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Published on 3/02/2021 10:52:49 AM | Source: Yes Securitiies Ltd

Buy UTI Asset Management Company Ltd For Target Rs.689 - Yes Secruities

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Regaining market share, Attractive valuations

Improving fund Performance aiding market share recovery

UTI AMC had witnessed continuous market share loss from 8.8% in FY12 to 5.6% in FY20 due to relatively weak equity fund performance and freezing of subscription in few flagship debt funds. However, with specific measures undertaken by the management the concerns around fund performance are abating as reflected from the equity market share gain for UTI AMC has to 4.9% as on Dec 2020 from 4.6% in March 2019. It has also been able to gain back 100bps of market share in its Liquid funds during YTDFY21. We believe the loss of market share is slowly getting arrested and shall lead to AUM growth of 16% during FY21E‐FY23E.  

 

Favorable AUM composition with highest contribution from B30 and Retail AUM

UTI AMC derives 24% of its AUM through B30 cities compared to industry average of 15%. In addition, retail investors contribute to 29% of the total AUM for UTI vis‐à‐vis the industry average of 21%. These favorable AUM dynamics is expected to increase the pie of Equity funds as retail investors and flows from B30 cities are more tilted towards equity. We believe with fund performance improving, UTI AMC shall be able to further strengthen its position in these segments in turn scaling up the margins with favorable AUM mix.

 

Presence in series of Investment Management services to further advance profitability

UTI AMC has presence across various investment management services like Retirement funds, PMS services to HNI, EPFO, CMPFO, ESIC, PLI offer funds and AIFs. Going forward, management intends on scaling up its PMS, AIF and Retirement solutions along with MF business to bring revenue diversification. Besides, the latest development of PFRDA raising the cap of fund management charges from existing 1bps to 9bps (slab‐based) shall strongly benefit UTI Retirement solution funds (which manages an AUM of Rs. 1,356 bn and contributes ~Rs.600 mn to the overall profitability). Additional contribution from these business segments is expected to abet UTI’s profitability.

 

Improving operational efficiencies to drive Return ratios  

Over the duration of next 4 years, 250 employees of UT AMC are retiring which shall translate in to saving of Rs.850mn as most of them will not be replaced. At few areas replacement with be done with low cost employees. Post which, management expects the annual savings to range between 10‐15% in employee costs. Also, the company has taken steps like green initiative and rent negotiations which shall further help to reduce operational expenses. We expect the EBITDA to grow at a faster pace of 46% CAGR during FY21E‐FY23E led by rationalization efforts in both employees cost and other expenses accompanied by operating leverage in process. We estimate EBITDA margin to expand to 48.1% and operating leverage to drive ROE to 16% (FY20 RoE of 10%).   We expect dividend payout to remain strong and reach up to 65% by FY23E as it has a dividend policy, of minimum 50% of PAT. 

 

AMC Play at a bargain price

We expect UTI AMC to report AAUM CAGR of 14% during FY21E‐23E and a EBIDTA CAGR of 46% during the same period. The stock currently trades at FY23E P/E of 14x, which is a steep discount to 31x and 21x for its listed player HDFC AMC and NAM respectively. We believe this discount to narrow down on account of (1) Increase in market share (2) Improving cost efficiencies (3) Improving return ratios. We assign a multiple of 17x (~50% discount to our average target multiples of HDFC AMC and NAM) to FY23E EPS to arrive at our target price of Rs689. Recommend BUY.     

 

Result Update

* Revenue – Management Fees was at Rs.2.1bn was in line with our estimate. Management fees grew by 7% yoy and witnessed a growth of 6% on sequential basis.

* Yield on Management fees ‐ The Yield on Management fees was 51bps, remaining flat on YoY basis, against our estimate of 52bps.  

* Operating Profit ‐ Operating profit came at Rs. 0.5bn which was lower than our estimates of Rs. 0.8bn on back of higher employee cost.

* Other Income – Other Income came at Rs. 1.36bn was much higher than our estimates of Rs. 0.9bn.  

* Profits – PAT stood at Rs. 1.4bn v/s our estimates of Rs. 1.2bn mainly led by robust other income.  

* Change in Estimates – 9MFY21 EPS stands at Rs. 28.4 which is 84% of our FY21 estimate of Rs. 33.7.

* Valuations ‐ The stock currently trades at FY23E P/E of 14x.

 

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