SUMMARY OF OUR BUSINESS, STRENGTHS AND STRATEGY Overview
We are a leading provider of asset management services in India catering to a diverse group of individual and institutional investors through a wide variety of equity and debt funds. We manage domestic mutual funds, as well as provide portfolio management services and manage overseas, venture capital and private equity funds. Our total assets under management ("AUM") equalled Rs. 495,418 million, as of September 30, 2007. Based on AUM in our domestic mutual funds as of December 31, 2007, we are the second largest mutual fund provider in India, according to AMFI. We believe we have the largest client base among mutual fund providers in India, with approximately 8.1 million client accounts. We have a high concentration of equity and balanced/hybrid funds, and had the second highest market share for equity funds (10.0%) and the highest market share for balanced/hybrid funds (41.9%) in India, as of November 30, 2007. Our income and liquid funds on a combined basis had the fourth highest market share (7.1%), according to Value Research.
We and our predecessor (Unit Trust of India) have been active in the asset management industry in India for more than 40 years, after having established the first mutual fund in India. We have a national footprint with representatives in 455 of India's 604 districts, with an extensive network of UTI Financial Centres, independent financial advisors, banks and other distributors, as well as offices overseas. We believe our history and track record in the mutual fund industry, strong brand recognition, distribution reach and client relationships provide a dynamic platform for future growth. Our investment philosophy is to deliver consistent and stable returns in the medium to long term with low volatility compared to market benchmarks. Our four sponsors are the State Bank of India, Life Insurance Corporation of India, Punjab National Bank and Bank of Baroda (which are all controlled by the Government of India). We are a professionally managed company led by our Board of Directors and a management team consisting of experienced professionals from the industry.
We currently manage 76 domestic equity, balanced/hybrid, income and liquid mutual funds. Our domestic funds had AUM of Rs. 450,026 million, as of September 30, 2007, constituting approximately 9.4% of the total AUM invested in mutual funds in India and making us the third largest fund provider, according to AMFI. Set forth below is the breakdown of our domestic AUM (in absolute amounts and as a percentage of total domestic AUM) by category of mutual funds:
(Rs. in millions, except percentages) As of September 30, As of March 31, Category of Fund 2007 2007 2006 2005 Equity Funds 174,725 38.8% 134,953 38.0% 134,671 45.6% 70,764 34.3% Balanced/Hybrid Funds 95,060 21.1% 87,625 24.7% 91,649 31.0% 80,133 38.8% Income Funds 104,228 23.2% 70,096 19.8% 24,431 8.3% 18,725 9.1% Liquid Funds 76,013 16.9% 61,954 17.5% 44,609 15.1% 36,947 17.8% Total Domestic AUM 450,026 100.0 % 354,628 100.0 % 295,360 100.0 % 206,569 100.0 %
Our AUM for domestic mutual funds increased from Rs. 138,967 million as of January 31, 2003, to Rs. 450,026 million as of September 30, 2007, representing a compound annual growth rate ("CAGR") of 28.6%. The industry AUM increased from Rs. 794,640 million as of March 31, 2003, to Rs. 4,769,206 million as of September 30, 2007, representing a CAGR of 48.9%.
We also provide portfolio management services ("PMS") to approximately 320 clients. We have been recently selected as one of three asset managers to provide portfolio management services to the National Investment Fund ("NIF"). In addition, we have been selected by the Pension Fund Regulatory Development Authority ("PFRDA") as one of three asset managers to manage funds under a new pension scheme of the Government of India. We manage offshore and foreign institutional investor ("FII") funds (including a co-branded fund with Shinsei Bank of Japan), as well as venture capital and private equity funds. As of September 30, 2007, our portfolio management, overseas, venture capital and private equity
funds had total AUM of Rs. 45,392 million. We also provide support services to the Specified Undertaking of the Unit Trust of India ("SUUTI"). Set forth below is the breakdown of our other AUM (in absolute amounts and as a percentage of total other AUM) by category of funds (other than SUUTI):
(Rs. in millions, except percentages) As of September 30, As of March 31, Category of Fund 2007 2007 2006 2005 Portfolio Management Services 21,609 47.6% 14,610 38.0% 1,254 11.2% 138 2.7% Overseas Funds 17,841 39.3% 18,406 48.0% 7,594 67.7% 4,104 81.0% Private Equity and
Venture Capital Funds (on cost basis)
5,942 13.1% 5,392 14.1% 2,371 21.1% 826 16.3%
Total Other AUM 45,392 100.0% 38,408 100% 11,219 100.0% 5,068 100.0%
Our investment strategy is to have a balanced and well-diversified portfolio for our funds, with equal emphasis given to asset allocation and sectoral allocation as given to security selection. We have an in- house research based approach for our investments and we follow process-based investment management practices. Our fund investment team includes 14 professionals with an average of over 12 years of investment management experience. Our research team includes nine analysts and covers approximately 300 companies. We believe that our professional management and disciplined investment approach contribute to efficient management of our funds. We have a rigorous internal control structure with emphasis on risk management, internal audit systems and regulatory compliance.
