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CAMS IPO: Should you invest?

CAMS-IPO.jpg

Computer Age Management Services Limited (CAMS) has filed DRHP with the SEBI for its upcoming IPO. We take a look to see if one should subscribe.

Short Answer: Penetration of mutual funds in India is 11% as compared to the world average of 55%. Majority of financial savings are in physical assets. Increase in penetration rates of mutual funds and a shift in savings from physical assets to financial assets provides a huge runway for companies like CAMS.

CAMS has 70% market share in a two player market, favourable return ratios and not much need for capital investments. Albeit expensive at the IPO offer price, a long growth runway and current duopoly make this an attractive issue to subscribe.


The Offer

Link to CAMS DRHP

Issue: 1,82,46,600 Shares, Offer for sale (OFS)

Price Band – Rs 1,229-1,230/share

Offer Value – Rs 2,244 Cr

Employee reservation portion – 1,82,500 shares

Offer for retail – 63,22,435 shares

Equity shares outstanding pre and post the offer – 4,87,86,800 shares

The selling shareholders are as below

Selling shareholders

Source: CAMS DRHP

Great Terrain is the promoter of CAMS. The shareholding pattern as on the date of filing the DRHP is as below

SHP

Source: CAMS DRHP

Great Terrain is wholly owned by Harmony River Investment Limited. Harmony River Investments is directly owned by certain private equity funds. The SHP of Harmony River Investments is shown below

Warbug Pincus SHP

Source: CAMS DRHP

Great Terrain has acquired its stake in the company in two tranches in 2018 and 2019. It acquired 1.82 Cr shares in 2018 at Rs 682/share and 29.4 lakh shares in 2019 at Rs 718/share.

Industry

CAMS has various sources of revenues, however the major source of revenues comes from servicing mutual funds, which are its customers. Basically CAMS charges mutual funds on the assets under management (AUM). We will look at this in detail in the next section. In this section we will look at the mutual fund industry.

India has been and is expected to be a high savings economy. The gross domestic savings (GDS) rate as a % of GDP in 2018 was 30.5%, it had peaked at 36.8% of GDP in 2008. GDS is the difference between GDP and final consumption expenditure.

GDS consists off

  • Savings of the household sector
  • Private corporate savings and
  • Public sector savings

Below is the GDS and its components for the last 4 years

Observations from the above table

  • Gross savings at the end of FY18 stood at 52 Lakh Cr, growing by 9% CAGR in the 3 year period
  • Non financial corporate savings have grown the fastest, 14% CAGR and stood at 20.7 Lakh Cr at the end of FY18
  • Household savings have grown at 6% and constitute 56% of gross savings, this has reduced from 61% in FY15
  • Drop in household savings in the overall mix can be attributed to. – high consumption by households, low income and job creation and increase in financial liabilities of households

Let us look at the break up of household savings

Observations from the above table

  • Gross financial savings increased by 14% CAGR, however financial liabilities in the same period increased by 25%. The result of this was increase in net financial savings by 9%
  • Physical assets form a major part of the household savings, 17.6 Lakh Cr in FY18. These assets were 60% of household savings

Physical assets constitute a majority of the savings, this gives room for financial savings to have a higher share going ahead as factors like – financial literacy, higher returns from financial instruments, government’s move towards digitization and curbing black money and diminishing attractiveness of physical assets will push people to move towards financial savings.

Mutual Funds

The assets under management (AUM) of mutual funds in India stood at Rs 23.8 trillion as on March,2019. The AUM has risen by 17.4% CAGR since 2000. Average assets under management (AAUM) at the end of March and November 2019 stood at Rs 23.8 and Rs 27.04 trillion. AAUM have grown by 16.2% CAGR from Rs 6.14 trillion in March 2010 to Rs 23.80 trillion in March 2019. The Indian mutual fund industry has 41 asset management companies (AMCs) as of March,2019 up from 32 in March,2000.

AUM since FY10 has increased by 16% CAGR, however since FY14 the pace has been faster. AUM growth since FY14 has been 23%. Between 2014-19 the industry saw a net inflow of Rs 9.6 trillion, 64% of these inflows were seen in 2017 and 2018. Equity funds in this period saw inflows growing at 39% CAGR from Rs 2.1 trillion in 2014 to Rs 10.7 trillion in 2019, the debt segment grew by 9%.  The number of folios have increased from 41.7 million as on March, 2015 to 82.5 million in March,2019. The no of folios as on September 30,2019 were 85.6 million.

Update: The MF AUM at the end of FY20 was Rs 27.6 trillion. The no of folios at the end of March,2020 and June,2020 was 89.7 million and 91.5 million.

