HDFC Asset Management Company Ltd (HDFCAMC) Q4 FY23 Earnings Concall Transcript

HDFC Asset Management Company Ltd (NSE:HDFCAMC) Q4 FY23 Earnings Concall dated Apr. 25, 2023.

Corporate Participants:

Simal Kanuga — Chief Investor Relations Officer

Navneet Munot — Managing Director and Chief Executive Officer

Naozad Sirwalla — Chief Financial Officer

Analysts:

Swarnab Mukherjee — B&K Securities — Analyst

Kunal Thanvi — Banyan Tree Advisors — Analyst

Devesh Agarwal — IIFL Securities — Analyst

Fujan Shah — Consortium Advisors — Analyst

Lalit Deo — Equirus Securities — Analyst

Prayesh Jain — Motilal Oswal Financial Services — Analyst

Dipanjan Ghosh — Citigroup — Analyst

Srinath V. — Bellwether Capital — Analyst

Abhijit — Kotak Mahindra — Analyst

Sahej Mittal — HDFC Securities — Analyst

Atul Mehra — Motilal Oswal Asset Management — Analyst

Gaurav Jani — Prabhudas Lilladher — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to Q4 FY ’23 Earnings Conference Call of HDFC Asset Management Company Limited. [Operator Instructions] Please note that this conference is being recorded. From the management team, we have with us Mr. Navneet Munot, Managing Director; Mr. Naozad Sirwalla, Chief Financial Officer; and Mr. Simal Kanuga, Chief Investor Relations Officer.

I now hand the conference over to Mr. Simal Kanuga, who will give us a brief following which we will proceed with the Q&A session. Thank you, and over to you, sir.

Simal Kanuga — Chief Investor Relations Officer

Yeah. Thanks, Nirav, and good evening, everyone. Let me start with data on the industry. QA AUM for the quarter ended March 23 was INR40.5 trillion, a 6% growth on Y-o-Y basis. Our net flows during the year in equity-oriented funds added up to INR1,801 billion, of which INR1,618 billion was in actively managed equity-oriented fund and balance INR184 billion in equity-oriented index funds. So if one looks at net flows, index funds constituted approximately 10%. The number for gross flows, though, would be materially lower.

One more data point on actively managed equity-oriented funds, which might be of interest, is flows via NFOs. During the year, industry collected approximately INR342 billion via actively managed equity-oriented NFOs. That is nearly 21% of the net flows into actively managed equity-oriented funds during the year. The corresponding number for FY ’22 was INR748 billion, which was nearly 34% of the net flows into actively managed equity-oriented funds during the previous financial year. SIP flows continued their growth trajectory and came in at INR143 billion for the month of March of 2023 versus INR123 billion for March of 2022.

SIP flows for FY ’23 clocked INR1.56 trillion nearly 35% of industry’s gross active equity flows. Comparable number in FY ’22 was INR1.25 trillion and nearly 23% of industry’s gross equity close. In terms of QA AUM, actively managed equity-oriented funds stood at INR19.38 trillion, and equity-oriented index funds stood at INR0.52 trillion. Now let’s move to debt. During the year, debt funds, including debt index funds and debt ETF saw outflow of INR582 billion. If one eliminates flows into debt index funds and ETF, the number is much higher — outflow of INR1,569 billion.

Liquid fund QA AUM grew by 8% Y-o-Y, adding INR0.42 trillion. Net outflows in liquid funds during the year were to the tune of INR510 billion. Others, which include ETFs, arbitrage and FOF investing overseas, grew by 13% on a Y-o-Y basis. Industry recorded 37.7 million unique customers at the end of the fiscal year. Individual investors contribution came in at 58% of the monthly average AUM for March 2023, and folio count for individual investors increased to INR145 million from INR129 million a year ago.

We now move to us. We closed the quarter with quarterly average AUM of INR4,498 billion, a growth of 4% Y-o-Y. Our market share in quarterly average AUM was at 11.1%, and the same, excluding ETF, was at 12.5%. Our actively managed equity-oriented AUM market share based on quarterly average AUM is now at 12% and 11.9% on a closing basis. We have seen some uptick in recent past. Our market share of quarterly average debt AUM, including debt index fund, was at 13.3%. Quarterly average liquid fund AUM market share stood at 13.1%.

Our asset mix further shifted towards equity and it now accounts for 54.4% of our QA AUM relatively better than that of the industry. We recorded 6.6 million unique investors at the end of the quarter ended March of 2023. For the quarter, that is Jan to March of 2023 we processed 13.14 million systematic transactions totaling to INR50.4 billion compared to 12.02 million transactions totaling to INR45.2 billion in the quarter ended December 2022. It is important to look at quarterly data here as February is a shorter month and we tend to see some overflows from Feb to March. For March of ’23, we processed 4.53 million transactions, adding up to INR17.1 billion.

The number for March ’22 was INR12.3 billion. So this month, March of ’23, we did process systematic transactions in terms of value of INR17.1 billion. The comparable number for March of ’22 was INR12.3 billion. In continuation of our commitment to expand product portfolio, we launched two equity-oriented thematic to sectoral funds, one long duration debt fund, which saw healthy interest, especially in the end of March and a range of passive strategies, both across equity and fixed income side during the year that went by.

We announced first close of our HDFC AMC Select AIF FOF on March 31, with commitments adding up to INR400 crores. The number is definitely encouraging, especially in current market conditions. We’ll continue to raise further capital in this fund and have some healthy pipeline in place. Now we move to financials. We closed the quarter with profit after tax of INR3,761 million, a Y-o-Y growth of 9%. Total revenue grew by 10% to INR6,378 million, while operating revenue grew by 5%. We ended FY ’23 with profit after tax of INR14,239 million, a Y-o-Y growth of 2%. Total revenues grew by 2%, while the operating revenues also increased by 2% Y-o-Y.

On the employee cost front, it stood flat at INR3,127 million, as against INR3,122 million in the previous year. If we consider the number, excluding non-cash charge on account of ESOP [Phonetic], it stood at INR2,726 million as against INR2,489 million in the previous year, a Y-o-Y increase of 9.5%. In terms of other expenses, we have seen an increase of 18%, all in absolute terms, INR348 million. This can be principally attributed to expenses that we’ve incurred for our business promotion, travel, digital assets, IT infrastructure, amongst others.

