India’s largest RTA (registrar and transfer agent) of mutual funds commands 70% market share in a duopolistic market
CAMS, a technology-driven financial infrastructure and service provider, is the latest IPO to hit Indian markets with a Rs 2,200 crore offer. Great Terrain Investment (affiliate of Warburg Pincus) is the promoter of the company with a 43.5% stake. CAMS is India’s largest RTA (registrar and transfer agent) of mutual funds. CAMS, a net debt free firm, commands 70% market share of MF industry’s total average assets under management. The IPO is at a price band of Rs 1,229-1,230 per share. The offer opens today ie 21 Sep and closes on 23 Sep. Read on to know more.
The company is proposing to raise upto Rs 2,242 cr through its Initial Public Offering of 18,246,600 equity shares.
The CAMS equity share has a face value of Rs 10 each.
The company will not receive any funds from the net proceeds as the offer is for sale up to 1.82 crore equity shares by NSE Investments. The offer constitute 37.4% of the post-offer paid-up equity share capital of CAMS.
Markets regulator SEBI has directed NSE to divest its entire stake in the CAMS held through its subsidiary, NSE Investments, within a period of one year from the date of receipt of the SEBI letter and to submit a compliance report in this regard with SEBI. It was also told that NSE shall not exercise any voting rights nor avail any corporate benefits in respect of the entire shareholding in the company held by NSE Investments except for the purpose of selling such shareholding and it shall withdraw its nominee directorship from the CAMS. This is why you are getting an opportunity to buy shares in CAMS IPO!
CAMS was formerly known as Computer Age Management Services. It was started in 1988. MF RTA business is a high entry barrier business and so there is little by way of strong competition.
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 etc.
While mutual funds business earns CAMS over 80% of revenue, CAMS also provides services to alternative investment funds (AIFs), insurance companies, banks and NBFCs.
Great Terrain is the promoter of CAMS with its pre-issue shareholding at 43.53%. Great Terrain is the wholly owned subsidiary of Harmony River Investment Ltd, which is directly owned by private equity giant Warburg Pincus LLC (New York, US).
As on June 2020, CAMS services four out of five largest AMCs – HDFC MF, ICICI Prudential MF, SBI MF and Aditya Birla Sun Life MF. Nippon India is served by Kfin.
In terms of top 15 AMCs, CAMS services nine out of top 15 AMCs, translating to ~70% market share in MF RTA business. As per Crisil Research, MF RTA business is expected to grow from Rs 900 crore in FY20 to Rs 1,760 crore by FY25; a CAGR of 15%.
In mutual funds business, CAMS makes more money by handling equity funds than debt funds. The industry shift towards Equity MFs augurs well for CAMS as equity offers 3x the fees offered by Debt & Liquid funds. MF RTAs earn the highest fee from equity funds (0.062%) while fee from passively managed ETFs and index funds (0.016%) is lower.
MF business helped CAMS clock revenue of Rs 699 crore in FY20. Earnings on that income was Rs 173 crore. Accordingly, CAMS has delivered consistent EBITDA margin in the range of 35-40% in FY17-20 while RoE has remained strong at or above 30% in FY17-20.
In the insurance business through CAMS Insurance Repository Services Ltd, CAMS has a market share of 39%.
In the AIF services business, CAMS provides functions like managing
records and performing fund accounting and reporting etc. CAMS also offers KYC registration functions and software solutions to mutual fund companies. As on June 2020, CAMS serviced 77 AIF clients with an AAUM of over Rs 16,000 crore.
However, since the Government of India has authorised CERSAI (Central Registry of Securitisation Asset Reconstruction and Security Interest of India) to act as, and to perform the functions of, the central KYC records
registry under the Prevention of Money Laundering Rules 2005, CAMS subsidiary, CISPL may lose a substantial portion of its business.
Priced at P/E of 34.5x FY20 on upper end of band, CAMS IPO price is fairly valued. While you may not get Happiest Minds kind of IPO listing gains, one can invest in the offer with a long term vision since CAMS is virtually the largest in a duopoly market. Kfin is the only competitor, while Franklin RTA services only Franklin AMC.
CAMS future growth is dependent on MF AUM size and mix.
Being a totally tech play, information technology disruption can impact operations.
CAMS gets bulk of revenues from a few clients and so concentration risks will persist.
While loss of MF client is tough, it is not impossible. The amount of time invested in migration, high risk of business disruption, data loss, coupled with customer and regulatory issues make it a tougher task to switch to a competitor, but CAMS can lose a top client and take a major business hit.
Subscribe & keep learning!