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Sixth IPO of the month: Why you should subscribe UTI AMC, brokerages answer


Most brokerages have a 'subscribe' rating on the issue given its decent returns and profit margins in the past few years

Sixth IPO of the month: Why you should subscribe UTI AMC, brokerages answer
UTI Asset Management Company (AMC), the sixth IPO to launch this month, opens for subscription today and will close on October 1. The company will be the third AMC to get listed on the stock exchanges after Nippon Life India Asset Management (NAM) and HDFC AMC and has fixed a price band of Rs 552-554 per share for its IPO. At the upper end of the price band, the IPO would fetch Rs 2,160 crore.
UTI AMC is the second-largest AMC in India in terms of total AUM, seventh-largest AMC in India in terms of mutual fund Quarterly Average Assets Under Management with Rs 1.5 lakh crore. It also has the largest share of monthly average AUM amongst the top ten Indian AMC coming.
The IPO comprises the sale of 3.9 crore equity shares, or 30.75 percent, stake by existing shareholders. The objects of the IPO are to achieve the benefits of listing the equity shares on the stock exchanges and to carry out the sale of equity shares offered for sale by the promoters.
Five major shareholders, SBI (18.2 percent holding pre-issue), LIC (18.2 percent holding pre-issue), BOB (18.2 percent holding pre-issue), PNB (18.2 percent holding pre-issue) and T Rowe Price (26 percent holding pre-issue) are executing OFS of 3.9 crore shares with an offer size of Rs 2,160 crore.
Post the IPO the shareholding of SBI, LIC, BOB, PNB, and T Rowe Price will be 10 percent, 10 percent, 10 percent, 15 percent, and 23 percent respectively.
Most brokerages have a 'subscribe' rating on the issue given its decent returns and profit margins in the past few years. It is well-positioned to capitalise on favourable industry dynamics, including the under-penetration of mutual fund products, brokerages said. They added that a long-term track record of product innovation, consistent investment performance and AUM growth are the key positives.
Let's take a look at what the brokerages have to say:
Geojit Financial Services
As per the brokerage, the company enjoys the second highest market share in PMS and NPS business with AUM of Rs 6,97,050 crore and Rs 1,35,600 crore, respectively. At the upper price band of Rs 554, UTI AMC is available at P/E of 25x FY20, which is cheaper compared to its peers (HDFC AMC-36x, Nippon Life - 38x). The brokerage believes that the IPO price is fair after factoring lower ROE, high competition and uncertainties from the pandemic and recommends a 'subscribe' rating on a short to medium term basis, expecting a listing gain.
LKP Securities
The brokerage said that UTI is well-positioned to capitalize on favorable industry dynamics, including the under penetration of mutual fund products. It is a pure-play independent asset manager with strong brand recognition and a diverse portfolio of funds and services added LKP.
"At higher price band, the stock is valued at 25.7(x)FY20 Earnings.
Comparing with peers like HDFC AMC and Nippon AMC which are trading at 35.2(x) and 35.0(x)FY20 Earnings respectively due to higher ROE. We still believe that UTI AMC is lucrative and we recommend to SUBSCRIBE," the brokerage noted.
Nirmal Bang
The brokerage believes that the IPO pricing is undemanding given the valuation HDFC AMC and Nippon AMC are currently commanding. From a more near-to-medium term perspective, it currently has a cautious view on the overall AMC sector.
"Even though we are positive on the industry prospects from a long-term perspective, we take cognisance of some of the near-to-medium term headwinds. The equity flows have been faltering month-on-month despite the equity markets being rewarding enough over the past few months. Market volatility, whether due to global cues and/or domestic economic data, could keep retail investors from participating in capital markets," the brokerage cautioned. The brokerage has not rated the IPO and said that it shall take a call on the stock rating at a later stage.
At a price band, UTI AMC has priced its IPO at 4.6 percent of the total FY20 AUM with 10 percentFY20 RoE. Peer comparisons are NAM India which is trading at a higher return ration. Considering relatively weaker return ratios and unfavorable AUM mix, UTI AMC is expected to be at a discount to its peers. Hence, the valuation discount by UTI AMC IPO is justified and remains attractive considering the gradual improvement in cost parameters, the brokerage noted.
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