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UTI AMC IPO: DETAILED ANALYSIS

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BASIS STRUCTURE OF UTI AMC IPO

The UTI AMC IPO will open on September 29. The subscription window will remain open till October 1.

The UTI AMC IPO will be of the book-building nature, and the company aims to sell a total of 3,89,87,081 equity shares through this process. This means, for the UTI AMC IPO, the price will be mentioned in a price band.

The other type of IPO, the fixed price offering, mentions only a fixed price and not a range.

The UTI AMC IPO is an offer for sale. This means no fresh shares are being issued.

Existing shareholders will be selling part of their stake to the public. About 30.75% of the equity is going to be sold through the UTI AMC IPO.

The main intention of bringing the UTI AMC IPO is to increase the liquidity associated with the company, especially for the existing shareholders. Here, the proceeds will go directly to the shareholders and not to the company.

In the other type of offering — fresh issue — new equity shares are issued by the company and all the proceeds from the IPO go directly to the company.

The table below summarises the details of the UTI AMC IPO. Questions like “When UTI AMC IPO will open?”, "What is the lot size of UTI AMC IPO?”, “When UTI AMC IPO allotment?”, "When is UTI AMC IPO listing date?”, etc. will be answered.

Total number of equity shares 12,67,87,254
Equity for sale 3,89,87,081
Face Value of each share Rs. 10
Price Band Rs. 552 - Rs. 554
Size of each lot 29 shares
Subscription window September 29 - October 1
Allotment date October 7
Listing date October 12

After the subscription of the UTI AMC IPO, the company will be listed on NSE and BSE.

ABOUT THE COMPANY

UTI Asset Management Company was officially incorporated in 2002.

Before this, UTI AMC was a part of the Unit Trust of India, which was formed in 1964.

The primary line of business for UTI AMC is the UTI Mutual Fund. It is the largest fund house in India in terms of total assets under management.

The UTI Asset Management Company has four direct subsidiaries — namely, UTI Retirement Solutions, UTI International, UTI Capital and UTI Venture Funds Management Company.

Apart from this, UTI International has two subsidiaries — UTI Investment Management and UTI International (Singapore). Lastly, UTI Venture Funds has one subsidiary — UTI Private Equity.

The company offers a B2B segment as well as a B2C segment. This means, UTI AMC manages the funds of both individuals and companies.

PRODUCTS & SERVICES

The products and services offered by UTI AMC can be split up into three verticals.

First is the UTI Mutual Fund. This is primarily meant for domestic clients — both individuals and corporates. They currently offer about 178 different mutual fund schemes.

In terms of Domestic Mutual Fund QAAUM, UTI AMC is the seventh largest fund house in the country. As of September 2019, the total mutual fund QAAUM of UTI AMC was about Rs. 154 thousand crores.

Second is the Portfolio Management Services section.

This is not meant for normal retail customers. Here, the clients are corporates and other high net worth individuals (HNIs).

The portfolio management services makes up about 80% of the other AUM for UTI, with an amount of about Rs. 499 thousand crores.

The third vertical includes the smaller sources of revenue, such as the retirement funds, offshore funds and alternative investment funds.

This makes up the remaining 20% of the other AUM for UTI, with an amount of Rs. 125 crores.

CUSTOMERS

UTI AMC’s customers account for 12.8% of total mutual fund customers in India.

Their business works on a B2B model as well as on a B2C model.

The mutual fund segment is meant for retail investors and corporates, both.

The PMS and other services are primarily meant for corporates and HNIs.

MANAGEMENT SHAREHOLDING PATTERN

UTI AMC is structured like a trust. There are no specific promoters.

Instead, in accordance with the SEBI Mutual Fund Regulations, there are four sponsors — State Bank of India, Life Insurance Corporation, Bank of Baroda and Punjab National Bank. These institutions all have the government of India as a majority stakeholder.