Our operating profit margin as a basis point of AUM stood at 35 basis points for the year ended March 31, 2023, with operating revenue margin at 49 basis points. The Board earlier today has recommended a dividend of INR48 per share against INR42 per share, translating into a payout ratio of 72% as against 64% last year. This is, of course, subject to shareholders’ approval. We would like to highlight, and you might have seen in our exchange release that the Nomination and Remuneration Committee of the Board has approved an ESOP plan, whereby 1.05 million shares will be offered to eligible employees at closing price as of yesterday.

Thank you very much for patient hearing. Navneet, Naozad and I are very much available for questions from here on. So Nirav, if you can kind of start building on the question queue, please.

Questions and Answers:

Operator

Thank you very much. [Operator Instructions] The first question is from the line of Swarnab Mukherjee from B&K Securities. Please go ahead.

Swarnab Mukherjee — B&K Securities — Analyst

Thank you for the opportunity, sir. I have three questions. First, on the yield for the quarter, so the yield has gone down slightly on a sequencing [Technical Issues].

Operator

Swarnab sorry to interrupt you. May I request you to speak through the handset, please?

Swarnab Mukherjee — B&K Securities — Analyst

Yes. Is this better now?

Operator

Yeah, slightly better.

Swarnab Mukherjee — B&K Securities — Analyst

Yeah. So sir, my first question is regarding the yield. So for the first 9 months, we were around 50 basis points plus in terms of the yield. And this time we see a slight compression in there. So just wanted to understand this be entirely a function of product mix or any kind of impact of the debt mutual fund related taxes and change that has happened or anything else to read into this or maybe something like more incremental flows in the balance advantage fund and whether there could be any impact of that? That is the first question.

In terms of the trade receivables, so the trade receivable numbers have remained around INR80 crores in first half and also now the balance sheet that has been released. This number was about half of — close to half of that in the previous year. So how — what should I read into this? Why has this number increased? And thirdly, related to the ESOP plan that you have mentioned, sir, if you could give some guidance on what could be the charge on P&L over the next couple of years?

Navneet Munot — Managing Director and Chief Executive Officer

The first question on the — this quarter’s margin. So firstly, this quarter was 90 days as against 92 days for the December quarter. So revenue per day of December quarter was INR6.08 crores so two less days this quarter would mean a loss in revenue of a little over INR12 crores. And we have had some year-end adjustments siding for unabsorbed cost of B30, which was debited during the quarter at fund level. I think this explains the difference broadly. And as you rightly mentioned, I mean, we also maybe, I mean, the product mix, etc. But largely, this explains.

Swarnab Mukherjee — B&K Securities — Analyst

Sir, if I could follow up on that [Indecipherable] costs, sir, if you could give a little bit more color on that when you get to the B30 that you mentioned.

Navneet Munot — Managing Director and Chief Executive Officer

Sorry, you’re talking about the cost or margin?

Swarnab Mukherjee — B&K Securities — Analyst

So in the margins, you said there is some impact from the B30 related assets, right? If you could just highlight on that.

Navneet Munot — Managing Director and Chief Executive Officer

This is 1 basis point, right, overall.

Swarnab Mukherjee — B&K Securities — Analyst

So just wanted to understand whether?

Naozad Sirwalla — Chief Financial Officer

Swarnab, it’s an accounting thing. So basically, whatever we have spent on B30 that needs to be absorbed within the year. So whatever kind of some bit of a year-end adjustment. And over and above that, the INR12 crores that Navneet mentioned kind of takes care of the — of your question, I think.

Swarnab Mukherjee — B&K Securities — Analyst

Okay, got it. So fair to assume that next year, stabilizing, we can really go back to what we were seeing in the first 9 months?

Naozad Sirwalla — Chief Financial Officer

Yeah. I think guidance is something that we have stayed away from. So don’t want to make any guess on what exactly the next year would look like. Having said that, maybe Navneet, you would want to expand on.

Navneet Munot — Managing Director and Chief Executive Officer

On the overall margin side, we have discussed in past and the commission we pay on the book is lower than the commission on flows. So new flows will result in some level of dilution. And then the base of dilution was like quite rapid in the financial year of March ’22 because the gross flows as a percentage of beginning of the year, AUM was 55% approx. And in the current year, the same is somewhere in early 20s. It also depends on the AUM of individual strategy. So growth in AUM also leads to some level of dilution. But finally, the way I look at it is growth in AUM and changes in asset mix over a period of time will determine profits of our business. And that is our focus area.

Swarnab Mukherjee — B&K Securities — Analyst

Okay, sir, got it, got it. If you could also [Indecipherable] related to the trade receivables and ESOP costs.

Simal Kanuga — Chief Investor Relations Officer

Yeah, I’ll take that. So trade receivables, there is just a change in the periodicity of payment because the payment cycle from the mutual fund — the fees we receive in the AMC. So this gets paid immediately after the month end. So there is no — that was a onetime change to sort of continue now going forward. But that’s — it’s absolutely [Indecipherable] receive that money, so that’s not an issue. On your question on costing for the new stock options so based on the Black-Sholes Model, the estimated cost that is a noncash charge, which will be debited to the P&L account over the next three years due to this new ESOP program would be around between INR55 crores to INR60 crores.

Of this INR55 crores to INR60 crores, approximately 55% would be accounted for in this financial year, 30% — around 30% in the following financial year, and the balance will be the year thereafter. Over and above this, we will have a debit of around INR18 crores from the existing ESOPs already issued, which are going through our P&L. I hope that answers the question.

Swarnab Mukherjee — B&K Securities — Analyst

Very clear, sir. Thank you very much. That’s all from my side.

Operator

Thank you. The next question is from the line of Kunal Thanvi from Banyan Tree Advisors. Please go ahead.

