CAMS IPO Review | Should I subscribe?

CAMS IPO Review – 5 Points Analysis

Introduction

Computer Age Management Services (CAMS), a RTA of Mutual funds and insurance industry has come up with an IPO. The IPO is open for subscription from 21st September’20 – 23rd September’20, In this blog, let us analyse the IPO on various fronts like company overview, sector analysis, financial and valuation analysis, corporate governance of the company and ultimately whether or not one should subscribe to this IPO.

CAMS IPO Review

IPO Details

• CAMS has come up with an IPO to raise INR 2200-INR 2400 crore from the equity market.
• The IPO is open for subscription from 21^st September’20 to 23^rd September’20 and price band of the issue is between INR 1229-1230. The minimum lot size of the issue is 12 shares.
• It is solely an offer for sale and company will not get any proceeds from the IPO. NSE has 37% stake in CAMS and SEBI has directed NSE to completely divest their stake in CAMS.
• Allocation breakup of IPO is QIBS – 50%,NIIs – 15% and retail investors – 35%.
• Managers for the issue are Kotak Mahindra ,HDFC Bank, ICICI Bank and Nomura.
• In post IPO shareholding, except for NSE all the shareholders will remain invested in the company.
• Out of the total issue size, ~INR 670 crore is already raised from anchor investors like various mutual fund houses(PPFAS, ICICI Prudential, HDFC Mutual fund, etc)

Company Overview

• CAMS works hand in hand with the Indian Asset Management Industry of India. It was incorporated in May ’88 and has its headquarter is in Chennai.
• A technology driven financial infrastructure and services provider to most of the mutual fund companies and other financial institutions like Private life insurance, Banks and NBFCs.
• Services offered by the company are as shown:

• Company has 4,243 permanent employees as of June 2020. Its network expands over 271 service centers, call centers in 4 major cities and 4 back offices all connected in real time.
• As of July 20, CAMS handles 16 clients with a total AUM of Rs 19.2 lakh cr.
• Being an asset light company, most of its profits are converted into cash giving a way for company to have a healthy dividends policy of 65%, which it plans to continue after IPO.
• Owing to its market leadership position and high ROE, it commands a high price-to-book value of nearly 34.61 times FY20 EPS
• It has received many awards in 2019 – “Best Service Provider” award by ICICI Prudential, “20 Most Promising Capital Market Solution Providers – 2019” by CIO Review India, “Highly Commended – Harnessing the Power of Technology” at the Adam Smith Awards Asia 2019.
• According to investor satisfaction survey, company has a satisfaction rate of 96% in 2019 and SEBI complaints, as a percentage of transactions handled, reduced from 0.015% in the financial year 2015 to 0.005% in the financial year 2019.

Subsidiary Companies

• Insurance services business- provides processing of new business applications, servicing policies and support functions to insurance companies
• Alternative investment funds services business- investor services & manages records, fund accounting and reporting for fund houses. Currently 70 Clients.
• Banking– digitization of account opening, facilitates loan processing and back-office processing services to banking and NBFCs. Received RBI approval for Account aggregator.
• KYC registration agency business-  verify and maintain KYC records of investors for FI
• Software solutions business- Tech team that develops software for their mutual funds services business. Develops innovative products using advanced technologies and ensure systems and data security, in addition to offering 24*7 support to clients

Revenue Mix

• Sales is concentrated in mutual funds business. This is directly related to the expense ratio of fund houses.
• As the mutual fund houses tend to reduce the expense ratio by incorporating more digitization, CAMS revenues will be at a risk.
• This revenue dependence on mutual fund industry seems to be a red flag for the company in longer run.

Why the CAMS business is sustainable ?

• Sticky relationships with AMCs–
  • MFRTAs provide strong technological back end to AMCs.
  • Further, they store huge amount of data and information for AMCs and so the amount of time that has to be invested in migration leads to high risk of business disruption and loss of data.
  • They assist AMCs in performance evaluation, increasing sales and save costs through the huge datasets they have access to
  • All this brings tremendous cost efficiencies and operational capabilities to the table for AMCs
• Due to near zero switching probabilities, it becomes utmost difficult for a new player to enter the market and disrupt the market for MFRTAs (like Reliance Jio did)
• As it is nearly impossible for AMCs to switch RTAs, these relationships once formed last for long times.
• As CAMS has already developed healthy relationships with 4 out of top 5 AMCs for 17+ years and also provides great services to them, it is long before, it faces competition or sees any significant decrease in market share.
• Account Aggregator license can be a good source of income in upcoming times as company already has a subsidiary operating in this segment.

• Insurance repository – India’s insurance sector penetration stands at 3.70% as of 2018, which is very low as compared to developing economies.
• 4 companies that perform the function of insurance repositories currently – CAMS, Central Insurance Repository Limited, KARVY, NSDL Database Management Limited. CAMS has 39% market share in E-insurance policies, after NSDL having 45% market share.
• Given the under-penetration of insurance and increasing digitization , E-insurance can be a sustainable source of income for CAMS.

Industry Analysis

• Mutual fund as a % of total financial household assets has spiked from 9.7% in Q4FY16 to 13.1% in Q2FY18.
• AUM has registered a 10-year CAGR of 13.4% from March’10 to March’20.

Competitive Landscape

• Its competitors in Mutual fund services business are – KFin Technologies Private Limited (Karvy) and Franklin Templeton Asset Management.
• Among the top five AMCs –  HDFC Mutual Fund, ICICI Prudential Mutual Fund, SBI Mutual Fund and Aditya Birla Sun Life Mutual Fund, 4 are serviced by CAMS

Financials

• CAMS revenue CAGR is in line with Mutual fund AUM’s growth rate i.e 12.8% over last 10 years.
• Company has very good operating profit margins ~43%, followed by good EPS and return on net-worth.

Comparison with competitors

• Here, as CAMS is a market leader in RTA business , it has superior financials.

Valuation

• CAMS’s share is valued at a P/E multiple of 34.5 times. On the other hand, HDFC AMC is trading at 37x PE, Nippon India and CDSL at 39x PE.
• The issue pricing seems to be inline with the listed players in the same space.
• Currently the company is garnering 30-35% premium in grey markets. This will take the PE close to ~40 x.
• However given the revenue CAGR of 13% , the current valuations seem stretched and there can be a possibility of PE re-rating.

Should I subscribe to this IPO?

Given the current euphoric sentiments in the equity markets, company is expected to get listed at premium valuations. This means that investors might get listing gains.

The company currently has good financials with RoE 35%, zero debt , robust operating profit margins and healthy dividend payout ratios. However, the risk of revenue concentrated in mutual funds industry is still a red flag and how the company expands its other businesses i.e account aggregator and insurance business will be a thing to watch out for. Depending on this company can give healthy returns in the longer run.