Company Name – Computer Age Management Services Limited (CAMS) Current Share Price – INR 2,228 (April 10, 2023) Market Cap – INR 10,913 cr |
1. What is interesting about the stock?
"I like to invest in companies that are so simple to run, that even an idiot can run it because sooner or later one will"
-- Warren Buffett
I mentioned that CDSL fits the bill perfectly. Another company that fits the bill is CAMS.
Of India’s 1.36 billion people, only about 4% have invested in equities, compared with about 13% in China, according to stock depository data on the number of investment accounts (and assuming one account per person which we know is not accurate). In the US, by contrast, a poll found about 55% of the population owns stocks either individually or through a mutual fund.
Keeping this in mind, the mutual fund industry took it upon itself to promote mutual funds as a preferred investment option.
‘Mutual Fund Sahi Hai’ campaign was launched in March 2017 by AMFI. The campaign promotes exactly what it states ‘Mutual funds are the right choice.’ AMFI is a non-profit organization that is an association of all the asset management companies of SEBI-registered mutual funds. Mutual Fund Sahi Hai campaign is not a Government of India initiative. However, SEBI strictly regulates AMFI, and under SEBI‘s guidance, AMFI launched this investor awareness program.
The campaign has been a huge hit. As a result, within one year of the campaign launch, 50 lakh new investors started investing in mutual funds.
Mutual Funds (MFs) outsource back-end processes like keeping track of investors’ buying/selling, KYC, periodic alerts to investors, and service to distributors (who sell MFs for brokerage), etc. to the Registrar and Transfer Agent (RTA).
CAMS started in 1988, is India’s largest RTA of mutual funds with an aggregate market share of ~68% based on mutual fund average assets under management AAUM managed by its clients and serviced by them. Its mutual fund clients include all top five mutual funds as well as ten of the fifteen largest mutual funds based as of March 2023. CAMS has ~20 years of average relationship with its ten largest MF clients which shows the stickiness in the business. CAMS is a technology-driven financial infrastructure and services provider to mutual funds and other financial institutions. Company has two decades of domain expertise, processes, and infrastructure to cater to MFs, AIFs, and insurance companies. CAMS has a pan-India physical network comprising 280 service centers spread over 25 states and 5 union territories.
CAMS recently won the RTA mandate from Zerodha, Helios Capital, and Navi.
Warburg Pincus, a marquee private equity fund, acquired control of CAMS in 2017 and currently has a ~20% stake as of December 31, 2022. The fund sold a 3.7% stake in August 2022.
Various elements of the service provided by CAMS to MFs are:
CAMS is involved through the life cycle of an account – from account creation to processing to redemption. Company also provides statutory statements, transaction origination, operations, investor and distributor services, risk management services, and compliance services:
Segmental revenue break-up for the Company in FY22 was:
MF asset-based (75%) – revenue based on AAUM and yield.
AAUM fluctuates based on the net inflows in the MF industry and the price of the underlying assets (equity, debt, etc). So, in the bull cycle of the markets, the AAUM increases as investors typically increase their net inflows in MFs, and the underlying asset prices esp equity share prices rise.
Yield depends on the type of MF mix (equity/hybrid have higher yield vs debt/liquid) and volume-based pricing or the flabbiest pricing contracts with MF houses which ensures that yield keeps falling as the assets grow
MF non-asset based (15%):
License fees for MF Decks application, front office applications
Call center
Transaction revenue (~25-30% of this segment's revenue)
Non-MF revenue (10%):
AIF/PMS fund services - services such as the creation of investor records, fund accounting services, and reconciliation, and creation of MIS and reporting systems
Insurance services - insurance repository business
Electronic Payment Collection - manage end-to-end Automated Clearing House (ACH) transactions and Electronic Clearance Services (ECS) for mutual funds, NBFCs, and insurance companies
KYC Registration Agency - Verification and maintenance of KYC records of investors for use by financial institutions
Account Aggregator - New system makes it possible for banks, tax authorities, insurers, and other finance firms to aggregate data of customers — who have provided their consent — to get a better understanding of their potential customers, make informed decisions, and ensure smoother transactions.