Kunal Thanvi — Banyan Tree Advisors — Analyst

Yeah, hi, thank you for the opportunity. So I had two questions. One was on SEBI Chairman recently did a press conference, and they kind of gave out a thought process of the regulatory in terms of TER and the basic understanding is that we want to — the regulator wants to move from, say, scheme-based TER to asset class based TER. So wanted to understand your thoughts on the same, how does it impact AMC and specifically large AMCs which have got very high equity book to start with and we being in the top three. So that was my first question.

Navneet Munot — Managing Director and Chief Executive Officer

So Kunal, firstly, regulator has, of course, laid down their thought process. Having said that, through industry forum, we are engaged and looking at all implications. We, as an organization, have decided to put on our thinking hats once the regulations are formally out. SEBI Chairperson did give an overview of their thought process in the post-SEBI Board meeting press conference that you would have heard, she did mention that they will do the necessary in consultation with the industry. I’m sure you will agree that SEBI’s overarching objective is investor protection and market regulations, coupled with market development. So I would say regulations are a given. As an organization, we need to make it sure that we do what is fair for our stakeholders.

Kunal Thanvi — Banyan Tree Advisors — Analyst

Sure, sure. So basically, like when — if at all, that regulation must come in, then that is the time when we will try to think how the things will go. Because the reason I ask this question is from a value chain perspective, how does the thing — everything flows if those kind of regulations were to come up? Because it in a way disrupt the entire value chain, right?

Navneet Munot — Managing Director and Chief Executive Officer

So now there is I think beyond what I’ve already stated that I can expand on at this point in time. And I hope you appreciate the same.

Kunal Thanvi — Banyan Tree Advisors — Analyst

Sure. Makes sense. The second question was on the LTCG introduction for the long-term debt mutual funds. Can you help us understand how does that impact the industry and HDFC AMC, and what was our exposure to specific three-year and above that point?

Navneet Munot — Managing Director and Chief Executive Officer

Yeah. So the finance [Indecipherable] has proposed an amendment in the tax laws effective April 1, ’23, whereby investments and specify debt mutual funds where equity exposure is not more than 35% of total caucus in domestic equity shares that will be treated as short-term capital asset. And the proposed amendment will have the impact of one fresh investments made on or after April 1, ’23 will not get benefit of cost indexation and concessional long-term capital gain tax rates. Gains will be treated as short-term capital gains by default and tax at the flat rate irrespective of the holding period.

There will be no impact on investments that have been made up to March 31, ’23. As much as we would have liked the tax advantage to continue, given the policymakers view on the development of the debt market, particularly the corporate bond market. Debt mutual fund still do have some inherent benefits, which, in my opinion, will continue to make them a preferred alternative. One that tax gets triggered only on redemption in case of debt mutual funds. Second, I mean, there’s no prepayment penalty or liquidity-related challenges. I think debt funds offer good liquidity.

Thirdly, the flexibility in terms of power redemption moving across rate or credit curve, I think transparency on all of that and also the flexibility that you get off the debt funds. And a diversified portfolio of securities with outstanding long-term track record at the industry level. So for all the news of securities going back, the total equivalent of NPA from the debt MF industry has been negligible. So we still think that there is scope for growth. But I must repeat what I said earlier that as an industry, we would have liked the tax advantage to continue because I think we were contributing and we have tremendous potential to contribute to the development of the debt market, particularly the corporate bond market.

Kunal Thanvi — Banyan Tree Advisors — Analyst

Sure, sure. And in terms of the share of corporate and retail in the three years and above, what would be that mix for the industry or for us if you can share that?

Naozad Sirwalla — Chief Financial Officer

So Kunal, there is no number, which basically is like in that form, right? So we do have in our presentation the breakup between the corporate and retail investors or individual investors as we put them across. But I think there are lots of corporates who stay along. There are lots of individuals who might use it for a shorter period. And like we do have corporates who do tend to stay for very long, even in ultra-short and those kind of funds.

Kunal Thanvi — Banyan Tree Advisors — Analyst

Sure. I understand. Thank you so much. I’ll get back in the queue. All the very best.

Naozad Sirwalla — Chief Financial Officer

Thanks Kunal.

Operator

Thank you. The next question is from the line of Devesh Agarwal from IIFL Securities. Please go ahead.

Devesh Agarwal — IIFL Securities — Analyst

Thank you, sir for the opportunity. Sir, firstly, I wanted to ask, although we are seeing a good market share gains on the equity side as well as on the SIP side, but somewhere they are getting offset by the loss in the market share on the debt segment. So can you give me some sense as to why are we losing market share on the debt side? What are the challenges for us out there?

Navneet Munot — Managing Director and Chief Executive Officer

So our market share in debt on QA AUM business for March ’23 stood at 13.3%. If we look at market share, excluding debt index funds, this will stand at 14.6% or so. I must mention we were a little late to launch debt index funds as we were waiting for some clarity in regulation and got off the ground once that was clear. So the delay in launching debt index funds did hurt us though we were able to catch up to an extent. Other than debt index funds in most of the other categories, market share would have been stable to better.

Devesh Agarwal — IIFL Securities — Analyst

Understood. Okay. And sir, on a full year basis, could you share the AMC yields and the gross tiers for the three key asset classes that is equity, debt and liquid.

Simal Kanuga — Chief Investor Relations Officer

I don’t know that he just want for equity debt and — 70 basis Devesh is on equity side. 7 odd basis on debt and around 12, 13 basis on liquid.

Devesh Agarwal — IIFL Securities — Analyst

Sorry, I missed for debt.

Simal Kanuga — Chief Investor Relations Officer

27 basis.

Devesh Agarwal — IIFL Securities — Analyst

Right. And Simal, what would be the TR numbers for the same segments.

Simal Kanuga — Chief Investor Relations Officer

I don’t have TER available. I’ll give it to you. We’ll send it across to you.

Devesh Agarwal — IIFL Securities — Analyst

Sure, sure. And lastly, if we see the opex for FY ’23, that’s roughly 14 basis points. So do you see there is any scope for any improvement on the cost side, especially given that now again on the ESOP expense, there will be some almost INR25 crores, INR30 crores hit for FY ’24? So still — but the growth that we saw in other expenses in FY ’23, do you think those would be continued or there would be some moderation in that. And on an overall basis this 14 basis points can come down to 13 basis point or something?

