We have a structurally bullish view on Indian mutual funds; HDFC AMC offers all the ingredients to be the best play in the space. Valuation is lofty, but strong earnings compounding should drive healthy returns, in our view. Initiate at OW. Structural opportunity for mutual funds in India and the right conditions for it to be realised: India\u2019s total and equity mutual fund AUM to GDP was 13% and 6% as of FY18 vs. global averages of 62% and 35%. The share of equity mutual funds has been rising in India\u2019s growing financial savings, and so has individual investors\u2019 share in AUM. Longevity and predictability of growth are improving with strong growth in AUM from smaller cities and inflows coming via monthly plans. Industry equity AUM has doubled in the past two years and net inflows have been slowing. But we think 20% CAGR over FY18-21 is achievable: We build in a moderation in net inflows from FY18 levels and modest asset appreciation. Given an improving Indian economy, we believe the risk of sustained outflows is low. HDFC AMC offers all the ingredients to play this multi-year story: It leads with (i) Scale \u2013 It is the largest AMC in India in terms of equity-oriented AUM with a market share of 14.4%, higher in equity (ex ETF) at 15.7%. (ii) Profitability \u2013 Equity (ex ETF) mix which is more profitable, was 50.3% vs. the industry at 40.8% as of July 2018. Hence, it is most profitable with a higher profit market share of 18% (FY17) and FY18 PAT\/ AAAUM of 26bp. (iii) Strong individual investor franchise \u2013 As of July 2018, it had the highest market share of retail equity AUM (ex ETF), at 14.7%, and was second in MAAUM from beyond top 30 cities, at 12.2%. (iv) Strong parentage, brand recall and experienced management. Valuation at 36x one-year forward P\/E looks lofty. Why are we OW? We expect gradual sustained lowering of expense ratios over time by the regulator and rising pressure from passive funds. However, strong AUM growth, higher share of equity and operating leverage should help deliver 20%+ EPS CAGR at HDFC AMC for some time, in our view. Over FY18-21, we forecast EPS CAGR of 23%. Although the stock can be volatile driven by monthly flows and market outlook, we believe that, unless there is sustained weakness, a P\/E of 30-40x can be sustained due to structural factors, scarcity premium (also low free float) and a high dividend payout. Key risks: Sharp drawdown in markets; adverse regulation. Investment thesis HDFC\u2019s mutual fund is the second-largest in India on total assets under management and largest MF d on equity AUM, both including and excluding ETFs. HDFC mutual funds\u2019 share of equity AUM in overall AUM at 50% is much higher than key peers; it has a higher share of individual AUM than industry and also the highest market share in active equity AUM and hence its profitability (PAT\/average annual AUM) is also higher.