UTI Asset Management Company coming with an IPO to raise upto Rs 2160 crore

UTI Asset Management Company

• UTI Asset Management Company is coming out with a 100% book building; initial public offering (IPO) of 3,89,87,081 shares of Rs 10 each in a price band Rs 552-554 per equity share. 
• Not more than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors.
• The issue will open for subscription on September 29, 2020 and will close on October 01, 2020.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 10 and is priced 55.20 times of its face value on the lower side and 55.40 times on the higher side.
• Book running lead manager to the issue are Kotak Mahindra Capital Company, Axis Capital, Citigroup Global Markets India, DSP Merrill Lynch, ICICI Securities, JM Financial and SBI Capital Markets.
• Compliance Officer for the issue is Arvind Patkar.

Profile of the company

The company was incorporated as ‘UTI Asset Management Company Private Limited’, a private limited company under the Companies Act, 1956, pursuant to a certificate of incorporation dated November 14, 2002 issued by the Registrar of Companies, Maharashtra at Mumbai (the RoC). Subsequently, pursuant to a special resolution approved at the Annual General Meeting on September 18, 2007, the company was converted to a public limited company and consequently the name of the company was changed to ‘UTI Asset Management Company Limited’ and a fresh certificate of incorporation dated November 14, 2007 was issued by the RoC.

The company is the second largest asset management company in India in terms of total AUM and the eighth largest asset management company in India in terms of mutual fund QAAUM as of June 30, 2020. It caters to a diverse group of individual and institutional investors through a wide variety of funds and services. It manages the domestic mutual funds of UTI Mutual Fund, provide portfolio management services (PMS) to institutional clients and high net worth individuals (HNIs), and manage retirement funds, offshore funds and alternative investment funds. Its history and track record in the mutual fund industry, strong brand recognition, distribution reach, performance and client relationships provide a platform for future growth. It has a national footprint and offers its schemes through a diverse range of distribution channels.

The company’s BDA and CA network distinguishes it from other asset management companies in India, as its BDAs and CAs, who are engaged by it on an exclusive basis primarily in B30 cities, allow it to efficiently and effectively develop, maintain and service its relationships with its distributors and investors. Its banks and distributors (BND) channel involves distribution arrangements with domestic and foreign banks, as well as with national and regional distributors. In addition, it has dedicated sales teams for institutional and public sector undertaking (PSU) clients and also offer products directly through its UFCs, digital applications and website. Its distribution channels are supported by 459 relationship managers (RMs) (as of June 30, 2020), who interact with clients and distributors and help generate new business and maintain its existing relationships. Investors are also able to directly invest in its mutual funds through its mobile applications for customers. It also has offices in London, Dubai, Guernsey and Singapore, through which it markets its offshore and domestic mutual funds to offshore investors who seek to invest in India.

Proceed is being used for:

• Achieving the benefits of listing the Equity Shares on the Stock Exchanges.
• The sale of up to 38,987,081 Equity Shares by the Selling Shareholders. 

Industry overview

The Indian mutual fund industry has a history of over 50 years, starting with the formation of the Unit Trust of India (UTI), a joint initiative of the Government of India and the RBI in 1964. It was regulated and controlled by the RBI until 1978 and thereafter by the Industrial Development Bank of India. UTI launched its first scheme, Unit Scheme 1964, in 1964 and its assets under management (AUM) reached Rs 67 billion by 1988. In 1987, other public sector banks entered the mutual fund space. SBI Mutual Fund was set up in June 1987, followed by the launch of Canbank Mutual Fund in December 1987. Subsequently, other entities such as Life Insurance Corporation of India, Punjab National Bank, Indian Bank, Bank of India, General Insurance Corporation of India and Bank of Baroda opened their own mutual fund houses, taking the industry assets to Rs 470 billion by the end of 1993. Seeing the rise in demand for mutual funds and with the onset of liberalisation in the country, the industry was opened to the private sector in 1993. The year also saw the introduction of the first formal mutual fund regulations, Securities and Exchange Board of India (Mutual Fund) Regulations, 1993. All mutual funds, except UTI, were under the ambit of these regulations, which were later replaced by Securities and Exchange Board of India (Mutual Fund) Regulations, 1996.

Aggregate AUM of the Indian mutual fund industry have grown at a healthy pace over the past ten years, against the backdrop of an expanding domestic economy, robust inflows and rising investor participation, particularly from individual investors. Average AUM grew at a CAGR of 13% from Rs 7.6 trillion as of March 31, 2010 to Rs 27.0 trillion as of March 31, 2020. Aggregate industry AUM grew at a CAGR of approximately 14.9%, from Rs 11.9 trillion as of March 31, 2015 to Rs 24.6 trillion as of June 30, 2020, driven by increasing aggregate financial savings combined with growing investor awareness of mutual fund products. Between March 2015 (Including fiscal 2015) and June 2020, the industry witnessed a net inflow of Rs 11.7 trillion. The first quarter of fiscal 2021 saw a drop in AUM as a result of the nationwide lockdown and overall capital markets performance. Fund flows after March 31, 2020 have been inconsistent, driven by the money market/liquid funds (with higher net inflows in April and May) and debt funds (with higher outflows in April).

