UTI Asset Management Company Ltd Management Discussions.

DEBT MARKET OVERVIEW AND OUTLOOK

The Financial year 2020-21 started with the economic uncertainty due to the lockdowns imposed in the country as a result of Covid-19. Government revenues were hit hard due to significant reduction in economic activities. The Government responded swiftly to the pandemic and its impact on the economy, by announcing various relief packages to support growth. The Reserve Bank of India (RBI) responded to the situation by announcing aggressive liquidity infusion by way of LTROs, TLTROs, OMO purchases, Operation Twist etc., to ensure that yields do not spike, at a time, when the economy was on a downward trajectory due to the lockdowns. These liquidity infusion measures have been successful in pulling down the overall yield curve with 10-year yield moderating from 6.30% at the start of year to the lows of 5.75% during the year. The benefits of easy liquidity have been reflected more in the short end of the curve with overnight rates falling even below 3% and settling in the range of 3.00% to 3.25% for most of the second half of the fiscal. Helped by these easy liquidity conditions among other factors, we have seen GDP going back to pre-covid levels in 3rd quarter of the Financial Year, along with inflationary pressures building up (reflected in core CPI data). This resulted in RBI moving in the direction of gradual liquidity withdrawal in the last quarter of the fiscal, which in turn, resulted in markets building expectations of increase in short term funding cost sometime in 2nd half of next fiscal.

However, getting into the FY22, we witnessed the emergence of 2nd wave of Covid-19, which has started impacting the economic activity. This has resulted in markets pricing out possibility of liquidity withdrawal anytime soon. While, the markets continue to assess the impact of this 2nd wave on the overall economic activity, we expect this impact to be limited, due to vaccination drive being carried out by the various Governments. This drive may help in ensuring that the lockdowns may not last for a longer time as compared to last year. The scope for RBI to provide further accommodation remains limited at a time when globally yields are heading higher in anticipation of improvement in economic growth. We have also witnessed upward pressures on the global commodity prices, which may result in upward movement of domestic CPI. In this backdrop, the market will watch out for cues from RBI on how long they will be willing to continue with the current liquidity surplus. Any liquidity withdrawal on part of RBI will be likely only after we see meaningful revival in growth expectations, which in turn will depend on our capability to swiftly vaccinate a large part of population. Overall, it becomes important to keep a close watch on the pace of vaccination which in our expectations will hold the key for any relaxation in lockdowns and subsequent future growth revival for our economy.

OVERVIEW ON EQUITY MARKET AND OUTLOOK

Nifty 50 climbed 73% during FY21, which was one of the sharpest rallies in the last decade. This performance is accentuated by the sharp collapse in the market that occurred during the last two months of FY20, as the COVID-19 pandemic propagated. Indian equities rallied along with most of the global equity markets as central banks worldwide embarked on record monetary stimulus. At the same time, governments across the world adopted a counter-cyclical fiscal policy by embarking on fiscal spending to pull their respective economies out of a recession. In India, the Government also undertook a series of supply side measures to improve the long-term growth potential of the economy.

Unlike in the previous two years, the participation in the rally was broad based and not restricted to select list of heavyweight stocks. Nifty Midcap 150 and Nifty Smallcap 250 Indices rose by ~100% and ~117% respectively in FY 2021, while Nifty 50 rose by ~73%. Equities as an asset class also outperformed other asset-classes in the financial year 2021, wherein MCX gold gave a return of ~7.3%, and CRISIL Bond Index gave a return of 7.7%.

On the economic front, India entered a technical recession for the first half of fiscal 2021, but has consistently improved the trend, with Q1 and Q2 real GDP declining ~24.4%, ~7.3%, respectively, and Q3 reporting 0.4% growth YoY. As per MOSPI estimates, FY21 real GDP is expected to contract by 8%. During the first 8 months of FY21 (April to November 2020), CPI inflation was at an elevated level (an average of 6.9%) owing to lockdown and supply side constraints that kept the food prices high. However, Inflation eased towards the end of the year as supply constraints eased and fell within the MPCs target band of 2-6%. Investment cycle too was affected by COVID-19 and it got reflected in Gross Fixed Capital Formation (GFCF) dipping to 30.9% of GDP as per the second advanced estimates for fiscal 2021. However, GFCF has been improving since Q1 of fiscal 2021 and reached 33% of GDP by Q3FY21. The governments focus on capex spends and manufacturing during the union budget for fiscal 2022, along with lower interest rates and expected revival in global demand, are creating a conducive environment for the capex cycle.

