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Mutual funds begin to eye stake in UTI-II

N Mahalakshmi in Mumbai

Big mutual fund players are waiting to grab a pie of UTI-II, the second entity cleaved out of Unit Trust of India, which will hold the true mutual fund assets of the behemoth.

Experts believe that UTI's assets will command the highest valuations ever paid in the domestic fund industry thanks to the superior quality of its assets, marketing and service infrastructure and low cost of operations.

Overall, the potential payoff for the government could be to the tune of Rs 1,800-2,000 crore (Rs 18-20 billion) at the minimum, because even after all the bad publicity the UTI got over the past couple of years, it is still considered a top-notch brand.

"UTI is still a premium brand. And if proper due diligence is allowed and the price is attractive a number of private players including HDFC will been keen on picking up a stake," said Milind Barve, chief executive officer, HDFC Mutual Fund.

Industry experts believe that based on conservative estimates, UTI-II alone could fetch roughly about Rs 700 crore (Rs 7 billion), or about four per cent of assets under management, if only the fund assets were to be sold.

But the government can get a good deal more if it decides to club with it the UTI brand, marketing, distribution and service infrastructure, and its back-office operations, and an access to investors in UTI-I, who are the target audience for mutual fund products.

The fact that UTI's funds are basically from the retail segment which tends to stay longer with the fund enabling the investment manager to earn a fee by managing the assets could only add to the pricing.

The UTI has 2.89 crore (Rs 28.9 million) investors, 54 branches, 266 chief representatives and 67,000 agents. With its existing servicing infrastructure, it manages about 42,000 crore (Rs 420 billion) of assets, but can service much more than that. The scalability built into operations is also high.

On the flip side, UTI is not getting any fresh money. On the contrary, money has been moving out of its net asset value-based schemes.

Also, the conversion rate of UTI-I investors may not turn out to be high given their risk-averse profile.

Finally, how the government structures the sale will hold the key to UTI's valuations. But a perspective can be had from the Indian mutual fund sector's latest acquisition story.

Franklin Templeton paid Rs 265 crore (Rs 2.65 billion) for the acquiring Pioneer ITI Mutual Fund in a deal sewn up last month.

When the deal was envisaged in March this year, ITI Pioneer commanded about Rs 4,023 crore (Rs 40.23 billion) of assets with 7.47 lakh (747,000) investor accounts and a presence in 34 cities.

ITI Pioneer was touted to be one of biggest retail money managers among private mutual funds. Its well-entrenched marketing infrastructure and brand image along with the superior performance record of most of its funds was a big plus for ITI Pioneer.

Prudential ICICI Asset Management, Zurich India Asset Management, Citibank, AIG and Prudential Securities of the US were in the race for acquiring ITI Pioneer. Some of these companies could well be interested in UTI as well.

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