Edited Transcript of HSMXI20MND.NS^C16 earnings conference call or presentation 9-May-20 1:30pm GMT

We’ll now move to us. Our quarterly assets under management for March ’20 was INR 3,698 billion as against INR 3,423 billion in March of 2019, a growth of 8%. We have 13.7% market share in QA AUM. Our closing AUM as of March 31, 2020, is INR 3,191 billion with a market share of 14.3%. More particularly, our QA AUM for the quarter ended March ’20 for actively managed equity-oriented assets was INR 1,574 billion, while the closing AUM as of March ’20 was INR 1,200 billion. The fall in closing AUM as compared to QA AUM can be attributed to the steep fall in markets as evidenced by a 23% drop in the NIFTY 50 during the month of March 2020. The rise of markets in month of April has led to an increase in AUM, and our future revenues from equity assets would depend on how markets shape up over the next few months. We now operate through 221 branches. We have 9.4 million live accounts and a workforce of 1,194 people.

Equity as a percentage of our total AUM, which was 48% in March ’19, has come down to 38% in March ’20, again, primarily due to fall in equity markets. Our individual monthly average AUM for March ’20 was 57.2% of total AUM as against 52.2% for the industry.

We continue to be the most preferred choice for individual investors with 15% share in individual AUM. Our unique investor count stands at 5.6 million as against a total of 20.8 million in the industry. Our systematic transaction flows for the month of March ’20 were INR 11.3 billion across 3.29 million transactions. We continue to be the #2 player in B30 market with a share of 11.9%.

We would like to highlight that our business is fully functional and continues the way it has been despite the lockdown. To give you an illustration, in month of February 2020, we did 650,000 transactions. In March, despite the widespread measures taken in terms of limiting workforce, along with eventual complete lockdown, we did 1.03 million transactions.

Slide #15 in our presentation that has been uploaded on the — our website as well as that of exchanges, provide you a snapshot of how we have handled the situation thus far and the continuing steps that we are taking on the matter.

I’ll now move to financials. Before I get into numbers, it would be pertinent to note that there is a significant onetime impact of unrealized loss recognized in the results for the year ended March 2020. This is in reference to our holdings and securities of SL Group. The total unrealized loss recognized in the financial year ended March 2020, stands at INR 1,203.6 million; it’s INR 120 crores. The carrying value of these NCDs as at March 31, 2020, was INR 294.21 million. So the residual number is now INR 29.4 crores. The value of the collateral as of March 31, 2020 is INR 358.78 million. In the previous financial year, the nonrecurring expenses amounted to INR 400 million. Keeping this in perspective, we are also disclosing our PBT as well as PAT adjusted for this one-off and nonrecurring expenses.

I’ll move to the annual numbers. So for the full financial year, the operating profit for financial year ended March 2020 was INR 15,129 million as compared to INR 11,931 million for March of ’19, an increase of 27%. PBT before nonrecurring items for the financial year ended March ’20 was INR 17,734 million as compared to INR 14,147 million for March ’19, an increase of 25%. However, due to nonrecurring items, the PBT for the financial year ended March ’20 was up by 20% to INR 16,531 million as compared to INR 13,747 million for March ’19. PAT, again, before nonrecurring items for the financial year ended March 2020 was INR 13,526 million as compared to INR 9,613 million for March ’19, an increase of 41%. However, due to nonrecurring items, the PAT for financial year ended March ’20 was INR 12,625 million as compared to INR 9,306 million, resulting in an increase of 36%.

In terms of the quarterly numbers, the last quarter of the financial year saw growing uncertainty due to the emergence of the COVID-19 pandemic and its effect on markets across the globe. This led to fall in AUMs across our industry, affecting revenues negatively. The operating profit for the quarter ended March 2020 was INR 3,562 million as compared to INR 3,534 million for March of 2019, an increase of 1%. PBT nonrecurring — before nonrecurring items for quarter ended March ’20 was INR 4,250 million as compared to INR 4,244 million for March ’19, an increase of 0.13%. However, due to nonrecurring items, the PBT for quarter ended March ’20 was down by 20% to INR 3,297 million as compared to INR 4,146 million as of March ’19. PAT before nonrecurring items for the quarter ended March ’20 was INR 3,213 million as compared to INR 2,837 million for March ’19, an increase of 13%. However, again, due to nonrecurring items, the PAT for quarter ended March ’20 was INR 2,500 million as compared to INR 2,762 million for March ’19, resulting in a decrease of 9%.

Our operating profit margin as a percentage of average AUM for the financial year ended March ’20 is 41 basis points. The corresponding number for the previous financial year was 37 basis points.

The Board of Directors have proposed a dividend of $0.28 per share, which is subject to shareholders’ approval.

Thank you for patiently hearing. Stay safe, everyone. We’ll open it up for questions now. Milind and Piyush are very much here to take questions, if any.

Raymond, if you can start taking questions, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Parthiv Shah from Tracom Stock Broking.

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Parthiv Shah, [2]

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Sir, my question is regarding this entire year is looking extremely tough, especially for the profitable equity AUM and especially, with the equity portfolios on an average being down by 20% and seeing that the outlook also not looking very great for the rest of the year. So a ballpark figure of at least a 20% hit on your equity AUM in terms of the income. So I was just trying to get a sense that how are you planning to recoup this particular loss for this year? Any sort of increase in the direct plans expense ratio? Or any sort of measures which can help you give levers for lower OpEx and thereby increasing your margins? So just want to get a sense of that.

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Milind Barve, HDFC Asset Management Company Limited – MD & Director [3]

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Yes. Thank you for your question. You’re right with your — I mean, you’re right in the way you look at it that this year, yes, we are looking at — we have started the year with an equity AUM or actively managed equity AUM, which is materially lower than the average of the last year or the average of the quarter. Also, it is equally important that about 73% to 75% of our revenue comes from equity-oriented funds. And consequently, the fall in the level of equity AUM will have a bearing on the revenues of the company. I do feel — we do feel that given that the working environment has changed and predominantly now business in the — at least in the first month of April and in the last quarter of March has predominantly been done from the digital platforms, it will actually — will lead to some meaningful reduction in operating expenses. So it would be difficult to make a very accurate estimate about how much of the revenue loss can be recouped.