The global growth outlook remains robust despite the second wave of COVID-19 due to normalizing economic activities and record fiscal and monetary stimulus unveiled globally by governments and central banks, respectively. The availability of vaccines and rapid vaccination drive globally are building hopes of speedy recovery over the course of the year. The IMF projected the global economy to grow 6% in 2021 and 4.4% in 2022 in the latest World Economic Outlook April 2021. For India, RBI has projected real GDP growth at 10.5% and inflation at ~5% for FY22. The MPC and RBI have indicated an accommodative stance. Reforms undertaken over the past year and a supportive fiscal stance underpin India growth recovery. In this backdrop, Nifty 50 earnings are estimated to grow at ~25% Compound Annual Growth Rate (CAGR) for the next two years on base of FY21 estimates (Bloomberg estimates). Companies that can navigate a challenging period are often well placed to accelerate growth, gain market share and profitability in the subsequent period as they face less competition. However current valuations, which are elevated relative to history; make the markets vulnerable to any sharp shifts in global liquidity, inflation expectations, earnings disappointments & a resurgence in Covid-19.

OTHER KEY HIGHLIGHTS OF FINANCIAL YEAR 2020-21:

FY21 institutional flow: Foreign Portfolio Investors were net buyers across most of FY21, with an equity net inflow of approx. USD 37.3 billion for FY2021. Domestic institutional investors (DIIs) were net sellers across most months, with total outflows at USD 18.2 billion for FY21. Mutual funds remained net sellers with an outflow of close to USD 16.5 billion. Systematic Investment Plan (SIP) portion of mutual fund inflows witnessed a downward trend before bouncing back in the month of March 2021. The average monthly run-rate of SIPs for FY21 was INR 80 billion in FY21. While all key sector indices ended FY21 with gains, various sector indices like NSE Metals (159%), NSE Auto (109.8%), NSE IT (105.8%), BSE Power (86.1%) outperformed the Nifty 50 Index (73%) while NSE FMCG (31.7%), BSE Telecom (34.4%) underperformed the Nifty 50.

FY21 witnessed recovery in primary market activity with fund raising via IPOs, FPOs, OFS, Rights issue, etc. rising from INR 1.47 trillion in FY20 to INR 2.55 trillion in FY21.

MUTUAL FUND INDUSTRY OVERVIEW:

Aggregate AUM of the Indian mutual fund industry has grown at a healthy pace over the past ten years, against the backdrop of an expanding domestic economy, robust inflows and rising investor participation, particularly from individual investors.

1] Equity Markets and Retail Participation

The Average industry AUM grew at a CAGR of 16.5% from INR 7.0 trillion as of 31 March, 2011 to INR 32.1 trillion as of 31 March, 2021, driven by increasing aggregate financial savings combined with growing investor awareness of mutual fund products. During the last five years, between April 2016 and March 2021, the industry witnessed a net inflow in equity-oriented funds of INR 3.55 trillion. The Average AUM of equity-oriented funds grew at a CAGR of 26.4%, from INR 4.18 trillion as of 31 March, 2016 to INR 13.51 trillion as of 31 March, 2021, while Average AUM of debt-oriented funds grew at a CAGR of 9.8%, from INR 5.87 trillion as of 31 March, 2016 to INR 9.40 trillion as of 31 March, 2021. The industry witnessed a decent growth over last 5 years despite of the challenging macro environment coupled with the impact of COVID-19 pandemic.

AUM of flexi-cap, multi cap, large cap, large and mid-cap, mid-cap, and ELSS together accounted for 68.9% of the industrys open-ended growth/equity-oriented scheme closing AUM as on 31 March, 2021. Average AUM of other categories of funds (including ETFs, Index funds and FoF investing overseas) saw robust growth of over 14.9 times (a CAGR of 71.7%) over a lower base as institutional investors such as the Employees Provident Fund Organisation (EPFO) began investing a portion (currently 15%) of their incremental deposits into equities via passively managed funds, an industry trend expected to continue for the medium term.

The Average AUM of liquid/money market funds grew at a CAGR of 13.1% from March 2016 to March 2021, supported by corporate investments, stable returns, and a high level of aggregate re-allocations from long-term debt instruments.

