Few Bets, Big Bets, Infrequent Bets- HDFC AMC- A Rare Opportunity

August 26, 2020

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Strategic Alpha

Technical Front:-
HDFC AMC has broken out of a Long Consolidation of 90 Days and Giving a Nice 1:7 Risk/Reward opportunity.
HDFC AMC CMP 2490, Stop 2395 CBSL, Upside Open till 3230, Time Period 30 Days.

Fundamental Front:-

HDFC AMC is in my circle of competence, I have worked with NJ India Invest(Largest National Distributor of Mutual Funds) for around 1.5 Years First as an Employee and Later as a Mutual Fund Distributor. I have a deep understanding of what all is required to run a successful AMC. AMC is a cash-generating business.

The business model of AMC is much safer than Banking, NBFC, and Insurance Companies. AMC is such a business where they charge Expenses Up to 2.5% to the MF Assets they are Managing. This way 100Rs taken for an investment in Mutual Funds from Clients, they 2.5% Annually, and Rest is invested in marketable securities. So this business model never requires any debt to scale up. More the AUM, More is Free Cash Generated. As long as they are keeping the operational expenses low, these companies cannot go into losses. Read More about the Expense Ratio here.

Moreover, with the Pedigree of HDFC, This AMC is able to attract large funds for investments. HDFC AMC is by far the second-largest AMC in India after SBI AMC. Read about Industry AUM Position here.

HDFC AMC Is More Safe Business than HDFC Bank. In the case of banks they take 100 Rs as Deposits and Lend out 105-106 Rs and Try to Make 2-3% on Loan Assets after All Expenses, however problem with this business model is that, They Hope 105-106 Rs come back, however, if that doesn’t come back, they are in deep trouble. Many Banks Like Yesbank have taken a big hit on NPA’s. In Bank, we cannot analyze based on its book value, as it is in thin air. If money doesn’t come back, All book value is actually Zero. That’s the reason why I don’t like banking businesses. IDFC First Blog that I have written is a bet on V Vaidyanathan, (The Jockey) and Not on the Horse(The bank).

HDFC AMC is a Debt Free, Cash generating Machine with HDFC Group Pedigree it will always fetch rich valuations compared to other Peers.
At current Valuations, HDFC AMC is a Wonderful Business at Fair Price.

As Warren says,

It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.

 

This is what I shared with one of the mentee JV partners Last Year in Feb 2019, HDFC AMC was trading at 1350 Odd, and in just 8 months it went to 3800. That’s the power of Focus and Few Bets, Big Bets, and Infrequent Bets.

HDFC AMC 1350 to 3800 Journey in 8 Months after this post

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The author of the blog Mr.Suyog Dhavan is a Full-time Investor / Value Trader and Value investing/Trading Mentor. His style of Investing is inspired by Mohnish Pabrai, Peter Lynch, and Porinju Veliath. He is the founder of Strategic Alpha Wealth, A Premier stock market mentorship firm with a mission to touch the lives of 1Lakh people through its mentorship program.

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