by Aakash Athawasya

This month, two technology companies have had major success with their respective IPOs - Route Mobile and Happiest Minds, listing with a premium in triple digits. Will Computer Age Management Services (CAMS) be the third?

Unlike the diverse offerings of tech giants, CAMS’ offerings are geared largely to the financial services industry. However, the single-industry operations should not faze investors, as CAMS is the undisputed leader in the market. Another aspect that makes CAMS unique is that it is backed by major names in the investment world. CAMS is under the co-ownership of NSE Investments, a subsidiary of the National Stock Exchange (NSE) and its other shareholders include HDFC, and two private equity giants - Mumbai-based Faering Capital and New York-based Warburg Pincus.

CAMS is a focal part of the country’s mutual funds market, serving as the single largest transfer and registrar agent. Taking just under 70% of the market, the company serves four of the five largest AMCs in the country - ICICI Prudential Mutual Fund, HDFC Mutual Fund, SBI Mutual Fund, and Aditya Birla Sun Life Mutual Fund. As of July 2020, the company serviced Rs. 19.2 trillion of AAUM of 16 mutual fund clients.

With original shareholders selling their stake, including NSE Investments disinvesting it’s holding, and the company looking at an enormous Rs. 2,244 crores to raise its status in a market it already leads, will the CAMS IPO live up to its billing?

IPO Breakdown - Ownership

The CAMS’ IPO was scheduled for 21 September to 23 September coinciding with the public offering of Chemcon Speciality Chemicals. The issue size of the offering is 1.82 crore equity shares at a price band of Rs. 1,229 to Rs. 1,230 per equity share valuing the total issue at Rs. 2,244 crores. 

The allotment will be divided between QIBs, non-institutional investors, and retail investors at 50%, 15%, and 35% respectively. The minimum lot size is a single bid for 12 equity shares and a maximum at 13 lots of 156 equity shares.

Prior to the issue, Great Terrain, the Warburg Pincus affiliate investment company holds the largest stake in the company at 2.1 crore equity shares or 43.5% of the equity share capital. NSE Investments is the second-largest shareholder pre-issue at 1.8 crore equity shares or 37.5% of the share capital. The other shareholders including HDFC, HDFC bank, and Faering Capital [through two funds], Acsys, hold less than 6% each. The pre-issue shareholding is as follows:

Data source: Computer Age Management Services, DHRP

According to the RHP’s offer structure, 1.2 crores equity shares will go up for an OFS from the respective stakes of Great Terrain, NSEIL, Acsys, HDFC, and HDB Trust. The offer includes a reservation of up to 1.8 lakh shares for subscription by eligible employees of the company. Finally, the offer and net offer will constitute 24.5% to 24.9% of the post-offer paid-up equity share capital of the company.

Prior to the offer of equity shares, the total number of outstanding shares for the company will be 4.8 crores. The division of the OFS is as follows:

The book running lead managers to the issue are Kotak Mahindra Capital, HDFC Bank, ICICI Securities, and Nomura Financial Advisory and Securities, with Link Intime serving as the registrar to the offer.

The objective of the offer is to carry out the offer for sale (OFS)  of 1.2 crore equity shares by selling shareholders’ stake, as well as the disinvestment of NSE Investments and achieve the benefits of being listed on the BSE. Markets regulator SEBI issued a notice to NSE Investments earlier in the year to disinvest its state in the company as it violates the rules for market intermediary institutions [MIIs]. CAMS has stated that the company will not receive any proceeds from the offer, and such proceeds will be received only by selling shareholders.

Strengths

1. Largest service provider in the mutual funds market
2. Long-standing relationship with mutual funds clients serviced
3. Scalable technology and increasing transaction volume
4. Focus on process and risk management for the company and clients
5. Experienced management and shareholders: Chairman Dinesh Mehrotra served as the MD of LIC and CEO Anuj Kumar was associated with Escorts Finance, BillJunction Payments, and IBM India.

