Buy This Small Cap AMC Stock, Shares Likely To Surge 32%, Says HDFC Securities

Leading brokerage firm HDFC Securities in its recent research analysis report on UTI Asset Management Company Ltd. (UTI AMC) has assigned a buy call on the stock with a target price of Rs 790 apiece. The brokerage claims a potential upside of around 32% from its current level considering the given target price of the stock. It is a small cap Financial sector Asset Management Company. It has a market cap of Rs 9,357 crore.

Stock Outlook & Returns

The share price of the UTI AMC last traded on NSE at Rs 737 apiece, 3.50% down compared to its previous close. The stock's 52 week low level is Rs 595 and the 52 week high is Rs 1,165.85, respectively. 

The stock made its debut on the stock exchange in October 2020. Since its listing, the stock has given a positive return of 54.77% to shareholders. However, the stock in the past 1 week has fallen by 3.64% and in 1 month fell by 2.11%, respectively. It gave 5.55% positive return in 3 months. Over the past 1 year, it gave a 29.2% negative return. 

In-line core

Revenue was sequentially flat at INR2.91bn, albeit in line with estimates. While equity yields for peers (HDFCAMC and RNAM) improved sequentially, UTI AMC witnessed yield compression (-4.3bps QoQ, -2.3bps vs. estimate). Staff cost at INR1.03bn (+2.5% QoQ, +5.4% vs. estimate) continued to be elevated, weighing down on profitability. While the management has guided for moderation in staff costs in FY24E (in absolute terms), we remain sceptical. Admin expenses shot up 25% QoQ (+20% vs. estimates) on account of (a) fund management fee pay-out in UTI International (INR35mn); (b) membership fee for Asia index funds (INR30mn); and (c) higher tech spends, dragging core operating profits to INR1.16bn (-6/-9% YoY/QoQ); we expect admin expenses to remain volatile in the near term due to higher competitive intensity. Investment income clocked in at INR1.5bn, driven by MTM gains from higher yields, driving APAT higher to INR2.03bn (+2%/1.1x YoY/QoQ).

Concerns and outlook

Although the equity market share was stable at 5%, the hybrid market share further dipped 12bps QoQ to 4.8%. NPS AUM market share further slipped 18bps QoQ to 27.2%; management opined that while the government sector allocation is stable at 33%, market share loss is in the private sector, which is likely to continue stretching the opex ratios.

 

Valuation - buy for a target price of Rs 970 per share

UTI AMC reported a weak quarter, with 9% sequentially lower core operating profits, owing to elevated staff costs (17.7bps of MF QAAUM) and a sharp rise in opex (+25% QoQ). While equity yields for HDFCAMC and RNAM improved sequentially, UTI AMC witnessed yield compression (-4.3bps QoQ, -2.3bps vs. estimate). Amongst top AMCs, UTI AMC holds the maximum levers to improve core profitability; however, near-term execution remains disappointing and poses a tall ask.

The brokerage said, "While we draw comfort from management commentary around a buoyant flow environment and a strong growth outlook for the retirement solutions business, we flag continued pressure on MF yields and staff costs in the medium term. We raise our earnings estimates for FY23E/24E by 9%/2% to build in higher treasury income and expect UTI AMC to deliver 8%/13% revenue/operating profit CAGRs between FY22-25E on the back of healthy AUM growth and marginal cost rationalisation. Given its attractive valuation, we maintain BUY, with an unchanged Target Price of INR 970 (19.8x Sep-24E NOPLAT + Sep-23E cash and investments)."

Disclaimer

The stock has been picked from the brokerage report of HDFC Securities. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.