Pros and strengths

Pure-play independent asset manager with strong brand recognition and diverse portfolio of funds and services: The company’s brand is recognized nationwide for its strength and more than 55 years of heritage as a leading, and pioneering, participant in the mutual fund industry. It has built a reputation for service, integrity and innovative solutions. Its national footprint, with a presence in many metropolitan and rural areas, and particular strength in B30 cities, has allowed it to leverage the UTI name and establish UTI as a brand which is recognized across the country. The UTI brand was also amongst the top five preferred industry brands in the Nielsen Mutual Fund Studies for December 2015 to January 2016 and September 2017. Its pan-India presence and recognition generates and supports investor confidence in its ability to provide consistent quality services wherever located, and also helps it recruit and retain skilled professionals. The company’s independence and its focus on business of asset management distinguish it from most of its major competitors that are part of diversified financial services institutions with varied sales, trading, underwriting, research and lending activities. It offers a diverse portfolio of domestic funds, including equity, hybrid, income, liquid an d money market funds, as well as portfolio management services, retirement solutions, and offshore and alternative investment funds.

Multiple distribution channels with wide reach and broad and stable client base: The company has a comprehensive multi-channel distribution network with both in-house capabilities and external distribution channels. It reaches clients through a number of distribution channels, including IFAs, direct distribution, and banks and distributors. Its IFA distribution channel comprises approximately 53,000 IFAs, while its direct distribution channel includes internal sales teams for institutional and PSU clients and its digital platforms, and its banks and distributors (BND) channel comprises arrangements with various domestic and foreign banks and other distributors. Digital initiatives, including its digital transaction system for institutional clients, UTI Buddy mobile app for its distributors, UTI mobile app for customers, mobile applications for its sales force, digital marketing platform and data driven digital marketing campaigns, are also an increasingly important part of its distribution, particularly following the outbreak of the COVID-19 pandemic.

Long-term track record of product innovation, consistent and stable investment performance and AUM growth: As one of the pioneers of the Indian mutual fund industry, the company has a long history of introducing and supporting products and solutions that deliver consistent and stable returns through the cycle, driving AUM growth. The company’s investment philosophy endeavors to deliver investment outperformance against benchmarks and competitors. Its rigorous investment research processes take into account both qualitative and quantitative factors, and includes proprietary ratings systems and research methodologies with an emphasis on risk and performance through comprehensive review procedures to drive investment and divestment decisions. Its in-house research teams covered 319 companies (from an equity perspective) and 251 companies (from a fixed income perspective) as of June 30, 2020. Many of its equity mutual funds have demonstrated strong performance through economic cycles. Its track record of product innovation and consistent and stable investment performance has contributed to its AUM growth.

Enhanced profitability driven by its size and product mix: The company strives to maintain and enhance profitability while it grows its business and AUM. Its size and broad distribution network, particularly in B30 cities, provides it with economies of scale, particularly in distribution, marketing, and back-office activities. AUM growth, particularly in its passive schemes and PMS business, delivers further economies of scale as a result of its operating leverage. Its client services are managed on an automated and integrated basis, which improves its cost structure; it is implementing a digital transformation program to leverage technology to improve efficiency and optimize its costs even further, including through the introduction of marketing automation and global investment management applications.

Risks and concerns

Market share has declined consistently over the past years: Factors such as increased competition in the mutual fund industry, including from technology -driven platforms, underperformance by company’s funds as compared to their respective benchmarks and competing schemes and shifts in the investment preferences of its customers may hinder its ability to maintain or grow its market share and may contribute to a reduction in its market share. In the future its market share may continue to decline and it may be forced to reduce its management fees, or incur increased sales and marketing costs and increased capital expenditures on technology upgrades, in order to maintain or increase its market share, which could have an adverse impact on business, financial condition and results of operations.

