UTI Asset Management Co. will launch its three-day initial public offering on Tuesday as its existing shareholders look to pare stake in the mutual fund house to meet regulatory requirements.
UTI AMC IPO: A review
Business
The company claims to be India’s second-largest AMC by total assets under management, and eighth-largest by quarterly average AUM. In the quarter ended June 30, 2020, the company’s average AUM for domestic mutual funds stood at Rs 1.34 lakh crore.
Besides, UTI AMC has other assets under management worth Rs 8.5 lakh crore, including portfolio management services to Employees’ Provident Fund Organisation, Postal Life Insurance, National Skill Development Fund and advisory PMS to various domestic and offshore accounts.
The company’s portfolio management services business handled AUM of Rs 6.97 lakh crore as on June 30, most of which was for EPFO, while the rest was in the form of retirement, alternative investment and offshore funds aggregating to Rs 1.52 lakh crore.
UTI AMC has a significant national footprint, with a sizeable presence in “B30 cities”, or cities beyond the top 30 for mutual funds. Nearly a quarter of the company’s AUM comes from such cities.
As on June 30, the fund house’s network included 53,000 independent financial advisers, 257 business development associates and chief agents and 163 UTI Financial Centres.
The company managed 43 open-ended and 129 closed-ended mutual fund schemes as on June 30. The open-ended funds included 20 equity schemes, of which 13 are active and the rest is passive; nine hybrid schemes, 10 income schemes, and four liquid and money market schemes.
Financials
As on June 30, UTI AMC’s net worth stood at Rs 2,834.92 crore, translating into a book value per share of Rs 224.45.
Assets managed by the company in domestic mutual fund grew at an annualised rate of 17.6% between fiscal ending March 2018 and March 2020. The company attributes this to inflows into its passive schemes. Its other AUM witnessed a compounded annual growth rate of over 100%, on account of managing Rs 3.28 lakh crore of additional assets for the EPFO.
UTI AMC’s revenue has declined 6% on a compounded basis over the past four financial years. During this time, its profit after tax, too, fell 11%.
Peers
While UTI AMC has several peers in the domestic asset management industry, only two of them—HDFC Asset Management Co. and Nippon Life India Asset Management—are listed.
UTI AMC, according to Emkay Research, operates at higher operating costs versus peers, which has taken a toll on its profitability. “However, our discussions with management suggest that it has adopted various cost-control measures to bring in best-in-class operational efficiencies. Management is committed to focus on digitalisation to bring in efficiency,” the brokerage said in a pre-IPO note.
But UTI AMC, according to the prospectus, is witnessing a shift in customer preferences to passive equity funds—accounting for nearly Rs 24,500 crore, or 18.3% of its average quarterly AUM in the quarter ended June 30, 2020—which may adversely impact the company’s income and profitability as fees received for passive funds are generally lower than that for active funds.
Valuations
UTI AMC’s earnings per share stood at Rs 21.8 in the financial year ended March 2020. At the upper end of the price band on offer, this implies a price-to-earnings multiple of 25.41 times, according to BloombergQuint’s calculations.
The company’s two listed peers are costlier by FY20 price-to-earnings and price-to-book value, as well as price as a percentage of average AUM in the quarter ended June 30.
According to brokerages, the company’s IPO is priced to reflect its relative position to its listed peers.
“Considering relatively weaker return ratios and unfavorable AUM mix, UTI AMC is expected to be at a discount to its peers,” Emkay Research said. “Hence, the valuation discount by UTI AMC IPO is justified and remains attractive considering gradual improvement in cost parameters.”
Nirmal Bang in a note said, “...we think the IPO pricing is undemanding given the valuation of HDFC AMC and Nippon AMC are currently commanding. From a more near-to-medium-term perspective, we currently have a cautious view on the overall AMC sector.”
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