Risk factors

1. Dependent on Mutual fund services clients
2. Disruptions in IT systems or data security breaches: In December 2018 the company’s data was encrypted by a ransomware attack
3. Mutual fund clients are subject to several laws and regulations
4. Majority of the revenue comes from the top-5 clients
5. Employee fraud could impair operations: In the past, an ex-employee misappropriated confidential data and shared it with third parties
6. Inability to manage growth and implementation could harm operations
7. Compliance with insider-trading, anti-money laundering, and financial terrorism regulations could pose liabilities
8. Periodic inspection audits by SEBI
9. German subsidiary SSDG - Sterling Software (Deutschland) is winding down operations
10. Third-party transactions could pose a potential conflict of interest with shareholders

Revenue from top-5 clients

Board

Financials

The revenue from operations for FY20 stood at Rs. 699.6 crores, which was a jump of 0.8% from the previous year’s revenue at Rs. 693.6 crores. The revenue for FY18 and FY19 were Rs. 641.5 crores and Rs. 478.3 crores respectively. The CAGR for the period was 14%. Revenue for Q1FY21 stood at Rs. 148.6 crores.

EBITDA for the most recently concluded quarter was Rs. 51.5 crores, which represented a drop of 24% from Q1FY20. EBITDA for FY20 was Rs. 287.3 crores, an increase of Rs. 17.3% from the previous financial year’s EBITDA at Rs. 243.6 crores. EBITDA margin for Q1FY21 was 34.6%. EBITDA margin for the completed year of FY20 was 41.1%, which was a jump of 590 basis points against FY19’s margins at 35.1%.

Net profit for Q1FY21 was Rs. 40.8 crores, a marginal increase of 1.7% against the previous quarter’s numbers. FY20 saw a net profit increase of 32.5% from Rs. 130.9 crores in FY19 to Rs. 173.5 in FY20. The CAGR for net profit growth between FY17 to 20 was 12%.

Valuation

The company’s EPS for FY20 stood at Rs. 35.5, which was a jump of 32.4% from the previous year’s EPS at Rs. 26.8. The EPS for FY17 and FY18 stood at Rs. 25.3 and Rs. 29.9 respectively. For the most recently concluded quarter Q1FY21, the EPS stood at Rs. 33.4 per share.

Taking the upper price band of Rs. 1,230 per equity share during the offering, and the most recent EPS at Rs. 33.4 per share, the price to earnings ratio for CAMS is 36.8 times.

The company does not have any listed peers and hence has provided no industry or peer group P/E ratio for comparison. However, a key competitor in the space is KFin Technologies (Karvy Fintech), which holds 27% of the MF registrar and transfer agent market. 

Here’s how CAMS’ P/E ratio compares to the listed NBFCs in the market:

Industry analysis

CAMS already leads the mutual fund service and registrar market holding a 70% market share, serving four of the top 5 domestic AMCs, however, the market is growing. According to a report by CRISIL, the AAUM of Indian MFs has grown from Rs. 6,140 billion to Rs. 23,796 billion between 2010 - 2019, a CAGR of 16.2%. This growth was because of the increasing share of mutual funds in householding saving and individual and institutional investors investing in the asset class. The number of folios grew from Rs. 41.7 million to Rs. 82.5 million between 2015 - 2019, a CAGR of 18.6%.

As of March 2019, the industry had 41 AMCs, up from 32 in March 2000. In terms of assets growth in the mutual fund industry, there has been a consistent increase since 2000. The AUM growth has been at a CAGR of 17.4% from Rs. 1.1 trillion in 2000 to Rs. 23.8 trillion in 2019. 

The share of mutual funds in the household’s financial assets is increasing. In 2016, it stood at 9.7% and it has increased to 13.1% by 2018. As a percentage of GDP, mutual fund AUM grew from 4.3% to 12.5% from 2002 - 2019.

Against the world average of 55%, India’s mutual funds AUM-to-GDP of 12.5% is still fairly low. Countries like the United States, France, and the United Kingdom have mutual fund penetration at 103%, 75%, and 59% respectively. Other comparable markets like Brazil and South Africa also have a higher penetration of 65% and 42% respectively.

Out of the 41 AMCs in the mutual fund space, the top-5 (HDFC Mutual Fund, ICICI Prudential Mutual Fund, SBI Mutual Fund, Aditya Birla Sun Life Mutual Fund, and Nippon India Mutual Fund) have 60% of the market share. The market share of the top-5 AMCs has grown from 54% to 58% between 2015 to 2019, with their AUM growing at a CAGR of 22% over the industry CAGR of 19.8%. CAMS’ market share has grown from 61% to 69% between 2015 to 2019, in that period its closest competitor Karvy’s share has dropped from 33% to 27%.