Below is the AUM by category for the FY14-19 period

Observations from the above chart

  • Equity AUM has grown the fastest – 39% CAGR from Rs 2,079 billion to Rs 10,727 billion
  • Equity AUM in FY19 was 45% of total AUM as compared to 25% in FY14
  • Debt AUM has grown the slowest at 9% CAGR, share of debt AUM in the total AUM has fallen from 57% in FY14 to 31% in FY19
  • Liquid/Money Market AUM has grown by 27% from Rs 1,333 billion to Rs 4,362 billion

Update: AUM of assets classes at the end of March,2020 – Equity: Rs 11,348 billion, Debt: Rs 7,449 billion, Liquid: Rs 6,327 billion and Others: Rs 1,913 billion. The numbers for June,2020 stood at Rs 9,740 Bn,6,797 Bn,6,272 Bn and 1,818 Bn. 

As can be seen from the above chart

  • Cumulative equity inflows for the period mentioned above have been Rs 6,460 billion, 40% or Rs 2,608 have come in FY18
  • Debt inflows have been Rs 523 billion, outflow of Rs 1,244 billion is seen in FY19
  • Liquid/Money market inflows have been Rs 2,200 billion, 44% or Rs 958 billion coming in FY17

Update: Inflows of funds in FY20 for the assets classes are – Equity: Rs 603 Bn, Debt:  Rs 342 Bn, Liquid/Money market: Rs -745 Bn and Others: Rs 673 Bn

Important pointers from the above chart which shows the AUM by investor classification

  • 58% of the AUM in FY19 was with retail and HNI investors, they prefer to invest in equity mutual funds, this was 52% in FY15
  • Corporates held 40% of the AUM in FY19, institutional investors prefer to invest in fixed income products
  • Banks and FIIs have a negligible monies invested in MFs

Update: The average AUM at the end March,2020 and July,2020 by investor classification is as below

Average AUM

The split of AUM by investor type as on September,2019 can be seen below

Monthly amounts invested via SIPs have seen a substantial increase in the 2016-19 period, these have increased from Rs 31 billion in April 2016 to Rs 80.5 billion in March,2019. Mutual funds collected Rs 927 billion in FY19 through SIPs as compared to Rs 672 billion in FY18, a jump of 38%. Number of SIP accounts have increased from 21.1 million in FY18 to 26.2 million in FY19.

Update: MFs collected Rs 1 trillion in FY20 through SIPs. As of July,2020 the SIP AUM was Rs 3.2. trillion. No of SIP accounts at the end of the period was 32.7 million.

Market Participants

The Indian mutual fund industry comprises of 41 AMCs (excluding Infrastructure Debt Funds). SBI is the largest AMC is terms of AUM, it is followed by HDFC and ICICI . Below is the total AAUM of the top 10 AMCs in the country in FY15 and June,2020.

Total AAUM

The top 10 AMCs have 84% of the total AAUM in June,2020 as compared to 78% in FY15. The number for the top 5 AMCs is 59% and 54% respectively. HDFC was the largest AMC in FY15 and has slipped to the second spot in June,2020.

MF Registrar and Transfer Agent

CAMS, Karvy, Sundram BNP Paribas Fund Services (acquired by Karvy in October 2019) and Franklin Templeton Asset Management are the mutual fund registrars and transfer agents (RTAs) operating in India. The MF RTA business is estimated to be Rs 8.6 billion in FY19, it is estimated that this has grown by 20% over the last 4 years.

Below is the AAUM of the 3 players in the FY15-19 period

Update: The AAUM of CAMS at the end of July,2020 was Rs 19.19 trillion and Karvy 7.3 trillion. Sundaram was acquired by Karvy in October,2019.  

Below are the clients serviced by the 3 RTAs in the FY15-19 period

Karvy has more customers than CAMS, however CAMS is the leader in AAUM

The RTAs offers services such as transaction execution, payment, settlement and reconciliation, dividend processing, investor interface, record keeping, report generation, brokerage computation and compliance related services.

Franklin Templeton is an RTA for mutual funds sponsored by their own group company. Hence the Indian RTA space is held by two players – CAMS and Karvy. CAMS is the market leader, servicing Rs 18.7 trillion of average AUM as on November 2019, this constituted 69% of total mutual fund industry AUM.

The reason why this space is a two player market is

  • MF RTA business is technology intensive requiring continuous upgradation of systems and processes in line with the increase in volumes and changing regulations
  • Business requires an extensive branch network. At of September 2019 CAMS had 270 and Karvy 221 offices across the country
  • RTA business is sticky, if a mutual fund is being serviced by a particular RTA shifting to another RTA is difficult  as huge amount of data and information needs to be transferred and there is a high risk of disruption of operations and customer experience
  • Investments in technology and branch expansion is justified only if volumes are adequate, hence a new players has to think twice before entering this space

Update: The no of clients of CAMS and Karvy were the same as in FY19

Revenue model of MF RTA

Revenues of MF RTAs primarily revolve around the AUMs handled by them across various categories – (equity, debt, liquid, hybrid and others), volumes of paper based transactions handled and fees on value added services. The majority of the revenues for MF RTAs is the fees charged on the AUM managed by the AMC for which the RTA provides its services.

