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CAMS IPO Opens Today: Should You Subscribe or Not?

Sep 22, 2020 4:30 AM 4 min read
Editorial

On the day when Indian equities fell by more than 2% in their last hour of trade…(supposedly) caused by a wide barrage of global cues, ranging from higher coronavirus cases in Europe to Indian banks gracing the FinCEN files (i.e. No one really knows), we shall discuss the IPO of yet another interesting company.  

Yes, the public issue of Chennai-headquartered Computer Age Management Services (CAMS), a name you may have noticed on your Mutual Fund (MF) documents*, opened today.  

*No judgements if you’re the kind of person who notices these things. Welcome to the club!

CAMS plans to raise ₹2,242cr ($305m) through the public issue, at a price band of ₹1,229-₹1,230 apiece, which will be open for subscription from September 21st - September 23rd. 

The proceeds, however, will not be received by it, and will go to NSE Investments - one of its key shareholders, which is seeking to divest its entire 37.5% stake in the firm following an order by SEBI earlier this year. 

Hence this is a ‘non-dilutive secondary offering’. 

What?! Read this to understand if this new piece of info bothers you :). 

FYI: Other shareholders in CAMS include Great Terrain, an affiliate of Warburg Pincus (43.50%), HDFC (5.99%), and HDFC Bank (3.33%).

ICYMI: Last week we also discussed the blockbuster IPO of Bengaluru-headquartered IT services firm Happiest Minds Technologies

 

 

Should I Subscribe to CAMS IPO?

While almost all brokerage houses have assigned a 'subscribe' rating to the public issue, we did a little digging of our own.

What Does CAMS Do?

Incorporated in May 1988, CAMS is a “technology-driven financial infrastructure and services provider” to MFs and other financial institutions.

Market Leader

90% of CAMS’ total revenue comes from MFs, that is by charging MF houses a percentage of the total assets under management (AUM). 

And according to a CRISIL report, it is India's largest registrar and transfer agent (RTA) of MFs, with an aggregate market share of c. 70% based on client AUM.  

Karvy comes in second at 30%.

Translation: Whenever you buy or sell some MF units, there’s a strong chance that CAMS (followed by Karvy) is booking and maintaining detailed records of your transactions on behalf of your fund house. 

As of June 30th, CAMS’ mutual fund clients included four of the top five (HDFC MF, ICICI Prudential MF, SBI MF, and Aditya Birla Sun Life MF), and nine of the 15 largest houses by AAUM. The company has serviced ₹19.2trn ($261bn) of AAUM for 16 mutual fund clients as of July 2020.

Glass Half Empty, Half Full: Scope of Growth

According to CRISIL, the mutual fund industry’s AUM is projected to grow from ₹23.8trn ($324bn) as of March 31st, 2019 to ₹54trn ($735bn) by financial year 2024 - a CAGR of 17% to 19%. 

 

CAMS IPO Opens Today: Should You Subscribe or Not?
Source: DRAFT RED HERRING PROSPECTUS

 

With growth of the company being linked to the rise in AUMs, the company is poised to generate consistent returns going forward. 

“If MF AUM is expected to grow 17-18% on a compounded basis for the next five-six years, then the company’s revenue growth will be expected to be between 12% and 13%,” said Anuj Kumar, CEO, CAMS.

Moreover, India’s significantly lower mutual fund penetration (AUM to GDP) than the world average of 55% is suggestive of the vast scope of the sector at-large. 

 

 

CAMS IPO Opens Today: Should You Subscribe or Not?
Source: DRAFT RED HERRING PROSPECTUS 

 

 

Given its dominant market position, CAMS is likely to reap the most benefits from any increase in mutual funds penetration in the country. 

Robust Financials

CAMS registered a revenue CAGR of 13.5% and a PAT CAGR of 11.8%, during FY17‐20. Return on equity (RoE) has been in the range of 34‐35%. The balance sheet has zero debt.

"Going ahead, we expect to see a revenue CAGR of 10% during FY20‐23E and a PAT CAGR of 16.3%. RoE will improve further as the benefits of operating leverage will drive margins and asset turnover," YES Securities said recently, assigning a "SUBSCRIBE" rating to the issue. 

Peer Comparison

"Given the high entry barriers and the near duopoly nature of the market, the moat of the company remains intact,” said Nirali Shah, a senior research analyst at Samco Securities. 

 

 

Verdict?

Markets appear to be recuperating from the lows they had hit in March, and the mutual fund industry in India is posited to grow. 

However, potential investors need to take into account 1) lack of diversification within CAMS’ business model (87.4% of 2019 revenues came from MF services), 2) Indian equities’ high volatility and risk of outflows with a direct bearing on CAMS revenues, 3) increasing regulatory pressures on MFs’ Total Expense Ratios (TERs), and 4) growing competition - CAMS EBITDA margins seem to be under pressure...dropping from mid 40s to mid 30 - higher than competition, but still; as potential headwinds while considering an exposure to this opportunity. So, get excited but not too much! 

FIN.

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