Initiating Coverage Report on UTI AMC - A turnaround in the works - HDFC Securities

UTIAM is India's eighth-largest MF asset manager. Its equity performance is improving (40.6% outperforming AUM, +1,285 bps vs. Mar-20) and market share stabilising (4.7%, +34bps vs. Mar-20), which should drive flows and revenue growth. UTIAM boasts of a strong agency-led granular AUM. IFA/B30 contribute 60.3/24.5% of equity/total assets. We expect FY20-23E revenue CAGR of 7.5% along with improving staff costs (27.0bps of AAUM in FY21E to 21.6 bps in FY23E) to drive operating profits at a CAGR of 13.8%. We initiate with a BUY rating and a target price of Rs 650 (10% discount to DCF) i.e. FY22/23E EV/NOPLAT of 23.6/18.0x, which is a 37.3/46.6% discount to NAM's target multiples.

- Improving performance; stabilising market share. As of Oct-20, 40.6% (+1,285 bps, vs. Mar-20) of the rated equity AUM of UTIAM is outperforming (4-star and plus). It is significantly better than the other large listed equity asset managers (HDFCAMC/NAM at 3.8/16.8%). UTIAM lost 373bps in equity market share over FY15-FY20; however, market share has started to consolidate and improve: 1HFY21 +34bps to 4.7%. We expect better performance to attract flows and aid market share recovery.

- Strong distribution footprint. Historically, UTIAM has been an agency-driven, given that it was established as Unit Trust of India- this is reflected even today as IFAs contribute a 60.3% share in equity AUM vs. HDFCAMC's 41.2 %. UTIAM also has a larger proportion of AUM i.e. 24.5% from B-30 locations; HDFCAMC/NAM are at 14.2/18.2%. This makes for a more granular AUM and gives the company a better bargaining power.

- AUM growth and reduction in staff costs to drive operating leverage. UTIAM delivered operating profit (OP = PBT - OI) of 17.3bps of AAAUM vs. HDFCAMC/NAM's 40.8/27.3bps in FY20. Lower profitability is primarily due to high staff costs. The company has a staff strength of ~1,386, of which ~251 are expected to retire by FY25E; this should lead to gross cost savings of ~Rs 840mn. As a result, we expect staff costs to reduce to 21.6bps of AAAUM in FY23E vs. 27.0bps in FY21E. Additionally, we believe UTIAM's AUM would grow at 16.2% CAGR over FY20-23E to Rs 1.85tn. Equity share is expected to increase 35bps vs. FY20 to 42.1%. This would drive revenues at an FY20-23E CAGR of 7.5% to Rs 9.79bn. Higher revenue, coupled with lower costs, is expected to drive operating profit to 22.6 bps of AAAUM.

- Key risks. The key industry risks are any macro slowdown, equity bear market, or a disproportionate growth in passives. Company-specific risks include any negative performance surprises, inability to execute (i.e. reduce costs), adverse judgments on ongoing pension-related labour litigation, and continued selling of shares by promoters after the expiry of lock-in.

Source : Equity Bulls

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