Fees charged by RTAs are tiered, they decrease as proportion of total AUM of the fund house once the AUM surpass the tiers for which the fees was agreed on. RTAs charge the highest fees for equity AUMs.

Below is the table which shows the fees charged by MF RTA as percentage of AUM on various categories

MF RTA fees

Source: CAMS DRHP

As can be seen from the above table equity funds attract the highest fees and passively managed ETFs and index funds the least.

Below is the total expense ratio (TER) applicable from FY20

SEBI TRI

Source: CAMS DRHP

The impact of this would be minimal, RTAs will see pressure in the near future. However as the proportion of equity AUM increases and debt AUM decreases the loss in revenues will be negated.

SEBI through a circular dated August 10,2018 have classified certain RTAs as QRTAs, if such RTAs were servicing more than 2 crore folios. QRTAs are required to comply with enhanced monitoring requirements since they hold sensitive financial data of large number of investors.

RTAs also provide their services to AIFs and act as insurance repositories. Revenues from these segments are negligible, however these can generate meaningful revenues going forward.

The IPO Candidate : CAMS

CAMS was incorporated as Computer Age Management Services Private Limited on May 25,1988 at Madras, Tamil Nadu. The company is a technology driven financial infrastructure and services provider to mutual funds and other financial institutions.

CAMS provides services such as transaction origination interface, transaction execution, payment, settlement and reconciliation, dividend processing, investor interface, record keeping, report generation, intermediary empanelment and brokerage computation and compliance related services. This is a win win situation for both the mutual funds and CAMS, mutual funds do not have to invest in infrastructure to provide these services and as an RTA, CAMS can provide these services to various AMCs.

CAMS is India’s largest registrar and transfer agent with market share of 69% of AAUM of mutual funds serviced as on November,2019. The market share has increased from 60.5% to 69% over the last 5 years. The company’s mutual fund clients include 4 of the 5 largest mutual funds and 9 of the 15 largest mutual funds based on AAUM as on November,2019. The relationship with the top 4 clients – HDFC Asset Management, ICICI Prudential Asset Management, SBI Funds and Aditya Birla Capital averages 17 years, this indicates that the business is sticky and if the RTAs are up to the mark in providing their services, clients will stick on. As on September 30,2019 CAMS had 278 service centers spread over 25 states.

As on September 30,2019 the company had 16 mutual fund clients with over 67 million accounts held by such clients. The number of accounts added in FY19 were 8.7 million. The company handled over 313 million transactions in FY19 from over 98 million in FY15.

Some of the key metrics of the business are

KPI CAMS

As discussed earlier RTAs charge more for equity mutual funds that they service. Equity oriented mutual funds serviced by CAMS at the end of September 2019 was Rs 6,654 billion or 38% of its total AAUM. Live folios serviced stood at 38.32 million, the total mutual fund folios as on September,2019 were 85.6 million.

Update: Total AAUM serviced by CAMS at the end of June 30,2020 was Rs 17,433 trillion. Equity oriented AUM was 33% of its total AAUM. Live folios were 40 million and total investor folios were 72 million. No of SIP transactions processes in FY20 were 238 million and 59 million at the end of June 30,2020. The company had 271 service centres across 25 states.

Structure

Structure

Source: CAMS DRHP

All of the company’s subsidiaries were wholly owned.

Business Verticals

The company has 7 business verticals, these are

  • Mutual Fund Services Business
  • Electronic Payment Collection Services Business
  • Insurance Service Business
  • Alternative Investment Fund Services Business
  • Banking and Non Banking Services Business
  • KYC Registration Agency Business and
  • Software Solution Business

Under the mutual fund services business the company offers the below services

  • Transfer Agency Services
  • Customer Care Services
  • Distributor Services
  • Technology and Mobile Application for Mutual Fund Business

Services provided under the transfer agency vertical are

  • Transaction origination – Offer both paper based and electronic transaction origination service and managing KYC requirements of investors
  • Operations – Accepting and executing orders, providing transaction processing and payment services to mutual fund clients. Ensuring all records are stored in digital format on its servers. Compute and process fees and commission payable by mutual funds to distributors and assist with the disbursements of such monies
  • Investor Services – Accepting transaction requests from investors, processing them and informing the AMCs and sending confirmations to investors and distributors. Sending periodic statements to investors. Computation and payment of brokerage fees and reconcile bank accounts of investors and distributors
  • Risk Management – Anti money laundering services, reporting to government agencies and authorities such as SEBI and suspicious transactions reporting are some of the services offered under this vertical
  • Compliance – Assist mutual fund clients in complying with scheme document requirements, KYC regulations and SEBI regulations

As part of the electronic payment collection services business, CAMS manages end to end automated clearing house transactions and ECS and service mutual funds, non banking financial company’s and insurance companies. The company executed 55.4, 80.6, 93.3 million ECS and ACH registrations in FY18,19 and 20. For three months ended June 30,2020 the company executed 22.3 million transactions.