Apart from that, the global asset management company T. Rowe Price Group (TRP), is a majority shareholder.

The table below identifies the primary shareholders of the company along with their respective stakes before the UTI AMC IPO and afterwards.

SHAREHOLDERS STAKE BEFORE IPO STAKE AFTER IPO
TRP 26% 23%
LIC 18.24% 9.99%
SBI 18.24% 9.99%
BOB 18.24% 9.99%
PNB 18.24% 15.24%

FINANCIAL OVERVIEW

The table below contains a summary of the UTI AMC IPO financials from the 2017 till 2020. All the figures stated below are in Rs. crores.

FISCAL YEAR 2014 2015 2016 2017 2018 2019
TOTAL
REVENUE
505.93 652.61 749.58 853.18 1152.14 1081.14
TOTAL
EXPENSES
266.86 357.32 407.29 452.65 612.99 584.50
PROFIT
AFTER TAX
169.99 201.26 232.05 290.81 396.92 351.94
TOTAL
ASSETS
1,390.92 1,063.22 1,743.92 2,399.12 2,791.00 2,930.38
NET
CASHFLOW
FROM
OPERATING
ACTIVITIES
125.01 111.36 213.12 299.90 261.22 63.56
RESERVES
AND
SURPLUS
1,039.95 1,209.49 1,578.59 1,687.17 2004.37 2281.07

Over the past six years, the total revenue of UTI AMC has grown at a CAGR of 13.49%. The company’s total assets have also grown at a similar rate, with a CAGR of 13.22%.

Total Reveue 

Total Assets

Net Profit

As for the net profit earned by the company, that has a CAGR of 12.89%.

The main source of revenue for UTI AMC, as is with most other asset management companies, is through the management fees that are charged for managing the various fund schemes and investor portfolios.

In fact, in 2017, 2018 and 2019, management fees made up 78.4%, 80.4% and 81.5% of the total income, respectively.

Now, one thing to note here is that the management fee that is charged by the AMC is directly dependent on the AUM for the fund house.

In fact, the management fee is generally stated as a percentage of the AUM. Further, the fees charged do not only depend on the size of the AUM, it also depends on its composition.

This means, the fees charged by different mutual fund schemes are not the same. For example, the management fee charged on an index fund will be considerably lower than the fee charged for a pure equity fund.

In fact, according to the predictions by CRISIL, the QAAUM of the mutual fund industry in India will grow at an approximate rate of 17% between 2019 and 2024.

The projections with regard to the industry revenues and the net profits are also quite positive, with expectations of 16% and 17% growth respectively, till 2024.

With these projections in mind, it is possible to infer that the positive outlook on the Indian mutual fund industry may trickle down to the UTI Asset Management Company as well, and bolster their growth rate.

If this happens, UTI AMC will see an increased growth rate for their revenue as well as their AUM.

INDUSTRIAL ANALYSIS

Over the past couple of decades, the mutual fund industry in India has been experiencing a steady bullish trend.

The average AUM for the industry grew to Rs. 4,80,000 crores in 2009 and to Rs. 25,70,000 crores in 2019. Between 2014 and 2019, the average CAGR in the industry was around 21%.

The reasons behind this bullish trend find their roots in the changing landscape of investments in India.

Another factor is the growing rate of participation among individual or retail investors.

Historically, it was observed that institutional investors made up the majority of the market, with 52% of the market share in 2014. However, as of September 2019, 58% of the total industry AUM actually comes from the retail investors rather than from the institutional investors.

Now, coming to mutual funds, the share of mutual fund investments in household savings has increased steadily.

CRISIL expects that the share of financial assets in total financial savings will only go up.

The table below shows the split up of household financial savings over the years. As you can see, the amount of investment in mutual fund has increased almost three-fold, from 2013 to 2018.

All the figures are in Rs. thousand crores.

