UTI AMC IPO Draws Strong Interest From Rival Fund Houses

 

Mutual fund houses are generally fairly competitive gathering assets and in trying to outdo one another. But when a fund house is set to get listed, it is viewed as attractive investment opportunity even by a rival.

The initial public offering (IPO) of UTI Asset Management Company (AMC) – the eighth-largest fund house by assets – saw healthy participation from domestic fund managers. Mutual funds (MFs) accounted for 67 per cent of investments made in the ‘anchor’ book. Now, anchor book investments are done just before the IPO opens for subscription.

Of the Rs 644.64 crore deployed in the anchor book on September 28, 2020, Rs 435 crore was done by MFs.

This is not the first time domestic fund managers made investments in AMC IPOs. Nippon India AMC (the erstwhile Reliance Nippon Life AMC) saw anchor book investment of Rs 205 crore by MFs, while HDFC AMC saw Rs 261 crore deployed by MFs.

Fund managers say the investment in UTI AMC is a call on the growth potential of the mutual fund industry, as well as UTI’s brand pull.

“UTI AMC is in the right business, which can offer high return on capital employed and return on equity. Given the potential of high operating leverage in an AMC, there is a good scope for strong earnings growth. Also, the IPO is being offered at reasonable valuations,” says the chief investment officer (CIO) of a fund house that participated in the anchor book.

High operating leverage is possible in a business model where costs are largely fixed in nature, as is the case with AMCs. Revenues can grow at a faster pace than costs.

Power play beyond the top-30 cities

UTI AMC remains a strong ‘brand’ beyond the top-30 cities, or B-30 cities as these locations are called in industry parlance. Among the top-ten AMCs, UTI has the highest share of assets in the B-30 cities, according to the fund house’s presentation.

“UTI AMC’s strong brand in B-30 cities shows its strong connect with customer base in these markets. Also, it has a robust distribution network, giving it deeper penetration,” says the CIO.

However, there are some asset managers that feel even though the business is attractive, shares of UTI AMC could be grabbed at lower price after it gets listed.

How UTI AMC fared over the years

Although UTI AMC is a formidable name in the mutual funds industry, it has been clearly overshadowed by nimble-footed, deep-pocketed and street-smart fund houses. Even SBI Mutual Fund – another state-owned fund house – has emerged as the country’s largest mutual fund house as per the September-end quarterly assets under managements figures.

“The fund house has lost market share in the recent past. There is also a concern over its asset mix. The legacy employee issues can also turn into an overhang on the stock,” says senior executive of a fund house, which didn’t participate in the anchor book.

Between March 31, 2019 and June 30, 2020, the fund house has seen its market share slip from 6.5 per cent to 5.4 per cent.

A few fund managers feel that the AMC can regain some of its lost market share. “UTI AMC’s declining market share seems to have stabilised. Its schemes’ performances are improving and it is accumulating good assets,” says the head of equity of another fund house. To be fair, UTI AMC has come a long way since its earlier days when it wasn’t under the Securities and Exchange Board of India regulations and was an opaque behemoth hiding behind an act of parliament, which was finally repealed.

But challenging markets, increased competition and the controversy of its CEO appointment has nibbled at its market share gradually. With Imtaiyazur Rahman, a former chief financial officer of the fund house, an insider and its acting chief executive officer (CEO) being finally made its CEO in June, the fund house may get firm direction.

Large share of low-cost passive funds

While equity assets account for 45.4 per cent of UTI AMC’s overall book (open-end funds), about 45 per cent of the equity assets are in passive schemes.

Compared to actively-managed funds, passive schemes earn less, given that charges are low.

For fund managers that participated in the anchor book, the asset mix doesn’t seem to be an issue. “It is fine as long as the higher-margin products are doing well, and are complemented by lower-margin products,” says the head-equity quoted above.

The anchor book of UTI AMC had seen 15 fund houses place bids through various schemes. However, it would be interesting to see how many fund houses keep their investments after the 30-day lock-in required of an anchor investor ends. The shares of UTI AMC are expected to be listed on October 12.

Sandip Ginodia , CEO

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