Central Record Keeping Agency (CRA) for New Pension System (NPS)
Future Prospects
Mutual Fund industry is expected to log a growth of ~15% for the next few years owing to under penetration of equity by Indian retail investors. The RTA industry could be expected to mirror this growth.
Management Background
Company is led by a professional management team with an average experience of 27 years.
Anuj Kumar is the Managing Director. He joined in March 2016 and was previously associated with Godrej & Boyce, Escorts Finance & IBM India. He has a Post Graduate Diploma in Management from IIM Calcutta.
Ramcharan Sesharaman is the CFO. He joined in March 2020 and was previously associated with Photon Interactive and Reliance Jio Infocomm. He is a qualified Chartered Accountant.
Strengths (Why invest in CAMS?)
Market leader with 68% market share in the duopolistic industry – well entrenched in large players with an integrated business model
Tailwind of industry growth driven by the “Mutual Fund Sahi hai” campaign by AMFI
Strong Focus on Process and Risk Management as can be seen by the length of their relationships with large MFs
Marquee promoter and experienced management
Weakness
Financials are dependent on the market cycle, especially AAUM-based MF revenue
HighThe high regulatory risk with the government launching central agencies similar to CDSL or NSDL
Continuous pressure on pricing by MFs
2. Key Historical Financials
Company had flat revenue growth in FY20 due to the market cycle which turned out in March 2020 but revenue got impacted in the first couple of quarters due to COVID-19. Revenue jumped 29% in FY22 on a YoY basis owing to a 28% increase in AAUM managed by CAMS. A fall in the yield due to higher AUM was balanced by higher growth in equity-linked AUM (48% on a YoY basis)
Operating leverage drove the increase in EBITDA margins from 42% in FY21 to 47% in FY22 – management expects the margin to be ~40% in the long term
Company had flat revenue, EBITDA, and profit growth in Q3FY22 on a YoY and QoQ basis as the AAUM managed by CAMS was flat
Net cash balance of ~ INR 500 cr as of September 30, 2022
ROCE/ROCE expanded to 67%/50% in FY22 vs 45%/39% in FY21 – reflecting the market leader with a 68% market share in a bull market
3. What is my view on company valuation?
CAMS had a highly successful IPO (which was subscribed 47 times) in September 2020 at a share price of INR 1,230. The Company's share price peaked at ~ INR 4,000 in September 2021 and has fallen by ~45% since then. Possible reasons could be the peaking of the equity indices and the sale of a ~10% stake by Warburg Pincus in December 2021.
CAMS currently trades at a P/E (TTM) multiple of 38x. Multiple seems to be expensive given the stage of the market cycle, flat revenue/profitability, and expected volatility in the rising inflationary environment with increasing interest rates.
However, the Company looks interesting for the long term, and investors could evaluate accumulating the stock at lower levels.
4. What are the risks to the investment analysis?
Risks to the analysis are:
Complete disruption by a technology player to fully digitize all the processes
Increase in passive funds (passive funds have lower fees implying lower yield for RTA players)
Breakthrough increase in non-MF revenue can lead to higher valuation in the medium to long term
The possibility of a further share sale by Warburg Pincus could create an overhang on the share price
About the Author
I have over 17 years of experience in venture capital, private equity, and investment banking in India and the Middle East across a wide variety of sectors. I was last working with Majid Al Futtaim Holding (MAF), a leading conglomerate in the Middle East, to look after investments, M&A, and venture capital. I have prior experience in India with Tata Capital (Private Equity), Merrill Lynch (Investment Banking or IB), and Ambit Corporate Finance (IB). I bring the long-term ownership mindset to the analysis.
I graduated from the MBA program of the Indian Institute of Management Lucknow (2005) after completing the Bachelor of Technology program at the Indian Institute of Technology, Kharagpur (2002).
I am an Insignificant Investor in the public market and co-founder of SocInvest.
Disclosure
I have had no stock, option, or similar derivative position in any of the companies mentioned for the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.