UTI AMC may be a better secondary market bet

ET Intelligence Group: Investors may consider investments in UTI Asset Management Company in the secondary markets. Deep and wide geographical reach beyond metros, decades-long existence in the mutual funds industry, and strong presence in a wide variety of equity and other investment products are a few key business strengths of the company.BusinessUTI Asset Management Company is the second-largest Asset Management Company (AMC) in terms of total Asset Under Management (AUM) of India’s mutual funds industry. In the top-30 cities, in terms of AUM, the company has a market share of 76 per cent. In the B-30 cities—tier-2 and tier-3 cities— the company has a market share of 24 per cent of total AUM in these locations. As of June 30, 2020, the company’s Quarterly Average AUM (QAAUM) was Rs 1.33 lakh crore. Out of this, 25 per cent of the AUM comes from active funds, 18 per cent from passive funds, 14 per cent each from hybrid and income funds and remaining comes from liquid and money markets. As more investors shift their savings in mutual funds products, the revenue and net profit growth of India’s mutual funds is quite bright. According to rating agency Crisil’s estimates, in the next five fiscals ending FY25, India’s mutual fund industry’s revenue and net profit will grow at Compounded Annual Growth Rate (CAGR) of 13-15 per cent and 15-16 per cent, respectively.The issue’s objectiveThis is an Offer for Sale (OFS). To meet regulatory requirements, investors such as SBI, LIC, Bank of Baroda, Punjab National Bank (PNB) and T Rowe Price (TRP) will offload their stake in the company. They will be selling close to 39 million shares. This is close to 30 per cent of the company’s total equity.FinancialsIn the past three fiscals ending FY20, the company’s revenue from operations has declined at CAGR of 13.8 per cent to Rs 854 crore. In the same period, its profit declined at CAGR of 17.4 per cent to Rs 276 crore in FY20. In the past three fiscals ending FY20, its listed peer HDFC Asset Management Company’s revenues and profit have grown at CAGR of 10.2 per cent and 33.2 per cent, respectively.ValuationConsidering its FY20 financials, the issue is commanding price to earnings multiple of 25.7 at the upper end of the price band. As of FY20, its listed peer HDFC AMC traded at a price-to-earnings multiple of 35.5. This is a 28 per cent discount to the sector average P/E of 36.17. This discount captures the differences in the financial performance and operational strengths of the company and its peers.

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