The company has 39% share in the insurance repository business. The company held over 2.1,2.8,2.9 and 0.5 million e – insurance policies as of FY18,19,20 and six months ended June 30,2020. Other services provided under the insurance business are – processing and scrutinizing of applications for insurance companies, training and on boarding of new insurance agents and assisting in back office operations.

CAMS has 77 AIF clients, servicing an AAUM of Rs 160.27 billion as on June 30,2020. Some of the services that it offers are creation of investor records, conducting KYC, fund accounting services and reconciliation, creation of MIS and reporting systems, data processing and dispatching drawdown notices and collection management on behalf of the client.

In the banking and non banking service business the company assists banks and NBFCs with processing of applications and setting up of new accounts. They also assist with loan application processing and loan disbursement. CAMS also offers with managing the operations of bank’s processing centers.

Under the KYC registration agency business which it conducts through its subsidiary CAMS Investor Services Private Ltd, launched in 2012 the company maintains KYC records of investors on behalf of capital market intermediaries registered with SEBI. CAMS is one of the five entities to be granted a KRA licence by SEBI.

The company conducts its software business through its subsidiary SSPL. SSPL owns, develops, and maintains the technology solutions for mutual fund clients.

Financials

Below are the revenues, operating profits and net profits for the last 4 years.

Financial Metrics

Revenues for FY20 stood at 700 Cr, 1% growth over FY19. Revenues have compounded at 14% in the FY17-20 period. Operating profits have increased by 23% on the back of drop in employee and operating expenses, OPM for the year stood at 34%. Average OPMs for the last 4 years are 33%. PAT in FY20 increased by 32%, primarily on the back of lower effective tax rates. Net margins for the year were 25%, the average margins for the last 4 years stood at 23%.

Break up of revenues can be seen below

Revenue break up

Majority of the revenues come from the data processing vertical, 79% in FY20. This has been consistent over 4 years.

On the balance sheet front the company has investments and cash balances of Rs 400 Cr at the end of June 2020, this forms 48% of the assets. The other major items are PPE and Intangible assets, forming 33% of assets. Working capital requirement of the company is negligible. Receivables and payables stood at 44 Cr each. There are no inventories on the books.

On the liability and equity section, owners equity comprises of 63% of this section, in other words 63% of the assets are funded by owner’s equity. The company does not have any debt on its books.

CAMS Cash Flows

The cumulative CFOs for the 4 years are Rs 683 Cr versus net profits of Rs 575 Cr. The company has generated positive free cash flows (FCF) in all the 4 years, the cumulative FCFs for the period is Rs 427 Cr. Majority of the CAPEX has been towards PPE and right to use assets. All of the FCF has been used to pay dividends as the company does not have any debt on its books.

Risks

Some of the risks that the business faces are

  • Revenues are dependent on AAUM of mutual funds, if AAUM managed were to decline due to tough market conditions, revenues of CAMS will be impacted
  • Top 5 clients contributed to 68% of revenues in FY20. Client concentration risk is high, even if 1 client were to move to another player, revenues will be impacted
  • Regulations impacting mutual funds will impact the RTAs. For instance the latest regulation of capping expense ratios for AMCs will impact RTAs
  • Company handles confidential data – personal and financial information of clients. Any breach of their systems will create legal and regulatory risk
  • The company was classified as a QRTA, this requires the company to comply with enhanced regulations laid down by SEBI
  • Fraud by employees of the company will impact the credibility of the company

Final Thoughts

Penetration of mutual funds in India is 11% as compared to the world average of 55%. Majority of financial savings are in physical assets. Increase in penetration rates of mutual funds and a shift in savings from physical assets to financial assets provides a huge runway for companies like CAMS.

The EPS for FY20 was Rs 36, at the upper price band of Rs 1,230 the stock trades at 34X earnings. This is not cheap, however CAMS has 70% market share in a two player market. The scope for savings to move into financial instruments is huge and it is tough for new players to enter this market, revenues are also sticky for this business. CAMS will enjoy this market leadership in the times ahead. The company has generated FCF over the last 4 years, the cumulative FCF over the last 4 years is Rs 427 Cr, since the company does not have any major CAPEX lined up in the near future and no debt, these will be distributed as dividends to shareholders. The ROE and ROCE of the company are also impressive at 30-32%.

Given the positives, we think it makes sense to subscribe to this IPO.


Since our analysis is purely about the IPO, and does not consider your specific financial goals and risk profile, please consult an Investment Advisor before taking any action.

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