Having said that, we remain cautiously optimistic about the recovery in the markets from the level of the markets on 31st of March, which — where we have reported our numbers. The markets have rallied close to about 6 or 7 points in the month of April. Accordingly, our equity AUM has grown from the level of March 31, but the future is very much predicated on the dispersion, intensity and the duration of the COVID pandemic and the lockdown, and the short-term impact of the lockdown on markets. Having said that, I must say that investor interest in equity AUM or equity products remains fairly sound. Even in the month of March, there was a fairly strong flow into equity mutual fund products, almost in the order of INR 11,000 crores just in the month of March. And in fact, industry had its highest close in the quarter of INR 29,000 crores in the fourth quarter of March ’20.

So we remain cautiously optimistic: a, about the recovery in the market; b, we will be fairly circumspect, and we will be — we will leave no stone unturned in terms of our efforts in reducing the operating costs in these tough times.

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Parthiv Shah, [4]

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And sir, also I want to understand, like, in terms of the fact that you mentioned that the — in the month of March, there was a growth in the equity AUM for the entire industry. Vis-à-vis that growth number in terms of percentage, how has HDFC AMC fared in terms of garnering market share in the equity AUM?

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Milind Barve, HDFC Asset Management Company Limited – MD & Director [5]

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I think my colleague has already mentioned the market share. There was — on a year-to-year basis, there was some fall in the market share. But it is important to note that we remain the most — the largest manager of actively managed equity funds. So our product mix still remains fairly strong as compared to our peers. And therefore, we have a reasonably good product mix, both on the product mix side as well as we have a very good liability franchise in terms of our share in the retail AUM of the industry.

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Operator [6]

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The next question is from the line of Paras from White Oak Capital.

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Parag Jariwala, White Oak Capital Management Consultants LLP – Senior Investment Analyst [7]

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Yes, sir. I have 2 questions. One is that on the equity AUM, we have TER. So let’s say, the AUM actually falls and the TER actually comes in the lower bucket by which we can charge a little higher TER to the customers. So in that situation, is the payout to the distributors remain same as the earlier TER or it will go up? So that — I mean, what I’m trying to ask is that, is there any room where we can increase our net yield? That’s first.

Secondly, in terms of SIP, if you can give some color in terms of the people who are dropping out or canceling their SIP, some bit of their profile, in terms of self-employed, salaried, et cetera, that would be very helpful.

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Milind Barve, HDFC Asset Management Company Limited – MD & Director [8]

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So your first question was regarding the TER change. Yes, it is true that when the AUM falls down, the applicable TER goes up a small — marginally goes up. Accordingly, in the — from the month of April, to the extent, there is a fall in the total AUM of the product. I’m talking about equity funds. There will be a marginal increase in the TER that we will be able to charge as per the SEBI guidelines. Having said that, the distributor commission is not linked to the TER, and that will remain constant in terms of basic plan as in the past.

So to that extent only, that is — we don’t believe that it will be very material. But yes, there will be a marginal improvement in the margin because of the fall in the AUM and the consequent increase in the TER — chargeable TER.

So there will be, probably, a small improvement in the margin. I don’t know — it is very difficult to forecast whether it will be material or not. But the distributor — to answer your question, the distributor commissions are all — the basis points of the AUM will remain constant.

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Parag Jariwala, White Oak Capital Management Consultants LLP – Senior Investment Analyst [9]

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Okay. And sir, on SIPs?

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Milind Barve, HDFC Asset Management Company Limited – MD & Director [10]

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On SIP, I think, yes, we continue to see new SIP flows, SIP registrations. There is a period of time when investors opt to cancel SIPs and also tend to either — some SIPs expire in the normal course of their term for which they are signed and sometimes some SIPs are canceled prematurely.

Having said that, I must mention, I think it is there in our presentation, but very high percentage of our SIPs are signed for 5 years, and there’s a very high percentage of our SIPs, which are signed for more than 10 years. So in that sense, people who are signing SIPs are actually very meaningful in terms of the commitment. So it is not that SIP is signed for a few months or few — 1-year period. People are still signing SIPs for 5 years and 10 years.

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Parag Jariwala, White Oak Capital Management Consultants LLP – Senior Investment Analyst [11]

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But on cancellation, do you want to — I mean, is it related or the calculations are higher than the previous quarters or previous months? Or is it constant?

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Milind Barve, HDFC Asset Management Company Limited – MD & Director [12]

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There’s no particular pattern to the cancellation. There is a certain amount of cancellation that happened even when markets were good, or whether they are good or whether they are bad. SIP is still a fairly material part of our total AUM flow, as we have shown in the slide. So that is like the order book that we have in our hands. So for example, we have to still get INR 1,100 crores as on March we got from just SIP flow. So we are one of the large players in the SIP space, and that gives us assured flows in our equity funds in the time to come.

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Operator [13]

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The next question is from the line of Yash Nerurkar from PPFAS Mutual Fund.

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Yash Nerurkar, [14]

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I hope everyone is doing well. So I have like 3 questions. I think one of which is partially answered. So I’ll just continue with the other 2. So firstly, right now, we know, I mean, it’s a completely different situation, kind of black swan event. So going forward, once this whole crisis gets over, so what will be your strategy going forward? Will it be something like work from home, like half the team works from home? How would the transactions be preferred and accepted, whether from the digital medium or some other preferred medium?

And secondly, right now, since almost everyone is sailing in the same boat, do you see the need to incentivize the IFAs slightly more? Or do you see a competition coming from the other players who are trying to incentivize the IFAs more? But then even they are — many of them actually going through a really difficult period. So just to add more sales or generate more AUM, I mean, is this what you guys are planning to do?

