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finance | IST

Here's the full text of HDFC chairman Deepak Parekh's speech on AMC IPO

HDFC Asset Management Company(AMC), the subsidiary of Housing Development Finance Corporation, has decided to launch its initial public offer(IPO) on July 25.
The company is aiming to raise Rs 2,800 crore through the public issue and the price band is fixed at Rs 1,095 to Rs 1,100 per share.
This will be the 5th listing within the HDFC group, said Deepak Parekh, chairman of HDFC, adding that this was the right time to list the AMC.
Here is the full text of HDFC chairman Deepak Parekh's statement:
Thank you all for being here today. With the launch of HDFC Asset Management Company’s IPO, we are now set to have our 5th listing within the HDFC group of companies. We have always believed that listing best reflects the value we have created in our key subsidiary and associate companies over the years. As I have always said, creating long-term value requires patience. HDFC, along with Standard Life Investments has nurtured HDFC AMC for 18 long years and based on the way we envisage India’s future, we thought the time was apt to list the AMC.
I don’t want to get into too many specifics on the IPO, which will be covered separately. But what I do want to do is highlight a few key structural changes in the Indian economy, which essentially reflects our optimism on the future of India.
Consensus estimates place India’s GDP growth over the next two years between 7 to 7.5%. With a GDP of US$ 2.6 trillion, India now ranks as the sixth largest economy in the world. Going forward, India’s ranking will most probably get pushed upwards given that the country demonstrates the potential to remain amongst the fastest growing major economies. This is against the backdrop of global GDP growth that is expected to remain under 4%.
This is not to imply that India is not facing its share of headwinds. The reason why India has been able to stay in acceleration mode is due to the fact that India is a domestic, consumption driven economy and it is this engine of growth that largely insulates India in times of global uncertainty.
At the start of calendar year 2018, India’s macros looked in good shape, but six months down the line, there are some significant changes in the global environment. And the unfortunate part is that the deterioration in some of the macros in India is largely an outcome of circumstances beyond India’s control.
Emerging markets, including India have borne the brunt on account of 3 key factors –
  1. Strengthening US dollar;
  2. Rising interest rates in the US, which has been aggravated by tightening dollar liquidity; and
  3. Rising oil prices.
  4. So if one looks at the year to date depreciation of emerging market currencies against the US dollar, the Indian Rupee’s depreciation of 7% is slightly higher compared to its Asian peers. Yet, India stands out well when placed against countries like South Africa, Brazil, Turkey, Argentina, amongst several others that have bled with currency depreciations ranging between 12 to 30%. Many believe that the Indian Rupee is still overvalued. It is important to reiterate that the Indian currency depreciation is not worrisome, especially with forex reserves at over US$ 405 billion. India’s forex reserves have reduced from its peak of US$ 420 billion, partly due to revaluation of reserves, as a large part the reserves are held in US dollars and partly due to the RBI supporting the rupee to stem volatility. So there is some uncertainty, but India is nowhere near the precarious position it was in 2013.
    Asian markets have seen an outflow by foreign portfolio investors to the tune of US$ 19 billion in the first half of the calendar year.  In India, overseas investors had pulled out a net amount of  Rs. 33,000 crore in the first six months of 2018, of which 86% were from debt markets.  However, the support to the markets came from domestic institutional investors who had pumped in a net amount of Rs 63,000 crore in the capital markets till June 2018. A large part of the depth from DIIs is on account of the rapid increase in assets under management of mutual funds which currently stands at over Rs. 23 lakh crore. When the domestic capital markets deepen, the impact from the volatility of foreign portfolio investors lessens considerably. Thus, the best way India can insulate itself from the vagaries of global portfolio flows is to increase domestic investment.
    The increase in the assets under management of mutual funds has taken time to grow. It has entailed an intensive two decades of efforts towards educating investors. No doubt, the shot in the arm came about post demonetisation. Markets were doing exceptionally well and interest rates on bank deposits had come down sharply. Mutual funds became the vehicle for the common man to invest his or her funds and systematic investment plans became the preferred choice.
    As at March 31, 2018, at an industry level, 51% of assets under management of mutual funds comprised retail investors and the number of individual portfolios stood in excess of 70 million. The strong thrust to deepen the geographic reach of mutual funds by reaching out to smaller towns and cities is also bearing fruit.
    So when one is asked whether the tempo of mutual fund growth will sustain, one needs to look at some basic parameters. For instance, take assets under management of mutual funds as a percentage of GDP. In India, AUMs of mutual funds as a percentage of GDP is just 11%, while the world average is 62%. In the US, this ratio is 101%, 57% in UK and 30% in Japan.  
    When one looks at equity assets under management as a percentage of market capitalisation in India, the ratio is only 4%, while in the US it is 42% and in UK it is 27%. 
    So clearly, the scope to grow in India is immense. What gives rise to optimism on mutual fund growth is that India is already seeing a gradual shift in household savings with a reducing dominance of physical savings and a growing share of financial savings. 
    Often the behaviour of markets is difficult to comprehend, even for experts. Therefore, the manner in which mutual funds are sold to the common man is extremely important. It is vital that investors understand that there are unavoidable risks. Being invested in capital markets requires a long-term horizon.
    Last Thursday, the Sensex and Nifty scaled an all-time new high, yet this rise was not broad-based, but concentrated in a few key stocks. So while India is still amongst the best performing major markets in Asia, there has been some decoupling on sectoral indices and gains have been a bit lopsided.
    Markets are expected to be skittish in the near term. 
    • Factors affecting market sentiment include how fast the Fed actions on further rate increases in the US and whether trade related tensions escalate further;
    • Back home, markets are looking for a re-rating in India’s corporate earnings;
    • Inflation concerns have increased with the WPI at a four and a half year high at 5.8% and retail inflation at 5%. For the first time since the RBI initiated inflation targeting, inflation rates could inch beyond RBI’s stated comfort levels.
    • Markets will closely watch oil price movements and this is more sensitive for India given that we import 80% of our crude oil requirements. Recently, Brent crude oil prices have eased to ~ US$ 74 per barrel, but we do have to remember that it had touched US$ 80 per barrel in May this year. Every US$ 10 per barrel increase in crude oil prices reduces India’s GDP growth by 0.3%, increases inflation by 1.7% and widens the current account deficit by US$ 10 billion.
    • In a pre-election year, markets will also closely track government policies and will accord a premium to credible policies.
    • Yet, despite the uncertainties, India has seen its largest number of IPOs. In the first half of 2018, 90 companies went public, raising US$ 4 billion. This is a good sign of strong investor confidence, even though investors will be more discerning in such markets.
    • HDFC Asset Management Company Limited has been:
      • The preferred investment vehicle for 8 million retail investors,
      • For a decade it has ranked amongst the top 2 AMCs in terms of total assets under management,
      • It has the highest market share in equity-oriented mutual fund schemes, and
      • It has successfully leveraged and built a strong relationship with over 65,000 empanelled distribution partners who are the backbone of the mutual fund.
      • The years ahead for the mutual fund industry are promising with greater financialisation of savings, rising incomes of the Indian middle-class and increased Indian aspirations for a better future. HDFC AMC looks forward to the journey of deepening the penetration of mutual funds in India and setting new market benchmarks.