Going forward, it is expected that increased financial savings as well as improving investor awareness may drive industry growth, following a broader economic recovery from the effects of the COVID-19 pandemic.

TREND ACROSS VARIOUS MUTUAL FUND SEGMENTS (AUM IN INR BILLION)

Segment Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-21
Equity 4,183 5,927 9,582 10,210 11,348 13,507
Debt 5,871 7,982 8,134 7,152 7,449 9,398
Liquid/ MoneyMarket 3,269 3,940 4,562 5,916 6,327 6,046
Others 212 446 773 1,206 1,913 3,155
Total 13,534 18,296 23,052 24,484 27,037 32,106

Note:

(1) Equity funds include ELSS, hybrid and solutions funds. Debt funds include gilt, income and infrastructure debt funds. Others include gold ETFs, other ETFs and FoFs investing overseas.

(2) After 31 March 2019, equity includes growth/equity-oriented schemes (other than ELSS), ELSS funds, hybrid schemes and solution oriented schemes. Debt includes gift fund/gift fund with 10 years constant duration, and remaining income/debt-oriented schemes. Liquid/money market includes liquid/money market/floater funds/overnight fund. Other include index funds, gold ETF, other ETF and FoFs investing overseas.

Source: AMFI CRISIL.

NET INFLOWS IN THE MUTUAL FUND INDUSTRY

Overall, the industry saw net inflows of INR 2,088 billion over the over the 12 months ended March 2021 after the slow down in inflows witnessed in FY19 and FY20.

Note:

(1) Equity funds include: ELSS, hybrid and solution funds. Debt funds include: gift, income, and infrastructure debt funds. "Others" include gold ETFs, other ETFs, and FOFs investing overseas.

(2) After 31 March 2019, equity includes: growth/equity oriented schemes (other than ELSS), ELSS funds, hybrid schemes, and solution-oriented schemes. Debt includes: gilt fund/gilt fund with 10 year constant duration, and remaining income/debt oriented schemes. Liquid/money market includes liquid/money market floater fund. Others include: index funds, gold ETF, other ETF, and FoFs investing overseas.

Source: AMFI CRISIL.

In fiscal 2021, within the debt-oriented categories, corporate bond funds, which typically invest in an underlying portfolio of higher rated papers, emerged as the biggest contributor in this asset class with net inflows of INR 693.05 billion over the 12 months ended March 2021. Credit risk funds saw the highest net outflows, at INR 289.23 billion, over the same period. In fiscal 2021, in the equity-oriented funds, sectoral/ thematic funds recorded the highest net inflows of INR 98.01 billion, aided by new thematic fund launches in the category, while large cap funds recorded the highest net outflows of INR 105.87 billion, as investors worried about expensive valuation after the recent sharp run-up in the market.

Equity-oriented funds also benefitted from continued inflows through systematic investment plans. The industry witnessed net flows of INR 960.80 billion in fiscal 2021 compared with ~INR 1,000 billion of inflows in the previous fiscal.

In fiscal 2021, under the hybrid funds, arbitrage funds which exploit volatility in the equity market to generate returns, recorded the highest net inflows of INR 269.08 billion, while aggressive hybrid schemes posted the highest net outflows of ~INR 258.47 billion. In the fiscal, equity ETF inflows were ~INR 398.20 billion and gold ETF inflows ~INR 69.19 billion. The two categories AUM rose ~88% and 78%, respectively, over the one year ended March.

2] Mutual Fund Industry Outlook:

The pandemic-induced developments notwithstanding, as economic activities resume and gather pace, businesses should see heightened requirement of funds. Thus, liquid and arbitrage funds might witness pressure again due to outflows. In addition, corporates are expected to reduce their exposure to debt funds, at least in the riskier categories. In the long term, with expectation of higher returns from the capital markets, fund flow into equity funds is expected to pick up. Increasing share of mutual funds in household savings, driven by expectations of higher and stable returns, is one of the key contributors of fund inflows, especially into passive and equity funds. A gradual improvement in corporate earnings, controlled inflation, stable political environment, consistent growth in mutual fund inflows and ~9% growth in nominal gross domestic product (GDP) post fiscal 2021 are expected to deepen mutual fund penetration.