YEAR 2013 2014 2015 2016 2017 2018
GROSS FINANCIAL
HOUSEHOLD
SAVINGS
1,064 1,190.8 1,257.2 1,496.2 1,438.4 1,869.6
CURRENCY 111.5 99.5 133.3 200.5 316.5 470.8
DEPOSITS 606.2 667 612.4 644.5 968 535.3
SHARES 17 18.9 20.4 28.4 44.3 63
MUTUAL FUNDS 8.2 15 14.5 18.9 20.8 23.9
INSURANCE 179.9 204.5 299.3 264.2 354.3 350.4
PROVIDENT/PENSION
FUND
156.5 177.8 190.9 290.7 325.2 367.9
OTHERS 7.1 23.1 1 67.9 63.1 82.2

According to a report by CRISIL, as of September 2019, the total number of live mutual fund folios in the Indian economy, stood at about 8.6 crores.

Out of this, about 1.1 crores were managed by UTI AMC. This translates to about 12.8% of the entire market share in terms of the number of folios.

To consider the market share in terms of the AUM, let us consider the following table. All the figures are stated in Rs. crores.

COMPANY MUTUAL FUND
QAAUM
OTHER AUM TOTAL AUM
UTI Mutual Fund 1,54,229.01 6,13,237.02 7,67,465.79
SBI Mutual Fund 3,20,662.84 3,14,156.43 6,34,819.42
Nippon India Mutual
Fund
2,02,649.49 2,55,703.76 4,58,353.25
HDFC Mutual Fund 3,76,597.57 8,152.33 3,84,749.89
ICICI Prudential Mutual
Fund
3,48,068.36 6,661.81 3,54,730.17
Aditya Birla Sun Life
Mutual Fund
2,53,828.5 2,241.14 2,56,069.63
HSBC Mutual Fund 11,746.87 1,83,653.97 1,95,400.84
Kotak Mahindra Mutual
Fund
1,68,399.32 3,658.75 1,72,058.08
Franklin Templeton
Mutual Fund
1,24,025.02 16,208.52 1,40,233.54
LIC Mutual Fund 15,467.84 1,11,937.62 1,27,405.45

The above table shows the top ten mutual funds in India, in decreasing order of total AUM.

As of March 2019, the top 10 asset management companies actually account for 83% of the total assets being managed by the mutual fund industry.

One thing to note here is that for UTI AMC, the larger proportion of assets being managed comes from the Portfolio Management Service unit rather than from the UTI Mutual Fund.

In fact, only about 20% of the total AUM comes from the mutual fund section, while the remaining 80% comes from the PMS and the pension scheme units.

COMPETITION

The mutual fund industry in India is highly fragmented. There are a large number of firms which provide similar services.

The market structure in this case is a monopolistic competition.

This means, there are a large number of firms which offer similar services, and a large number of customers. Each individual buyer or seller has almost no control over the market price.

Currently, there are about 45 asset management companies registered with the Association of Mutual Funds in India.

Out of these HDFC and ICICI have possessed the highest market share in terms of the QAAUM.

In order to survive and thrive in a highly competitive industry that is evolving rapidly, a company needs to establish for itself, a wide competitive moat which will ensure sustained growth levels.

Now, for the mutual fund industry, this competitive strength can take the form of high investor retention rate, strong distribution network, low expense ratio (fee charged for managing the fund), expert management and a strong R&D division which will keep bringing the most advanced products in line with the evolving demands and market trends.

UTI AMC boasts of one of the lowest complaint rates in the industry, meaning the customer satisfaction rate is among the highest.

Only 0.002% of the active folios have registered complaints from customers, which is the lowest recorded value among other competitors. From this, we can infer that the investor retention will also be quite high.

Apart from that, there is also the pre-existing distribution channels that UTI already possesses, particularly in the B30 cities.

Currently, the company has a presence in close to 700 districts in India, which places it in an ideal position to trap the growing stream of investors. In fact, one of the primary strategies that UTI has always followed is to keep adding to their distribution network.