Simal Kanuga — Chief Investor Relations Officer

Devesh, I think Naozad will expand on this, but just one point here. There will be no incremental 25 basis point because if — what Naozad mentioned, right, the total cost is 50-odd of that first year would be, whatever, 55-odd percent and then what we have from the previous one. But in the current year, that March of ’23, we had a noncash expenditure of INR40 crores anyway hitting the book. So the delta would be much lower than the number that you are mentioning. But Naozad can further expand on cost.

Naozad Sirwalla — Chief Financial Officer

So I think if we go through the cost, Devesh, on the employee cost side, if we take out the noncash expenditure, the ESOP cost, the employee cost for last three years CAGR is about 8% and Y-o-Y was 9.5%. If you come to other expenses the CAGR for that over the past three years is around 6%. Now let’s start look at it from an absolute number point of view. Our other expenses were INR1,954 million in March ’20. And for the current year, they were INR2,326 million. So that’s an absolute increase of INR372 million over three years. So we have spent INR37 crores over the — over March ’20, right, for a 3-year period. And of INR37 crores that I’m referring to, INR10 crores actually has gone up due to CSR expense. So if we exclude CSR expense, we have spent INR27 crores extra over the last three years, a CAGR of less than 5%.

On a Y-o-Y basis, the increase in cost was [Indecipherable] to business development, NFO spend, IT and digital infra spend and marketing. So needless to say we have been and we’ll be prudent when it comes to expenses. But at the same time, we were not efficient from investing into the business in future. On your 14 basis point question, I think some of the heavy lifting that we have done on the IT and digital side has gone through this year. I think not only we give guidance on that, but we would believe that we should be able to at least maintain the 14 basis points for ’24.

Devesh Agarwal — IIFL Securities — Analyst

Understood. Okay, thank you so much.

Operator

Thank you. The next question is from the line of Fujan Shah [Phonetic] from Consortium Advisors [Phonetic].

Fujan Shah — Consortium Advisors — Analyst

Hello, am I audible? First question would be on the let’s suppose if you compare Y-o-Y, the industry has gone overall of 6%. Overall, our revenue is 1% or 2%. Now as we have reached on every pincode then almost every — like we have penetrated all across India. So what are the strategic initiatives we are taking to get a better trajectory coming years ahead for HDFC AMC better revenue growth more than [Indecipherable]?

Navneet Munot — Managing Director and Chief Executive Officer

I think this growth is lower. On the debt side, because of the debt index fund, I think our equity market share has been inching up, which is a heartening feature. Our SIP market share and all the systematic transactions that we disclosed, which includes SIP and STP that market share has been inching up. And as you rightly mentioned, I think we have a large platform presence across 228 our own branches and a large distribution network and trying to make the most of it. Our performance has improved, product approvals from different distributors or all the advisers has been improving, and we are trying to — I mean we have been investing on our digital assets on marketing on various other initiatives and which have started paying fruits.

Fujan Shah — Consortium Advisors — Analyst

Okay, got it. Thank you so much.

Operator

Thank you. The next question is from the line of Lalit Deo from Equirus Securities. Please go ahead.

Lalit Deo — Equirus Securities — Analyst

Yeah, good evening, sir. Thank you for the opportunity. So I have two questions. Firstly, the improvement of the performance of major equity schemes so you are saying like in major schemes, we are back to like quartile 1 and quarter 2. So now in terms of flows, so like how has the market share improved across different channels like the direct channel or a distributor-led channel. Can you comment on the same qualitatively?

Navneet Munot — Managing Director and Chief Executive Officer

So you’re absolutely right. I think our performance across most of the categories is top tier. And I think our investment need is being complemented for sticking to their belief despite living through periods of underperformance, and I’m sure you appreciate that — this is easier said than done. We have been working on increasing our systematic transaction book and have seen recent results, which I also spoke earlier. I’ve asked that how it’s been showing results and various numbers, I think if you look at our number of unique investors that has grown to INR6.6 million, and that’s an increase from INR6.3 million in previous quarter. Across the industry, the number of unique investors has increased to 37.7 million, up from 36.7 million.

So during this quarter, nearly one-third of new unique investors chose HDFC Mutual Funds. Systematic transactions, Simal talked about earlier, has increased from INR12.3 billion in March ’22 to INR17.1 billion in March ’23, Systematic for us may include both SIP and STP. Of course, we also had a couple of new thematic funds, business cycle and M&C fund during the year. But I think our — most of our strategies, which have included long-term track record and, of course, have shown very strong performance recently. They are clearly resulting in excellent market share. And it’s across channels. I think your question was on channel. So I think whether you look at direct, you look at national distributors, you look at our MFDs, look at other banks. I think almost across all channel partners, we have seen improving trends.

Lalit Deo — Equirus Securities — Analyst

And sir, one more thing was like so at this point of time, since we are seeing some performance improvement also and now the change in control of the raw material also like from HDFC Limited to HDFC Bank. So do we see that the share of those, which is coming from HDFC Bank to HDFC AMC should increase over the period of time because of our performance improvement also? Like how do you see that asset potential over the [Indecipherable] FY ’25?

Navneet Munot — Managing Director and Chief Executive Officer

So I mentioned earlier, we are definitely excited about the opportunity and look forward to working closely with HDFC Bank on the distribution front. And given that we have top-quality products across asset classes, we are confident of further wallet share from HDFC Bank.

Lalit Deo — Equirus Securities — Analyst

Sure. Thank you, sir.

Operator

Thank you. The next question is from the line of Prayesh Jain from Motilal Oswal Financial Services. Please go ahead.

Prayesh Jain — Motilal Oswal Financial Services — Analyst

Yeah, hi, good evening everyone. Sir firstly, do you think that there is a market for hybrid between having 35% to 65% equity that now that they have — they still continue to enjoy the indexation benefits?

Navneet Munot — Managing Director and Chief Executive Officer

I think funds will have to get sold on their merits. I don’t think just because of the tax treatment, there would be a certain category, which I think the industry would like to push. I think we have products for, as I keep repeating the same sentence, fund for all investors’ needs. And I’m sure different investors, depending on their needs, their time horizon, their liquidity preference, return expectations and the risk appetite, they would choose different products.

