MF subsidiaries to push up parents' valuation

Expected IPO of UTI Mutual Fund and rich valuations of life insurance companies are key triggers

Companies owning asset management businesses can reckon on two triggers to boost their valuations. The first is the expected listing of UTI Mutual Fund in the second half of 2017, and the other is the rich valuations of life insurance companies.

Stocks of the country’s two largest private life insurance companies—ICICI Prudential Life and HDFC-Max via Max Financial services (MFS) — are commanding valuations that are much higher than that being accorded to asset management companies (AMCs). Although strictly not comparable, but given the high proportion of equity-linked products rather than protection products in their overall portfolio, these companies can be compared to AMCs, believe analysts. Insurance companies, for instance, are valued at 40-50 per cent of their assets under management (AUMs), whereas the AMC businesses of most listed banks and non-banking financial services (NBFC) companies are valued at just 4-5 per cent of their respective assets under management.

Most analysts thus believe that the value they ascribe to AMC businesses of banks and NBFCs in their sum-of-the-parts (SOTP) valuations can increase by at least 25-30 per cent in the future akin to the steep rise in valuations of life insurance companies on listing.

Next is the listing of UTI Mutual Fund (UTI MF) — which is the sixth-largest AMC in the country, which will be the first AMC listing and will lead to price discovery for this segment. 

Nidhesh Jain, Financials analyst, Investec Capital, says, “I think there will be a substantial valuation upgrade for AMCs due to recent listings of life insurance companies as well as likely listing of UTI Mutual Fund. Valuations of larger AMCs such as HDFC MF, ICICI Pru MF, etc can go up to 10 per cent of their AUMs from 4-5 per cent prevailing.”

Suresh Ganapathy, Financials analyst at Macquarie Capital, agrees. “The value unlocking will happen only if a couple of mutual funds decide to list and if they decide to list today the top AMCs are more likely to get higher valuations. Currently, everybody values AMCs at 4-5 per cent of the AUMs which could go up by 25-30 per cent very easily for the top AMCs,” he says. 

The impact on target prices though will be proportionate to the size of the AMC business. Thus, given that despite having large AMCs, these are a smaller part of the overall SOTPs for most banks. This effectively means that their target prices could go up by just 2-3 per cent driven by higher AMC valuations.

NBFCs, on the other hand, stand to be bigger beneficiaries of rising AMC valuations. “For some companies such as Reliance Capital, Sundaram Finance and Motilal Oswal, AMCs form a decent portion of the overall valuations. So there could be a valuation upgrade of 10-20 per cent for these companies’ target prices,” adds Jain. The AMC business of Reliance Capital, for instance, figures amongst the top few in the country and contributes about 35 per cent to its SOTP valuations. Similarly, for Motilal Oswal Securities, its AMC business forms about 20 per cent of its total income. Sundaram Financial derives 8 per cent of its SOTP value from the AMC business and could benefit from an increase in its valuations. 

Rising proportion of equity in the overall AUMs of AMCs is another positive and could aid their valuations. Santosh Singh, Financials analyst, Haitong Securities, says, “AMCs’ valuations could rise on the back of increasing equity funds. Equity and retail debt are the only profitable parts of a mutual fund. While equity is valued on 12-13 per cent of the AUM, retail debt is valued at 4-5 per cent and rest of the portion is valued at 1-2 per cent. Given that equity has increased as a proportion for most AMCs, AMC valuations could increase going forward.”

Overall, even as the value unlocking from life insurance businesses has only started to play out, an uptick in AMC valuations could be another catalysts to the parent bank/NBFC.

Managing assets

Listed companies that own stakes in leading AMCs

• ICICI Bank 
• HDFC 
• Reliance Capital 
• Motilal Oswal Securities 
• SBI 
• Sundaram Finance 
• Kotak Mahindra Bank
• IDFC 
• Axis Bank 
• Canara Bank
• Aditya Birla Nuvo