{"id":1056,"date":"2021-05-18T20:10:00","date_gmt":"2021-05-18T20:10:00","guid":{"rendered":"http:\/\/oscillationss.blogspot.com\/?p=1056"},"modified":"2021-05-18T20:10:00","modified_gmt":"2021-05-18T20:10:00","slug":"uti-amc-significant-re-rating-candidate","status":"publish","type":"post","link":"https:\/\/oscillations.in\/?p=1056","title":{"rendered":"UTI AMC: Significant Re-rating Candidate"},"content":{"rendered":"

Stock Idea: UTI
\nAMC<\/span><\/u><\/b><\/p>\n

Grade: TIER 2<\/span><\/u><\/b><\/p>\n

(This business study of UTI AMC is taken from the Monthly Newsletter (Jan-21 Edition) of this Blog. The sample of Jan-21 edition was shared at this blog on 28th Jan, 2021.)<\/span><\/p>\n

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UTI AMC is a melodrama but the
\ndrama started with the debacle of US-64 fund of UTI in early 2000 forced Indian
\ngovernment to split UTI in 2003 into UTI Asset Management and Special
\nUndertaking Unit Trust of India (SUUTI, having the junk\/illiquid assets of UTI).
\nFirst melody was tried with the likes of SBI, PNB, LIC and BOB acquiring 25%
\nstake in the troubled (reputation) UTI AMC bringing in 500 cr. <\/p>\n

Things were going fine but it
\nstill had the trauma of US-64 and then in 2009 these 4 decided to sell 26%
\nstake to the US investment giant T Rowe Price who manages more than $1 trillion
\nglobally for $ 140 million (Rs. 650 cr). I think this was done to do some image
\nmakeover by bringing in global giant as largest investor as this would make
\npeople to have trust in UTI as global giant was picking a stake. This was a
\ngood move or we can say a perfect move. But these 4 could not leave the greed
\nto manage one of the biggest AMC in India (holding some 10% (4th<\/sup>
\nbiggest) share of Indian market at that time, now 6% share and 8th<\/sup> biggest).
\nThey continued to interfere in the working of UTI along with government who
\nwanted to dominate and control the board of UTI which was just the opposite of
\nwhat had been promised to TR Price that UTI AMC would be a professional firm.<\/p>\n

On the contrary except PNB, the
\nrest three were having their own AMC businesses and they owned 18.5% stake each
\nwhich clearly was a case of conflict of interests. After the initial stage,
\nthese 4 were not interested in running the UTI. In fact, LIC and SBI who were
\nhaving relatively very small AMC business even tried to acquire the stake of
\nothers to control and merge UTI AMC with their own AMC business. It was without
\nthe head for two years and so could not introduce new schemes because SEBI
\nrules do not allow a new fund offer without the approval from the head of a
\nfund house. Even around 2018 TR Price took these four gentlemen to court. As
\nthe three gentlemen (except PNB) were running their own AMC businesses so they
\nwere not that much focused on growing UTI AMC as they were <\/span>having just 18.25% share in UTI so their only
\nattempt was to merge it with their wholly owned AMC business.<\/p>\n

The association of these three investors
\n(LIC, SBI, BOB) having their own AMCs with UTI was a clear case of conflict of
\ninterests which was badly hurting the growth of UTI which was losing market
\nshare continuously (SBI now is the biggest AMC in India). So things were
\nterrible for the growth perspective although the schemes of UTI AMC were doing well
\nand they have done well in last 20 years. But then amid this tussle over
\ncontrolling UTI; SEBI happened as a blessing. In 2018, SEBI in order to control
\nthe conflict of interests made a regulation that a sponsor of a mutual fund,
\nits associates, group company and its AMC cannot hold 10 per cent or more stake
\nin a rival AMC. They also can\u2019t have a representation on the board of another
\nmutual fund house. This regulation forced these three investors to sell their
\nstake in the recent IPO and brought the same to 10%.<\/p>\n

In the recent IPO, TR Price and
\nPNB also sold 3% of their stake bring down their stake to 23% and 15%. So this
\nis a significant event in the journey of UTI and in my view this is going to
\nchange the fate of this company.<\/p>\n