Prayesh Jain — Motilal Oswal Financial Services — Analyst

Okay. Sir and secondly, on the cost front, if I look at sequentially from Q3 to Q4, there’s a good decline in the other expense or overheads. So how should we read that? Is there anything specific that you would like to highlight out there and whether this is sustainable run rate what we’ve seen in Q4?

Naozad Sirwalla — Chief Financial Officer

I think quarter-on-quarter we should not be tracking quarter-on-quarter. But especially, in the last quarter, we had lesser NFOs business expense was slightly lower. Certain CSR spend was in Q3 versus Q4. So it’s — that’s the primary reason for the drop from INR66 crores to INR58 crores. Year-on-year basis more — I mean, not.

Prayesh Jain — Motilal Oswal Financial Services — Analyst

Okay. Okay. Got it. And the other part of the SEBI’s discussion was on the broking charges that the AMC paid. Could you highlight as to what are the brokerage charges as a percentage of bits of equity AUM that we would have paid in FY ’23?

Navneet Munot — Managing Director and Chief Executive Officer

No, I don’t think I can discuss that.

Prayesh Jain — Motilal Oswal Financial Services — Analyst

Okay. Okay. And that would — and whatever the commentary has been around it to be included in the TER. Do you think that will impact us in what way?

Navneet Munot — Managing Director and Chief Executive Officer

On a serious note, I mean, brokerage is included in TER. It will definitely be a regime change. And I think all of us will have to deal with it accordingly. We will do what is in the best interest of our unitholders and other stakeholders. So I think it will be prudent to strategize on the same once we know of exact regulation.

Prayesh Jain — Motilal Oswal Financial Services — Analyst

Interesting. Okay, okay. Thanks. That’s all from my side.

Operator

Thank you. Next question is from the line of Dipanjan Ghosh from Citi. Please go ahead.

Dipanjan Ghosh — Citigroup — Analyst

Hi. Good evening. Just two questions from my side. One, just going back to the yields. You mentioned it was a factor of some unabsorbed cost and accounting impact on B30. And second was barring the less space, it was also some product mix change. So if you can just kind of qualitatively give some understanding of the B30 impact? And also, what would be — or maybe quantify the impact of the product mix change during the quarter? Second, on the expense part, again, going back, given that you’re focusing on rolling out your non-mutual fund strategy and also kind of spending on the tech side. And how do you — how do you kind of intend to maintain the current cost ratio? If you can give some color on that?

Simal Kanuga — Chief Investor Relations Officer

I think first point, as you understand, right, how the B30 accounting works. So basically, the B30 spend is accounted for and then over a 12-month period, it gets amortized. Now we are not able to do it as per the SEBI formula there is a formula saying that what percentage of sales is happening from B30 so on and so forth, the balance need to be absorbed in the TER. So there was some adjustment in reference to that. So that was the B30 thing that we referred to the Dipanjan.

Dipanjan Ghosh — Citigroup — Analyst

Sure. On the expense side?

Naozad Sirwalla — Chief Financial Officer

So expense, I think we’ve mentioned that some amount of spend that’s already gone through this year, some of it will continue going forward. So I don’t know exactly what you’re looking for because we don’t necessarily give forward-looking guidance.

Dipanjan Ghosh — Citigroup — Analyst

Understood. I just wanted to understand what will be the incremental quantum of spend on the non — of rolling out the non-mutual fund strategy? And if that will be material to our overall P&L.

Naozad Sirwalla — Chief Financial Officer

Dipanjan, that would just not count. It will be very, very minimal. And I think most of that in terms of setting up of our AIF and the related costs in reference to legal accounting tax all of it has already been taken care of. So we don’t anticipate anything material from — on that for sure.

Dipanjan Ghosh — Citigroup — Analyst

Sure. And just maybe one question if I can slip in your product pipeline for FY ’24. I mean I just wanted to get some understanding will there be any NFO spends that kind of on the equity side that can come up.

Navneet Munot — Managing Director and Chief Executive Officer

So we will be doing few NFOs, not many. And I think if you kind of recall right, I just kind of referred to that NFO as a percentage of the net sales number in FY ’23 has been at a pace slower than as compared to FY ’22. Most of the standard categories, we already tick the box, even in terms of sectoral and thematic, we’ve been able to expand our product portfolio. On the passive side, we have kind of done sleuth of products, both on the ETF as well as on the index platform. I don’t — we don’t expect many more NFOs to see the light of the day during the course in terms of high spending kind of NFOs. We would continue to expand our portfolio on the sectoral thematic side.

Naozad Sirwalla — Chief Financial Officer

Core categories, I think our prudent book is almost full. I think we have mentioned earlier, we had 8 NFOs in FY ’22. We had like 25, including a lot of passive funds in FY ’23. Yeah, there will be a few sector-thematic funds here and there, but I think our product portfolio is almost full. We have absolutely best-in-class when it comes to active, absolutely best-in-class when it comes to passive on the product side, yeah.

Dipanjan Ghosh — Citigroup — Analyst

Got it, correct. Thank you and all the best.

Naozad Sirwalla — Chief Financial Officer

Thank you.

Operator

Thank you. [Operator Instructions] The next question is from the line of Srinath V. from Bellwether Capital.

Srinath V. — Bellwether Capital — Analyst

Hi. Just wanted to find out what was the equity yield contraction year-on-year? 70 bps was the number for the current year, but what was the kind of equity yield contraction.

Simal Kanuga — Chief Investor Relations Officer

[Technical Issues] See actually difficult to kind of look at it and any way we will not tell you anything for future. That’s what we can tell you. Because what happens is whenever there is a contraction in yield due to increased AUM that tends to have a follow-on effect over a period of time, thereby, that kind of neutralizes itself.

Srinath V. — Bellwether Capital — Analyst

No, no, more not from the future, but largely want to reconcile the current numbers. If you actually see the yields reported for the year have not changed much, but because of the mix change, we are not able to see how yields are moving to reconcile the gap between asset growth and revenue growth.

Simal Kanuga — Chief Investor Relations Officer

We’ll get back to you on this number. Do we have it offline here? I think we have moved from mid-70s to early 70s for the weighted average AUM of the year.

