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CAMS IPO Details, Review & Analysis

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BASIS STRUCTURE OF THE CAMS IPO

- Computer Age Management Services (CAMS) is all set to bring their IPO to the market on September 21.

- This CAMS IPO is of the book-building kind, i.e., here, the shares that are being offered are quoted with a price band. The other kind of IPO — fixed price offering — quotes the shares on offer with a specific price, not a range.

- Through the CAMS IPO, the company plans to raise an amount of Rs. 2,258 crores from the market.

- It is interesting to note here, that while there are about 1.82 crore shares on offer here, none of those shares are newly issued by the company itself.

- The CAMS IPO does not have a fresh issue segment. It only has an offer for sale segment.

- This means, the company is not selling any further stake. Instead, existing shareholders are simply selling their shares to the public.

- The proceeds from a fresh issue are generally retained by the company itself, and are used to fund expansion plans or sometimes, even to pay off long term loans.

- However, as this is an offer for sale, the company itself does not intend to receive any of the proceeds from the CAMS IPO.

- In this case, the equity that is on offer comes from NSE Investments, the investment section of the National Stock Exchange itself. This is being done as part of SEBI’s instructions.

- The table below contains all information related to “When CAMS IPO will open?”, “What is the lot size of CAMS IPO?”, “When is CAMS IPO listing date?”, “When is CAMS IPO allotment?”, etc.

IPO DETAILS

Total number of equity shares 4,87,60,000
Number of equity shares on offer 1,82,46,600
Equity for sale 1,82,46,600
Face Value of each share Rs. 10
Price Band Rs. 1220 — Rs. 1230
Size of each lot 12 shares
Subscription window September 21-23
Allotment date September 28
Listing date October 1

- It is important to note here, that unlike most other IPOs, the CAMS IPO will be launched only through BSE and not through both BSE and NSE. This is an effort to avoid any situation of conflict as NSE’s subsidiary is one of the primary stakeholders in this case.

ABOUT THE COMPANY

- Computer Age Management Services (CAMS) was officially incorporated in 1988.

- CAMS is widely known for the work that the company does in the mutual fund industry as a registrar and transfer agent.

- For example, all records of new accounts being opened, any transactions that may have taken place are maintained with CAMS.

- Apart from that, CAMS also provides technology based solutions to insurance companies, equity funds, banks and NBFCs.

- It is primarily a technology driven company.

- The CAMS business model has a B2B dynamic, as well as a B2C dynamic.

- The main promoters of the company are NSE Investments and Great Terrain Investment.

- The company currently services about 70% of the mutual fund market.

- As of December 2019, CAMS has a presence in about 25 states in India.

- Over the last three years, the company has maintained a CAGR of about 20%.

CUSTOMERS

- The clients that CAMS services mainly come from the mutual fund industry or the broader banking and financial services industry.

- As of September 2019, CAMS had 16 mutual fund clients.

- The top 9 mutual fund houses in terms of AUM are all clients of CAMS.

- In terms of fees, CAMS charges these fund houses a certain percentage of their total assets under management.

- Examples of clients include HDFC AMC, ICICI Prudential AMC, Aditya Birla Capital, SBI Fund Management, DSP Investment Managers, Kotak Mahindra AMC, and many more.

PRODUCTS & SERVICES

- The products and services offered by CAMS can be split into two verticals.

- One category is the services that are related to its role as a registrar and transfer agent for mutual funds.

- Setting up accounts, processing transactions, data management, customer service, risk assessment and management, etc, are some of the services provided in this category.

- The second category includes the technology based solutions that CAMS provides to the banking and financial services industry.

- Under this category, examples of services provided includes the setting up of IT infrastructure for banks and NBFCs, dividend processing, maintenance of investor interface, secure platforms for payments and settlements, record keeping services and many more.

MANAGEMENT

- The table below lists out the existing shareholders in the company, along with their respective stakes. This shareholding pattern is before the CAMS IPO.

NAME NUMBER OF SHARES STAKE
Great Terrain 2,12,24,000 43.53
NSEIL 1,82,85,000 37.50
HDFC 29,20,724 5.99
HDFC Bank 16,23,708 3.33
HDB Trust 15,55,444 3.19

Faering Capital India Evolving Fund II

12,41,430 2.55
Acsys 9,44,724 1.94

Faering Capital India Evolving Fund III

7,08,970 1.45

- Out of the above mentioned stakeholders, NSE Investments is going to unload their entire stake.

- This means, after the CAMS IPO, the promoter holding in the company is going to reduce from 100% to 62.58%.

