UTI AMC IPO opens today; should you subscribe? Here's what brokerages say

The initial public offer (IPO) of UTI Asset Management Company (AMC) is set to open today for subscription. The price band of the offer has been fixed at Rs 552 to Rs 554 per equity share. At the upper price band, the issue size stands at Rs 2,160 crore. The offer is proposed to close on October 1 (Thursday). On Monday, the company raised Rs 644.64 crore from anchor investors by allocating 11,636,124 shares at Rs 554 apiece.

UTI AMC is the second-largest asset management company in India in terms of total assets under management (AUM) and the eighth-largest asset management company in the country in terms of domestic mutual fund Quarterly Average Assets Under Management (QAAUM) as of June 30, 2020. UTI AMC has four sponsors, viz; SBI, LIC, PNB, and BOB. That apart, global asset management company, T. Rowe Price International Ltd, is also one of its major stakeholders holding a 26 per cent stake in the company.

Objective and offer structure

The IPO is an offer for sale (OFS) of 38 million shares by SBI, BOB, LIC, PNB, and TRP and the company will not receive any proceeds from this offer. The prime purpose of the issue is to achieve the benefits of listing shares on stock exchanges. Bids can be made for a minimum of 27 equity shares and in multiples of 27 equity shares thereafter.

So, should you subscribe to the offer? Here's what leading brokerages recommend.

KR Choksey -- Subscribe

Despite the Covid-19 pandemic, the mutual fund industry’s AUM continued to grow and stood at Rs 27.28 trillion as of July 2020, albeit at a slower pace, 5.7 per cent increase compared to July 2019. Looking at the historical trend, we believe that the mutual fund industry is likely to benefit from continued inflow, particularly in the equity segment, attributed to the rising preference for financial assets within household savings among retail investors, increase in risk appetite and rising penetration in B30 cities. If we compare the valuations of HDFC AMC and Nippon India Mutual Fund (NAM India) to UTI AMC, the fair value turns out to be 750-760 (Issue price Rs 552-554). Hence, the IPO looks attractive in terms of valuation with an upside potential of nearly 35 per cent.

Prabhudas Lilladher -- Subscribe for listing gains

UTI AMC witnessed a steady healthy 15 per cent QAAUM CAGR over the last four years 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 price-to-earnings (P/E) ratio based on the upper price band of Rs 554 stand justified given business concentration risks weighing upon financials (3.5 per cent QAAUM CAGR against 14 per cent industry CAGR, revenue at -3 per cent CAGR and return on equity decline of 958 basis points over FY17-FY20). Hence, we suggest "Subscribe for listing gains" and closely monitor the journey towards the high-profit margin business.

Geojit Financial Services -- Subscribe

UTI AMC's FY20 return on equity (RoE) stands at 10.3 per cent which is much lower than its peers (HDFC AMC -35.5 per cent and Nippon Life -16.2 per cent). 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 per cent compared to HDFC AMC- 12.6 per cent and Nippon Life- 8.6 per cent. Additionally, they have a huge business of PMS and NPS, which accounted for 41 per cent of Q1FY21 revenue. We believe that the IPO price is after factoring lower ROE, high competition, and uncertainties from the pandemic. Accordingly, we recommend Subscribe rating on a short to the medium-term basis, expecting a listing gain.

BP Wealth -- Subscribe

Considering its established position in retirement solutions through product innovation and large retirement fund mandates with increase geographical reach and expand distribution channels, we give a "SUBSCRIBE" rating to this IPO issue for the medium to long term.

LKP Securities -- Subscribe

At a higher price band (Rs 554), the stock is valued at 25.7(x)FY20 earnings. Comparing with peers like HDFC AMC and Nippon AMC which are trading at 35.2(x) and 35.0(x)FY20 earning, respectively due to higher return on equity (ROE). We still believe that UTI AMC is lucrative and recommend subscribing to the offer.

Nirmal Bang Securities -- Not Rated

At 25.4x FY20 EPS (trailing), we think the IPO pricing is undemanding given the valuation 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. Even though we are positive on the industry prospects from a long-term perspective, we take cognisance of some of the near-to-medium term headwinds. The equity flows have been faltering month-on-month despite the equity markets being rewarding enough over the past few months. Market volatility, whether due to global cues and/or domestic economic data, could keep retail investors from participating in capital markets.