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Milind Barve, HDFC Asset Management Company Limited – MD & Director [15]

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I think at this stage, it will be very difficult to make a very accurate prediction on how things will unfold on the pandemic and on the lockdown. But one does see that, in the near term, style and method of working by having so many people in the offices and people walking into offices, at least in the near future, does not seem to be the business model, at least in the ensuing 1 or 2 quarters because of the need and rightly so, for social distancing. There will be a need — and limited amount of travel and commuting being permitted. I think for a considerable period of time, we — I hope that I’m wrong in this, we will be seeing business which comes through on digital platforms, both through distributors as well as coming on HDFC MF online platforms. As you know, there are multiple digital platforms which are available. There are a number of distribution houses who have their own digital platform. There are stock exchanges who have digital platforms. There is NSE, and then there is HDFC MF online.

So people are choosing various types of digital platforms to access mutual funds, to do their transactions for buying and selling. And I do agree with you that this is — could be the beginning of a change of what might unfold as a method of working. We would, as a company and as a policy, encourage more work from home if it helps to mitigate the possibility of risks of the riders, and that would be the style. And we — I must mention to you that since the lockdown was announced in the last week of March, almost all of our operations as far as that are client-facing are fully operational. We are working from home and everybody has been digitally sort of empowered and connected to the office. Even sales people are doing their calls on the phone without having to physically meet.

So yes, there is a redefining of the business — method of doing business and style of doing business, at least in the near term. I think the hardship of this is being — felt equally, whether it is a fund house, whether it’s the distributor and most importantly, the retail investor also. And I think we are not, at least currently, looking at repricing anything on our products — of our products.

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Yash Nerurkar, [16]

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Okay. That just answers my question. I just had one question, if I may. So currently, what trends do you see? I mean, is there a shift from those investors that earlier invested in debt funds or the balance funds? And are they moving to equity more after whatever happened in Franklin Templeton?

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Milind Barve, HDFC Asset Management Company Limited – MD & Director [17]

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There is no data to really support this across the industry. And I think to say whether — yes, people, when they are — if they are taking money out of certain debt funds, they are — many of them are taking — doing what is called a switch out to some other fund. Either they are switching out into other debt funds, which they are comfortable with. Within the fund house also, the requests are to switching into some other debt fund of the same fund house. So it is not necessary that people are taking money out from mutual funds entirely out of the debt. But it is very difficult right now, and is also very premature to establish and think if there is a very particular distinct pattern about where that money is moving out. There is some trend definitely of moving to — within debt funds itself, shifting to whatever the investor in his perception feels is a safer debt fund.

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Operator [18]

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The next question is from the line of Saurabh Kumar from JPMorgan.

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Saurabh S. Kumar, JP Morgan Chase & Co, Research Division – Senior Analyst [19]

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Sir, I just had one question on this market share loss, both from a December basis and from last year March basis. Sir, I mean, if you have to break it down between basically the front book and the existing AUM, I mean, the back book, will the loss be more on the back book side, I mean, basis the performance? Or is it you would have lost even on the flows as well?

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Milind Barve, HDFC Asset Management Company Limited – MD & Director [20]

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Actually, we are not disclosing flows because they are not very consistent on a month-to-month basis. But having said that, I would say that there has been a slightly sharper fall in our AUM, partly because of performance of some of our funds or one of our larger funds. It is also true that we, as compared to the industry, which has about 10% of its AUM in small and mid-cap, we are closer to 20% of our equity AUM in smart — mid-cap fund. We are the biggest — one of the biggest — actually, it is the biggest mid-cap fund. We have a reasonably large small-cap fund. And I think the damage or the impact of markets on these group of shares for fair market cap has been stronger. To that extent, our fund house would have been impacted apart from marginal state on the performance.

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Saurabh S. Kumar, JP Morgan Chase & Co, Research Division – Senior Analyst [21]

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Okay. And on this front book, basically on the flows as per your understanding, obviously, it’s difficult for us to get that. For your understanding, would you be maintaining your current market share? Or…

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Milind Barve, HDFC Asset Management Company Limited – MD & Director [22]

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Very difficult to make projections. For example, the flow is — see, we had INR 67,000 crores of flows in the industry for the last year. Interestingly, the last quarter was actually the strongest flow of almost INR 30,000 crores, so almost like half of the flow gained in the last quarter.

So I think the markets — the flows react to how people feel about markets, whether they’re reasonably priced and so on. But I think the good thing that — and I can mention that the number for April was announced yesterday, I think, in the evening by NSE. I think that has been published at about INR 5,500 crores or something, which is INR 5,000 crores-plus, which is a fairly good number. It’s a fairly resilient number to see that flows and interest in equity, so it still remains.

It’s very difficult to make projections on market share and make projections on flows itself.

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Saurabh S. Kumar, JP Morgan Chase & Co, Research Division – Senior Analyst [23]

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Fine. Sir, just one more question. I mean, if — I mean, there are one — I mean, there are some points which the parent companies have put up for sale. So would you be — I mean, given you have the balance sheet and the market capitalization, would inorganic, would you be open to it at least?

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Milind Barve, HDFC Asset Management Company Limited – MD & Director [24]

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Yes, as a strategy, we are always open to looking at what is tactically synergetic to acquire and use the currency of our listed shares. Having said that, it is equally true that we have — there is nothing that is under active consideration at the moment.

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Operator [25]

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The next question is from the line of Roshan Chutkey from ICICI Prudential Asset Management.

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Roshan Chutkey, ICICI Prudential Asset Management Company Limited – Associate VP and Analyst [26]

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I have a following assertion to make and then based on this, help me understand whether do you agree with it or not. The management see as a proportion of AUM is likely to fall gradually over the next 4 years after old book churns and new flows come in. Essentially, the trade payout on the incremental source is high. Do you agree with this?

