UTI AMC IPO opens tomorrow: Attractive valuation, huge PMS biz; should you subscribe? Brokerages’ take

The Rs 2,160-crore UTI AMC is scheduled to open for subscription from September 29. India’s second-largest asset management company by assets under management has fixed the price band of the issue at Rs 552-554 per equity share. The issue will close on October 1, 2020. So far this month, the IPO market has witnessed five public issues, Happiest Minds Technologies, Route Mobile, CAMS, Chemcon Speciality Chemicals and Angel Broking. All the five issues got oversubscribed by the investors. While, on listing of Happiest Minds and Route Mobile shares on the stock exchanges, investors received a premium of over 100 per cent from the IPO price. Analysts expect that UTI AMC IPO will garner the interest from all market participants, as it is priced at an attractive valuation.

UTI AMC has attractive valuation

“UTI AMC demanded a valuation of 25x of FY20 earnings and 5.3 per cent of Q1FY21 QAAUM. However, listed peers HDFC AMC trades at 35x FY20 earnings and Nippon AMC trades at 37x FY20 earnings. Additionally HDFC and Nippon AMC trades at 12.56 per cent and 8.55 per cent of Q1FY21 QAAUM, respectively. Hence, considering attractive valuation and asset-light business models we believe IPO sail through successfully,” said Jaikishan Parmar, Senior Equity Research Analyst, Angel Broking Ltd.

UTI is the second-largest AMC in India with total AUM of Rs 9,706 billion, and eighth-largest AMC in India in terms of mutual fund business with Quarterly Average AUM (QAAUM) of Rs 1,336 billion. The IPO comprises sale of 3.89 crore shares by the existing stakeholders such as SBI, LIC, Bank of Baroda, Punjab National Bank, and TRP. State Bank of India, Life Insurance Corporation and Bank of Baroda are offering to sell 1.04 crore shares each, while Punjab National Bank and T Rowe Price International will offload 38.03 lakh shares each.

IPO price factors in high competition, uncertainties from pandemic

Analysts at Geojit Financial Services have given a ‘subscribe’ rating to the issue on a short to medium-term basis. They are expecting listing gains as the company’s FY20 ROE stands at 10.3% which is much lower than its peers (HDFC AMC-35.5% and Nippon Life-16.2%). Based on the upper price band, the market cap to MF AUM for UTI stands at 5.3% compared to HDFC AMC’s 12.6% and Nippon Life’s 8.6%. “Additionally, they have a huge business of PMS & NPS, which accounted for 41% of Q1FY21 revenue. We believe that the IPO price is after factoring lower ROE, high competition and uncertainties from the pandemic,” said Geojit Financial Services in a research note.

Investors will have to shell out at least Rs 14,904 to bid

The bid lot size of the issue is of 27 shares or in multiples thereof, meaning that one will have to shell out at least Rs 14,904 to bid for the issue. Analysts at Nirmal Bang believe that favorable macro tailwinds, which are structural in nature, combined with a reputed brand name will augur well for UTI AMC to deliver sustainable growth and profitability. “Even though we are positive on the industry prospects from a long-term perspective, we take cognizance of some of the near-to-medium term headwinds,” it said in a report. The research and brokerage firm has a cautious view on the overall AMC sector from a more near-to-medium term perspective. Market volatility, whether due to global cues or domestic economic data, could keep retail investors from participating in capital markets.

Emkay Global Financial Services in its report noted that considering relatively weaker return ratios and unfavorable AUM mix, UTI AMC is expected to be at a discount to its peers. “Hence, the valuation discount by UTI AMC IPO is justified and remains attractive considering the gradual improvement in cost parameters,” it said. The key risks include any adverse impact on inflows, both for equity and debt funds, which may impact overall revenues and profitability of the company.