UTI Asset Management Company - Valuations trailing business recovery - ICICI Securities

UTI Asset Management Company's (UTI AMC) predecessor Unit Trust of India (UTI) is a pioneer and one of the oldest brands in India's mutual fund industry with a heritage of >55 years. Currently, with a 5.6% share of total AUM in India in 9MFY21, it ranks eighth in the mutual fund industry. UTI AMC has lost equity AUM market share from 8.7% in FY15 to 4.6% in 9MFY21 and its debt AUM market share from 7.7% to 4% in the same timeframe. This has resulted in its AAUM remaining stagnant at ~Rs1.5-1.6trn as at Dec'20, but overall revenue yield declining from 57bps in FY18 to 47bps in FY20. However, UTI AMC has chartered a business recovery on the basis of cost control and increased distribution tieups (which includes CitiBank, State Bank, ICICI Bank, HDFC Bank etc). We believe that this should help UTI to charter 7.4% EBITDA CAGR over FY20-23E with 13% RoE.

- Recommend BUY with a target price of Rs700 based on 25x core FY23E EPS of Rs18 and add cash and investments of Rs255/share. UTI valuation discount to peers (currently trading at 26x FY20 EPS compared to 51/49 for HDFC AMC/Nippon AMC) is driven by history of market share loss and higher cost structure. While market share loss has been a common phenomenon for most AMCs, cost structure of UTI can improve with organic initiatives.

- Cost-control initiatives can help improve profitability: Employee costs (20bps of AAUM) and other expenses (13bps of AAUM) remain high vis-à-vis peers like HDFC AMC and Nippon AMC. Management wants to control employee costs (Rs3.5bn level per annum) aided by natural retirement of high-salaried personnel and also retain other expenses at Rs2bn-2.25bn level over the next five years. Even an industry median cost structure can lead to an incremental 5bps improvement to the operating profit levels (Rs 2.6bn FY22E operating profit on an AUM base of Rs2.15trn).

- Leading presence in B30 markets, distribution initiatives can help improve market share: With approximately 27% of its overall AUM in B30 geographies, UTI has the highest concentration in that segment among the top-10 AMCs. In addition, UTI AMC is actively seeking strategic partnerships, including with banks, to help gain a better foothold in T30 markets as well as cement its position in B30 - thus helping it recoup the market share ceded over the past five years.

- Expect earnings CAGR of 3-21% for over the next 10 years assuming +/- 300bps movement in equity market share. Assuming that: 1) Indian nominal GDP grows at 9% CAGR over the next 10 years, 2) aggregate net inflow p.a. is 1 % of aggregate GDP (vs 0.8% over 2010-20), and 3) average annual performance growth is 7.8% (vs 6% over 2010-20) - Indian AUM is likely to grow to Rs45trn by 2025 and Rs100trn by 2030. Within a possible +/-300bps change in equity market share, UTI AMC's Revenue / operating profit / PAT CAGR is likely to be 2-14% / 1- 24% / 3-21% over the next 10 years after adjusting for decline in yields from growth in AUM and periodic stepdown in allowable MF TER.

Source : Equity Bulls

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