The Rs 2,160-crore initial public offering of UTI Asset Management Company has opens for subscription on September 29, with a price band at Rs 552-554 per share.
It is a SEBI-registered asset management company and sponsored by big government firms LIC, SBI, PNB and Bank of Baroda with each one having 18.24 percent pre-offer stake in the company, while global private equity firm T Rowe Price International (TRP) is the major shareholder with 26 percent pre-offer stake.
The IPO is an offer for sale of 3,89,87,081 equity shares by abovementioned shareholders. Hence all the money will go to these shareholders.
Incorporated in 2002, UTI AMC, which was separated from erstwhile Unit Trust of India, has operating history of 55 years through its predecessor, Unit Trust of India.
All brokerage houses advised to subscribe the issue for listing gains as well as medium-to-long term given the attractive valuations compared to peers, though return on equity has been much less than listed peers (HDFC AMC and Nippon Life Asset Management).
UTI AMC IPO to open on September 29: Here are 10 key things to know
In fact considering the financial position compared to peers, the issue price band is justified and hence the company has also left a lot on the table for investors to earn from the issue, brokerages feel.
"Company's FY20 return on equity (RoE) stands at 10.3 percent which is much lower than its peers (HDFC AMC-35.5 percent and Nippon Life-16.2 percent). However, at the upper price band of Rs 554, UTI AMC is available at P/E of 25x FY20, which is cheaper compared to its peers (HDFC AMC-36x, Nippon Life - 38x). Based on the upper price band, the Market cap to MF AUM for UTI stands at 5.3 percent compared to HDFC AMC 12.6 percent and Nippon Life 8.6 percent," said Geojit Financial Services.
Additionally, UTI AMC has huge business of PMS & NPS, which accounted for 41 percent of Q1FY21 revenue. "We believe that the IPO price is after factoring lower ROE, high competition and uncertainties from pandemic. Accordingly, we recommend subscribe rating on a short to medium-term basis, expecting listing gain," said Geojit.
UTI is the second largest Asset Management Company in India in terms of total AUM and the eighth largest AMC in India in terms of mutual fund quarterly adjusted asset under management (QAAUM) as of June 2020. UTI AMC manages over 150 domestic mutual fund schemes, comprising equity, hybrid, income, liquid, and money market funds. As of June 2020, the total QAAUM for domestic mutual funds was Rs 1,33,630 crore, while the other AUM was Rs 8,49,390 crore.
UTI generates its revenue mainly from asset management activity primarily comprised of fee-based income such as management fees, marketing fees and investor services fees, among others. For Q1FY21, UTI reported profit of Rs 101.1 crore, up by 42.4 percent largely attributed to mark to market gain under treasury operations.
Schemes offered by the company are more on debt and liquid assets side, which is not preferred choice among investors, while HDFC AMC and ICICI Prudential MF offer favourable mix with more focus on equity oriented schemes. Hence, earnings by UTI AMC is less than peers, brokerages feel.
Among 68 percent of total individual investors, the equity-oriented schemes are preferred whereas 76 percent of total institutional investors prefers debt-oriented schemes, as on July 2020. UTI's product mix remains tilted towards debt and liquid assets which are less favourable to retail investors. For market leaders like HDFC Asset Management Company (HDFC AMC) and ICICI Prudential Mutual Fund (ICICI) has more favourable mix with equity assets and hybrid assets commanding a greater share in total AUM as compared to the Industry.
"If we compare the valuations of HDFC AMC (current price is Rs 2,192 per share) and Nippon India Mutual Fund (NAM India - current price Rs 260.60 per share) to UTI AMC, fair value turns out to be Rs 750-760 (issue price Rs 552-554). Hence, the IPO looks attractive in terms of valuation and an upside potential of around 35 percent," said KR Choksey.
The brokerage noted that the market share of UTI AMC is declining over the last 3-4 years; from 7.7 percent in FY17 to 5.9 percent in FY20.
The AUM CAGR of UTI between FY10-FY20 stood at around 7 percent whereas the AUM CAGR of Industry grew at a rate of 17.3 percent during the same period. The management has acknowledged the market share decline and plans to regain the ground with increase geographical reach through its multi distribution channels, improvement in fund performance, and retaining and maintaining human capital.
UTI provides portfolio management services to institutional clients and high net worth individuals like Employee Provident Fund Organization, National Skill Development Fund, Postal Life Insurance, and manages retirement funds, NPS, offshore funds, and alternative investment funds catering to a diverse group of individuals, institutional investors, banks, trusts, and NRIs. It has 4 subsidiaries namely UTI Retirement Solutions, UTI International, UTI Capital and UTI Venture Funds Management.
UTI AMC is a dominant player in beyond T30 cities (B30) market. The growth for the company in last four years was largely driven by passive funds as it bagged chunky public investments in ETFs, pension and retirement funds.
Its pan-India distribution network gives them access to its investors located in around 700 districts, including remote areas, and fortifies its strong presence in towns, cities and villages. It has 11 million live folios accounting for 12.8 percent of client base managed by the Indian mutual fund industry.
It enjoys strong brand recall especially in B30 segment attributed to its strong national footprint. With around Rs 37,000 crore or 24 percent of its overall AUM in B30 geographies, UTI has the highest concentration in B30 markets among the top 10 AMCs.
The company witnessed steady healthy 15 percent QAAUM CAGR over the same period led by strong distribution franchise, sticky client base, strengths in managing retirement (2nd highest) and PMS funds.
"However lower yields on passive/alternate funds, higher cost structures and current pandemic led headwinds would cap near term return profile. Valuations at 26x/21x FY20/FY21E P/E based on upper price band of Rs 554 although lower than peers (35-36x HDFC AMC/Nippon Life) stand justified given business concentration risks weighing upon financials (3.5 percent QAAUM CAGR versus 14 percent industry CAGR, revenue at -3 percent CAGR and RoE decline of 958bps over FY17-FY20). Hence, we suggest subscribe for listing gains and closely monitor journey towards high profit margin business," Prabhudas Lilladher said.
LKP Securities also believes that UTI AMC is lucrative and recommended to subscribe, while Angel Broking, too, is positive on IPO and rate it as subscribe considering attractive valuation, huge growth potential of MF industry, asset-light business and higher dividend payout ratio.
Aggregate AUM of the Indian mutual fund industry has grown at a healthy pace over the past ten years, against the backdrop of an expanding domestic economy, robust inflows and rising investor participation, particularly from individual investors. Average AUM grew at a CAGR of 13 percent from Rs 7.6 lakh crore as of March 2010 to Rs 27 lakh crore as of March 2020. As of July 2020, there were 41 fund houses.
Among two major IPOs opened for subscription, analysts also prefer to go for UTI AMC than Mazagon Dock Shipbuilders.
"Being dominant players in their respective fields, both companies are undervalued from a valuation perspective. Coming to UTI, it has received a mandate to manage 55 percent of EPFO in 2019 which has significantly boosted its AUM. Additionally, this year itself it granted ESOPs at Rs 728 per share while its price band is at Rs 552-554 per share which means it leaves more money on the table for investors for listing gains," Nirali Shah, Senior Research Analyst at Samco Securities said.
"Apart from being a dominant player with high barriers to entry, Mazagon is also debt-free and enjoys a few perks due to its proximity to the coasts of Mumbai. How quickly it is able to execute orders and generate cashflows will decide Mazagon's future growth trajectory. There could also be a delay in funding from the Indian Defence Budget or risks of cost and time overruns due to Government dependency. Hence, this company is at a higher risk and can be looked for listing gains keeping in mind an investor's own risk appetite. UTI AMC is a comparatively safer bet," she added.
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