UTI AMC IPO Coming Soon| Should You Invest?

UTI AMC Gets SEBI Nod for Rs.3,500 Cr IPO

Introduction

UTI AMC IPO Coming Soon! UTI Asset Management Company – India’s 7th largest mutual fund, got approval from the Securities and Exchange Board of India (SEBI) for an initial public offering (IPO) to raise almost Rs.3,500 Cr. The company had filed draft papers with SEBI in December 2019 and obtained its observations on June 16, 2020.

UTI AMC IPO Coming Soon

Company Overview

• UTI Mutual Fund is the 7th largest asset management company in India in terms of Total Assets under management (AUM). As on March-2020, UTI Mutual Fund’s AUM was around Rs.1.51 Lakh Cr.
• The Unit Trust of India was bifurcated into two components :
  1. SUUTI (Specified Undertaking of Unit Trust of India) and
  2. UTI Mutual Funds or UTIMF
• The UTI Mutual Fund was incorporated in 2002 and registered with SEBI in 2003 under the SEBI Mutual Funds Regulations.
• Thus, the UTI Mutual Fund persists as a pioneer of Indian Mutual Fund Industry.
• It was the first to offer a Unit Linked Insurance Plan or ULIP in 1971 with added life and accident cover. It also reached another milestone in 1986 with what was India’s first Offshore fund, called simply the ‘India Fund.’
• The company has 150 branches, 47,000 independent financial advisers, 320 chief agents and business development associates and over 1 crore investor accounts, spread across India.

UTI AMC IPO Details

• IPO Size
  • The Existing shareholders of the UTI mutual fund will sell 3.90 Cr shares in the issue. Thus this offer for sale could help raise about Rs.3,500 Cr for them.
• Issue Price Band
  • The UTI AMC IPO is likely to be priced at Rs.850-900 per share.
• Kotak Mahindra Capital, Axis Capital, Citigroup, DSP Merrill Lynch, ICICI Securities, JM Financial and SBI Capital are the bankers to the offer.

Stake Dilution by UTI AMC Promoters through Offer for Sale

Who are the Promoters of UTI AMC?

• The promoters of the company with the respective % stake held is as follows :
  1. State Bank of India : 18.5%
  2. Life Insurance Corporation of India : 18.5%
  3. Punjab National Bank : 18.5%
  4. Bank of Baroda : 8.5%
  5. US-based T Rowe Price : 26%
• The objective of this IPO ie. offer for sale by the promoters is to achieve the benefits of listing the equity shares on the stock exchanges. While, the UTI AMC will not receive money from the public issue.

Stake Dilution by Promoters

Lets see how much stake the promoters are looking to dilute.

• Thus, SBI, LIC and Bank of Baroda are planning to sell 1.05 Cr shares each in UTI Mutual Fund.
• While PNB and T Rowe Price will sell 38.04 Lakh shares each through an offer for sale.
• In recent commentary of SBI Q4 FY20 Results by Mr. Rajnish Kumar, Chairman, State Bank of India, mentioned – SBI is capable of meeting its liquidity requirements in the upcoming challenging quarters amid the COVID pandemic.
  • Thus, we can see that SBI is going to dilute 6.98% stake out of the total 18.5% in UTI AMC and will sell 1.05 Cr Shares.
  • At the issue price Rs.850-900 per share, SBI will raise funds around Rs.900 Cr through this offer for sale.  

Valuation

• This will be the third public offering in the Indian mutual fund industry after Nippon Life Asset Management and HDFC AMC.
• The current market capitalisation of Nippon Life Asset Management is around Rs.19,100 Cr. While HDFC AMC has a market capitalisation of around Rs.52,000 Cr.
• The Price to Earnings Ratio (PE) of both Nippon India AMC (45.9) and HDFC AMC (42.2) is above 40. On the same basis, the valuation of UTI Mutual Fund is done.
• Considering the upper price limit of Rs.900 per share, UTI AMC will be valued at Rs.13,500 Cr.

Mutual Fund Industry in India – Key Opportunities & Challenges

• While Investing in any company, there are 2 Key Parameters to look for :
  1. Earnings Visibility
  2. Earnings Growth Potential
• What are the Opportunities and Challenges for Mutual Fund Industry, Asset Management Companies in the next 10-15 years?

Opportunities

• Mutual Fund Industry in India is having a very low penetration (only 2-3%). Whereas, the penetration level in the Developed Markets is almost around 90-95%.
• So, we can clearly see that there is a great scope available for the growth of Mutual Fund industry and the Asset management companies in India.
• The Mindset shift of Indian Investors from the traditional Physical Asset (like Real Estate, Gold) to Financial Assets (Mutual Funds – Both Equity and Debt, Stocks) is going to play a big role in the development of the mutual fund industry in India.

Challenges

• Emergence of Passive Investing will be a key challenge for the asset management companies (though not in coming 5-10 years).
• Passive investing or Index investing includes both Index Funds and ETFs ie. Exchange Traded Funds.
• These 2 options offers much lower expense ratios in the ETF markets.
  • Assets under Management will grow along with the Volumes, as a result of which Expense Ratios will keep on declining.
  • And with the falling Expense Ratios, the Income Levels will also continue to fall.
• ETFs are currently a big threat to the Actively Managed Funds in the Developed Markets.
• However, with the low penetration, currently the growth opportunities are very high in Mutual Fund Industry in India.