Srinath V. — Bellwether Capital — Analyst

Okay. This is for equity, right?

Simal Kanuga — Chief Investor Relations Officer

That’s right.

Srinath V. — Bellwether Capital — Analyst

Yeah. Perfect. And given the kind of gross flows you guys have had, especially because of the share gain in the last 12 months, would it be kind of fair to assume that large part of this repricing where our back book had significantly lower payouts is kind of either — we are like halfway done or we are largely done. How do you see this book repricing? Because if now like 70% of the assets we hold are assets that are like two, three years old, then the repricing should be largely done, right?

Naozad Sirwalla — Chief Financial Officer

So we have mentioned this earlier. This is dependent on multiple variables and difficult to predict. It depends on what part of AUM is going out, more recent high-cost AUM or the older AUM. And we also have to factor in the mark-to-market impact so mark-to-market impact versus flows. So gross sales as a percentage of outstanding AUM also guides the speed of dilution — so we’ve seen this many times, but honestly, we ourselves find it difficult to put a precise number. The endeavor is always to have better retention of the existing assets. At the same time, continue to get higher share of the gross flows.

Srinath V. — Bellwether Capital — Analyst

Got it. Got it. Navneet, any views on stock buyback, given that we are now going to see an equity dilution coming in a business like ours, which ideally needs no capital. Wanted to understand what is your broad take on buybacks as well as do we need any specific SEBI approval over and above what any other normal company would need to do a buyback?

Navneet Munot — Managing Director and Chief Executive Officer

So I mean, I mentioned earlier on the overall payout ratio on the usage of capital is something that we keep discussing with the Board. At this time, you would have seen, I think we have an [Indecipherable] payout ratio. Have we discussed specifically buyback, not really. But I mean all options are always open.

Srinath V. — Bellwether Capital — Analyst

Okay, okay. And the last one is would it be possible to quantify the brokerage payout in value terms because as we try to assess what is the likely risk that we are going to face. So I’m not asking you what the law will be or how you will deal with, but would it be possible just to disclose the value number so that at least we can figure out what is the value at risk?

Navneet Munot — Managing Director and Chief Executive Officer

It is prudent to I think, think over to say once we know of exact regulation. There’s no point speculating at this point in time.

Srinath V. — Bellwether Capital — Analyst

Okay. Thank you.

Operator

Thank you. Next question is from the line of Kunal Thanvi from Banyan Tree Advisors.

Kunal Thanvi — Banyan Tree Advisors — Analyst

Yeah. Thanks for the follow-up. Can you help me with what is our EV for the new flow that we — I think did you see any improvement in the competitive intensity in this quarter? And like, are we seeing some improvement in the new yield for the new flows that we are getting? That is question number one. Second is, from a longer-term perspective, if you can help us understand the remuneration policy for the company because we’ve seen like ESOP coming back, how does one kind of equate between the variable pay and ESOP with ESOP coming in like? And also at what level we’ll be giving the ESOPs, will it be company-wide? And what would be the impact on the variable salary that we see in one of the quarters during the financial — will that kind of subside because of the ESOP, how should one look at it?

Navneet Munot — Managing Director and Chief Executive Officer

Sure. So on the — your first question on the commission payout trend, I think we have been saying for last couple of quarters that things are getting better. If you observe the direct plan TER of recently concluded NFO, they are much healthier than, say, NFO’s launched, say, a year back. And even non-NFO flows are coming in at better margins. In fact, actually, I mentioned this earlier, there are no direct plan TER due to high commission, our distribution fraternity medium to longer term, more than anyone else if customers may opt for direct plan if the difference is materially large. And most of the distribution partners do understand and appreciate the same. Your second question on the ESOP side so as Simal mentioned in the opening remarks, our NRC has approved a grant of 10.5 ESOPs to the eligible employees.

You would appreciate HDFC Group has been a strong believer in culture of shared ownership and align interest. And we believe by giving employees a stake in the company, they become more invested in the success and are further motivated to work towards achieving the shared goals. People are our biggest asset. This business is all about people. And on the distribution and other things that you asked for, so we have engaged services of a big four [Phonetic] firm for advising us on this. This is broad-based covering more than 50% of our people. Dilution is less than 0.5% over a 3-year vesting period. And I think Naozad has already mentioned about the financial impact and accounting impact of this site.

Kunal Thanvi — Banyan Tree Advisors — Analyst

Sure. The reason I was asking this was, of course, our industry is people-based and once people — once we issue so to 50% and more of the employees, does it mean that there will be the variable payouts that we make because of the performance links, will that kind of smoothen up or that continue to beat the way it has been over the period of time?

Navneet Munot — Managing Director and Chief Executive Officer

I mean, we consider all of that in the NRC and of course, in the management team, when we look at the fixed pay variable and then, of course, the ownership through the soft plans. And I think, as I mentioned earlier, that if you look at the three-year CAGR, it’s been like single digits. So yeah.

Kunal Thanvi — Banyan Tree Advisors — Analyst

Sure. Got it. So — and last question, if I can squeeze in, is on Naozad mentioned that we strive to maintain 14 bps in the total cost that we have, right? Now when we look at our business on the way things have been moving, it is probably very apparent that the yields would kind of come off, right? And since it’s an operating leverage business, one would believe that the cost per AUM could kind of also come down and hence, the falling yields could get subsided by that? Can you throw some light on how do we think about our cost structure, not from an a year perspective, like 5-year perspective in terms of — in relation with the AUM growth because given the fact that our TER will kind of come down with the increase in size, cost, as a percentage will decide what kind of profit growth we as a company would achieve in the next four, five or maybe 10 years from now?

Naozad Sirwalla — Chief Financial Officer

So I think if you take it over a long-term period and operating leverage, as you’re rightly said is a focus for everyone. So if you say that over a three-, five-, 10-year period, our endeavor would be that our cost grow at a slower pace than the AUM. And by that mathematically, the basis points should come down, right? So that obviously is the endeavor for the business.

Kunal Thanvi — Banyan Tree Advisors — Analyst

Okay, sure. Thank you.

Operator

Thank you. The next question is from the line of Abhijit [Phonetic] from Kotak Mahindra.

