HDFC Asset Management higher yields and SMID recovery underpin earnings outlook

Investment View and Valuation

Prabhudas Lilladher retained its BUY rating on HDFC Asset Management Company following the July 16, 2026 Q1 FY27 result update and raised its target price by 0.7% to Rs 3,040. The broker considered the quarter good, with a core-income beat driven by a stronger blended mutual-fund yield.

The valuation is based on a 36x multiple applied to March 2028 core EPS. Near-term triggers identified by the broker include a broader-market rally, which could improve small- and mid-cap returns, and the SBIFM listing.

Q1 FY27 Financial Performance

HDFC Asset Management reported revenue of Rs 10,985 million in Q1 FY27, up 13.5% year on year and 4.7% above Prabhudas Lilladher's estimate of Rs 10,496 million. Mutual-fund yield was 47.0 basis points, compared with the estimate of 44.9 basis points, and increased 1.7 basis points quarter on quarter.

Operating expenses were higher than expected, principally because of higher other operating expenses. Other income was also above estimate, while the Q1 FY27 tax rate was lower than the broker's expectation.

Assets Under Management and Flows

Quarterly average assets under management were Rs 9.35 trillion, up 0.7% quarter on quarter and 12.9% year on year. Equity plus balanced QAAuM of Rs 5.77 trillion was in line with expectations.

The share of equity and ETF assets increased by 38 basis points and 8 basis points quarter on quarter, respectively, while the debt share declined by 118 basis points. SIP flow fell 1.4% quarter on quarter to Rs 48.1 billion, although this compared favourably with the 4.5% decline reported for ICICI AMC.

Management Commentary and Operating Outlook

Management aims to maintain the operating margin in the 33-35 basis-point range. Management commentary and the quarterly yield movement indicate that most of the impact from the TER change has been passed on to distributors.

HDFC Asset Management's one-year equity performance has weakened slightly, but its three-year performance remains among the best, supporting net flows. Its market share in net equity flows was among the highest at 14.6% in FY26 and 12.6% in Q1 FY27. The company has approval to launch its first SIF offering, HSIF Equity Ex-Top 100 long-short, in the near term.

Costs and Key Negative Factors

The key negative in the quarter was cost. Other operating expenses rose 24.5% quarter on quarter, driven largely by chunky CSR expenditure and technology costs. Employee cost was also above the broker's estimate.

Prabhudas Lilladher expects ESOP costs of Rs 790-800 million in FY27, Rs 630 million in FY28, Rs 410 million in FY29 and Rs 110 million in FY30. Despite the near-term cost pressure, the broker expects cost-to-AuM to decline, modelling opex-to-AuM of 9 basis points in FY28E versus 10 basis points in FY26.

Earnings Estimate Revisions

Following the result, the broker raised FY27E and FY28E revenue estimates by 0.1%, raised opex estimates by 1.3% and 1.1%, respectively, and reduced core EPS estimates by 0.2% and 0.1%, respectively.