Deepak Parekh, Chairman, HDFC, and Milind Barve, Managing Director, HDFC Asset Management Company, in an exclusive interview with Zee Business's Anurag Shah, informed about the idea of the launch of the initial public offer (IPO) of HDFC AMC and the reason for valuation of the shares.
Country's second-largest mutual fund firm by assets HDFC Asset Management Company (AMC) will launch its initial public offer IPO on July 25 at a price band of Rs 1,095 to 11,00 per share. The IPO will open for subscription by anchor investors on July 24, 2018.
Q: The year has been volatile for the market and bullish for the financial sector especially the mutual fund industry. Can you let us know the reason that made you choose the year to go ahead with IPO launch? What is the thing that is boosting your confidence?
Deepak Parekh: Several things are there to boost the confidence. In addition, I feel it is a perfect time to launch it at least in absence of alternate investment opportunity and people are looking forward to investing their savings, which has gone up, due to an increase in disposable income and number of middle-class families.
Earlier, Gold was the preferred area of investment but no longer it is an option for investment because in last five years returns from the metal have gone down and have seen a growth of just 1 percent per year. This lack of returns on the investments has forced them to move away and look forward to other areas of investment. Currently, gold is being brought by the actual users.
Real estate was the second option to invest but the sector has also seen appreciation and the rental yields have come down. The returns in the sector have also gone down from 10 percent to 2 percent. Bank deposit rates have come down and post demonetisation, we saw the movement of money towards the mutual fund industry, which helped in establishing a mutual fund vehicle. Secondly, the mutual fund penetration in India stands at 13 percent, which is to low when compared to the global numbers that stand near 62 percent. Its penetration is China stands at 39 percent. Thus, there are scopes of growth in the Indian mutual fund industry.
Q: The valuation of the IPO is being termed to expensive. Can you let us know about the process that was adopted to decide the valuation? In addition, have you settled the issue related to pre-IPO placement and have returned the money that was collected from these advisers and distributors?
Milind Barve: Generally, IPO valuation is reached in two ways. In the first approach, we went ahead with roadshows, where we met both international and domestic investors and got feedback from them. Secondly, our merchant banks also advised on the issue of IPO valuation. But the final decision was taken by the board of the company. I think the valuation was decided after considering almost every factors. The valuation is quite less than it was reported in newspapers. It has been kept low to make it attractive for the investors, reasonable and conservative.
Now, let's talk about the private placement that we did with distributors and employees of our group and we were asked by the market regulator, SEBI, to return the money that was collected from them. On that front, we managed to transfer the shares that were allotted to the distributors to the KSK group, an entity that was interested in buying those shares.
Q: Sir, you were talking that the absence of investment opportunities has made people think about the mutual fund. Don't you feel that there is a risk in the market for the investor at least in the backdrop of the momentum of 2017 and volatility of the year?
Deepak Parekh: Risk factor always lies in the equity market. So people should have a long-term view while investing in the equity market and not of a year or two. Longer view helps in mitigating the risk and can provide an average return in 5 years. Equities are not fruitful for short term but can yield good returns in a long term.
Q: What is the risk in the short term in the time to come if we talk about the domestic market?
Milind Barve: In the case of India, the short term is out of its control at present due to crude prices and strengthening of the dollar. The first risk is related to crude prices, which is not controlled by India. Variation in its prices will have an impact on the short-term market of the country. The second risk is related to the strengthening of the value of the dollar, which has depreciated the value of the rupee by 7 percent in past 6 months. In addition, US interest rates, which is on a rise, is also a matter of concern for India.
Q: Do you think that the reduction of total expense ratio (TER) by SEBI will bring down the margins of the company?
Deepak Parekh: Actually, the total expense ratio (TER) reduction has been announced. The expense ratio in the open-ended equities was reduced by 15 basis points on June 1. In the case of close-ended funds, the TER was reduced by 20 basis points in the month of February. As a result of the announcements, the industry decided to reduce the distribution cost, which goes in form of a commission, in the close and open-ended fund by 20 basis points and 15 basis points respectively. So, it hardly has any impact on the margins.
Q: HDFC group is the second largest company in India with a 10 trillion market cap. Can you inform us about the future plans of the company at the group level and also about the succession plan? In addition, I would also like to ask about the companies that will be listed in near future?
Deepak Parekh: There are two companies that will be listed in near future and they are HDFC Agro and HDFC Credila. HDFC Agro is a non-life company, while Credila is an education loan company of HDFC. They will be listed after their assets are increased to a level where they can be listed. We believe that every company should be listed as it helps in making it transparent and inform investors about the value of the company.
All the five companies are aware that we are getting old and we have to find a replacement and work on the same is on. There will be a smooth transition, no need to worry.
(Transcribed by: Jitesh Kumar Jha)