One Thing That May Impact UTI AMC’s Valuations In IPO
Post the IPO, UTI AMC is unlikely to command valuations comparable to private peers HDFC AMC and Nippon Mutual Fund.
UTI Asset Management Company Ltd. filed for its initial public offering as it looks to capitalise on demand for shares of asset managers.
The offer-for-sale by India’s seventh-largest mutual fund will see its shareholders State Bank of India, Life Insurance Corporation of India, Bank of Baroda, Punjab National Bank Ltd. and T. Rowe Price Group Inc. sell part of their stakes.
That comes as Reliance Nippon Life Asset Management Ltd. (now Nippon India Mutual Fund) and HDFC Asset Management Company Ltd.—the two listed mutual funds in India—have seen their value more than double in 2019 as household savings shifted from gold and real estate to financial assets.
UTI AMC manages Rs 1.54 lakh crore in mutual fund schemes. In November, it won the contract to manage 55 percent of the total corpus of the Employees’ Provident Fund Organization. Including the portfolio management services it provides to the EPFO, the National Skill Development Fund, Postal Life Insurance and various offshore and domestic accounts, its total assets stand at Rs 7.8 lakh crore. That makes it India’s largest investment management firm.
The company, however, manages lesser equity assets than the two listed asset managers. An AMC usually earns higher income from equity-oriented funds compared with other funds. Also, the management fee for the government’s mandates is usually lower than what they charge others.
A lower contribution from equity-oriented funds coupled with the Securities and Exchange Board of India’s decision to cut the total expense ratio—a key source of revenue for an asset manager—kept UTI AMC’s revenue growth subdued from 2016-17 to 2018-19.
Its listed peers were, however, able to boost their profits by passing on nearly 80-90 percent impact of their reduced total expense ratio to distributors.
The inclusion of EPFO assets in UTI AMC’s portfolio will boost its earnings in the second half of the ongoing fiscal, but its exposure to defaulting companies could offset that. UTI AMC’s total nominal exposure to companies that have defaulted on debt repayments as on Sept. 30 stood at Rs 3,420 crore. The asset manager has already provided for Rs 3,020 crore, according to its draft red herring prospectus.
HDFC AMC and RNAM currently trade at 48.8 times and 38.7 times their 12-month forward price-to-earnings ratio, according to Bloomberg. Given the subdued financial growth in the past and lower contribution from equity-oriented funds, UTI AMC would find it tough to command such valuations.
At a valuation of 25 times its earnings, the selling shareholders would raise nearly Rs 3,200 crore from the primary market, making four to eight times their investment in the company, according to BloombergQuint’s calculations.