In all research reports, I have
\nseen issues related to high employee cost and high operating expenses eating
\nout the profit margins so these reports conclude that UTI deserves lower
\nvaluation due to these issues impacting profitability and they declare it is
\nworking just like a PSU. But its historical ROE was around 16% and it is around
\nthis level in Dec-20 and Nippon is also having the similar ROE. HDFC is having
\nhigh ROE of 31% but this is due to the fact that HDFC can distribute its funds
\nfrom its vast banking channel at much lower costs and at a much bigger scale. Bank
\nbrand name also helps. Same has happened with SBI with highest market share
\nalthough it is also a PSU. Also, low dividend payout and large cash in the books
\nis one of the reasons for lower ROE for UTI and recently it has approved
\ndividend policy for much higher dividends (50% of profits) so this will improve
\nthe ROE.<\/span> <\/b>Dividend payout ratio of UTI was around 20%-30% while the likes of
\nNippon and HDFC have much higher dividend payout ratios (80% and 50%
\nrespectively). Even due to growing net worth the ROE of HDFC has also fallen
\nfrom 40% in 2018 to 36% in 2020.<\/span><\/p>\n

Further, banks distributing
\nschemes of AMCs related to their group are a clear conflict of interest as
\nbanks are forcing their group mutual funds on the customer rather than really
\ngiving honest advice and in this process they are earning huge commissions from
\nthe group AMCs. But I think SEBI is going to tighten the things more here in
\nthe near future. Direct schemes (Online sale without any intermediary) are
\ngaining momentum as current investors are well informed and they don\u2019t need to
\ngo to some selfish intermediaries for deciding their choice of fund as they can
\ndo the research on their own in this digital age. So things are going to change
\nin the fund distribution very fast. Already direct channel has grown to 50%
\nshare from some 30% 2-3 years back. In today\u2019s world, investors can find the
\ninformation related to consistent fund performers like UTI against others and
\nthey can take independent decisions so due to this there is a possibility of
\nsmaller funds growing faster than the other big brands. Like, UTI is one of the
\nbest performer in the retirement solutions (pension funds) and its funds under
\nthis are growing faster. Its retirement benefit pension fund is the largest in
\nits category.<\/p>\n

I was looking for the performance
\nevaluation of UTI AMC schemes and luckily I found the recent report from CITI
\nwhich has very detailed data and I found the same in their report saving much
\nof my time. UTI schemes have done much better. In last one year, UTI Equity
\nschemes have outperformed the benchmark index in 63% of their schemes. The same
\nfigure is 10% and 30% for HDFC and Nippon. Axis is the leader with 78%. The
\nequity schemes of HDFC are performing badly and it is losing market share (at
\n13.6% from 15.8% last year Dec-19). Its stock price is also doing badly with
\nnegative returns in last one year. Actually people
\ndo not realize that AMC is a knowledge based business and skills of managers
\nmatter the most rather than their costs.<\/span> UTI has higher employee costs
\nas it got large number of employees from the erstwhile UTI in 2003 split and
\nmanagement is working on it to reduce it. In next 5 years the retiring
\nemployees will reduce some 80-90 cr payout.<\/p>\n

But
\nif it has legacy issues then it has some high growth catalysts also. First,
\nmost of these problems were related to past and already happened in time and
\nspace and current board run management is working to resolve these issues.
\nSecond, UTI AMC has strong distribution strength in Tier 3 cities (B30) having
\nthe largest share. Future growth in the AMC\/Mutual fund industry will be driven
\nby these small cities. These cities have higher focus on equity schemes where
\ncharges are higher than debt funds so UTI can earn higher than other due to its
\nstrong presence in these cities. But for me the most important event is the
\ncoming possible restructuring in the ownership of UTI. I don\u2019t think the likes
\nof LIC\/SBI\/BOB have any scope left to acquire it or mismanage it. In fact, they
\nhave sold their stakes in UTI Trustee Company to TR Price in line with their
\nstake sale in AMC business. A Mutual fund trust holds assets of the fund on
\nbehalf of investors and monitor performance and compliance with regulations. <\/span><\/p>\n