In the long run, this can work as a competitive strength for the company.

STRENGTHS

- Potential presented by B30 cities

CRISIL has identified that the B30 cities in India, or the slightly smaller cities possess the potential for very fast growth. In this context, the biggest 30 cities are termed as the T30 cities. The B30 list contains the next 30 cities in the country.

UTI has the highest market share in the B30 cities in comparison with the other top ten market players, and this puts them in a unique position to take advantage of the new investors who are coming out of these cities.

- Brand name and goodwill

When it comes to financial and investment related services, the brand name or the reputation of the company plays a significant role in attracting investors.

It is perhaps, a subconscious preference that we have to pick older, established players over the newer companies, who are yet to make a name for themselves.

UTI, with its track record of more than 55 years, has established itself as a clean and fair player. In 2016 and 2017, the company was recognised as one of the top five preferred industry brands.

- Economies of scale
Because UTI has been in operation for over 50 years, the company has had the chance to grow gradually and organically, and strengthen the base of their operations.

Now, with the huge size, well-established distribution network and investors in 697 districts, UTI is ideally posed to enjoy the economics of scale.

These manifest in terms of lower distribution costs, lower marketing costs and others

WEAKNESSES

- Highly concentrated sources of revenue

One of the primary risk factors is the dependence on the AUM for income sources. Any reduction in the assets under management will have a direct impact on the revenue earned.

As most sources of expenditure are fixed, and are unrelated to the AUM, a sudden fall in income will reduce the profit margin.

- High concentration of assets in a few schemes

While the company operates about 178 different mutual fund schemes, the Domestic Mutual Fund QAAUM is not divided equally among these 178 different schemes.

Instead, the cumulative amount is very concentrated on only a few schemes in each category.

For example, 73.5% of the total amount invested in equity funds is concentrated in only the top six equity funds.

This means, if any of these funds underperforms, then there is the risk of losing out on a significant portion of the total assets being managed.

- External factors
There are certain external factors that influence the capital markets, over which the company has no control.

For example, changes in the interest rate will affect the valuation of fixed income funds.

As 52.4% of the total domestic mutual fund assets under management for UTI AMC are invested in debt funds, this will pose a risk to the total AUM and the market valuation of the company.

- Credit risk
Any fixed income investment is subject to credit risk.

Considering the fact that 52.4% of the total mutual fund AUM is held in fixed income securities, this can be very dangerous if there is any potential for default. Debt funds invest in bonds, debentures and other forms of fixed income securities, all of which pose a certain degree of credit risk.

For example, UTI AMC suffered an exposure of Rs. 1,990 crores when DHFL defaulted on their non-convertible debentures.

VALUATION OF UTI AMC IPO

The future for the mutual fund industry in India looks bright and promising.
UTI AMC has followed a more gentle trajectory to reach the position it is currently occupying. This means — organic growth strategies, and more time to develop the products being offered.

Operating in a highly competitive industry can have an impact on the financials of the company, and eventually, its market share. There is also the risk posed by the fact that this industry is rapidly evolving.

Looking at the financial figures, UTI’s CAGR is lower than the industry average and this can pose a problem in the long run.

These factors can pose as a risk to investors in the UTI AMC IPO, especially if the projected plans and strategies are not executed optimally.

The table below compares the key financial ratios of UTI AMC IPO with its peer group of companies in the same industry.

NAME MARKET
CAP (Rs. Cr.)
P/E EPS Net Profit Margin
(%)
P/B
HDFC 49,051.58 52.62 43.85 48.59 16.02
Nippon India 17,432.89 39.06 7.94 36.43 6.72
UTI - 20.16 27.48 33.41 -

The average P/E ratio in the asset management industry is about 27.34.

In comparison, UTI’s P/E ratio based on the upper price band is 20.16.

As the P/E value is lower than the industry average, we can conclude that the UTI AMC IPO is undervalued.

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