A glut of AMC shares can depress valuations as scarcity vanishes
When the UTI AMC filed the draft red herring prospectus (DRHP) for its IPO, it was already anticipated. Like in case of other AMCs, the IPO of UTI AMC will be structured as an offer-for-sale, wherein the existing shareholders of UTI will get partial or total exit. Apart from SBI, LIC, BOB and PNB; T Rowe Price will also be monetizing part of its stake in UTI AMC through the IPO route. How exactly will UTI AMC stack up against competition?
Losing market share slowly
UTI marked the arrival of mutual funds in India. Launched in 1963, UTI had been a market leader till the late 1990s. Post the default on assured return scheme, US-64, UTI began to gradually lose market share to other players like HDFC AMC, ICICI Pru AMC, and Reliance AMC etc. Currently, UTI ranks seventh in terms of AUM after HDFC AMC, ICICI Pru AMC, SBI MF, Birla MF, Nippon MF and Kotak MF. With an AUM of Rs.160,000 crore, UTI is nearly half of the 3 largest AMCs in India. Its equity AUM has also not grown in a very meaningful way over the last few years. To that extent, there would be limited visibility that UTI could get in terms of valuation metrics. The larger funds have created strong bancassurance merits, an incomparable network combined with a low cost model for client accretion. That is where UTI has been struggling to expand its AUM. Unless the equity AUM builds up in a big way, UTI AMC would really struggle to get good valuations.
Riding the bandwagon
Very clearly, UTI AMC is trying to ride the AMC euphoria in the market right now. The two listed AMCs in India; HDFC AMC and Nippon AMC, have given more than 100% returns in the last one year. Despite quoting at a steep ratio of market cap / AUM, the AMC stocks have continued to attract buying at dips. Stocks like HDFC AMC have been quoting at rich valuations due to the scarcity factor. It commands 20% market cap / AUM; a valuation more than twice the price of similar AMC deals happened in India. UTI AMC is not alone in the queue. ICICI Pru AMC, SBI Mutual Fund, Birla Mutual Fund, Kotak MF, Axis MF and even L&T Mutual Fund are planning an IPO. What would be the outcome of so many listed AMC shares?
An overcrowded AMC market
That is the big risk. The AMC market could soon become overcrowded with a large number of listed entities. That would take away the scarcity factor in AMC stocks. The relentless inflows into SIPs at Rs.8300 crore per month has been instrumental in making AMCs look attractive. If the economic weakness persists, the SIPs may find it harder to sustain. With TERs trending lower, that would be the first sign of risk for AMC valuations. But any valuation shift needs a trigger. The glut of AMCs getting listed could just be the trigger for AMC stocks to normalize, which will be for good!
