UTI AMC IPO lags peers on growth, profitability and also on valuation

The street’s enthusiasm for UTI Asset Management Co.’s initial public offering (IPO) could be mixed. IPOs are doing well with record subscriptions driven by high participation. However, the current market volatility has been a spoke in the wheel that could cause investors to focus on some of the imperfections in the company’s performance.

UTI’s average asset under management (AAUM) market share is a bit of a sore point. Its March 2014 AAUM market share stood at 8.2%. This has since shrunk to 5.4% in June 2020 among domestic mutual funds. The fund house saw a higher erosion in debt funds because of the turmoil in the debt market. As a result, the size of its income fund AUM contracted by about 60% since March 2018.

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Peer Check

The general downtrend in equity AUM across the industry is also a concern. In August, there was a net withdrawal of 4,000 crore from equity funds. Further, retail investors are also dabbling in equity investing directly, which is another concern for the growth of mutual funds. Besides, stand-alone fund houses are seeing slower growth compared to fund houses that are backed by banks, said analysts.

One good thing is that the asset management company’s (AMC’s) equity AUMs have held up better despite the turmoil. Equity AUMs slipped about 9% since March 2018. Note that management fees are higher in active equity AUMs. Besides, the overall share of active funds in its total AUM is also quite good at 25%, which has increased of late.

UTI AMC’s presence in smaller towns is a positive, which helps it bring in a larger share of inflows from the B30 towns (B30 towns are a level below the top-30 cities).

This offers diversity in terms of AUM flows, and may be less prone to market volatility. In addition, UTI manages 8.4 trillion in pension and provident funds as on June 2020, which includes retirement solutions and offshore funds. Still, UTI’s profitability has been hit because of a contraction in fund management fee income and high operating costs. In the last two years, UTI’s operating profit shrunk 22% annually. Besides, operating profit margin at 40% for FY20 is the lowest compared to peers, such as HDFC Asset Management Co. Ltd at 78%, and Nippon Life India Asset Management Ltd’s 47%. The management is adopting cost-control measures to usher in efficiencies.

The one box that UTI AMC ticks comparable to peers is valuation. UTI AMC’s price-earnings multiple on its FY20 earnings is 25.7 times. In comparison, HDFC AMC and Nippon Life AMC are trading at 36 and 37 times FY20 earnings, respectively. While the valuations may be enough to see the IPO garner subscription, profitability and market share gains will be a factor to watch out for in the long run.

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