As per a CRISIL report, the industrys quarterly average AUM (QAAUM) is expected to increase at ~14% CAGR between March 2020 and 2025. The growth is expected to be led by equity funds, which will continue to garner strong investor interest. Average equity AUM is expected to increase at ~18% CAGR to ~Rs 25 trillion by fiscal 2025, from Rs 11.1 trillion in March 2020, driven by strong inflows. Strong growth in equity funds will increase their share in the overall fund pie from 42% to 47% by March 2025, in line with the global average.

3] Key Challenges:

The Indian economy has faced its first contraction in more than four decades due to the impact of the COVID-19 pandemic. The impact of this pandemic is likely to widen Indias fiscal deficit, which could exacerbate the structural risk factors and make Indias economy vulnerable to possible downside risk and volatility.

Retail participation and inflows into mutual funds and other market-linked products are heavily influenced by market performance and sentiment. A prolonged downturn or ongoing volatility could result in further decline in aggregate demand for market-linked products and cause industry AUMs to shift into relatively lower-risk assets.

COMPANY OVERVIEW:

1) Business Overview:

UTI AMC is one of the largest asset management company in India in terms of Total AUM and the eighth largest asset management company in India in terms of mutual fund QAAUM as of 31 March, 2021. As of 31 March, 2021, 23% of our Monthly Average AUM was attributable to B30 cities as compared to 16% for the overall industry. We cater to a diverse group of individual and institutional investors through a wide variety of funds and services.

2) Operational Performance Review:

(I) MUTUAL FUND

UTI AMC manages 138 domestic mutual fund schemes (excluding 10 segregated portfolios), comprising equity, hybrid, income, liquid and money market funds as of 31 March, 2021. Our Domestic Mutual Fund QAAUM was INR 1,829 billion as of 31 March, 2021, which accounted for approximately 5.69%, or the eighth largest amount, of the total QAAUM invested in all mutual funds in India as of 31 March, 2021, according to AMFI Data.

(II) PMS SERVICES:

Our PMS business provides portfolio management services to institutional clients and HNIs. The company provides Discretionary PMS to the Employees Provident Fund Organisation (EPFO), the Coal Mines Provident Fund Organisation (CMPFO), the Employees State Insurance Corporation (ESIC), the National Skill Development Fund (NSDF) and to HNIs, Non-Discretionary PMS to Postal Life Insurance (PLI), and Advisory PMS to various offshore and domestic accounts.

UTI AMC got the mandate to manage 55.0% of the total corpus on 31 October, 2019 of the Central Board of Trustees, EPF, accounting for INR 6,635 billion as on 31 March, 2021, which is 84.65% of our PMS AUM as of 31 March, 2021. UTI AMC also manage retirement funds (in retirement solutions business, which manages the NPS funds), offshore funds and alternative investment funds. These other businesses (excluding our domestic mutual funds and PMS business) had an aggregate closing AUM of INR 1,946 billion as of 31 March , 2021.

(III) FINANCIAL PERFORMANCE REVIEW:

(a) Total Income

Total income for the fiscal year ended 31 March, 2021 was INR 1,198.63 crore, an increase of INR 308.67 crore, or 34.7%, from INR 889.96 crore for the fiscal year ended 31 March, 2020. This increase was primarily due to an increase in net gains on fair value changes and from increase in revenue from the sale of services.

(b) Revenue from Operations:

Revenue from operations increased by INR 314.49 crore, or 36.8%, from INR 854.03 crore in the fiscal year ended 31 March, 2020 to INR 1,168.52 crore in the fiscal year ended 31 March, 2021, primarily reflecting an increase in revenue from sales of services and higher net gains on fair value changes. Revenue from operations as a percentage of total income was 97.5% for the fiscal year ended 31 March, 2021 compared to 96.0% for the fiscal year ended 31 March, 2020.

(c) Other Income:

Other income decreased by INR 5.82 crore, or 16.18%, from INR 35.93 crore in the fiscal year ended 31 March, 2020 to INR 30.11 crore in the fiscal year ended 31 March, 2021. This decrease was primarily due to lower foreign exchange difference. Other income as a percentage of total income was 2.5% for the fiscal year ended 31 March, 2021 compared to 4.0% for the fiscal year ended 31 March, 2020.

(d) Expenses:

(i) Fees and Commission Expenses: Fees and commission expenses increased by INR 0.05 crore, or 1.83%, from INR 2.91 crore in the fiscal year ended 31 March, 2020 to INR 2.96 crore in the fiscal year ended 31 March, 2021. This was primarily a result of the incremental commission paid for the new fund raised in UTI Structured Debt Opportunities Fund - II by UTI Capital.

