PL Stock Report: UTI Asset Management Company (UTIAM IN) - Q2FY24 Result Update - Weak quarter; opex leverage to support earnings - BUY

UTI Asset Management Company (UTIAM IN) - Gaurav Jani - Research Analyst, Prabhudas Lilladher Pvt Ltd.

Rating: BUY | CMP: Rs787 | TP: Rs900

Q2FY24 Result Update - Weak quarter; opex leverage to support earnings

Quick Pointers:

• Core earnings miss at 16bps PLe, due to lower MF yields.
• Equity market share continues to decline; debt segment doing well.

UTIAMC saw a weak quarter as core income missed PLe by 5.7% due to lower revenue led by reduction in MF yields by 2bps QoQ to 33.6bps. Fall in MF yields was driven by (1) decline of 6bps in balanced yields to 84bps (2) TER reduction in ETF from 7bps to 4bps and (3) yield decline in debt by 4bps to 22bps due to strong inflows in short duration funds. Equity performance remains sub-optimal which is impacting net flows resulting in market share fall to 4.33% (-15bps QoQ). Opex leverage could benefit UTIAMC and we envisage opex/AuM to reduce from 30bps to 23bps over FY23-26E. We trim core income for FY24/25E by 7%/3% due to 5% cut in revenue led by lower yields. Stock is attractively valued at 13.8x implying a 42% discount to Nippon. Key levers for re-rating are (1) TATA AMC buying majority stake in UTIAMC and (2) excess cash distributed to investors. Rolling forward to Sep’25 core EPS we maintain TP at Rs900. Retain ‘BUY’.

• Core income miss due to fall in equity yields; tax rate also lower: QAAuM came in a tad lower (-0.3%) at R2669bn, growing by 7.6% QoQ. Revenue was a miss at Rs2.91bn (PLe Rs3.01bn). MF fees inched up by 1.8% QoQ to Rs2.24bn, despite equity growing by 8.2%. MF yields dipped by ~2bps QoQ to 33.6bps. Opex was 1.6% lower to PLe at Rs1.86bn, largely led by other opex. Operating income at Rs1.06bn was a 5.7% miss to PLe of Rs0.8bn resulting in operating yields at 16bps (PLe 17bps). Other income was ahead at Rs1.14bn (PLe Rs1.0bn). Tax rate was lower at 16.8% (PLe 22%) leading to in-line core PAT at Rs880mn (PLe Rs876mn). PAT was Rs1.83bn (PLe Rs1.66bn) owing higher other income and lower tax rate.
  

• Yields saw a downtick QoQ; opex growth should be controlled: Equity yields were stable QoQ at 72bps and dip in MF yields was due to headwinds in other segments viz. (1) fall of 6bps in balanced yields to 84bps as mobilization of new funds was at a higher cost while NFO was done a cost of 32-35bps (2) TER in ETF was reduced from 7bps to 4bps as proposal for EPFO rates was revised which led to reduction in management fees and expense ratios and (3) debt saw a 4bps fall to 22bps since there were significant inflows in shorter duration funds which yield lower. Opex growth has been rationalizing and salaries are expected to grow by 4-5% in FY24 and employee addition would be majorly in sales and marketing. Other opex is expected to grow by Rs6-7mn led by rental expenses from new branch offices.
• Performance dragging flows; market share falls: As per our calculations, equity and hybrid combined (ex-NFO) saw net outflows of Rs35.73bn for H1FY24, compared to inflows of Rs545bn for the industry. Underperformance in flagship schemes has been driving these net outflows for UTIAMC. Market share in equity (incl. balanced) as at Q2’24 further declined by 15bps QoQ to 4.33% with overall market share at 5.68% (vs 5.76% in Q1’24). Extent of compression going forward could be lesser than FY23 as lower yielding AuM now makes up for 80% of equity+balanced AuM.