UTI AMC, the second largest AMC in India in terms of total AUM, is 8 th largest in terms of QAAUM (`1,33,600cr) as of June 30, 2020. In terms of live folios, UTI AMC accounts for 12.2% of the 89.7mn industry folios as of March 31, 2020.
Huge growth potential in Mutual Fund AUM:
Over the past five years (FY2015- 20), equity AUM for the Indian MF industry has increased 2.7x from `3.24 lakh cr to `9 lakh cr. Further, overall AUM has nearly jumped 2.4x from `11.48 lakh cr to `27.14 lakh cr over the same period. There is a huge growth potential for MF industry as the penetration of mutual funds is low in India with an AUM/GDP ratio of 11% as of March 2020 vs. that of developed countries at >50%. Lower attraction in real estate by investors due to subdued returns coupled with lower inflation will direct investors from physical assets to financial savings, resulting in MF AUM to grow at a healthy rate.
Healthy financials to support aid dividend payout:
UTI AMC reported EBITDA margin of 36% for FY20 and average RoE for last 3 years stood at 13.5%. Primary reason for subdued RoE is lower dividend payout (20%) vs. listed players payout ratio of more than 50%. However, management has indicated that from FY2020 they will consider increasing dividend payout ratio substantially.
There is possibility of EBITDA margin to improve:
UTI AMC’s operational profitability is lower vs. listed peers primarily owing to higher cost. With growth in AUM, we expect cost to grow at slower speed, which will benefit operating leverage and will help the company to improve EBITDA margins.
Outlook & Valuation:
At the upper end of the IPO price band, it is offered at 25.4x its FY20 earnings and 5.25% of Q1FY21 QAAUM, demanding `7,024cr market cap, which we believe is reasonable. Further, listed peers like HDFC AMC trades at 35x FY20 earnings and Nippon AMC trades at 37x FY20 earnings. Additionally, HDFC and Nippon AMC trade at 12.56% and 8.55% of Q1FY21 QAAUM, respectively. Considering attractive valuation, huge growth potential of MF industry, asset-light business and higher dividend payout ratio, we are positive on this IPO and rate it as SUBSCRIBE.
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