HDFC will keep its stake above 50% in HDFC MF, says MD Milind Barve

At least 60-80 per cent of the new branches we are opening are in the smaller towns, says Barve

Just ahead of HDFC Mutual Fund's Rs 28-billion initial public offer (IPO), Milind Barve, managing director of the fund house, talks to Jash Kriplani. Edited excerpts: 

Your reading of the MF industry's growth in recent years?

We have seen retail (from individuals) participation increase with the rise of equity inflow. In FY14, the equity segment saw net outflow of Rs 140 billion. In FY18, the industry collected Rs 2.6 trillion in equity-oriented funds. A dramatic change has happened in the way flows have moved from household savings. For many of us who have been around for some time, an earlier inflow of Rs 150 billion was considered a good year. Now, if we get a similar amount in a month, people ask us what has gone wrong.

This IPO is coming at a time when the broader markets have been weak.

Despite all the growth, industry assets to GDP (gross domestic product) are still only 11 per cent. The world average is 61 per cent. In Britain, it is 57 per cent, America's is 101 per cent and Japan's is 30 per cent. The growth we have seen is likely to remain structural, not cyclical.

Earlier reports suggested HDFC MF was looking for a valuation of Rs 300 billion. At the issue price, the fund house will be valued at Rs 233 billion.

We wanted to price it attractively, to ensure value is left for investors that will participate in the public issue. HDFC, as a group, has a track record of creating shareholders' wealth and that was one of the key factors that informed our pricing.

HDFC is diluting four per cent in the IPO. Will there be further dilution?

HDFC is reducing its stake from 57.3 per cent to 53.2 per cent. Standard Life is bringing down its stake from 38.2 per cent to 30.2 per cent. As far as HDFC is concerned, it remains committed to keeping its stake at the threshold of 50 per cent.

The industry has struggled to retain top talent. How has HDFC MF managed to do that?

We are mindful that an AMC (asset management company) is a people's business. We have to always create the right balance between empowering people and supporting them. We need to give professional freedom within boundaries of risk. We also need to reward talent in a fair way. This is where we feel ESOPs (employee stock option plans) are an important tool. By giving stock options, you reward people for the value we collectively create as a company. All of us are rewarded on the same value. ESOPs are very much part of the culture at the HDFC group. We also spend an enormous amount of time before hiring anyone, especially from another organisation.

How has HDFC MF managed to differentiate itself?

We have a clear focus on retail investors. The industry has roughly 50 per cent of AUM (assets under management) coming from retail. The share of retail in our AUM is 62 per cent. We have the largest retail market share at 15.7 per cent. Also, our product mix is of superior quality, with equity assets accounting for over half of our assets, as against the industry average of 42 per cent.

How do you plan to tap into smaller geographies?

At least 60-80 per cent of the new branches we are opening are in the smaller towns. Only 20-25 per cent of new branches are being opened in towns where we already have a presence. Our focus on B-30 (beyond the top 30) centres will be through the branch network and through the distribution network. If HDFC Bank has a presence in those regions, we will leverage that.

For a cash-rich business like yours, how do you maintain capital efficiency?

In the past 18 years, we have hardly added any capital. When we started the company in 2000, we had a capital of just Rs 200 million. In 2003, when we completed the acquisition of Zurich AMC, we ended up with a capital of Rs 1.08 billion. And recently, when we did a private placement, we added Rs 1.5 billion to our capital. The reason for our high return on equity (ROE) is our low levels of capital. We have had a liberal dividend payout policy, which also helps in maintaining low levels of capital. In the past five years, we have paid Rs 10.6 billion in dividends.