Itus Capital Investment Update – UTI AMC

We made a significant change in the portfolio construct at Itus, with a complete exit of UTI AMC. This was done in April 2022. The PL across all clients for the investment in UTI AMC was -6.1% and the weighted average sale price across all clients was at 821.

Background of the investment

We had invested in UTI AMC on the back of all 3 levers that we look for in a business in favour of the investment

1. Cash flow growth: UTI AMC had continued to grow its cash flows 3x in the last 2 years (2019-21). This came about due to robust improvement in the performance of its schemes led by the flagship funds run by Mr. Vetri Subramaniam. This translated into a revenue growth of 27% CAGR in the last 2 years and the AMC being whitelisted by all the large banks and Wealth management firms in India
2. Return on Incremental Capital: The AMCs expense ratio was being managed with a clear plan to bring it down. There was a clearly laid out plan to bring the expense of the AMC down (we bought the AMC when the expense was at 35 bps of AUM and it began to drop to 33 bps of AUM in two quarters since our purchase. This resulted in a ROCE improvement of 2%
3. Valuation: Our expectation over the next 2 years with a  nominal growth of 15% on the revenue growth with an expense reduction dropping to 30 bps of AUM was the PAT to grow to 650 Cr in the next 2 years (from 430 Cr in FY22). This would potentially mean that the downside in the business we were buying it at (13x Forward) was extremely low.

Position sizing the investment

UTI AMC was one of the funds highest exposure investment in the portfolio. Why did we size the position to 10% across clients?

• While security selection is an important job of a fund house, position sizing (we believe) is an equally if not more important job
• We were getting a business which had levers of both cash-flow growth and RoIC expansion simultaneously happening with an extremely high margin of safety ( cheap valuation)
• We believed that we would not lose significant capital if we get the thesis wrong here.

Reason to exit the investment fully

I have often highlighted that getting married to your investments is the biggest nemesis of a manager or investor. While I continue to believe that our investment thesis was sound, our exit was predicated on the thesis changing – when our core investment thesis changes, we would exit a position.

Over the last 2 quarters, the AMC business has seen a margin compression on the equity book ( this has been an industry-wide trend). While this we believe will normalize over time, we had expected the management to be prudent on the cost during times where there was significant yield pressure. However, in the 4QFY22 earnings, the expense of the AMC in the quarter (and the year) continued to increase which was contrary to the thesis we had and our discussions with the management.

(To put this in perspective, UTI AMC has an average cost per employee at 26.1 L / annum which continues to be 3x the industry leader).

This was an extremely important lever to our growth on the business, and we no longer were comfortable with the investment and the management narrative on the execution. We exited the position completely at a -6.1% loss on the position which we believe was prudent risk management.

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