UTI AMC IPO opens Sept 29: Valuation discount reflects declining revenues and profits

Price band fixed at Rs 552 to Rs 554 per equity share; offer to remain open from September 29th to October 1st

Staff Writer Sep 28, 2020

IPO debutsAnother long-awaited IPO is set to hit markets. UTI Asset Management Company (UTI AMC), the second largest asset management company in India in terms of total AUM and the eighth largest asset management company in India in terms of mutual fund QAAUM (Quarterly Average Assets Under Management), will open the initial public offer of equity shares on 29th September 2020. The offer is proposed to close on October 1, 2020. The price band of the offer has been fixed at Rs 552 to Rs 554 per equity share. In this article, we will analyse the UTI AMC IPO and understand the prospects it offers. Read on.

Issue details

Sector: Asset Management Company. The existing listed peers of UTI AMC are HDFC AMC and Nippon Life India Asset Management.

IPO price band: Rs 552- Rs 554.

Share face value: Rs 10.

IPO issue size: 38.98 million shares.

Issue proceeds: Rs 2,152-2,160 crore. This is an offer for sale, which means UTI AMC will not get any money from the IPO. All the proceeds will be taken by the selling shareholders.

Minimum lot size (shares): 27.

Post IPO market capitalisation at the upper band – about Rs 7,000 crore.

IPO shares listing: Around October 12.

Kotak Mahindra Capital Company Limited, Axis Capital Limited, Citigroup Global Markets India Private Limited, DSP Merrill Lynch Limited, ICICI Securities Limited, JM Financial Limited and SBI Capital Markets Limited are the book running lead managers to the offer.

Why the IPO

The UTI AMC IPO will see five shareholders viz. State Bank of India, Punjab National Bank, Bank of Baroda, Life Insurance Corporation of India and T Rowe Price International, reduce their stake in the AMC by a total of around 31%. SBI, BoB and LIC will divest an 8.25% stake each, while T Rowe and PNB will sell 3% each. Pre-issue, SBI, LIC, BOB and PNB hold 18.24% each while T Rowe has a 26% stake in UTI AMC. The objective of the selling shareholders such as SBI, LIC and BoB, is to bring down their individual stake in UTI AMC to below 10% each as mandated by SEBI rules.

What is AMC business model

A substantial part of AMC income is dependent on the total value and composition of Assets Under Management or AUM. This is because as an AMC, the management fees are usually calculated as a percentage of AUM. Any decrease in the value, and certain changes to the composition, of AUM will cause a decline in income and profit. Similarly, an increase and or favourable composition can boost income and profit.

The amount of expenses funds can charge is usually based on a percentage of AUM. Accordingly, the value of AUM can also affect the level of AMC operating expenses. In addition, excluding any distribution costs, most of AMC costs do not vary directly with AUM or income. As a result, AMC operating margins may fluctuate by a higher percentage than changes in income.

What works in UTI AMC IPO

UTI AMC, a predecessor of Unit Trust of India, as on June 30, 2020 had total QAAUM for domestic mutual funds at Rs 1,33,630 crore while other AUM was at Rs 8,49,390 crore. UTI AMC manages mutual funds of UTI Mutual Fund and provides portfolio management services to institutional clients and HNIs. Furthermore, it also manages retirement funds, offshore funds and alternative investment funds. UTI AMC provides discretionary PMS to Employees Provident Fund Organization (EPFO), Postal Life Insurance (PLI), National Skill Development Fund (NSDF) and advisory PMS to various offshore and domestic accounts. As on June 30, 2020, AUM for PMS business was at Rs 6,97,050 crore.

Favourable macro tailwinds, a reputed brand name (UTI) are expected to deliver sustainable growth and profitability for the company if it is able to manage competition from the 40-AMC strong MF industry.

UTI AMC has the highest concentration in B30 markets among the top 10 AMCs. SBI AMC is the only other player with a concentration of over 20% in B30 markets. The ability to charge an additional 30 bps in B30 locations lowers pressure on scheme margins in these geographies.

UTI AMC has done incredibly well despite not having a preferential tie-up with a bank. Many of its competitors are part of diversified financial institutions and so benefit from referrals from their affiliates.

How do financials look

UTI AMC is a debt-free business.

Net revenue has fallen in recent years. In FY20, total revenue fell 17.6% YoY to Rs 891 crore, due to reduction in revenue from sale of services and lower gains on fair value changes. Net revenue peaked in FY18. The story is similar for PAT, RoE etc. In FY20, PAT declined to Rs 276 crore.

Importantly, PAT as percentage of revenue declined from 38% in FY17 to 31% in FY20, though in Q1FY21 has increased to 37%. Consequently, RoE declined from 18.5% in FY17 to 10% in FY20, which has increased to 3.6% (non-annualised) in Q1FY21.

The uptrend in Q1FY21 needs to be maintained.

Take a look at financial snapshot below

UTI AMC Financials

What does IPO valuation say

At the upper price band of Rs 554/share, UTI AMC is being valued at about Rs 7,000 crore. This is lower than HDFC AMC’s Rs 45,000 crore valuation and Nippon Life India Asset Management’s Rs 15,600 crore valuation.

At about 25 times FY20 EPS (trailing), UTI AMC IPO pricing is not as demanding given the valuation HDFC AMC and Nippon AMC. In each key valuation parameter, UTI AMC lags listed peers. For instance, UTI AMC has a RoNW of 9.88% compared to over 31% of HDFC AMC and over 16% for Nippon Life India. In terms of Price to Earnings (PE), UTI AMC’s 25 times PE is at a discount to HDFC and Nippon’s 36-40 times range.

Do note that the company’s both current and average RoE in the last three years has been less than 15%.

Thus, the valuation does leave room for upside. Seen in another way, the IPO has priced in the shortcomings.

RupeeIQ take

UTI AMC’s operational profitability is lower due to high costs. If the company is able to bring positive economies of scale with growth of its AUM, especially individual sourced equity AUM, this would be good. At the current price, UTI AMC does not demand a lot and hence this can be a long-term value buy contingent upon whether the company is able to grow business fast. If the company is not able to bring changes post listing, expect the valuation discount to persist.

Staff Writer

This article is written by RupeeIQ editorial staff.

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Mohammed Haseeb