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Business tailwinds gather momentum…

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 as well as folio additions. Cost reduction program undertaken by the company and hike in pension fund management charges are strong earnings drivers ahead.

These growth levers, along with attractive valuations, make us constructive on UTI. Maintain BUY with a revised target price of Rs862 (earlier: Rs700), based on 25x core EPS of Rs23.8 and cash of Rs268/share. Our revised earnings estimates take into account the additional revenues to be generated from the pension business (Rs657mn / Rs755mn in FY22E / FY23E) and cost-control initiatives.

* Q4FY21 reported earnings in line with estimates. Core PAT in Q4FY21 came in at Rs831mn (Rs2.2bn/Rs2.2bn/Rs1.9bn/Rs1.7bn in FY18/FY19/FY20/FY21). Q4FY21 QAAUM stood at Rs1.83trn, up 21% YoY and 11% QoQ. This resulted in revenue growth of 29% as revenue yields improved 3.4bps YoY to 51.5bps. Employee costs declined 33% YoY and 36% QoQ to Rs743mn aided by lower ESOP cost in the current quarter (Rs30mn in Q4FY21 vs Rs105mn in Q4FY20), write-back of excess provision towards variable pay made in Q4FY20 (Rs145mn), and absence of non-managerial variable pay (Rs125mn in Q4FY20) led to total savings of Rs350mn YoY. Other expenses rose 51% on account of CSR spends and digital initiatives. Operating margins (% of QAAUM) came in at 23bps vs 9.3bps in Q4FY20 and 13.4bps in Q3FY21.

* Outperformance on several counts including: 1) gain in equity market share (based on QAAUM reported by AMFI) from 4.4% in Q4FY20 to 4.7% in Q4FY21; 2) sequential gain in debt market share from 3.77% in Q3FY21 to 4% in Q4FY21 (although on YoY basis it is still lower by 39bps) (based on QAAUM reported by AMFI); 3) increase in SIP market share (based on gross SIP flows reported the company and industry SIP flows reported by AMFI) from 2.9% in Q1FY21 to 3.2% in Q2FY21, 3.5% in Q3FY21 and 3.6% in Q4FY21 (SIP AUM rose 75.4% YoY to Rs137bn as at Mar’21); 4) overall equity/total inflow of Rs(-)7.5bn/126bn for UTI compared to Rs(-)627/2,148bn for industry in FY21; and 5) total live folios stood at 11mn including 0.5mn added in FY21; there is also a substantial jump in digital platform mix in total sales from 23% in FY20 to 52% in Q4FY21.

* Cost reduction remains an earnings trigger. The frontloading effect of ESOP and retirement of senior personnel remain available avenues for reduction in employee costs. We expect employee costs to remain at Rs3.8bn/3.9bn and other expenses in the range of Rs1.9bn/2.5bn in FY22E/FY23E. As a percentage of operating revenues, we expect total opex ratio to shrink from 68% in FY21 to 62% / 61% in FY22E / FY23E.

* Increase in pension fund management can bring additional Rs657bn/755bn revenues in FY22E/FY23E. We expect an effective yield of 0.05% for UTI’s retirement solutions AUM on its expected AUM of Rs1.7trn and Rs1.9trn, which we expect will result in revenues of Rs839mn and Rs954mn vs Rs150mn in FY21.

* Maintain BUY with a revised target price of Rs862 (earlier: Rs700), based on 25x core EPS of Rs23.8 and cash of Rs268/share. Expect revenues, operating profit and core PAT to grow 14.1%, 13.3% and 16.8% respectively between FY21-FY23E.

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