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What should investors do with CAMS after listing with 23% premium?

Manali Bhatia of Rudra Shares & Stock Brokers is the only analyst advising exiting the stock on listing gains as growth is highly correlated with AUMs of mutual funds.

October 01, 2020 / 02:59 PM IST
 
 
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Computer Age Management Services (CAMS) witnessed some profit booking at higher levels, but traded much above its issue price. Overall, market rallied with Sensex rising around 600 points intraday on October 1.

CAMS opened the first trading day at Rs 1,518 (up 23.4 percent over issue price of Rs 1,230) and immediately hit an intraday high of Rs 1,550 on the BSE. Within initial few minutes of trading, it also fell up to Rs 1,306.20, an intraday low, from opening levels but recouped later.

It was trading at Rs 1428.85, up 16.17 percent over issue price, but down 5.87 percent from opening price, at the time of publishing this copy.

What should investors do now?

Analysts advise investors to hold the stock either in full or partial quantity given the strong business market share, asset light business model, expected growth going ahead and no direct listed peer, though company's growth is highly correlated with AUM of mutual funds.

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"Considering, strong revenue visibility, healthy financial, and generous dividend payout policy, we recommend investor with long term horizon should continue to hold," Jaikishan Parmar, Senior Equity Research Analyst at Angel Broking told Moneycontrol.

"There is strong revenue visibility for CAMS, as they have a 70 percent market share of the MF registrar business. It is an asset-light business model, hence end of the year investor can expect a healthy dividend, and there is a possibility that dividends per share might increase every year," he said.

CAMS being India's largest registrar and transfer agent of mutual funds today has an aggregate market share of 70 percent based on mutual fund average assets under management (AAUM).

Hence, Prashanth Tapse, AVP Research at Mehta Equities also suggested holding on to the stock on listing day, for long term as the market always rewards a player who has the growth potential with high returns.

He is optimistic on CAMS's growth story. "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. Hence we believe investors should tap this opportunity and hold for a multibagger story for 2-3 years," he reasoned.

On valuations parse at upper price band (Rs 1,230), he also believes the company can comfortably command a PE of 40x-50x post listing from 34x (IPO offer), with asset-light business models typically tend to be valued differently and expect decent 15-20 percent return on investment (ROI) YoY, which makes sense for IPO allotted investors to hold, with the visible & high potential long term growth story.

If investors wishes to add on CAMS on listing day, he/she can do only if the listing premium is below 20 percent to allotment price i.e. below Rs 1,480 per share, he advised.

CAMS provides a comprehensive portfolio of technology-based services such as transaction origination interface, transaction execution, payment, settlement, record keeping, brokerage computation and compliance related services.

During FY17-20, CAMS' revenue grew at a 14 percent CAGR, EBITDA 13 percent and profit 12 percent. The balance sheet is lean with zero debt and negative working capital, thus resulting in healthy return ratios (FY20 RoE/RoCE at 35/37 percent).

Astha Jain, Senior Research Analyst at Hem Securities, on listing day, investors can book profit on partial holding & keep remaining holding for long term purpose as she 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 of 70 percent.

Also company has long history of existence since 1988 & presently company has experienced management & marquee shareholders, she said.

CAMS has been consistently generating strong free cash flow over the last four years, with free cash flow (FCF)/PAT conversation at 107 percent in FY20. It is a consistent dividend paying company with FY20 payout at 40.

Company caters to four of the five largest MFs in India as well as nine of the 15 largest MFs based on AAUM as of July 2020. It has showcased strong growth in overall AUM (23 percent CAGR) and equity AUM (30 percent CAGR) serviced, market share (+9pp), folios serviced (13 percent CAGR), accounts handled (21 percent CAGR) and transactions processed (27 percent CAGR) over the last 5 years.

However, Manali Bhatia, Head-Research at Rudra Shares & Stock Brokers is the only analyst advised exiting the stock on listing gains as growth is highly correlated with AUM of mutual funds, but increasing digital transactions and high interest towards ETF, could offset the future growth.

"Also, given its market leadership, integrated business model (asset light model with no borrowings as of June 20), and pan India presence, provides cushion to company. In addition, consistent growth in revenue and profit with attractive return ratios (ROE of 34%), strong cash flow, entry barrier coupled with dominant market share in industry; all these commands premium valuations. However, as the digital transactions are rising day by day this could put pressure on company’s growth profile," she further explained.

CAMS raised Rs 2,244 crore via the public issue during September 21-23, which consists an offer for sale of 3,89,87,081 equity shares by State Bank of India, PNB, LIC, Bank of Baroda and T Rowe Price International. Hence the company will not receive any funds from IPO.

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.
Sunil Shankar Matkar
first published: Oct 1, 2020 02:59 pm

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