UTI AMC IPO – What are the likely risks and returns?

UTI AMC IPO UTI AMC IPO   What are the likely risks and returns?

UTI needs no introduction for most of us involved in the capital markets in any form. Established in 1963 under a Statute of Parliament, it launched India’s first mutual fund scheme (US-64) in the year 1964. Ironically, the same US-64 created a big challenge for the UTI Fund in 1999 leading to a massive restructuring of the fund.

While UTI continues to be a key player in the Indian MF space, it has surely fallen in the rankings if you consider client funds under management at just Rs.1.35 trillion. However, if you add up the funds that UTI also manages for the EPFO and the NPS, then the total AUM including the PMS AUM stands at Rs.9.65 trillion and it is second only to SBI Mutual Fund. An IPO that was long expected from the UTI stable is finally opening on 29 September.

Highlights of the UTI AMC IPO

Here are some of the key highlights of the UTI AMC IPO opening on Tuesday.

  • IPO of UTI AMC opens on Tuesday, the 29th of September and closes on Thursday, the 01st of October 2020. In all the issue will remain open for a period of 3 days. However, practically, 30 Sep happens to be bank closing in many places due to half year closing.
  • UTI AMC will offer a total of 3.8 crore shares by way of offer for sale or OFS in the price band of Rs.552-554. It is expected to be priced at the upper end of the band. Being an OFS, no fresh funds will come in. Post issue the promoter stake will fall to 69.25%.
  • As per SEBI orders, LIC, SBI and Bank of Baroda will need to reduce their stake in UTI to 10% since they have their in-house AMCs. LIC, SBI and BOB will off-load 8.25% each in the OFS, while PNB and T Rowe Price will offload 3% each. The 10% rule of SEBI will not apply to PNB as it has already sold PNB AMC to Principal AMC in 2016.
  • Post the IPO, BOB, LIC and SBI will hold 10% each in UTI AMC, T Rowe Price will hold 23% and PNB will hold 15.25%, with the employees of UTI AMC and the general public holding the balance shares.
  • For the retail investors infusing less than Rs.2 lakh in the IPO, the minimum bid size will be 27 shares and in multiples of 27 shares thereof. Retail investors can invest up to a maximum of 13 lots in the IPO under a single application.

How do the valuations of UTI AMC compare with peer group?

Let us first look at how the IPO valuation will look like. For example, the issue size will be approximately Rs.2105 crore at the upper band of the IPO price. Considering that represents 30.75% of the company, the IPO assigns a total valuation of close to Rs.6850 crore to UTI AMC. In terms of P/E this lower then HDFC AMC and Nippon AMC, but it must be remembered that the return on equity (ROE) of UTI AMC is also much lower than the other two listed AMCs in India.

Another way to look at AMC (and perhaps a better way) would be to look at comparative valuations as percentage of the external AUM. On that parameter, HDFC AMC trades at 12.8% AUM while Nippon AMC trades at 9% of AUM. Considering that UTI IPO is being made at less than 6% of AUM, it is relatively cheaper and attractive in technical terms.

There is one more thing to consider here. For example, UTI may rank eighth all-India with an external AUM of just Rs.1.35 trillion as compared to Rs.3.6 trillion for HDFC AMC and closer to Rs.2 trillion for Nippon AMC. But if you add the PMS monies that UTI AMC manages for the government, EPFO etc, the total AUM stands at Rs.8,40,000 crore making it second in overall AUM only to SBI Mutual Fund. However, that being a non-lucrative business does not positive reflect in valuations.

Is the UTI AMC IPO a good investment idea?

UTI AMC is surely a pedigreed player in the Indian market and has the wherewithal to grow its AUM in a big way as the overall interest in mutual funds build up. While the UTI AMC IPO appears reasonably priced in terms of P/E ratio and in terms of Value/AUM, the pace of growth and profitability in the coming quarters will hold the key. It must be remembered that UTI AMC profits have been dwindling in the last 3 years.

Investors need to evaluate each of these and take a decision based on their investment span, risk appetite etc.,

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