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Milind Barve, HDFC Asset Management Company Limited – MD & Director [27]

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The trail is already consistent. Now there is going to be no further increase in the trail. The trail is a constant number, and that is not going to increase. It will increase pro rata to the AUM increase.

But you’re right, if you’re referring to the trail on the book as well as — or as compared to the trail on the flows, then the trail on the flow is a little higher than the trail on the book. That is true.

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Roshan Chutkey, ICICI Prudential Asset Management Company Limited – Associate VP and Analyst [28]

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And therefore, as the old book churns and new flows come in, your asset management fee to MF AUM ratio should deteriorate, right? The yield on the revenue, right?

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Milind Barve, HDFC Asset Management Company Limited – MD & Director [29]

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The reality — in theory, you’re right. But the reality, it is not that the book churns very rapidly. There are a lot of investors who are old investors who continue to stay invested for long time. So there is no data to show that X percentage of the book necessarily churns. In fact, we find a lot of investors are really long term. Long term, as in like 5-, 10-year investors. They don’t churn. Sometimes those who come in 1 year back, if he is unhappy, he will churn. So it is very difficult to make a very accurate assessment of how much the margin will fall because of the flow impacting the book. But in concept — conceptually, you’re right that because of the cost, the trail on the flow is higher than trail on the book. As you get more flows into the book, the margin on the book will come down.

But to give you — just to elaborate on this, this year, on a INR 10,00,000 crores industry AUM, the flows for the industry was INR 67,000 crores in the book. So roughly, new flows are now 6%, 6.5% of the book. So basically, it is not a very material number. I’m talking of industry number, just to make the point. The industry flow as a percentage of the book this year has been as low as 6%.

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Operator [30]

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The next question is from the line of Umang Shah from Arohi Asset Management.

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Umang Shah, [31]

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The first quick question is, Q-on-Q, we have seen a slight uptick in the other operating expenses. Could you please elaborate on what has caused that?

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Milind Barve, HDFC Asset Management Company Limited – MD & Director [32]

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Piyush, you want to take this?

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Piyush Surana, HDFC Asset Management Company Limited – CFO [33]

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There is a onetime item of around INR 9 crores in that, which is related to settlement that you might have read about the settlement order. So that’s essentially the uptick.

Just so as to kind of elaborate a little bit on that. So that — and you would also have noticed the MTM loss. So with these 2 things, this whole SL thing that we were dealing with last year seems to have come to a conclusion, just wanted to add.

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Umang Shah, [34]

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But Piyush sir, that would reflect in the other income, right? Not in the other effect?

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Piyush Surana, HDFC Asset Management Company Limited – CFO [35]

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Right.

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Milind Barve, HDFC Asset Management Company Limited – MD & Director [36]

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No, no, no. You are…

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Piyush Surana, HDFC Asset Management Company Limited – CFO [37]

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[MPF] could reflect in the other income, but there was a matter — regulatory matter, which was pending related to that, which you would also — so that is also closed now. And we paid some interest to the FMP investors and the concerned FMPs and some settlement fees. So that’s closed now.

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Umang Shah, [38]

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Got it. Got it. So yes. Sir, the other question which I had was, I was just looking at the regular and the direct TERs for several funds in the same category. So I was looking at HDFC multi-cap scheme, and I was looking at the other multi-cap scheme. Now just read out some numbers, which I had. For April ’20, the regular TER for your multi-cap fund was 1.5, and your direct was approximately 0.9. So that left a trail of 0.6. Now for the other funds, I’ll take some names like Axis, which has 1.7 for regular and direct at 0.4, which leaves a trail of 1.3. And there’s Kotak at 1.5 and 0.6, which leaves a trail of 0.9. So if you look at the trail, which you have, yours seems to be the lowest and that to by a considerable margin. So here I just wanted to understand here as to how do you think about this in terms of the IFAs recommending your schemes, et cetera?

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Milind Barve, HDFC Asset Management Company Limited – MD & Director [39]

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Let me answer this. Let me tell you that some of our schemes, like HDFC Equity Fund, which is a multi-cap fund; Top 200, which is a very old fund, Balance Advantage, which earlier used to be Prudence Fund. These are very old funds, and we have a lot of investors and distributors who are being our loyal investors unit. They are also being paid the commission that was being paid from the earlier time, and it has got — the commission has got increased and increased over a period of time. So there’s a lot of old AUM, as I was just explaining in answer to another question. The trail fees that are paid on the book are very low. And the trail fees that are paid on the flow are relatively higher than the book trade. So today, we believe we are reasonably competitive in our trail commissions. It’s there as far as this example that you gave in the multi-cap related to this equities fund.

So we are competitive, and we always have the option to review our trail commission with distributors if we feel that there is a need to increase the rate or decrease it. But it is true that you maybe — it is not possible to be seen as maybe comparing fund house to fund house trail and trying to equate it. There are — I would say that trail commissions are usually banned. As long as we are in an acceptable ban, I think that is usually considered a good amount. But it is very difficult to maintain overall business margin if you want to be seen as the highest paying guy. Highest paying guy is then the lowest margin guy. So that is another impact from stakeholders point of view.

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Umang Shah, [40]

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Got it, sir. And the last question which I had was, if you look at the performance of HDFC AMC from 2008 to 2012, which was the time when GST happened, there was massive fluctuation in your overall AUM. But despite that, you managed to retain your revenues and increase your PAT. So can you help us understand as to despite AUM fluctuations in that period, how were you able to retain that growth and retain revenue numbers then?

