IPO Analysis: UTI Asset Management Company

IPO Rating - Invest

About the Issue

UTI Asset Management Company (UTI), India’s second-largest asset management company in terms of Total AUM is entering the primary capital market with its initial public offer (IPO) of equity shares of the face value of Rs 10 each.  The price band has been fixed between Rs 552 and Rs 554 and minimum bid lot is 27 equity shares and in multiples of 27 equity shares thereafter.

UTI Asset Management Company (UTI), India’s second-largest asset management company in terms of total AUM, is entering the primary capital market with its initial public offer (IPO) of equity shares of the face value of Rs 10 each. The price band has been fixed between Rs 552 and Rs 554 that has a minimum bid lot of 27 equity shares and in multiples of 27 equity shares, thereafter.

The size of the IPO is Rs 2,160 crore at the upper price band and the entire issue is an offer for sale of 38,987,081 equity shares by the selling shareholder. This offer includes a reservation of up to 2,00,000 equity shares (constituting up to 0.16 per cent of the post-offer paid-up equity share capital) for purchase by eligible employees. UTI will not receive any proceeds from this issue and all proceeds from the issue will go to the selling shareholder. There are five shareholders that are selling their stake in the current IPO namely, State Bank of India, Bank of Baroda, and LIC, which will be selling 10,459,949 equity shares each while Punjab National Bank and T Rowe Price International Limited (TRPIL) will be selling, 3,803,617 equity shares each.,

The IPO will open for public subscription on September 29^th and closes on October 01^st, 2020.

The equity shares are to be listed on BSE Limited and National Stock Exchange of India Limited.

About the company

UTI is the second-largest asset management company (AMC) in India in terms of the total assets under management (AUM). If we take only mutual fund AUM, it’s the eighth-largest in India in terms of mutual fund quarterly average AUM (QAAUM) as of June 30, 2020, according to CRISIL. When it comes to the shares of monthly average AUM attributable to B30 cities (in the mutual fund industry, T30 refers to the top 30 geographical locations in India and B30 refers to the locations beyond the top 30), UTI has the largest share among the top ten Indian AMCs by QAAUM as of June 30, 2020.

The company manages the domestic mutual funds of UTI Mutual Fund that provides portfolio management services (PMS) to institutional clients and high net worth individuals (HNIs) and also, manages retirement funds, offshore funds & alternative investment funds. At the end of June 30, 2020, the company’s total QAAUM for the domestic mutual funds was at Rs 1,33,630 crore, while the other AUM was Rs 8,49,390 crore. With almost 1.1 crore live folios as of March 31, 2020, UTI’s client base accounts for 12.2 per cent of the approximately 8.9 crore folios that, according to CRISIL, are managed by the Indian mutual fund industry.

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Being the oldest AMC, UTI has a national footprint and offers their schemes through a diverse range of distribution channels. As of June 30, 2020, the company’s distribution network includes 163 UTI financial centres (UFCs), 257 business development associates (BDAs) and chief agents (CAs) (40 of whom, operate official points of acceptance (OPAs)) and 43 other OPAs, most of which, are in each case, located in B30 cities.

Its IFAs channel includes approximately 53,000 independent financial advisors (IFAs) as of June 30, 2020. The company has dedicated sales teams for institutional and public sector undertaking (PSU) clients and also, offers products directly through their UFCs, digital applications, and website. The distribution channels are supported by 459 relationship managers (RMs) (as of June 30, 2020), who interact with clients & distributors and help generate new business and maintain their existing relationships. The company also has offices in London, Dubai, Guernsey, and Singapore, through which, they market their offshore and domestic mutual funds to offshore investors, who are keen to invest in India.

There are many first(s) that is credited to the company. Many of the company’s open-ended funds were the first in their category in India or have been established for more than ten years (including five with over 25 years of track record), including India’s first equity-oriented fund, (UTI Mastershare Unit Scheme), and first tax saving-cum-insurance fund (the UTI ULIP)

The mutual fund schemes managed by the company have been able to perform better than its benchmark. The schemes, representing 92.3 per cent of the closing AUM invested as of June 30, 2020, in six core equity strategies, have outperformed their respective benchmark indices by an average of 1.3 per cent per annum. From March 31, 2018, to March 31, 2020, the QAAUM of domestic equity mutual funds increased at a CAGR of 17.6 per cent (largely due to inflows into passive schemes). In the same period, the company’s other AUM grew at a CAGR of 101.1 per cent, primarily due to our appointment to manage Rs 3,28,280 crore of additional assets for the EPFO that increased further by Rs 21,310 crore in the three-month period ended June 30, 2020.

Asset Under Management

Financials of Company

The company’s revenue from the operation has declined by nine per cent annually in the last three years ending FY20. Nonetheless, a major fall in revenue of 19 per cent was witnessed in FY20, as compared to FY19. To understand this, we need to understand the revenue structure of the company. The company gets revenue primarily from two sources; one is, fees for managing the assets and the other from the treasury income. In the fourth quarter of FY20, it has booked a mark-to-market (MTM) loss of Rs 83 crore that led to a decline in the overall revenue. Most of it has been recovered now. Going ahead, the financial performance of the company will depend on much upon how the AUM increases. Looking at the current larger savings of the Indians and under-penetration of mutual funds, the future of AMC companies look promising. 

Valuation and recommendation

At the higher end of the price band of Rs 554, the issue is valued at 25.18 times its FY20 earnings per share of 21.53, which seems to be cheap compared to other listed players that are available at around 38 times its FY20 earnings. The market cap to sales (FY20) will come around 8.5 times compared to peers that are available at more than 20 times. Even if we take the market cap to MF AUM of the company, it is demanding 5.25 per cent compared to its peers available at more than nine per cent. Hence, we believe that the issue is attractively priced and the readers can ‘invest’.