We offer our products through a diverse range of distribution channels, including a network of ten regional offices, 79 UTI Financial Centres ("UFCs") and two satellite offices, as well as overseas offices in London, Dubai, Bahrain and Singapore. For distribution, we utilize third-party agents, including approximately 31,000 independent financial advisors, as well as private and public sector banks, post offices, and corporate distribution houses. Our clients include individual retail investors, banks, corporate and other institutional investors, public sector undertakings, and overseas investors. Domestic individual investors represented 51.2% of our total domestic AUM, while corporate and other business entities represented 27.1% and banks and other financial institutions represented 11.1% of domestic AUM, as of November 30, 2007. Trusts, foundations and non-resident Indians represented the remainder of our domestic AUM. Our consolidated total income for the Fiscals 2007, 2006 and 2005, equalled Rs. 4,096 million, Rs. 3,920.9 million and Rs. 3,285.4 million, respectively, representing a CAGR of 11.7%. Our consolidated profit after tax for the same periods equalled Rs. 1,552.3 million, Rs. 1,357 million and Rs. 1,034.4 million, respectively, representing a CAGR of 22.5%. For the six months ended September 30, 2007, our consolidated total income and profit after tax equalled Rs. 2,035 million and Rs. 727 million, respectively.
Our Strengths
We believe we benefit from the following key strengths:
Well-positioned to capitalize on favourable macro-economic conditions and industry dynamics. The Indian mutual fund industry is expected to continue to grow due to favourable macro-economic conditions and industry dynamics, such as GDP growth and a high savings rate. According to the RBI Annual Report 2007, the GDP of India averaged approximately 8.6% for the last three fiscal years and 9.1% for the first half of this fiscal year. India has a high rate of financial savings as a percentage of GDP, with a savings rate averaging 31.3% for the last three fiscal years. However, mutual funds continue to constitute a small portion of overall savings in India. The RBI Annual Report 2007 indicates that 4.8% of household savings consisted of savings in mutual funds for fiscal year 2007. We believe our large size and diverse client base, coupled with our strong portfolio of equity and other funds, extensive distribution network and widely recognized brand, position us to capitalize on future growth in the mutual fund industry.
Large focused asset manager with diverse fund offerings, experienced fund managers and record of steady AUM growth. Based on AUM in our domestic mutual funds as of December 31, 2007, we are the
second largest mutual fund provider in India, according to AMFI. Our total AUM for our domestic funds equalled Rs. 450,026 million as of September 30, 2007. We offer a variety of domestic funds, including equity, balanced/hybrid, income and liquid funds, as well as portfolio management services and overseas, venture capital and private equity funds. We believe that our large size enables us to benefit from economies of scale, especially in the areas of fund management, marketing and distribution. Further, we believe that our focus on our core business of asset management distinguishes us from our major competitors with varied sales, trading, underwriting, research and lending activities. Our investment professionals can better serve clients by developing expertise in our investment products, free from many of the conflicts of interest that can arise with competing business lines. Our approach helps us attract and retain professionals who aim to work in a firm where asset management is the central business. We believe our dedicated focus has contributed to our record of steady AUM growth over the years. Our total domestic AUM were Rs. 354,628 million, Rs. 295,360 million and Rs. 206,659 million as of March 31, 2007, 2006 and 2005, respectively, representing a CAGR of 31.0% over this period.
