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Buy UTI Asset Management Company Ltd For Target Rs.1,200

Business momentum and relative valuations remain favourable

UTI Asset Management Company (UTI) is exhibiting multiple positive business indicators such as gains in market share in equity segment as well as flows, SIP and folio additions too. Cost reduction programme undertaken by the company, improvement in subsidiary performance, NFO pipeline, and relatively attractive valuations are strong earnings drivers ahead. Maintain BUY with a revised target price of Rs1,200 (earlier: Rs862), based on 30x (25x earlier) core EPS of Rs31 and cash of Rs274/share. We factor-in closing AUM growth of 15%/17% with yields at 43bps /40bps for FY22E/FY23E. Our higher multiples earnings reflect the overall business momentum and available growth levers.

* Business momentum remains positive. Based on AMFI closing AUM data, UTI’s equity market share (including hybrid funds) has improved from 4.45% in FY20 to 4.75% in FY21 and 4.76% in Q1FY22. Passive market share has grown from 12.2% in FY20 to 13.2% in FY21 and 13.1% in Q1FY22. Debt market share has eroded from 4.3% in FY20 to 4% in FY21 and 3.8% in Q1FY22. SIP market share (UTI’s gross SIP sales / Industry net SIP flows) has risen from 3.6% in Q4FY21 to 3.8% in Q1FY22. Its total inflow market share improved to 10.24% in Q1FY22 vs 6% in FY21. All categories of fund (except income fund) saw positive inflows. Equity and ETF flow market share stood at 6.24% and 11.6% respectively in Q1FY22.

* Subsidiaries too are contributing to growth expectations. Increased yield in the pension management subsidiary from 1bps to 5bps (which also witnessed strong AUM growth of 30% YoY in Q1FY22), higher AUM growth of 93% YoY in the international subsidiary, and possible gains from the venture capital subsidiary are all adding to UTI’s earnings growth expectations.

* Cost improvement remains a valid earnings trigger over next 2-3 years. Relatively higher cost vs peers (total opex as % of AAUM for UTI was 34.5bps in FY21 vs HDFC AMC’s 10.4bps and NAM’s 24.3bps), scheduled senior employee exits over the next 3-4 years, and cost performance in FY21/Q1FY22 makes cost reduction one of the key investment theses on UTI. Q1FY22 operating expenses (annualised) stood at 31.9bps vs 12.1/20.8bps of HDFC AMC/NAM.

* Management changes and strategic corporate initiatives (started from the IPO itself) can be important elements for further rerating. UTI has appointed Ajay Tyagi as head of equities, Vetri Subramaniam as CIO, P. Dastoor as head of sales, and S. Asthana as new fund manager (effective Aug’21). Besides, it has set up a separate digital committee at the Board level and dedicated business development units for T30/B30 cities.

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