US-64 NAV likely to shore up

NEW DELHI, FEB 28: The bailout package for US-64 is likely to shore up the net asset value of the beleaguered flagship of Unit Trust of I...

NEW DELHI, FEB 28: The bailout package for US-64 is likely to shore up the net asset value of the beleaguered flagship of Unit Trust of India by around 63 paise. A quick estimate based on the Rs 4,800-crore cushioning provided by the Government in the form of a special fund will directly boost the NAV of the scheme by 63 paise. This will mean the approximate NAV of the scheme going up to Rs 11.50 based on a corpus of Rs 17,000 crore and unit capital of Rs 15,629 crore.

This move will narrow the difference between the sale price of the unit (current Rs 15) and the NAV. Eventually, this will help the fund begin the process of moving towards an NAV-driven scheme which has been recommended by the Deepak Parekh committee.

The bailout basically involves transferring Rs 4,800 crore worth of public sector stocks at book value from US-64 to a new fund, Special Unit Scheme (SUS). In return, an equivalent amount of Government securities will enter the portfolio of US-64.

Assuming the market value of these PSUstocks to be lower by an average of 20 per cent, the new deal will mean an addition of assets worth Rs 960 crore. This works out to an addition in the NAV of approximately 63 paise. In terms of income, this will translate into an annual inflow of approximately Rs 528 crore, being the interest received on the Government securities. The new deal, along with the income-tax exemption, which provides this kind of cushioning opens a number of possibilities for the scheme. Given the objective of moving towards an NAV-driven scheme, any attempt to hike the sale price of the units may not make much sense.

Usually, the UTI increases the sale price of the units ahead of the closure of its financial year in June.

The chances of a hike in the unit prices also looks dim in the backdrop of the Rs 1500 crore net redemption in the scheme as of December 1998. UTI will be forced to keep the sale price within reasonable limits to not only stem the outflow but also to ensure fresh inflows come in. The hike in sale price willeffectively depend on the stock market.

A stable pricing policy coupled with the income tax exemption will make the scheme very attractive, if it is assumed that the dividend will be maintained at Rs 2 per unit. At the current sale price of Rs 15 per unit, this will mean a tax free yield of 13.33 per cent. This is a very attractive return which will lure investors back to the scheme.

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However, the possibility of maintaining the dividend at 20 per cent appears remote given the volatility in the stock markets. It is likely that the UTI will maintain a more or less stable pricing policy and pare the dividend by one per cent or two per cent. With the tax exemption, investors investing at current price will still get a slightly higher yield.

On the flip side, the restructuring of US-64 could mean losing the dividend tax exemption offered in the budget. Following the Rs 4800 crore asset replacement (from equity to debt), the total equity holding of the scheme is likely to be lower than 50 per cent as againstthe current 70 per cent. The budget has proposed dividend tax exemption for open-ended mutual funds whose equity holding is more than 50 per cent. To be able to take advantage of the tax exemption, UTI will have to invest more in equity from its fresh inflows. This appears to be the key to the finance minister’s hope that the US-64 package will help revive the stock markets.