UTI strikes back

When life insurance corporation of India, State Bank of India, Bank of Baroda and Punjab National Bank were forced to pick up 100 per cent stake in UTI AMC (asset management company) in September 2005, the media and analysts were aghast. Most assumed that the government was, as usual, throwing good money after bad.

Very few would have dared to imagine that their investments would return 1,000 per cent returns in just two years. But that’s exactly how things have panned out. Today, the market is valuing the AMC at up to Rs 12,000 crore—against the acquisition cost of Rs 1,237 crore. And that doesn’t include the value of its real estate assets and other investments.

Now, the sponsors, as the four investors are collectively called, who each own 25 per cent of UTI AMC, are diluting their stake in the AMC, which is all set to list on the domestic bourses before the end of the financial year, making it India’s, and Asia’s, first listed standalone mutual fund as well as India’s most valuable AMC whose profits are nearly three times that of its nearest AMC.

However, prior to listing, UTI AMC plans to sell 20 per cent stake through a private placement to strategic partners. The company wants to raise Rs 1,200-2,000 crore through the private placement. The AMC will issue 10 million fresh shares to the selected partners and no one strategic partner will get more than a 5 per cent stake in it.

Says Jaideep Bhattacharya, Chief Marketing Officer (CMO), UTI AMC: “We have received expressions of interest from 20 domestic and international corporations and will rope in strategic partners who operate in the financial services space and have very strong execution capabilities.” Adds U.K. Sinha, CMD, UTI AMC: “We will use the proceeds from the private placement to set up our private equity infrastructure fund, upgrade our technology platform, open more distribution centres and invest in UTI Ventures.” According to market grapevine, players like UBS, National Australian Bank, Shinsei Bank and Goldman Sachs have shown interest in picking up stakes in the AMC. Says a merchant banker associated with the issue: “This (placement) will also help benchmark the share price of the company.”

The private placement is expected to be completed within a month and the AMC will be listed before the end of this financial year. The four sponsors will offload 19.4 million shares in the initial public offering (IPO) that will bring down their holding to 51 per cent. The AMC has appointed seven merchant bankers to sell the issue.

In 2005, the financial institutions had paid the government a valuation of 5 per cent of the total corpus of Rs 24,969 crore managed by the AMC.

Thereafter, there has been a sea change in its fortunes. Says Sinha: “There has been a complete reversal in our work culture. Unlike the fixed pay model in government organisations, we have a quarterly incentive system that emphasises performance.” Today, apart from managing the mutual fund, the AMC also runs a portfolio management scheme (PMS), offshore funds, pension money, PSU surpluses, disinvestment money as well as funds under UTI-I.

Hemant Rustagi, CEO, Wiseinvest, a financial planning and consulting firm, who spent seven years in the erstwhile Unit Trust of India and also as a competitor working with Jardine Fleming, says: “UTI never perceived itself as a mutual fund. It was a government organisation that adopted wrong policies. However, things have changed and it now focuses on performance and on regaining its past glory.”

As on November 2007, UTI Mutual Fund is the third-largest in India, with a corpus of Rs 52,179 crore, behind Reliance AMC and ICICI Prudential AMC, which manage Rs 77,764 crore and Rs 54,903 crore, respectively.

The other UTI: Even more profitable When Unit Trust of India was split into two—UTI AMC and UTI-I—in 2001 following the scam that brought the curtains down on the original UTI, 25 assured return schemes and its flagship US-64 scheme, which comes to an end in April 2009, were transferred to UTI-I, also called Specified Undertaking of the Unit Trust of India (SUUTI). Its liabilities to its bondholders: around Rs 15,000 crore. “Our assets are far greater than our liabilities,” says a UTI-I official. The value of the its three top holdings—in L&T, ITC and Axis Bank—alone were worth Rs 29,000 crore as on December 3, 2007. The balance Rs 11,000 crore of investments, however, are mostly in illiquid, unlisted or sick companies. UTI-I may not offload shares of its top three holdings in the market. A.M. Naik, CMD of L&T, says that Prime Minister Manmohan Singh has assured him that the 9.30 per cent stake held by UTI-I will be transferred to LIC. And given ITC’s sensitivities on the issue, the government may well follow the same formula in the case of ITC shares held by it. It is not yet clear as to how UTI-I will dispose of its stake in Axis Bank. And what will happen to the Rs 25,000-crore surplus? That will be the government’s reward for bailing out UTI.

However, UTI is, by far, the largest AMC if one considers the overall corpus of Rs 1 lakh crore managed by it (See Hidden value table below). Globally, AMCs are, typically, valued at 6-12 per cent of the assets managed by their mutual fund schemes.

On that basis, UTI AMC is worth Rs 3,130-6,260 crore, but there’s more. Says a merchant banker involved in UTI AMC’s public issue: “We’re still in process of finalising the valuation. For growth markets like India, this can range from 6-15 per cent of the total corpus managed by the funds.

UTI AMC will probably get a higher valuation because of its exposure to non-MF businesses like private equity, PMS and offshore funds.”

Thus, its total corpus of Rs 1 lakh crore should give UTI AMC a valuation of Rs 6,000-15,000 crore, making it India’s most valuable AMC (for past deals, see the top most table, Deal Street).

It is also, by far, India’s most profitable AMC. In 2006-07, UTI AMC earned a profit of Rs 147 crore on revenues of Rs 387 crore.

The corresponding figures for Reliance AMC were 50.65 crore and Rs 202.6 crore and for ICICI Prudential AMC Rs 48 crore and Rs 239 crore, respectively. Interestingly, UTI AMC’s figures don’t include revenues from PMS and its other fund management businesses.

But for the bonus (the AMC issued four shares for every one share held by the sponsors) issued to its shareholders last year, its EPS would have been Rs 147 per share. (See the second table from top, How They Stack Up).

The Unit Trust of India was once the vehicle of choice for many investors in India, but the unravelling of its flagship US-64 ruined the goodwill it had built up over decades.

Now, in its new avatar, UTI AMC is taking small steps towards regaining that old glory. In this regard, listing is likely to augur well as it will make it more accountable.