So trustees have significant
\ncontrol over the working of an AMC due to regulatory powers. After the stake
\nsale by these three; now TR Price holds 51% stake in Trustee Company which
\nenables it to indirectly control the operations at AMC also. TR Price is a
\nglobal giant and is waiting patiently for the things to turn good in India as
\nIndia is the next high growth market. It has waited 11 years for the things to
\ntake shape in india which shows its commitments to India. So my feeling is that
\nvery soon something is going to happen in UTI AMC shareholding. It may be that
\nthese four may sell their stake (or part) making TR price the majority holder
\nrunning the show. TR Price can channelize huge funds from its US business to
\nIndia for investment through UTI.<\/p>\n

UTI AMC has big business in PMS
\nwhere it manages the funds of Employees Provident Fund Organization (EPFO),
\nPostal Life Insurance (PLI), National Skill Development Fund (NSDF) etc. UTI
\nmanages the largest share of the funds of EPFO. SBI is the second AMC who
\nmanages the funds of EPFO. Earlier it was only SBI who was managing the funds
\nof EPFO but it was performing very badly (not being able to beat the bank FD
\nrates). I think the likes of EPFO may opt for an independent AMC like UTI
\nrather than corporate owned AMC like HDFC AMC where there is a clear case of
\nconflict of interest as they may be biased in their EPFO fund investment
\nstrategies. <\/p>\n

Summary of Analysis levels Involved in the
\nstudy of UTI AMC:<\/span><\/u><\/b><\/p>\n

1.
\nLevel 1 (Lower relative valuation)<\/span><\/u><\/b> \u2013
\nLow valuation (18 PE and 2.4 times book value) keeping in view the established
\nbrand, expertise, market share. Underlying performance metrics are not that
\nweak as compared to other two listed players. It is more the result of market
\nperception.<\/span><\/p>\n

2.
\nLevel 2 ( Industry level growth and restructuring)<\/span><\/u>– <\/span><\/b>Mutual fund
\nindustry will grow fast in India as people are getting aware of the financial
\nassets and planning for the same quite early.<\/span><\/p>\n

3. Level 3 (Forecasting of
\nmanagement decisions which may result in massive future growth and value unlocking)<\/span><\/u> \u2013 <\/span><\/b>However, the
\nmost value will come from the actions of the management in shedding the
\nGovernment control, PSU work culture and becoming more professional, TR Price
\nacquiring majority shareholdings or some other private player coming by
\nacquiring the share of other PSU investors. <\/span><\/p>\n

This one is a Tier 2 grade stock as of now but once it implements dividend policy distributing liberal dividends, management becoming more independent and professional in approach and any stake sale by 4 PSU shareholders this will be transformed into Tier 1 quite fast and aggressively. <\/span><\/p>\n

(This study is a business analysis of UTI AMC. Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your own Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post. This business study of UTI AMC is taken from the Monthly Newsletter (Jan-21 Edition) of this Blog. For subscribing to the monthly Newsletter reach at oscillationss@yahoo.in).<\/b>

\n<\/span><\/p>\n

<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

Stock Idea: UTI AMC Grade: TIER 2 (This business study of UTI AMC is taken from the Monthly Newsletter (Jan-21 Edition) of this Blog. The sample of Jan-21 edition was shared at this blog on 28th Jan, 2021.) UTI AMC is a melodrama but the drama started with the debacle of US-64 fund of UTI in early 2000 forced Indian government to split UTI in 2003 into UTI Asset Management and Special Undertaking Unit Trust of India (SUUTI, having the junk\/illiquid assets of UTI). First melody was tried with the likes of SBI, PNB, LIC and BOB acquiring 25% stake…<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-1056","post","type-post","status-publish","format-standard","hentry","category-blog"],"_links":{"self":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/posts\/1056","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=1056"}],"version-history":[{"count":0,"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/posts\/1056\/revisions"}],"wp:attachment":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1056"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1056"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1056"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}