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Milind Barve, HDFC Asset Management Company Limited – MD & Director [41]

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I think there are 2 things, which I will give you a high-level answer. The one is that we have a very strong focus on the high-margin equity business, which remains the core. As I mentioned, almost 75% of our revenue last year has come from the equity AUM, mostly mutual fund revenues. So I think one is a very strong focus on profitable part of the market segment, which is an equity business or actively managed equity. That is one thing that helped. And the second is that we have an extremely strong control on operating costs and expenses. And I think as we understand it, the key to managing this business lies in optimizing the high-margin business to the extent possible and maintaining a very prudent level of cost control in order to maintain operating costs. So I think that is the key, which is not only followed in those years, we — but we continue to follow year after year. As we have shown in our presentation deck, our operating profit margin has been maintained at 41 basis points. And when you look at some of the key elements of cost in it, we have been able to contain both employee cost and other operating expenses at a significantly low basis points of the industry AUM. As far as AUM, I think we are about — among the lowest if you consider at these costs. For example, employee cost is barely 5.5 basis points of AUM and operating expenses at another 6.5 or 7 basis points. So I think the focus on cost is as important as trying to optimize the margins by pursuing the higher-margin equity business.

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Operator [42]

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The next question is from the line of Haresh Kapoor from IIFL Asset Management.

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Haresh Kapoor, IIFL Asset Management Limited – Assistant Analyst [43]

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So just trying to understand what’s really happened during the quarter. So just on a quarterly average AUM basis, your AUM was down 3.3%, equity being down 5.3%. Probably, those are the key indicators on average AUM, which are down, but your revenues are down like 10% on a Q-on-Q basis. So any yield movement that’s happening on the debt funds or any other particular line items or such due to which your revenue line item on a Q-on-Q basis will be down like 10%?

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Milind Barve, HDFC Asset Management Company Limited – MD & Director [44]

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See, on an overall basis, when the product mix has less equity and obviously, in the last quarter, we saw an unusual, like a 23% fall in the market in just 1 month, that hurts the averages for the year. It also changed the product mix also. It changed the product mix from more equity in the total AUM versus lesser equity in the AUM. That reduces the productivity of the AUM overall. So basically, what has happened is not material change in the margins. In fact, the margins in the quarter remain fairly stable. It is mostly the composition of the total AUM, which was — which had a higher element of equity in the December quarter, now has a lower element of equity in the March quarter. That is the answer.

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Piyush Surana, HDFC Asset Management Company Limited – CFO [45]

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Besides that, just to add to that, in the December quarter, you would remember, we also had — on our advisory mandate, we had some extra performance fee, so that is why the revenue of that quarter was a little higher. So it wouldn’t be — if you’re not comparing apples-to-apples when you’re comparing these 2 revenues.

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Haresh Kapoor, IIFL Asset Management Limited – Assistant Analyst [46]

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Okay. And second thing, just around this SIP transaction, et cetera. So for the month of March, the data that you have given on Slide 11, and obviously, that was down. But how has the momentum been for you? Because from December to March, that’s obviously down, but in terms of going ahead market share losses on the SIP book, in particular, if you could comment on and how is that trend shaping up?

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Milind Barve, HDFC Asset Management Company Limited – MD & Director [47]

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I think, yes, we would like to reverse the trend of — reverse what we hope is not a trend of slightly lower SIP because as you can see on a year-to-year basis, it’s not a material fall. And clearly, what happens is that there is a little bit of incumbency disadvantage because we have been doing this SIP for the last 10, 12 years. We were the people who were talking of SIP when everybody else was talking about which product, while we were talking about doing SIP. So what has also happened is that there are a lot of SIPs for us as compared to the industry, which are running through its normal expiry process. Somebody has signed up an SIP for 3 years or 5 years or 7 years, that period is also coming to an end. It is true that there is some cancellation of SIPs. So we will try to focus attention on trying to reverse this trend as much as we can. And the SIP still remains a reasonably meaningful part of our flows.

Having said that, I — we believe that we are a reasonably good player in terms of our SIP book as well as the flow that we get per month. We have, I think, on our presentation deck, where we have presented almost INR 1,100 crores March number for SIP, which is a fairly material amount, I’d say. And if I’m assured of INR 1,100 crores flows in SIP every month, that is a fairly good number. But of course, we do recognize that it has come off from what is there in the previous quarter?

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Haresh Kapoor, IIFL Asset Management Limited – Assistant Analyst [48]

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And just in terms of this market share on the debt side. So obviously, we have had some event which has happened in the market with one of the AMCs. Previously, we have seen during one of the other market shocks that happened a couple of years back, you gained market share on the debt fronts. So are you seeing that trend already in the month of April, where market share gains are happening on the debt side? Or it’s more or less status quo at the moment, where some trends could happen in the future? Or you’ve already seeing that trend?

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Milind Barve, HDFC Asset Management Company Limited – MD & Director [49]

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I think there is a shift more in the — to some extent, there is some shift away from debt funds into liquid and overnight funds. And as we have probably mentioned, our share in the liquid fund has increased meaningfully, both in averages as well as in closing AUM. And we — what we see in April is that the size of the liquid and overnight business has increased materially. So there is some element of safe-haven investing that is happening. And I think being blessedly the strong brand, we are the natural beneficiaries of that trend.

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Operator [50]

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The next question is from the line of Nischint from Kotak.

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Nischint Chawathe, Kotak Securities (Institutional Equities) – Associate Director & Senior Analyst [51]

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I think you have been talking to distributors and I’m sure, consistently. In your latest dialogue, what is it that they really expect from you? What kind of a support they really expect from you? What is it that you should do for them so that they can do their best? I guess, you can’t do much about market movements or for that matter, appetite or the wallet that can get into equity mutual funds. But in terms of support, what is it that they are really looking forward from you?

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Milind Barve, HDFC Asset Management Company Limited – MD & Director [52]

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I think if you ask me in these kind of really challenging, in many ways, very unusual and challenging times, the distributors are doing an outstanding job in staying connected with their constituents, their clients in turn because their clients are asking them, whether it is about the market, whether it is equity or debt. And I think the one thing that we and our investment team, in particular, has been focusing on that almost every day, we are having 3 to 4 conference calls, webinars. Many of them are with distributors, sometimes at the request of the distributors with the investors directly. I have never seen such heightened level of investor calls, sharing of information, sharing of news and handholding that the entire industry is doing, we are very much at the forefront, where we are engaging with everybody who wants to have a call with a fund manager, anybody who wants to have a call — setting a call with these investors, we are supporting that. I think the most important thing that clients — distributors want is a view — at least like a considered view on what we believe are the possibilities in the market, particularly in equity and what are the right things to do for customers at this time. And I think that is where we are very committed and our investment team and along with the help of the sales team are doing a lot of such engagement. Whenever I’m trying to call or speak to a fund manager, all the time I’m being told he is on a call or he is on a webinar or he is on some [conference] meeting with other distributors, groups of distributors or sometimes group of clients.

