Buy UTI Asset Management Co Ltd For Target Rs. 1,000 - JM Financial
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Media reports indicate Tata group to acquire 45% stake in UTI AMC
As per media articles, Tata group is considering options to buy 45% stake in UTI AMC from four state-owned entities namely PNB, LIC, SBI and BOB. Post the transaction, it is expected that UTI AMC will merge with Tata AMC to become the 4th largest AMC in the country with a proforma AUM of INR 3.1tn (as of Jul’22). Based on Jul’22 data, the combined entity is expected to have an equity/debt/liquid/others mix of 45%/12%/25%/18%, market share in equity/debt/overall AUM of 7.5%/4.8%/8.4% and B-30 to form 21% of the total AUM. UTI AMC is prominent in large cap and flexi cap category while Tata AMC is prominent in sectoral, balanced and value category and thus the product portfolio should complement each other. If we were to consider the FY22 numbers for UTI and Tata AMC, it results in PAT/AUM and ROE of 0.23% and 16.8% respectively for the merged (proforma) entity. UTI AMC is currently trading at 13.1x FY24E EPS which is at a discount of 55%/40% to HDFC AMC/NAM. If the transaction goes through, we see significant re-rating potential in UTI AMC, given that the transaction will result in combination of two strong domestic brands and distribution presence. We maintain BUY valuing UTI AMC at 17.5x FY24E EPS resulting in a TP of INR 1,000.
* Merged entity to become 4th largest AMC in the country: As of Jun’22, PNB/LIC/SBI/BOB own 15%/10%/10%/10% stake in UTI AMC and T.Rowe Price owns 23%. Tata group is exploring options to buy 45% stake from the four state owned entities and Tata MF currently owns 2.6% stake in UTI AMC. It is expected that post the transaction, UTI AMC will merge with Tata AMC to become the 4th largest AMC in the country with a proforma AUM of INR 3.1tn (as of Jul’22).
* AUM mix and market share for the combined entity: As of Jul’22, UTI AMC and Tata AMC had an equity/debt/liquid/others mix of 40%/13%/22%/25% and 57%/9%/34%/0.5% respectively. UTI AMC and Tata AMC had a market share in equity/debt/overall AUM of 4.8%/3.8%/5.9% and 2.8%/1.0%/2.4% respectively. Based on Jul’22 data, the combined entity is expected to have an equity/debt/liquid/others mix of 45%/12%/25%/18%, market share in equity/debt/overall AUM of 7.5%/4.8%/8.4% and B-30 to form 21% of the total AUM. UTI AMC is prominent in large cap and flexi cap category while Tata AMC is prominent in sectoral, balanced and value category and thus the product portfolio should complement each other.
* Valuation and view: UTI AMC is currently trading at 13.1x FY24E EPS which is at a discount of 55%/40% to HDFC AMC/NAM. If the transaction goes through, we see significant re-rating potential in UTI AMC, given that the transaction will result in combination of two strong domestic brands and distribution presence. We maintain BUY valuing UTI AMC at 17.5x FY24E EPS resulting in a TP of INR 1,000.
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