Depend on third-party distribution channels, other intermediaries: The company depends on third-party distribution channels such as its IFAs channel, which includes a network of approximately 53,306 independent financial advisors and its banks and distributors channel (BND), which is comprised of 346 distributors, 58 domestic and foreign banks and 58 institutional distributors as of June 30, 2020. As of June 30, 2020, 14.2% and 17.3% of its Domestic Mutual Fund QAAUM for its income and liquid/money market funds was attributable to its IFAs and BND channel, respectively, while the remaining 68.5% was directly invested. Similarly, as of June 30, 2020, 60.4% and 9.8% of its Domestic Mutual Fund QAAUM for its equity and hybrid funds was attributable to its IFAs and BND channel, respectively, while the remaining 29.8% was directly invested. Its distribution network also includes 43 official points of acceptance (OPAs) at investor service centres owned by KFin. Any failure to secure new distribution relationships or maintain its existing relationships may adversely affect its competitiveness.

Dependent on the strength of brand and reputation: The company’s business and prospects are dependent on the strength of its brand and reputation and, to a lesser extent, that of the Sponsors. In an industry where integrity, trust and customer confidence are paramount, it is exposed to the risk that litigation, misconduct, operational failure, negative publicity (including through social media), press speculation or other problems, including in respect of the Sponsors, could harm its brand and reputation. Its brand and reputation could also be adversely affected if its schemes, products or services underperform certain benchmarks or do not perform as expected by investors, whether or not the expectations of investors are well founded. It is also exposed to the risk that the conduct or performance of third parties over which it has no control, including its approximately 53,000 independent financial advisors (IFAs) and KFin, its main registrar and transfer agent (RTA), will have a negative impact on its brand or reputation.

Highly dependent upon IT systems to process transactions: The company’s business is highly dependent on the capacity, performance and reliability of its communications and IT systems and the communication and IT systems of its key service providers, including various banks, custodians and its RTA. It is also highly dependent on its ability to process a large number of transactions on a daily basis, and rely on financial, accounting, trading, settlement, compliance and other data processing systems to do so. Any failure or interruption of such systems (or their back-up systems and procedures), whether caused by cyber security threats or attacks, external hacking, malware infection or other security breaches, fire or other natural disaster, power or telecommunications failure, acts of terrorism, war or otherwise, could result in a disruption of its business, liability to customers, regulatory intervention or reputational damage, and thus have a material adverse effect on its business.

Outlook

Incorporated in 2002, UTI Asset Management Company (UTI AMC) is in the business of managing the domestic mutual funds of UTI Mutual Fund, provides portfolio management services to institutional clients and high net worth individuals like Employee Provident Fund Organization, National Skill Development Fund, Postal Life Insurance, and manages retirement funds viz. NPS, offshore funds like Shinsei UTI India Fund, and alternative investment funds catering to a diverse group of individuals, institutional investors, banks, trusts, and NRIs. The company’s size and diverse client base coupled with its strong product portfolio and, particularly in B30 cities, extensive distribution network and widely recognized brand, position it to capitalize on future growth in the Indian mutual fund industry. Its brand is recognized nationwide for its strength and more than 55 years of heritage as a leading, and pioneering, participant in the mutual fund industry. The market knowledge and depth of its senior management team enables it to identify and capitalize on strategic opportunities and changing industry, macroeconomic and regulatory dynamics in India. On the concern side, the company’s business is subject to extensive regulation, including periodic inspections by SEBI and by the Pension Fund Regulatory and Development Authority (PFRDA), and its non-compliance with existing regulations or SEBI’s or PFRDA’s observations or its failure or delay to obtain, maintain or renew regulatory approvals could expose it to penalties and restrictions. It encounters competitive pricing pressures in its business. It may not be able to maintain its current fee structure and fee reductions on its existing or future business would have an adverse impact on its income and profitability.

The issue has been offered in a price band of Rs 552-554 per equity share. The aggregate size of the offer is around Rs 2152.08 crore to Rs 2159.88 crore based on lower and upper price band respectively. On the performance front, the company’s total income for the fiscal year ended March 31, 2020 was Rs 8,909.6 million, a decrease of Rs 1,899.3 million, or 17.6%, from Rs 10,808.9 million for the fiscal year ended March 31, 2019. This decrease was primarily due to a reduction in revenue from the sale of services and lower net gains on fair value changes. Profit after tax decreased by Rs 798.2 million, or 22.6%, from Rs 3,528.3 million in the fiscal year ended March 31, 2019 to Rs 2730.1 million in the fiscal year ended March 31, 2020. 0. This decrease was primarily due to the decrease in total income compared to the fiscal year ended March 31, 2019. The company intends to invest in the human and organizational resources needed to increase the number of companies covered by its in-house research team and its fund strategies. This will enable it to launch new products and enable AUM growth. It plans to do so by deepening its presence in T30 cities, where there remain attractive growth opportunities, and expanding its reach into new markets. Besides, the company plans to further strengthen and deepen its relationship with its institutional and PSU clients, with a particular focus on developing relationships with small- and medium-sized institutional clients to expand its domestic mutual fund investor base.