Abhijit — Kotak Mahindra — Analyst

Hi, good evening. First is a broad industry question. I think there was another guideline that SEBI put out around the responsibility of mutual fund trust versus the AMC boards. So anything to read there because it seems like SEBI probably wanting to give more strategic decisions to the trust rather than the AMC board. So does that change things in a material way in the way the business runs in terms of how performances looked at in terms of how fees are charged?

Navneet Munot — Managing Director and Chief Executive Officer

So of course, I think both the Trustee Board as well as the AMC Board look at all of these things, the performance is closely tracked, the fund performance I’m talking about and all the other things related to risk management, compliance, a variety of other things. Of course, as I mentioned earlier, SEBI’s overarching objectives have been market regulation, investor protection, and they keep doing lots of things to ensure that the industry performance well and take care of the unitholders to the best of our ability over a period of time.

Abhijit — Kotak Mahindra — Analyst

No, what I meant is, generally, in terms of being able to, let’s say, make more day-to-day decisions around, let’s say, what fees to be charged, how to ensure better performance if that requires any changes anywhere in the business? On all those aspects, do you see anything materially change in the way the business is run today?

Navneet Munot — Managing Director and Chief Executive Officer

The way business is run, that has materially changes that, no.

Abhijit — Kotak Mahindra — Analyst

Got it. Got it. Second one, again, on fees, again, just a broad question amongst the industry, is there an industry view on whether the industry is sort of making more money than what is desirable or what is justified? And I mean, of course, I may not have put that question in the right way but is there a consensus in terms of what’s the right level of profitability across different buckets of AUM sizes that the industry operates in today? And how are you sort of putting it across to the regulator?

Navneet Munot — Managing Director and Chief Executive Officer

So if I remember correctly, the combined PAT that we get PAT on the industry was around INR8,000 crores, and we are managing INR40 lakh crores, so that’s 20 basis points. But that profit would also include other income. And so if you adjust for that, operating level would be around INR6,500 crore, INR6,700-odd crores for the industry of INR40 lakh crores, that’s how much [Indecipherable]. Up to you I mean, when you compare with, let’s say, the business we run, whether 16 basis points, 17 basis points is too much to us, not really, I think.

Abhijit — Kotak Mahindra — Analyst

Got it. Sorry, in terms of a follow-up, clearly, like the larger guys, including HDFC do have the benefit of the profitable back book, but would it be fair to assume that the regulator would not look at it in a very negative way compared to where the rest of the industry is? Because I mean, just in terms of how the phase would be arrived at.

Navneet Munot — Managing Director and Chief Executive Officer

You would appreciate the hard work that would have been put over two decades to build that book and to get to this profitability is not easy to some millions of investors creating long-term ramp for them, tens of thousands of distribution partners across the country, I mean, across 228 physical locations, serving like close to 98%, 99% of imports, delivering the performance that we have delivered over two decades plus. I mean if you look into that, I have all of that. Profit number in that context.

Abhijit — Kotak Mahindra — Analyst

Got it. Got it. Alright. Okay, thank you so much.

Operator

Thank you. Next question is from the line of Sahej Mittal from HDFC Securities. Please go ahead.

Sahej Mittal — HDFC Securities — Analyst

Hi. Good evening and thanks for the opportunity. So first is on the net yields on non-NFO business, non-NFO flows, which are coming to you. So if in the current quarter, you are getting, say, for example, 60 bps hypothetically on your equity AUM. So what was this number for non-NFO equity flows for the last quarter versus year-over-year? That is first. And the second is that given that the industry is going hard on the asset manager so what is your view that are they also given the kind of commission payouts which are happening in the industry right now. So — is the regulator even looking at the profitability of these distributors and the kind of back book, which they have. Those are my two questions, sir.

Navneet Munot — Managing Director and Chief Executive Officer

So on the commissions on the incremental flows I think we have answered that. I think our environment is improving a bit, whether you look at the NFOs or the non-NFOs in the industry. The second question was on, I missed that.

Sahej Mittal — HDFC Securities — Analyst

Distributor, the regulator going — how is the regulator looking at the commission payouts for distributors?

Simal Kanuga — Chief Investor Relations Officer

Actually, the Chairperson has kind of clearly stated, right, let the industry decide on how they want to manage that. So I don’t think — it is our understanding, limited understanding suggests that a regulator will not kind of get to that level of discussion. At least that’s what Chairperson stated in the press conference.

Sahej Mittal — HDFC Securities — Analyst

Right. And sequentially on the non-NFO flows in the equity segment, there’s no dip in net realizations. Is it fair to assume?

Simal Kanuga — Chief Investor Relations Officer

On commissions have gone down, see, net realization will be a different story because what happens is when my — what tends to happen is if the AUM cost is that INR5,000 crore multiplier you will see a dip in the revenue. But if you’re looking at dip-in commission over a period of last 12 months, as Navneet mentioned, we have seen numbers get marginally better from where they were.

Sahej Mittal — HDFC Securities — Analyst

Got it. Got it. Thanks.

Operator

Thank you. Next question is from the line of Prayesh Jain from Motilal Oswal. Please go ahead.

Prayesh Jain — Motilal Oswal Financial Services — Analyst

Yeah, hi. Thanks again. Just on the AIF you mentioned that you allowed rates worth INR400 crores of commitment. What are the other plans with regards to new launches over the next two or two years?

Navneet Munot — Managing Director and Chief Executive Officer

So Prayesh, this is our first one. So I think as of now we are focused on this one. Maybe over a period of time, we’ll kind of further expand our product portfolio when it comes to AIF. But I think as of now, we want to focus on building this one to the level next.

Prayesh Jain — Motilal Oswal Financial Services — Analyst

Okay. Okay. And this is another question similar to one it’s a last earlier possibly. But if I look at your ROEs that have come down from 35%, 36% range to now 25%. Also, if we look at this from a profitability of AMC, two years, three years down the line, do we think that this could say, trend upwards in some form going ahead in any way. But it doesn’t seem appears to be the way the regulatory moves are kind of coming across. It doesn’t seem that the profitability in terms of ROEs could really trend on the higher side.