Secondly, this is a key to us given the current circumstances really calls for some extraordinary handholding of the distributors, who in turn are staying connected with investors. And that is how — that’s what we are engaged in.

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Operator [53]

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The next question is from the line of Madhukar Ladha from HDFC Securities.

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Madhukar Ladha, HDFC Securities Limited, Research Division – Research Analyst [54]

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First, I just want to check on the question of Roshan, which Roshan asked earlier. I think, Milind, you mentioned that there was some 6% of the flow. I didn’t really get that part. Can you just repeat that?

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Milind Barve, HDFC Asset Management Company Limited – MD & Director [55]

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Yes. So I think, you see, very often when people are trying to model an AUM growth in — particularly in the equity book, the equity book, as you know, is influenced by flows. It is influenced by the market movement. These are the 2 main drivers of AUM in equity. So the point I was making is that on opening assets under management, the industry had about INR 10,00,000 crores of assets under management in equity book at an industry level, which is about INR 10,00,000 crores. And the net flow, that is the net purchases or net inflow into equity mutual fund in the financial year ’19-’20 was about INR 67,000 crores. So I was trying to — so the point I was making, that the flow as a percentage of the book, the book at the beginning of the year and the flow during the year, the flow was about 6.5% or 6.7%. That is the point I was making.

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Madhukar Ladha, HDFC Securities Limited, Research Division – Research Analyst [56]

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Right. But sir, on the other hand, wouldn’t it be important to look at gross outflow and then the gross inflow because if the outflows are higher from a back book perspective, then that could really impact our commission trails. Our commission trails would increase more. So maybe the 6% number might not really give us the best picture. And I believe churn has been quite high as well as when you look at the gross numbers.

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Milind Barve, HDFC Asset Management Company Limited – MD & Director [57]

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There’s nothing for me to believe that there’s a lesser churn. That is, in fact, as I was answering the question earlier, there are a lot of old investors who prefer to stay invested. Sometimes it’s a new investor if he experience, in the short period, he is not good, he tries to go out. So there is no particular data to show that a lot of old investors are going and then necessarily the gross flows are adding — coming into the book.

Theoretically, you’re right, you have to look at the gross flow. But on the net, it is — but it is material to know who is going out also. And it’s very difficult to make a very accurate prediction whether the guy who is going out is a high-commission guy or is a low-commission guy.

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Madhukar Ladha, HDFC Securities Limited, Research Division – Research Analyst [58]

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Understood, sir. Just a couple of other questions. One, our investment book is about INR 3,944 crores, right, on the balance sheet. So how — what portion of that is equity?

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Milind Barve, HDFC Asset Management Company Limited – MD & Director [59]

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Our equity is very — there is no real equity exposure. We have a very small exposure, which is the mandatory requirement to invest…

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Madhukar Ladha, HDFC Securities Limited, Research Division – Research Analyst [60]

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That’s sponsor commitments.

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Milind Barve, HDFC Asset Management Company Limited – MD & Director [61]

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That is the only thing that we invest in equity. And other than that, we have some very small amount in some AIFs — sorry, venture funds that in turn might have some equity and unlisted amount.

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Madhukar Ladha, HDFC Securities Limited, Research Division – Research Analyst [62]

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What is that total percentage, if you can give a total ballpark percentage number?

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Milind Barve, HDFC Asset Management Company Limited – MD & Director [63]

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In equity? It’s very small. Piyush, you want to mention how much in equity in our AUM?

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Piyush Surana, HDFC Asset Management Company Limited – CFO [64]

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It’s roughly around INR 100 crores to INR 125 crores, including the mandatory investments that Milind just talked about.

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Madhukar Ladha, HDFC Securities Limited, Research Division – Research Analyst [65]

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Okay. Got it. The — your tax rate is a little low. I’m guessing it’s partly to do with how this M2M is actually taxed. Can you give us…

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Piyush Surana, HDFC Asset Management Company Limited – CFO [66]

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No. Actually, it is also low because we keep investing in — and keeping our investments for 3 years before we kind of redeem.

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Madhukar Ladha, HDFC Securities Limited, Research Division – Research Analyst [67]

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Right. So they are taxed as long-term capital gains, that’s why.

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Piyush Surana, HDFC Asset Management Company Limited – CFO [68]

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Yes, yes, yes.

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Madhukar Ladha, HDFC Securities Limited, Research Division – Research Analyst [69]

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Okay. Okay. Great. And you mentioned — I think, Piyush, you mentioned that last quarter, there was the international mandate, I guess, some advisory fee coming from there. And that got deposited in last quarter. Isn’t — doesn’t that accrue every quarter? Or why is it there in December? And..

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Piyush Surana, HDFC Asset Management Company Limited – CFO [70]

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There are 2 components of these sort of mandates. One is the regular fee, which is usually quite marginal. And the performance fee, which is a larger chunk, when there is — when it meets performance parameters. So that’s what happened in December, and that’s why we had that uptick in December.

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Madhukar Ladha, HDFC Securities Limited, Research Division – Research Analyst [71]

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So that’s performance-fee-led. Okay. And finally, on — can you talk a little bit about what cost levers do you have going into FY’21? I think we’ve done really well on the cost side. What additional can we do? And given that, we are going to face some pressure, have we sort of thought of some plan of how we could reduce costs further?

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Piyush Surana, HDFC Asset Management Company Limited – CFO [72]

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Madhukar, on costs — sorry, Milind.

