AMC Valuation: Pvt deals acting as benchmarks for AMC valuation

Sandeep Singh
Posted online: Monday, December 17, 2007 at 0000 hrs

The Rs 10,000-crore valuation of Reliance Capital Asset Management (RCAM) last week has implications for UTI Mutual Fund, which plans to float its IPO within this financial year. In an industry that has no benchmarks for valuing mutual fund companies, this is a financial debutante — in this Rs 501-crore deal, $10 billion US-based hedge fund Eton Park has bought 4.8 per cent of RCAM’s equity.
Earlier, UBS while acquiring the Indian arm of Standard Chartered Mutual Fund valued it at 5 per cent of its AUM, while Robeco valued Canbank Mutual Fund at 10 per cent of its AUM while acquiring a 49 per cent stake. The current deal, which values RCAM at 13 per cent of its AUM, is the highest such valuation offered till date for an Indian AMC.
According to Vikas Khemani, co-head institutional equities, Edelweiss, “In India there is no standard for AMC valuation and so these private deals act as the benchmark. This deal will impact the UTI AMC IPO as it has revised the benchmark.” But it’s not just RCAM’s high and growing AUM alone that has got the fund this valuation.
“Reliance has big size of AUM and has shown in the past that it has the ability to grow at a fast rate,” said Khemani. “We are the largest AMC and the most profitable one,” said Vikrant Gugnani, CEO, RCAM. The fund’s AUM have shot up by 124 per cent in the past 12 months and the momentum should continue, he feels. “Currently, we’re present in 300 locations and looking to expand to 500 by March 2008 and to 1,000 by March 2009 along with our global expansion plans.”
Typically an AMC is valued on three factors — the AUM that it holds, the break up of equity and debt in that AUM, and the growth rate of its assets. Globally, there’s another factor: the fee structure of the AMC, which currently is not applicable to Indian funds. In addition, factors like the growth rate of the industry itself — currently in fourth gear in India — takes the valuation of the companies higher.
RCAM’s relatively higher valuation, therefore, could also be because of the market re-rating the industry.
To compare, as on November 30, 2007, UTI AMC had total AUM of a little over Rs 52,000 crore, which has grown by 18.4 per cent in the past year, while RCAM has an AUM of over Rs 77,500 crore which grew by 124 per cent. But what goes in favour of UTI AMC is that its equity assets — on which the company earns a higher return through fund management fee — stand at 47 per cent of its AUM, while RCAM’s figure is 40 per cent. So, if RCAM has growth on its side, UTI has profitability, though RCAM’s growth is far higher than UTI’s profitability.
UTI will also benefit from the fact that it is an AMC with public sector companies (LIC, PNB, SBI and Bank of Baroda) as shareholders and, along with LIC and SBI, has got a hefty chunk of the pensions business last month. “I think UTI should get a valuation of somewhere between 10-15 per cent of its AUM,” said Khemani. At this rate, UTI should be worth about Rs 5,000-8,000 crore.
Meanwhile, the IPO plans of UTI AMC are well on course, UK Sinha, chairman and managing director, told The Indian Express: “I expect the whole IPO process to get completed by March 2008.” He declined to comment on valuations.