Navneet Munot — Managing Director and Chief Executive Officer

The ROE is driven by the base effect for us, given that we have a large balance sheet. So of course, as we increase our payout, as we have been doing in structure over the last two, three years. But the ROE impact would be there just order base effect live for us.

Prayesh Jain — Motilal Oswal Financial Services — Analyst

So because the margins have also gone down, and that would have also played out. So more — it was more from that perspective. So I understand the balance sheet size has gone up. But it was more from a margin perspective, if you look at they have kind of come off. So from a longer term perspective, do we see that returning any time soon?

Navneet Munot — Managing Director and Chief Executive Officer

That is around 35 basis points. So have been over the last several quarters, 35 basis points, 30 basis points.

Naozad Sirwalla — Chief Financial Officer

Actually, Prayesh, see, profits have grown. So basically, if you’re looking at ROE, I mean, we definitely appreciate your question on margins having gone down. Yes, that has been the case, right? And I think Navneet did make a mention that our margins have are kind of governed because of the book being at a different price and the flows being at a price higher than the cost of the book. So yes, margins are going down, but that would not have any kind of direct impact. So ROE is nothing as right, but profit divided by the net worth. And out there, we are sitting on slight bit of an extra cash. So the way we see it is we are infinite ROE business theoretically in sense.

Today, apart from what is required by regulation in terms of the skin in the game circular and the minimal net worth criteria of INR50 crores, everything balance is sitting on our balance sheet. If that is not there, then our — of course, our ROE will look very, very different. But yeah, with you on the margin side, I think our business has undergone a bit of pressure on the margin side over the last few years. On the regulatory front, we honestly don’t know what’s going to really play out. Having said that, if you remind yourselves to 2019, right, I think we did see a regulatory change and post that, we’ve been able to kind of tackle things as it is. So I think let us see how this comes up, and we’ll decide then after.

Prayesh Jain — Motilal Oswal Financial Services — Analyst

Sure. Thanks a lot.

Operator

Thank you. The next question is from the line of Atul Mehra from Motilal Oswal Asset Management. Please go ahead.

Atul Mehra — Motilal Oswal Asset Management — Analyst

Thank you. good evening and thanks for the opportunity. Just one question in terms of typically the way we see it is on the mutual fund business, the regulatory issues like we discussed on the call, are generally increasing in terms of fee pressure and so on. So why in terms of — it might not contribute very much in the near-term. But would you want to, from a medium to long-term perspective, incubate a private equity venture capital business, where the long-term value that we can derive is much higher. Although near term, obviously, it will not move the needle given how large our public markets business is. But the profitability and the scope there could be much larger when you look at it from a long-term perspective. So any thoughts on these two businesses?

Navneet Munot — Managing Director and Chief Executive Officer

You shouldn’t look at a business from more regulated or less regulated. In fact, the regulation on alternatives, as you would be aware, is also changing. I’ve mentioned earlier, I wouldn’t comment much on the regulation side, but we remain committed that over a period of time, there are tremendous opportunities in this business. Our mission is I’ve repeated it several times, is to be the well creator for every Indian. And that includes, I mean, an SIP of INR100, INR200, INR500 per month, somebody who’s contributing that to serving the ultra-HNI and family offices and institutions who are looking at maybe other kinds of solutions within the asset management business.

We are building capabilities across the board. We have been best-in-class — I mean, in terms of our product range on the active side, we have significantly expanded on the passive side. So as that market grows, we are absolutely ready to capture that. And on the alternatives, as you mentioned, the first product on the [Indecipherable] has been launched. So far, I think we are pretty happy with what we have done on both sides, building capability on the investment side as well as our reach to the investors. I think over 200 investors have participated in our first close. I mean, that’s very, very heartening. And over a period of time, we would like to build that.

We have launched two strategies on PMS. And over a period of time, there will be opportunities on that side. Our subsidiary on the Gift City [Phonetic], I think another quarter or two once we start — I mean once that’s fully set up, we will look at launching products, both for global investors who want to invest in India and at a later stage, even providing opportunities for domestic investors through the LRS Group [Phonetic] to invest globally. So I think we want to capture the every possible opportunity on the asset management side. And I don’t think the length through which we will look at is like what is more regulated and what is less regulated. We really appreciate, I think, the way regulators have played their role in India, I think tremendous credit to them for the market development over the years.

I think Indian Capital Markets, I’m sure you would agree or one of the most, I would say, robust, I think, one of the most liquid and transparent market. And over a period of time, transparency really helps in building trust among the investors, all kinds of investors. So whatever regulator does I’ve mentioned it earlier, even at the cost of repeating apart from market regulation and investor protection, they also have an objective of market development. And we are all hopeful as an industry, we engage with the regulator with other market participants on how do we grow together for the, I would say, betterment of investors and of course, for the growth of the economy over a period of time.

Atul Mehra — Motilal Oswal Asset Management — Analyst

Great, sir. Thank you and all the best.

Operator

Thank you. The next question is from the line of Gaurav Jani from Prabhudas Lilladher. Please go ahead.

Gaurav Jani — Prabhudas Lilladher — Analyst

Thank you for taking my questions. Just wanted to understand from a mix perspective in terms of equity, direct and indirect, are we material distant is from the industry?

Navneet Munot — Managing Director and Chief Executive Officer

Our equity mix is better than the industry. I think on the closing AUM, the equity was 56% of the total assets on average, it was 54% of total assets. Industry would be 49% yeah, 49%. So yeah, it is better than the industry.

Gaurav Jani — Prabhudas Lilladher — Analyst

So I actually the direct contribution in equities versus the industry. So that will be about 80-20, I mean 20 direct and 80 indirect.

Navneet Munot — Managing Director and Chief Executive Officer

On the management fee is same in both direct as well as in the distribution plan, yeah.

Gaurav Jani — Prabhudas Lilladher — Analyst

Understood. Thank you sir. That’s it.

Operator

Thank you. Ladies and gentlemen, that was the last question. I will now hand the conference over to Mr. Navneet Munot for closing comments.

Navneet Munot — Managing Director and Chief Executive Officer

Thank you.

Operator

[Operator Closing Remarks]