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Milind Barve, HDFC Asset Management Company Limited – MD & Director [73]

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Yes, I’ll just mention briefly, and Piyush, you can add to it. I think what we will need to do that as — we will have to have a fairly hard look at all our discretionary cost items in our operating costs and to see how much we can save out of that. We believe that there is some spending that is done discretionary to auditors in holding events and things like that, which anyway now cannot be held. So we think that some of these discretionary expenses can be saved upon. We also will look at rationalizing employee cost, which, to some extent, we have done this year. As you can see that in spite of having higher, about 70, 80, new employees during the year, our employee cost has gone up in, if I’m not wrong, low single digit. Piyush, it is 4%, 4.5%?

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Piyush Surana, HDFC Asset Management Company Limited – CFO [74]

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Yes.

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Milind Barve, HDFC Asset Management Company Limited – MD & Director [75]

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Yes, 4%. So there is some bit of rationalization of employee cost, which is already underway. So we will use all these levers. And I think the new method of working that is evolving, although for a different reason, we hope that changes too for the better, that will lead to some savings in operating costs, which we foresee.

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Operator [76]

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The next question is from the line of Shubhranshu Mishra from BOB Capital Markets.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division – Analyst [77]

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This on the closing AUM, where we are split by around INR 50,000 crores. Is it entirely MTM? Or is that also from that of redemption? If one can get the breakup, it will be helpful.

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Milind Barve, HDFC Asset Management Company Limited – MD & Director [78]

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No, it would be fair to say that almost — most of it is the — I would say, almost entirely, if you say last quarter, there was a fair bit. I mean, see, the markets in the quarter fell by almost 30%. So — and within that, as I have mentioned earlier, there was a slightly bigger book, which is in much bigger mix than the industry on — in small-cap fund and mid-cap fund. We are the industry’s largest mid-cap. So obviously, in times like this, in the last 12 — sorry, last quarter, the mid-cap fund has fallen by 31%, and the small-cap has fallen by 38%. So therefore, the impact on the MTM on the book has been slightly more higher given the character of the composition of the equity.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division – Analyst [79]

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So INR 50,000 crores is MTM, not redemption, correct?

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Milind Barve, HDFC Asset Management Company Limited – MD & Director [80]

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Right.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division – Analyst [81]

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Okay. Sure. And also now we have almost INR 1,00,000 crores liquid fund, and I believe we are gaining more in the liquid, which is almost like the entire TER flows down to your PAT. So how do we look at the PBT going forward? We have been averaging that around 39, 40 bps of core PBT. Is it a fair assumption that it’ll remain in a similar range?

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Milind Barve, HDFC Asset Management Company Limited – MD & Director [82]

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I don’t — you’re talking about PBT…

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division – Analyst [83]

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PBT, because the liquid fund — my sense is that we will gain a little more in the liquid fund going forward as well. Is that a correct assumption?

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Milind Barve, HDFC Asset Management Company Limited – MD & Director [84]

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No. In liquid funds, we — which contributes about 6% or 7% of the total revenue, we will earn more because of the size of the liquid fund going up. But more importantly, we have to contend with or deal with the fact that there is a reasonably — a reasonable amount — degree of fall on the equity AUM book on which the margins are much higher than liquid funds.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division – Analyst [85]

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Okay. So how do we look at the core PBT in that case? Would it remain in the same range, around 39, 40 bps, or would fall slightly, 5 to 6 bps?

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Milind Barve, HDFC Asset Management Company Limited – MD & Director [86]

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I don’t think we can give any guidance on PBT number, to be honest, because given the fact that our business is fairly closely linked to the equity markets, in general, because of the fact, as, if you note, I mentioned earlier, that almost 75% last year of our revenue came from equity-oriented funds. So the level of equity markets, our level of equity, actively managed equity AUM, that becomes a primary driver to our revenues and consequently, on our profit before tax and after tax.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division – Analyst [87]

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And just one last question. How do you look at the dividend payout? Are we going to conserve cash for any unto — for any eventuality in FY ’21 if the payout ratio comes off than — for FY ’20? Is that correct?

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Milind Barve, HDFC Asset Management Company Limited – MD & Director [88]

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Yes. I think the directors considered the various options between the payout ratio. There was a need felt that it is important to be probably a little more conservative, increase the dividend. We have increased the dividend from INR 24 share to INR 28 per share, which is an increase. And in this environment, it is necessary to be a little bit more cautious and prudent rather than having a very high dividend payout, and conserve more cash.

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Operator [89]

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The next question is from the line of Nikhil from ICICI Prudential Life Insurance.

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Nikhil Joseph, [90]

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Just one clarification. Could you explain the other income for the quarter is negative, why? And we’ve not seen a negative other income for the past many quarters. Just if you could throw some more light on it.

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Milind Barve, HDFC Asset Management Company Limited – MD & Director [91]

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Piyush?

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Piyush Surana, HDFC Asset Management Company Limited – CFO [92]

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Yes. So the MTM on the NCDs that we talked about, there’s a note in it below that. So it was INR 25 crores as of the end of the third quarter. And now it’s — for the year-end, it’s INR 120 crores. So the residual amount of MTM, which has come in, has created that negative other income.

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Nikhil Joseph, [93]

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All right. Sure. Sure. And also, sir, on the equity AUM, is it possible to disclose how much has come after the — after, say, September 2018 on the current book, yes, AUM?

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Simal Kanuga, HDFC Asset Management Company Limited – Head of PMS Sales & New Initiatives and Chief IR Officer [94]

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I’m sorry, this is Simal. So you want the September ’18 AUM and you want the current AUM. That’s what you’re looking for?

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Nikhil Joseph, [95]

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No, sir. How much — so basically, after the TER regulation change, how much of the AUM sitting on the book right now would have incurred after that date?