(ii) Finance Cost: Finance cost decreased by INR 1.29 crore or 13.79% from INR 9.35 crore in the fiscal year ended 31 March, 2020 to INR 8.06 crore in fiscal year ended 31 March, 2021. This is primarily as a result of reclassification of leases and renegotiation in the rental for various UFCs amid to COVID 19 Pandemic.

(iii) Employee Benefit Expenses: Employee benefit expenses increased by INR 39.60 crore, or 11.65%, from INR 339.88 crore in the fiscal year ended 31 March, 2020 to INR 379.48 crore in the fiscal year ended 31 March, 2021. This increase was primarily due to increase in expenses incurred in respect of the employee share option scheme and an increase in variable pay, salary cost, health insurance and Actuarial Cost for the financial year 2020-21. Employee benefit expenses as a percentage of total income is 31.66% for the fiscal year ended 31 March, 2021 as compared to 38.19% for the fiscal year ended 31 March, 2020, primarily as result of the increase in our total income.

(iv) Depreciation and Amortisation Expenses: Depreciation and amortisation expenses increased by INR 2.19 crore, or 6.53%, from INR 33.59 crore in the fiscal year ended 31 March, 2020 to INR 35.78 crore in the fiscal year ended 31 March, 2021. This increase was primarily due to higher capitalization of various intangible asset, which is as a part of digital initiatives taken by the company for various operations. Depreciation and amortisation expenses as a percentage of total income were 3.77% for the fiscal year ended 31 March, 2020 compared to 2.98% for the fiscal year ended 31 March, 2021.

(v) Other Expenses: Other expenses increased by INR 6.39 crore, or 3.92%, from INR 162.93 crore in the fiscal year ended 31 March, 2020 to INR 169.32 crore in the fiscal year ended 31 March, 2021. This increase was primarily due to an increase in CSR expenses following the changes in Companies Act 2013 in respect of CSR Rules, where it has been mandated to provide for the unspent CSR Expenses as well and transfer the same in a separate bank account, as well as increase in rates & taxes, foreign exchange differences, and membership & subscription expenses, partially offset by an decrease in Repair & maintenance Expenses, Advertisement and business promotion expenses and travelling & conveyance expenses. Other expenses as a percentage of total income were 14.13% for the fiscal year ended 31 March, 2021 compared to 18.31% for the fiscal year ended 31 March, 2020.

(vi) Profit Before Tax: Profit before tax for the fiscal year ended 31 March, 2021 was INR 603.03 crore, an increase of INR 261.73 crore, or 76.69%, from INR 341.30 crore for the fiscal year ended 31 March, 2020. This increase is primarily due to increase in revenue from the sale of services and higher net gains on fair value changes, partly offset by an increase in employee benefit expenses, depreciation and amortization expenses and other expenses. As a percentage of total income, profit before tax was 50.31% in the fiscal year ended 31 March, 2021 and 38.35% in the fiscal year ended 31 March, 2020.

(vii) Tax Expenses: In the fiscal year ended 31 March, 2021, our tax expenses increased by INR 42.32 crore, or 63.76%, to INR 108.70 crore in the fiscal year ended 31 March, 2021 from INR 66.38 crore in the fiscal year ended 31 March, 2020. Current tax increased by INR 8.75 crore, or 11.76%, from INR 74.43 crore in the fiscal year ended 31 March, 2020 to INR 83.18 crore in the fiscal year ended 31 March, 2021, primarily due to an increase in our profit before tax. Deferred tax increased by INR 33.67 crore or 420.37%, from INR (8.01) crore in fiscal year ended 31 March, 2020 to INR 25.66 crore in fiscal year ended 31 March, 2021, primarily due to increase in revenue from gain in fair value changes.

(viii) Profit After Tax: Profit after tax (attributable to the owners of the company) increased by INR 222.68 crore, or 82.08%, from INR 271.46 crore in the fiscal year ended 31 March, 2020 to INR 494.14 crore in the fiscal year ended 31 March, 2021. This increase was primarily due to the increase in total income compared to the fiscal year ended 31 March, 2020. As a percentage of total income, profit after tax was 41.22% in the fiscal year ended 31 March, 2021 and 30.50% in the fiscal year ended 31 March, 2020.