CAMS is the dominant player in a two-player MF RTA industry, with 70 percent market share.
Computer Age Management Services (CAMS), a technology-driven financial infrastructure and service provider, launched its maiden public issue on September 21, with a price band of Rs 1,229-1,230 per share.
The IPO consists of an offer for sale of 1,82,46,600 equity shares where NSE Investments, subsidiary of National Stock Exchange, will be selling its shares. Hence, all the money raised from public issue will go to NSE Investments and the company will not get any money from this offer.
The issue size is Rs 2,244 crore at higher end of price band, of which the company has already garnered Rs 667 crore through 35 anchor investors on September 18.
Almost all brokerage houses have assigned a 'subscribe' rating to the public issue citing leadership position in the sector of registrar and transfer agent (RTA) for mutual funds, zero debt, high return ratios, strong financials, strong relationship with AMCs, experienced management team, a proxy way to the growing mutual funds penetration, etc.
In fact, they advised subscribing the issue with long term perspective given the potential going ahead.
CAMS is the dominant player in a two-player MF RTA industry, with 70 percent market share. It services 4 of the top-5 MFs in the country. Its revenue growth is directly linked to the AUM growth of its partner MFs and it is, hence, a proxy play on the MF industry.
"The opportunity landscape for the MF business in India is huge, given low penetration and financialisation of household (HH) savings, thus providing long-term visibility. At Rs 1,230 per share (IPO price), CAMS is priced at 35x FY20 EPS, at a 10-15 percent discount to listed AMCs, Exchanges and Depositories. We expect stock to trade in-line with other comparables and further re-rate," said IIFL Securities while assigning subscribe call.
The brokerage feels premium valuations are justified given dominant market share in a growing industry, low risk of competition, strong parentage, strong free cash flow generation, and robust RoEs.
The market share of CAMS, a key service provider for MFs and other financial institutions, has increased from 61 percent in March 2015 to 70 percent in July 2020, as AUMs of the MFs serviced by CAMS grew by 21 percent per annum versus industry growth of 18 percent per annum.
CAMS provides services through a pan-India physical network comprising 271 service centers spread over 25 states and five union territories.
In addition to CAMS, KFin Technologies (erstwhile Karvy Fintech) offers RTA services to 24 AMCs and has a market share of 27 percent, while the balance 3 percent is with the captive arm of Franklin Templeton MF, IIFL said.
MFs is the key segment for the company and accounts for 85-90 percent of its revenues. CAMS has maintained its leadership position since 2005-06 and benefitted with above-industry AUM growth of the MFs it services, leading to increase in market share.
"We see low risk of MFs shifting to the other RTA, or starting their own captive arm, as the migration cost is prohibitive (risk of disruption to operations) and there is limited cost-saving potential. Resultantly, we see low competition risk to CAMS (market-share loss is likely, if MFs serviced by CAMS start underperforming)," said IIFL Securities.
CAMS is looking to diversify its revenue base with addition of AIFs and Insurance companies to its client roster.
"Future outlook will largely depend on the increase in AIF and insurance repository business improvement, which look very promising for the long term, hence we advise investors to apply with a long term horizon," SPA Securities said.
The company earns a healthy RoE of over 35 percent, has zero debt, has a dividend payout policy of at least 65 percent and generates robust free cash every year. The valuations are reasonable at FY22E P/E of 26x, feels Yes Securities which also assigned a subscribe rating.
Following a moderate growth in FY21 (COVID impact), the brokerage expects AMC industry to register 15 percent AUM CAGR over the medium term.
Incorporated in 1988, Chennai-based CAMS also enjoys a first mover advantage with no listed players for valuation comparison and high entry barriers protecting investor's risk.
Hence, Mehta Equities recommended investors to subscribe to the issue for long term only as the market always rewards a player who has the growth potential with high returns.
The brokerage likes the story with a unique integrated business model having pan India asset-light strategy. "If we presume mutual fund AUM is expected to grow by 16-18 percent CAGR for next 5-6 years, then CAMS is well placed to tap the business growth in the same tandem."
On valuations parse at upper price band (Rs 1,230), the issue is asking for market cap Rs 5,997 crore and seeking PE 34x times on FY20 EPS, which seems the issue is fully priced in but asset-light business models typically tend to be valued differently and expect decent 15-20 percent return on investment (ROI) YoY, said Mehta Equities.
Hem Securities also likes the asset light business model of company & excited by the fact that the industry is mainly concentrated between limited players with company holding majority market share.
Also company has long history of existence since 1988 & presently company has experienced management & marquee shareholders, said the brokerage which recommended subscribe the issue both for listing gains as well as long term horizon.
Dinesh Kumar Mehrotra is the Chairman and Independent Director of the company. He has previously served as the chairman and the managing director of Life Insurance Corporation of India.
Anuj Kumar is the Whole time Director and CEO of firm. He was previously associated with Godrej & Boyce Manufacturing Company, Blow Plast, Escorts Finance, BillJunction Payments, IBM India and Concentrix Daksh Services India.
Its marquee shareholders include Great Terrain (an affiliate of Warburg Pincus), HDFC, HDFC Bank and NSE Investments (NSEIL), among others.
CAMS has delivered a robust financial performance overall revenue growing at a CAGR of 14 percent in FY17-FY20 driven by strong growth in AAUM (around 15 percent CAGR). Over the same period, the EBITDA and net profit grew at a CAGR of 13 percent and 12 percent respectively. The company carries no debt obligation, thus translating in healthy return ratios with ROCE/ROE of 37/35 percent. Furthermore, it is consistently paying dividend with FY20 payout at 40 percent.
Hence given the leadership position, zero debt, healthy cash position and high return ratios, LKP Securities recommended to subscribe.
Among others, Geojit Financial Services and KR Choksey Securities also advised subscribing the issue, but despite positive fundamentals, Choice Broking believes the demanded valuation is little stretched, so it assigned a "subscribe with caution" rating for the issue.
However, investors, who are subscribing the issue, should also consider risks and concerns like subdued economic growth and poor financial investment market, unfavourable change in the mutual fund AUM composition, any sharp decline in AUMs or reduction in yield by MFs, unfavourable regulatory environment, exit of one client which can create huge impact on financials, Cyber security is a material threat, and competition.Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.