Broad and stable client base and multiple distribution channels. With approximately 8.1 million client accounts, we believe we have the largest client base among mutual fund providers in India. Our list of clients includes individual retail investors, banks, corporate and other institutional investors, public sector undertakings ("PSUs"), and overseas investors. We believe that the nature of our clients and distribution channels, as well as our good relationships with clients, have resulted in a stable and growing investor base. Individual retail clients represent over one-half of our total client base, which we believe helps insulate us from excessive short-term churn and volatility in our funds. Our broad client base also provides us with a number of opportunities, including cross-selling different funds. We have a comprehensive distribution network with both in-house capabilities and external distribution channels. We reach clients through a number of distribution channels, including retail distribution (consisting of ten regional offices, 79 UTI Financial Centres ("UFCs"), two satellite offices, 455 district representatives and collection centres, and approximately 31,000 independent financial advisors, as of September 30, 2007). Our other distribution channels consist of institutions, private and foreign banks, PSU banks and post offices (with access to approximately 1,600 PSU bank branches and 2,000 post offices), and corporate distribution houses. Our wide-spread distribution network gives us access to 455 districts (out of 604 districts in total), including remote areas, and reinforces our strong presence in small and medium towns, cities and villages. Our funds are also distributed through our foreign offices in London, Dubai, Bahrain and Singapore.
Strong brand recognition. Our brand is recognized nationwide for the UTI Group's strength and more than 40 years of heritage as a leading participant in the mutual fund industry. We believe that we have built a reputation for service, integrity and creative solutions and that our affiliation with state-owned sponsors strengthens our brand. Our national footprint, with a presence in many metropolitan and rural areas, has allowed us to leverage the UTI name and establish UTI as a brand which is recognized across the country. The UTI brand was selected as one of the most preferred industry brands in the AC Nielsen annual survey in April 2007 and the most preferred mutual fund in the CNBC Awaaz consumer survey for 2005. According to ET Brand Equity Survey 2007, UTI was rated among the top 50 trusted services brands in India. We also received the Readers Digest - Trusted Brand Gold Award in the category of investment fund company for 2005-2006. We believe our pan-India presence and recognition generates and supports investor confidence in our ability to provide consistent quality services wherever located, and also helps us recruit and retain skilled professionals.
Profitable structure benefiting from our large size, automated and integrated systems, and high proportion of equity and balanced/hybrid funds. We strive to maintain and enhance profitability while we grow our business and AUM. Our size and broad distribution network provides us with economies of scale, particularly in distribution and marketing activities. Our client services are managed on an automated and integrated basis, which further improves our cost structure. Our total operating expenses as a percentage of total income equalled 43.0%, 46.7% and 50.9% in the Fiscals 2007, 2006 and 2005, respectively. Total operating expenses as a percentage of total income equalled 45.1% for the six months ended September 30, 2007. We also have a relatively high proportion of equity and balanced/hybrid funds, which increases our profitability since the fees charged for such funds are generally higher than the fees charged for income and liquid funds. Our AUM for equity and balanced/hybrid funds as a percentage of total AUM were 38.8% and 21.1%, respectively, as of September 30, 2007. We had the second highest market share for equity funds (10.0%) and the highest market share for balanced/hybrid funds (41.9%) in India, as of November 30, 2007, according to Value Research.
Experienced professional management and well established state-sponsors with access to PSU business opportunities. We are a professionally managed company led by our Board of Directors and a dedicated and hands-on senior and upper management team with an average of almost 20 years of experience in the financial services industry. We have recently expanded our management ranks, adding depth and experience and positioning us for future growth. We have a dynamic human resources program with a track record of hiring and retaining talent through initiatives such as incentive based compensation, a merit based promotion system and specific training programs. Furthermore, each of our four sponsors are well-known state entities in India: State Bank of India, Life Insurance Corporation of India, Punjab National Bank and Bank of Baroda. Our affiliation with our Sponsors puts us in a favourable position in terms of gaining access to a variety of opportunities with public sector undertakings ("PSUs"). For example, we are one of the three fund managers selected by the Government of India to manage the assets of the National Investment Fund ("NIF"). The first tranche of Rs. 3,689 million in NIF proceeds was received by us in October 2007. We are also one of the three asset managers selected by the Pension Fund Regulatory Development Authority ("PFRDA") to manage the pension fund of government employees. In the first phase, we have been awarded the right to manage 40% of the total corpus. We believe similar opportunities exist with other PSUs, in particular those PSUs which have been authorized for the first time, as of August 2007, to begin investing up to 30% of their surplus funds in equity funds managed by state-owned enterprises such as us.
