UTI, HDFC & ICICI may post over Rs 100-cr profits in FY08

UTI, HDFC & ICICI may post over Rs 100-cr profits in FY08
15 Feb, 2008, 0051 hrs IST,Muthukumar K, TNN

In early 2003, when HDFC Mutual paid Rs 140 crore to buy out Zurich MF’s entire Indian assets for roughly Rs 3,200 crore, it raised eyebrows and even smirks within industry circles. After all, HDFC MF was buying a firm with predominantly equity assets at the time when the stock market was in the doldrums.

Looking back after the multi-year bull run that began in 2003, there could not have been a better bargain. “Timing couldn’t have been more appropriate. And it was a strategic call to acquire top performing equity assets since HDFC at that point in time was established on the fixed income side,” reminiscences HDFC MF managing director Milind Barve.

It’s been five years since the acquisition and the equity market has been on a roll, rising nearly six times. And thanks to the growth of equity assets, the profits of top asset management companies (AMCs) have also been soaring.

Last year, the MF industry grew its assets by 60% and if the numbers are any indication, this year too, it will grow at the same pace. For the first 10 months of the financial year 2008, the average assets of mutual funds were Rs 4,74,297 crore, a 58% growth year-on-year. During the same period, assets of Reliance MF grew 125% (133% last year), HDFC 57% (54%), ICICI Pru 62% (63%) and SBI 61% (65%).

As per industry sources, the top three profitable fund houses are likely to finish FY08 with profits in excess of Rs 100 crore. Last year, it was only UTI that managed to earn around Rs 143 crore in profits. But this year, HDFC and ICICI Pru could be the new entrants to that elite club. As per industry sources, for the nine months ended December 2007, HDFC AMC earned a PAT of Rs 86 crore, ICICI Rs 75 crore and Reliance Rs 55 crore. During the last financial year, UTI earned Rs 143 crore while HDFC earned Rs 67 crore, Reliance 51 crore and ICICI Pru Rs 48 crore.

Could this portend bumper profits for the entire MF industry? Experts believe so if the threshold level of Rs 10,000 crore of total assets is crossed. Boston Consulting Group India partner and director Alpesh Shah says, “Typically, the break-even point for an AMC is around Rs 10,000 crore of assets and after that the profitability grows.” Out of 32 mutual fund houses in the country, 18 were having assets in excess of Rs 10,000 crore. Mr Shah adds though that over the past 5-7 years, the break-even point has doubled, thanks to rising salaries and distribution costs.

The latter half of the current financial year is crucial for the MF industry. Equity markets have corrected sharply and the abolition of entry loads by Sebi has pushed up marketing expenses for asset management companies. SBI MF MD Syed Shahabuddin says, “Previously, the marketing expenses of a NFO used to be paid from the entry load. Now, it has to be paid from the pockets of asset management companies.” Typically, fund houses now have to forecast the NFO collections and accordingly work out the marketing expenses.

“Any wrong judgement could mean a direct hit on profitability,” he says. Some of the asset management companies are also trying their luck to convince their auditors to amortise these expenses, adds a CEO. It has been nearly 15 years since the industry has been privatised and past five years have been the best. New players like AIG, AXA, Fidelity, Lotus have entered this industry. Many exited too. Zurich Alliance, Pioneer, Dundee were among them. Once considered to be a fringe business, AMCs have come of age in India, with some of them in the process of going public.