, absolutely right. I mean, that engagement is very, very critical. Performance is one part. But in terms of engaging with all of them to explain our performance, to explain our philosophy, to explain our investment process is very, very critical. And I think given the large presence we have across the country with 277 branches and large number of people on the sales side constantly do that. The number of calls that we have increased from our product team as well as from the fund management side. In fact, as we speak, on another call, Chirag is addressing several of our partners. On the content side, I think we have continuously been working to improvise our content that we share with our partners as well as investors.

On the digital support, there is a lot of work that has happened over the last several quarters in terms of amplifying the distribution. I think in his opening remarks, Simal mentioned about the distributor app that we have, another product called Connect that we have, which helps them in amplifying their business. And all of those efforts are very much on, which over a period of time, given the strong partnership we have with our partners, should give us good results.

[Operator]

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

[Kunal Thanvi, analyst]

So in the real part of the conversion, you had mentioned about the merger of HDFC Bank Limited from a whole shareholder perspective. Can you also touch upon from the distribution perspective? Because now with HDFC Bank becoming the parent for HDFC AMC, how does it change the distribution or it remains the same? The reason I ask this question is if you look at the other competing bank like AMC, their parents would have a very high share of distribution when we look at the distribution. Whereas for HDFC Bank number would be lower than the median of the industry and even lower than -- very low compared to the, say, a player like SBI. Just wanted to understand on the distribution side, as a mutual fund company, we would -- we stand to benefit out of this merger. Or any qualitative data would help.

[Navneet Munot, executive]

Simal had mentioned about a few other banks, I think they either have a closed architecture or a very guided architecture. HDFC Bank has always believed in open architecture. Having said that, we've become part of a much -- I mean, of an entity which has a much wider network, which are much bigger scale. So we move from being a sibling of them to a parent-child relationship. And I hope that, that gives us a lot many more opportunities to look forward to.

[Kunal Thanvi, analyst]

Sure, sure. And just a last if I can squeeze in. One of the key indicators for say, flow market share have always through the SIP market share, right? Some -- like there also be still lagging compared to the market in terms of market share. Any thoughts, any early signs that you see on the SIP book, which of course, will translate into the overall market share over the course of period?

[Navneet Munot, executive]

Kunal, you are absolutely right. I mean, if you look at the overall flows of the equity flows -- I mean, if you look at the overall equity flows, also, a good part of that comes from the SIP. And if the market share is lower on that side, that also impacts the overall market share. And we were a pioneer of SIP. We were one of those fund houses who took, I would say, a huge amount of efforts to spread the word around SIP, to create the awareness of long-term investing, disciplined investing, power of compounding, which we have been beneficiary of, creating the equity AUM, the stable AUM that we have created. Having said that, surely I think our market share has come off for a variety of reasons, which we may have discussed over the last several calls, but all the efforts that we are making today, and they are highly, highly focused on gaining market share back in SIPs.

And we have huge potential there. I think the way we used to be several years back in terms of absolute leadership in SIP and where we are today, there is definitely a gap, and then we want to close that gap as early as possible. So whether it's the engagement with our partners, whether in terms of content, whether in terms of marketing, whether in terms of the new product launches or creating more awareness about our existing products, spreading the word around the bounce back in performance, every single thing that we need to do, I mean, I've made some references to all the digital efforts that we have been making, whether in terms of what we are doing on our website or our app, we believe we have all that required very well in place. And all the other efforts that we are making hopefully should result in better share in SIPs going forward. We don't want to be where we are today when we look at our share in incremental SIPs. I think we deserve a much higher share compared to where we are today.

[Operator]

In the interest of time, that was our last question. I would now like to hand the conference over to Mr. Navneet Munot for closing comments.

[Navneet Munot, executive]

Thank you so much for being with us this evening. And as I mentioned earlier that we have set a mission for ourselves, which is to be the wealth creator for every Indian, and the vision that we have set for ourselves is to be the most respected asset manager in the world. And each and every member of my team is highly committed to realize this mission and this vision over the next several years. Thank you so much for your support.

[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.