FINANCIAL OVERVIEW

- The table below contains a summary of the key financial figures for the CAMS IPO from the 2017 till 2020. All the figures stated below are in Rs. crores.

YEAR FY 2020 FY 2019 FY 2018 FY 2017
TOTAL REVENUE 721.34 711.81 657.82 502.64
TOTAL EXPENSES 470.6 510.62 434.87 313.45
TOTAL ASSETS 802.53 736.32 697.25 584.85
PROFITS AFTER TAX 173.5 130.89 146.31 124.21
NET CASHFLOW FROM OPERATING ACTIVITIES 201.2 187.39 162.23 132.13

- As we can see here, the total revenue earned by CAMS has been increasing steadily. Between 2017 and 2020, this figure showed a CAGR of about 9.45%.

- Above 70% of the company’s revenues comes from the top five clients.

- It is interesting to note that the revenue earned from the mutual fund segment of CAMS’ operations is directly related to the AUM of the industry. This means, as the total size of the mutual fund industry grows, the amount of assets managed will rise, and so too, will the revenue earned by CAMS.

- It is a symbiotic relationship of sorts.

- The services provided by CAMS will help to improve the services provided by mutual funds. Thus the investor base will grow, and so will the assets under management. CAMS’ income is directly related to the growth of the total AUM of the mutual funds.

- The revenues earned from the mutual fund business accounted for about 86% of the total revenue, while the remaining 14% was made up by the other services.

- One positive fact to observe here is that CAMS has no noticeable long-term borrowings.

- The reason why this is a good sign is that oftentimes we find companies use bank loans and other forms of credit to finance their operations and expansions.

- These borrowings, if left unserviced, can cause a huge strain on the company’s balance sheets in terms of interest payments.

- This is not an issue for the CAMS IPO.

- We can observe here, that there is quite a noticeable gap between the total revenue earned and the net cashflow from operating activities.

- There can be two possible explanations for this fact.

- Either the majority of the revenue being earned is not coming from the core operations of the company, or a part of the revenue being earned on an accrual basis is not being realised in cash.

- Financial statements are generally calculated on an accrual basis — the entries are noted down as soon as the product/service changes hands. It does not matter even if the cash from that entry has not come in yet.

- This can become a problem of sorts, later on, if this pattern continues.

INDUSTRY OVERVIEW

- The mutual fund industry in India is valued at Rs. 27 lakh crores in terms of Average Assets Under Management.

- It is expected that this industry will grow at a CAGR of 17-20% in the next 5-10 years.

 

- According to CRISIL, by 2024, the mutual fund industry’s AUM will amount to Rs. 54 lakh crores by 2024.

- As for the mutual fund registrar’s business, this is expected to grow at a CAGR of 16% over the next 5 years.

- In particular, the equity segment of the mutual fund industry in India has seen remarkable growth. The average AUM for the equity led funds grew at a CAGR of 39%, rising from Rs. 2.1 lakh crores in 2014 to Rs. 10.7 lakh crores in 2017.

- It is expected that this growth rate will continue and will sustain for the next decade at least. These expectations are based on the shift in the pattern of domestic savings in favour of market-based securities, like equity.

- 70% of the mutual fund industry in India is serviced by CAMS. As of July 2020, CAMS serviced the AUM of 16 different mutual fund houses, amounting to Rs. 19.2 lakh crores.

- The table below shows the market share of the top 5 AMCs in India. Together, the top 5 AMCs capture about 58% of the market.

NAME TOTAL AUM (Rs. Thousand Crores) MARKET SHARE (%) REGISTRAR
HDFC Mutual Fund 3.42 14 CAMS
ICICI Prudential Mutual Fund 3.2 13.1 CAMS
SBI Mutual Fund 2.8 11.6 CAMS
Aditya Birla Sun Life Mutual Fund 2.5 10.1 CAMS
Nippon India Mutual Fund 2.34 9.6 Karvy

- The industry is characterised by the presence of barriers to entry and exit.

- These barriers come in the form of high compliance demands, extensive network requirements, existing relationships with the mutual fund houses and high operating leverage.

- It is unlikely that the level of competition for CAMS and Karvy will increase significantly in the next 5-10 years.

- As for the insurance repository business, here, CAMS services 39% of the market.

There are three more contemporaries in this segment — namely NSDL, CDSL and Karvy.

- In the insurance repository market, NSDL controls 45% of the market. CAMS comes in second, with 39%.

COMPETITION

- This industry is not fragmented at all. In fact, it is a duopoly, bordering on a monopoly.

- One of the most optimistic factors about the CAMS IPO is that the company does not have any direct peers.

