UTI AMC IPO: Investors shouldn't expect significant gains in near-term

Past not impressive, but healthy industry growth, wide reach, strong management and brand, and focus on high-margin products are positives

The UTI Asset Management Company’s (UTI) initial public offering (IPO) looks attractive given the over 30 per cent discount to listed players, yet investors shouldn't expect significant gains in the near-term. Lack of: favourable assets under management (AUM) mix; sharp uptick in retail business and cost optimisation, are reasons for the same. However, analysts expect the situation to improve in the long run for India's oldest asset manager, and say lower valuations capture most concerns.

According to Deepak Jasani, head of research retail at HDFC Securities, “While the valuation is reasonable, large listing gains can happen only if markets remain bullish.” However, one can expect appreciation over long-term as the overall industry is likely to see good growth and the company is striving for market share gains, he added.

Bunty Chawla, analyst at IDBI Capital, echoes a similar view. “The IPO is attractively priced, which is justifiable given the company’s weaker performance in the past led by higher share of low-margin segment in AUM.” However, it would see improvement going ahead with rising mutual fund (MF) investment penetration and the company’s focus on high-margin equity MF segment, he added. Chawla recommends ‘subscribing’ to the IPO from a long-term perspective.

Operations

UTI is India’s second-largest AMC in terms of total AUM and 8th largest by quarterly average MF AUM. Besides managing 153 domestic MF schemes as of June 2020, UTI also deals in portfolio management services (PMS), National Pension Scheme (NPS), alternative investment funds (AIF), and offshore funds. It has pan-India presence through direct channels such as UTI Financial Centres, business development associates, chief agents, etc and has good reach in B-30 cities.

PMS and NPS segments, where it mostly manages provident fund/pension fund of the Central and State Government, and where the fee is minuscule, account for around 87 per cent of UTI's overall AUM as of June 2020. Even its MF business is driven by low-margin segment such as liquid funds. Therefore, its financial performance of the past two years isn't inspiring despite strong AUM growth.

Financials

Over FY18-FY20, overall AUM rose by 65 per cent led by PMS segment as UTI received a mandate to manage 55 per cent corpus of the Central Board of Trustees, EPF (employee pension fund) in October 2019. The latter now forms over 80 per cent of its PMS AUM. However, its domestic MF AUM (closing basis), which is far more profitable than PMS and NPS, declined by about 7 per cent annually (quarterly average AUM down 1 per cent annually) during this period. Thus, revenue and net profit have contracted (see table). The relatively higher pressure on net profit was due to higher costs, say analysts.

But, things may be turning around. Analysts say, sharp traction to retail accounts is key for UTI to bump up the share of high-margin products. UTI's individual MF AUM had shrunk by about 10 per cent, annually, over FY18-20, but it is up 12.6 per cent sequentially in June 2020 quarter. It accounts for 45.5 per cent of MF closing AUM.

The management also alluded that it has started focusing on high-margin products. In June quarter, revenue and pre-tax profit were up 11.6 per cent and 15.8 per cent, year-on-year, respectively, though mainly led by reversal of mark-to-market provisioning.

Importantly, analysts say, many of UTI's MF schemes rank high in terms of performance when compared to peers, which should help it gain market share going ahead.

Valuation

At FY20 earnings, the IPO is priced at around 25 times compared to 35-38 times valuation of HDFC AMC and Nippon Life AMC. On the basis of June 2020 closing MF AUM, the IPO’s valuation stands at about 5 per cent versus HDFC AMC’s 12.6 per cent and Nippon Life AMC’s 8.3 per cent.