The Hindu Business Line : Modest valuation of UTI stake sale could set a benchmark

BL Research Bureau The deal for sale of a 26 per cent stake in UTI Mutual Fund, one of the country’s largest fund houses, to investment management giant T. Rowe Price may be much-awaited. But the valuation at which it has been struck comes as something of an anti-climax.

The transaction values UTI Mutual Fund at about 3.3 per cent of assets managed (Rs 76,850 crore). That’s low compared to past deals where fund houses have fetched valuations of 5-13 per cent of their assets from their acquirers. But valuations for this deal may, in fact, be a sign of things to come.

Takeovers of mutual funds by foreign aspirants have been a common occurrence in India. Deals inked until last year saw fund houses valued between 5 and 13 per cent of their assets managed (see table).

Reliance Capital’s sale of a minority 5 per cent stake to Eton Park was undoubtedly the most expensive one, valuing the fund house at 12.9 per cent of assets managed. However, even if that deal was an “outlier”, inked as it was at the peak of the previous bull market, mutual fund stake sales in 2007 and early 2008 were mostly clinched at valuations of 5-8 per cent of the assets managed.

Lower profitability

Seen in this backdrop, the UTI-T. Rowe Price deal seems to capture only a modest valuation, at 3.3 per cent of assets. It is the UTI deal, however, which could set the benchmark for future transactions in the mutual fund space.

The reasons for this are two-fold. One, last year’s market meltdown has served as a reminder of how cyclical the Indian asset management business can be, with funds seeing their equity assets shrink sharply during the market meltdown, as NAVs fell and inflows dried up. Though inflows into equity funds have begun to trickle back in recent months, they are not of the scale seen in the boom years. Two, the regulator’s recent crackdown on entry loads charged by equity funds and the ban on payment of commissions out of investor assets have sharply reduced the profitability of the MF business in India, probably for good.

Seen in this backdrop, the valuation that UTI Mutual Fund has obtained for this stake sale may not be as unattractive as a historical comparison suggests. UTI Mutual Fund remains among the more sought-after fund houses for foreign players seeking an India presence. Its large retail investor base (perhaps the largest among Indian funds) and sizeable equity assets in kitty (36 per cent of the total managed) are both big plus points for any acquirer looking to obtain a strong foothold in the Indian MF space.

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