UTIAMC is India’s eighth-largest MF asset manager. Its equity performance is improving (40.6% outperforming AUM, +1,285 bps vs. Mar-20) and market share stabilising (4.7%, +34bps vs. Mar-20), which should drive flows and revenue growth. UTI AMC boasts of a strong agency-led granular AUM. IFA/B30 contribute 60.3/24.5% of equity/total assets for UTI AMC. “We expect FY20-23E revenue CAGR of 7.5% along with improving staff costs (27.0bps of AAUM in FY21E to 21.6 bps in FY23E) to drive operating profits at a CAGR of 13.8%,” says a report by HDFC Securities.
The brokerage gives a ‘BUY’ rating to UTI AMC share with a target price of ₹650 (10% discount to DCF). UTI AMC’s current share price is ₹566.
Here are the highlights of the report:
> Improving performance; stabilising market share: As of Oct-20, 40.6% (+1,285 bps, vs. Mar-20) of the rated equity AUM of UTI AMC is outperforming (4-star and plus). It is significantly better than the other large listed equity asset managers (HDFCAMC/NAM at 3.8/16.8%). UTI AMC lost 373bps in equity market share over FY15-FY20; however, market share has started to consolidate and improve: 1HFY21 +34bps to 4.7%. We expect better performance to attract flows and aid market share recovery.
> Strong distribution footprint: Historically, UTIAMC has been an agency-driven, given that it was established as Unit Trust of India- this is reflected even today as IFAs contribute a 60.3% share in equity AUM vs. HDFCAMC’s 41.2 %. UTIAMC also has a larger proportion of AUM i.e. 24.5% from B-30 locations; HDFCAMC/NAM are at 14.2/18.2%. This makes for a more granular AUM and gives the company a better bargaining power.
> AUM growth and reduction in staff costs to drive operating leverage: UTIAM delivered operating profit (OP = PBT – OI) of 17.3bps of AAAUM vs. HDFCAMC/NAM’s 40.8/27.3bps in FY20. Lower profitability is primarily due to high staff costs. The company has a staff strength of ~1,386, of which ~251 are expected to retire by FY25E; this should lead to gross cost savings of ~ ₹840mn. As a result, we expect staff costs to reduce to 21.6bps of AAAUM in FY23E vs. 27.0bps in FY21E. Additionally, we believe UTIAM’s AUM would grow at 16.2% CAGR over FY20-23E to ₹1.85tn. Equity share is expected to increase 35bps vs. FY20 to 42.1%. This would drive revenues at an FY20-23E CAGR of 7.5% to ₹9.79bn. Higher revenue, coupled with lower costs, is expected to drive operating profit to 22.6 bps of AAAUM.
> Key risks: The key industry risks are any macro slowdown, equity bear market, or a disproportionate growth in passives. Company-specific risks include any negative performance surprises, inability to execute (i.e. reduce costs), adverse judgments on ongoing pension-related labour litigation, and continued selling of shares by promoters after the expiry of lock-in.
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