Our Strategy
The key elements of our growth strategy include:
Increase retail investor base and equity AUM by expanding distribution channels and leveraging technology. We seek to continue to develop our distribution network and increase our geographical reach through reinforcing and expanding our in-house and third party distribution channels. Our broad distribution network enables us to reach retail investors, who have historically been a more stable class of investors. Retail investors also are more likely to be long-term investors in equity and balanced/hybrid funds, which usually have higher margins than debt funds. We intend to increase the number of our UFCs nationwide from 79 to approximately 120 UFCs and also upgrade some of our existing UFCs. We will continue to leverage our long-standing relationships with private banks and independent financial advisors, which allow us to reach more remote areas without incurring substantial costs. We aim to benefit from our tie-ups with PSU banks and post offices, which we see as a significant opportunity for further growth, given their geographical reach. We will also explore opportunities to establish partnerships with other strong and reputable distributors to capture market segments which we may not be able to access efficiently ourselves. For example, we intend to establish further arrangements with foreign banks in India to access their private banking clients. We also are focused on increasing our distribution by leveraging our technological capabilities. In particular, we plan to market our products through additional ATM units in rural areas, and make wider use of our website.
Pursue new PSU, institutional and other growth opportunities. We seek to increase AUM by accessing new markets which we believe are strategically viable. We intend to use our track record of tie-ups with government entities (such as NIF and PFRDA) to pursue other opportunities in the public sector. For example, we recently launched a micro-pension fund to provide pension benefits to unorganized workers, which comprise a majority of the total workforce in India. We were recently selected as one of two asset managers for the Post Office Life Insurance Fund and Rural Post Office Life Insurance Fund (together, the "Insurance Funds"). We will be responsible for managing a portion of the proceeds from insurance premiums collected going-forward by the Insurance Funds. The Insurance Funds currently are reported to have an estimated combined corpus of approximately Rs. 106 billion. We are also committed to expanding our institutional client base and reaching more high net worth individuals by strengthening our institutional distribution channel. We recently reorganized our sales force according to distribution channels, and believe the increased client focus resulting from the reorganization will help us better address the needs of different client segments. Building on the success of our first two venture capital and private equity funds, we plan to launch additional funds, including an infrastructure private equity fund.
Continue to improve investment performance across our categories of funds. We believe the most effective strategy for growing our businesses is aligning our economic interests with those of our clients and delivering strong investment performance. We seek to improve our investment performance by consistently applying our investment philosophy while actively managing portfolios to balance risk and return. We also will follow our disciplined and rigorous investment processes backed by fundamental research and our
"hands-on" approach to asset and risk management. Although we will continue to have balanced and well- diversified portfolios, we have more clearly and narrowly defined the investment objectives for our funds, which we believe will help the fund managers achieve superior results and better position the funds in the increasingly crowded marketplace. We will also leverage our strength in liquid and income funds to increase our AUM. Value Research has assigned ratings of three stars or higher to 12 of our debt funds, reflecting our strong investment performance. Our in-house research department currently covers approximately 300 companies. We intend to continue to pursue our rigorous in-house research based approach, increase the number of companies covered by our in-house research team and improve the interaction between our research team and fund managers and companies.
Achieve product leadership and innovate. We are focused on offering competitive products and services based on our investment strengths, and we will continue to selectively expand our investment products where we believe the application of our competencies and our investment philosophy and processes may produce attractive offerings for investors. We continually develop new investment products to offer to clients, particularly through our in-house research capabilities. Specific investment products are developed by our investment team and are tested and evaluated. In the last 18 months, we have launched four new equity funds, including UTI-India Lifestyle, focusing on the expanding consumer lifestyle industry in India, and UTI-Spread, an arbitrage fund. We also recently launched UTI-Gold, an exchange traded fund ("ETF")