- The closest competitor that CAMS has in the mutual fund segment of its business is Karvy, or Kfintech.

- Because there are only two primary players in the industry, their performance is highly correlated.

- An important point to mention here is the recent scam that Karvy got embroiled in, in December 2019.

- In a nutshell, Karvy took advantage of the Power of Attorney that all investors have to sign with their broker, and claimed that the shares of over 95,000 clients belonged to the company itself.

- The purpose of doing so was to pledge the securities and obtain easy credit against them.

- Over Rs. 2,300 crores worth of shares were pledged and the amount was then transferred to the real-estate subsidiary Karvy Realty.

- According to reports, it is possible to conclude that this amount would have been used to repay the high net-worth individuals who had invested in the real-estate projects.

- This scandal struck a huge blow to Karvy’s image and its perception among investors.

- This scandal also served as an unexpected boon for the CAMS IPO, the only other competitor in this segment.

- The clients who moved away from Karvy went straight to CAMS, thus increasing their revenue and their market share.

- Even if we disregard this scandal, even then, the financials of CAMS are stronger than that of Karvy.

- While CAMS’ revenue in FY2020 was in the region of Rs. 700 crores, Karvy’s revenue totalled Rs. 449 crores.

- Similarly, if we look at the profit margins of the two companies, CAMS led with 42.8%, while Karvy brought in the rear at 36%.

STRENGTHS

- The primary advantage for the CAMS IPO is the fact that it operates in a very niche segment. There are no other companies in India that offers the same range of services that CAMS does.

- In the mutual fund business, the closest peer that CAMS has is Karvy, and in the insurance repository segment, it is comparable to NSDL and CSDL.

- This means CAMS operates in an industry which is practically a duopoly. There are high entry costs, little competition and a wide competitive moat.

- The other major advantage is the fact that the revenue that is earned by CAMS is directly dependent on the growth of the mutual fund industry in India.

- Now, if you look at the recent trends in the mutual fund industry, you will see that this market is booming, and is expected to grow by at least 20% in the next few years.

- When this happens, CAMS will benefit directly, and its balance sheet, which is already quite impressive, will be further fortified.

- Another strength for the company is the fact that it has an extensive distribution network which spans the entire country.

- With a presence in 25 states and 5 union territories, CAMS has ensured that it builds its business on a strong infrastructural network.

- Going forward, this will help the company to scale up its operations and build on the stable foundation.

WEAKNESSES

- A major weakness in the business model of CAMS is that most of its revenue comes from a few clients only.

- Such dependance is not a good thing, as the revenue earned will take a sharp hit if any of these clients leaves.

- The other possible red flag is the fact that while the range of services offered by CAMS is large, most of their work is related to the mutual fund industry and the financial services industry.

- Another point to note here is that CAMS operates in an industry which is subject to very strict regulatory controls.

- Any changes in these regulations can have quite an impact on CAMS’ business.

- For example, CAMS charges a higher fee from equity mutual funds than they do from debt mutual funds, owing to the greater service requirements of the former.

- Now, the operating costs for a mutual fund are transferred to the investors through the Total Expense Ratio, which is expressed as a percentage of the total assets.

- Under the SEBI (Mutual Funds) Regulations, 1996, SEBI has set a maximum limit to the Total Expense Ratio that can be charged for each fund scheme.

- If SEBI changes its regulations with regard to equity mutual funds, and restricts the amount that can be paid to service providers like CAMS, the company will essentially have to rethink their entire business operation.

VALUATION

- Here, it is important to understand that while there are other companies in India which offer some of the services that CAMS does, there is no direct peer.

- The table below compares the key financial ratios of the CAMS IPO with the closest group of peers with which we might be able to draw a comparison and understand the valuation.

NAME

MARKET CAP

(Rs. Cr)

EPS (Rs.) P/E P/B EV/EBITDA
CAMS 6,000* 35.6 35.5 11.38 -
Karvy - 23.64 - - -
NSDL 3,500* 7.88 - - -
CDSL 4,902 8.99 40.5 8.61 15

*expected value, based on projections*

- The average industry value of the P/E ratio is in the range of 33.37.

- A rule of thumb is to always check whether the company’s P/E value is lower than the industry average. This indicates that the company is undervalued by the market.

- In this case, as we can see, the CAMS P/E ratio is slightly higher than the market average.

- This means, the company is not undervalued by the market.

- However, taking into account the strong financials of the company, along with the fact that it does not have any long-term debt, the market is very bullish where the CAMS IPO is concerned.

- It is expected that the company will continue to deliver steadily, and grow at a moderate rate to provide long-term returns.

 

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