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Simal Kanuga, HDFC Asset Management Company Limited – Head of PMS Sales & New Initiatives and Chief IR Officer [96]

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So basically you want a split in that fashion. In sense, we don’t give a split between what was the AUM before that and what is now because it can be — as it can have even got undergone a churn or something. But I will — if you look at the September 2018, our equity AUM, I’ll just give it to you. September ’18, it was — yes, it is INR 1,47,000 crores.

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Operator [97]

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We will be able to take one last question. We take the last question from the line of Piran Engineer from Motilal Oswal Financial Services.

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Piran Engineer, Motilal Oswal Securities Limited, Research Division – Research Analyst [98]

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I have a couple of questions all around distributor and commissions, and one of which is a follow-up to Parag’s question. So when the TER goes down because you all have entered the higher slab, then do you all take the full hit? Or when do you all pass it down to the distributor? Because on the other case, you said that you retain all the benefits when you go in the lower slab, so what — when you go in the upper slab.

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Milind Barve, HDFC Asset Management Company Limited – MD & Director [99]

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No, no. See, when you go into the upper slide, also the distributor commission remains the same. So the distributor commission, as you may be aware, is a certain basis points on the AUM. So when suppose I have a — suppose I’m a distributor and I have INR 100 crores AUM with us. Now when that — and let us say, I’m paying certain basis points, X basis points. If that 100 becomes 110 in that product, you’ll also get a 10% increase in the revenue because of the increase in the AUM, but the basis point doesn’t change. So for example, if the TER goes up because of a fall, it will optically appear as there is an increment in the margin. But — however, similarly, when the AUM goes up, the TER comes down, but we don’t reduce his commission. His commission remains the same.

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Piran Engineer, Motilal Oswal Securities Limited, Research Division – Research Analyst [100]

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So then how often are broker commissions renegotiated? Is it an annual sort of process or is it done when required? How does it work to you?

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Milind Barve, HDFC Asset Management Company Limited – MD & Director [101]

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No, we don’t renegotiate. It is not something that we have a time frame for renegotiating. We don’t renegotiate it at all, if you ask me. I don’t think there is a system that we talk every quarter of every year. No, there is no resetting of commission. Once — will they — see, usually, the commission and the basis point of the commission is triggered by some event, if it is regulatory or if it is something that has changed — materially changed the landscape of commissions and margins. For small, small events, we don’t keep going back to renegotiating either upward or downward based on AUM movements, at all. There is no time frame at all there.

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Piran Engineer, Motilal Oswal Securities Limited, Research Division – Research Analyst [102]

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Sir, then to one of the other questions, I think Madhukar’s question, you said that the impact on — of commissions on incremental flows is higher, but it depends on which customer is going out. So…

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Milind Barve, HDFC Asset Management Company Limited – MD & Director [103]

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Absolutely.

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Piran Engineer, Motilal Oswal Securities Limited, Research Division – Research Analyst [104]

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So for the same customer, for the same distributor sales scheme, et cetera. If, say, NJ Invest sold your HDFC Top 100 to a customer in 2010 and the same thing, say, to another customer in 2012. Could you be paying in different commission rates for those 2 different timeline?

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Milind Barve, HDFC Asset Management Company Limited – MD & Director [105]

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Yes. Yes. Absolutely. Yes.

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Piran Engineer, Motilal Oswal Securities Limited, Research Division – Research Analyst [106]

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So it’s not harmonized at all?

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Milind Barve, HDFC Asset Management Company Limited – MD & Director [107]

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It is not harmonized because whatever was applicable and committed to him in 2010 will continue to be paid on the 2010 asset. And whatever has been committed to him to be paid in 2019 will continue to be paid as long as that asset remains. So actually, the way our registrars and [CAN] and that is the method in the industry itself, the commission amount is tied to an individual transaction. So it is not given on distributor. Within a distributor, there could be different prices for different buckets of transactions given to us over different periods of time in different products.

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Piran Engineer, Motilal Oswal Securities Limited, Research Division – Research Analyst [108]

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Fair enough. Okay. And sir, just if you can give me a ballpark figure, what is the maximum different — paid to different set of customers for the same product? So let’s say, okay, the HDFC Top 100 scheme is distributed by distributor A and distributor Z, what could be the maximum variance in commission?

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Simal Kanuga, HDFC Asset Management Company Limited – Head of PMS Sales & New Initiatives and Chief IR Officer [109]

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Piran, we don’t disclose that here.

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Piran Engineer, Motilal Oswal Securities Limited, Research Division – Research Analyst [110]

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Okay. Okay. Fair. And just lastly, what percentage of your equity is distributed by individual RIAs? And is that going to be impacted by this new regulation or proposed regulation?

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Simal Kanuga, HDFC Asset Management Company Limited – Head of PMS Sales & New Initiatives and Chief IR Officer [111]

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So Piran, if you can, we have a pie on the — on our presentation, which says that if you look at IFAs, and now they are called MFDs that is around 40% of our total equity business.

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Operator [112]

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Thank you very much. We’ll take that as the last question. I would now like to hand the conference back to Mr. Jaideep Goswami for closing comments.

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Jaideep Goswami, ICICI Securities Limited – Head of Institutional Equities [113]

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Thank you. I take this opportunity to sincerely thank Milind and the entire top management team of HDFC AMC to take time out and address all the questions patiently.

Milind, any final thoughts from you before we close?

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Milind Barve, HDFC Asset Management Company Limited – MD & Director [114]

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No, I think there are a couple of questions, and I think we would stay with what we have presented in our presentation pack, and the answers we have given to the various questions. We would like to thank all the people who asked questions. We would like to thank all the people who are on the call, and thank you to ICICI for hosting us. And once again, on my personal behalf and on behalf of all of my team, hope that everybody stays safe and healthy. Thank you.

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Jaideep Goswami, ICICI Securities Limited – Head of Institutional Equities [115]

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Thank you.

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Operator [116]

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Thank you very much. On behalf of ICICI Securities, that concludes this conference. Thank you for joining us, ladies and gentlemen. You may now disconnect your lines.