IPO analysis: Computer Age Management Services

IPO Rating - Invest with limited exposure

About the Issue

Computer Age Management Services (CAMS), India’s largest registrar & transfer agent of mutual funds, is entering the primary capital market with its initial public offer (IPO) of equity shares of the face value of Rs 10 each. The price band has been fixed between Rs 1,229 and Rs 1,230. The minimum bid lot is 12 equity shares and in multiples of 12 equity shares, thereafter.

The size of IPO is Rs 2,242 crore at the upper price band and the entire issue is an offer for sale of 18,246,600 equity shares by the selling shareholder. This offer includes a reservation of up to 182,500 equity shares (constituting up to 0.37 per cent of the post-offer paid-up equity share capital) for purchase by eligible employees, who are offered a discount of Rs 122 per share. The company will not receive any proceeds from the offer and all such proceeds will go to the selling shareholder, which in this case is NSE Investments, a subsidiary of National Stock Exchange. This sale was necessitated because it will pave the way for the listing of the company on NSE platform in the future. At the upper price band, the market cap of the company will stand at Rs 6,001 crore.  

The IPO will open for public subscription on September 21 and closes on September 23.

About the company

CAMS was incorporated in the year 1988 and is a technology-driven financial infrastructure and services provider to mutual funds and other financial institutions. It is India’s largest registrar and transfer agent of mutual funds (MFs) with an aggregate market share of around 70 per cent at the end of July 2020 based on MFs’ average assets under management (AAUM) managed by its clients and serviced by them. Over the last five years, it has grown its market share from approximately 61 per cent during March 2015 to approximately 69 per cent during March 2020, based on AAUM serviced.

CAMS MF clients include four of the five largest MFs as well as nine of the 15 largest MFs based on AAUM at the end of July’20. It has grown its service offerings over the years to provide an end-to-end value chain of services to its MF clients, distributors, and investors, through its pan-India network. The nature of services to MFs spans multiple facets of their relationship with their investors, distributors, and regulators. Thus, CAMS plays an important role in developing and maintaining its clients’ market perception. As of July’20, CAMS serviced Rs 19.2 lakh crore of AAUM of 16 MF clients. According to a CRISIL report, while the 10-year CAGR of quarterly average asset under management (QAAUM) of MFs serviced by CAMS stood at 15.8 per cent between FY10 and FY20, the overall industry grew at 13.4 per cent CAGR. Similarly, the 5-year CAGR of QAAUM of MFs serviced by CAMS stood at 21 per cent (FY15-20) against the industry growth of 18 per cent. Further, the company’s MF clients had 1.98 crore systematic investment plan (SIP) accounts as of June’20.

The company derives a significant portion of revenue from the mutual funds' services business. For the three months ended June 30, 2020, and the financial years 2020, 2019, and 2018, revenue from our mutual fund's services business accounted for 89.7 per cent, 86.9 per cent, 86.8 per cent and 86.6 per cent of revenue from operations, respectively. A substantial portion of the fees charged to mutual fund clients is calculated and charged on basis points of the AAUM of the funds serviced by the company.

Hence, the growth of AUM of its mutual fund clients is important, as a substantial portion of its mutual fund revenues are based on the mutual fund AAUM of its clients. Moreover, the nature of the funds and services provided is such that it charges more fees from equity mutual funds as compared to other categories of mutual funds.

The aggregate AUM of the Indian mutual fund industry has grown consistently over the past 10 years, against the backdrop of an expanding domestic economy, robust inflows, and rising investor participation, particularly from individual investors. Quarterly AAUM grew at CAGR of 13.4 per cent to Rs 27.0 lakh crore in March 2020 from Rs 7.6 lakh crore in March 2010.  Moreover, the major growth in the last five years has been driven by the equity dedicated funds. The AAUM of equity-oriented funds grew at a CAGR of 25.5 per cent, from Rs 3.7 lakh crore in March 2015 to Rs 11.3 lakh crore in March 2020, whereas the debt segment grew at a CAGR of 7.1 per cent during the same period. This resulted in the share of debt funds declined from 45 per cent in the March quarter of the financial year 2015 to 28 per cent in the June quarter of the financial year 2021. Conversely, the share of equity funds rose from 31 per cent in the March quarter of the financial year 2015 to 40 per cent in the June quarter of the financial year 2021.

Mutual fund assets in India have seen robust growth, especially in recent years, driven by a growing investor base due to increasing penetration across geographies, strong growth of the capital markets, technological progress, and regulatory efforts aimed at making mutual fund products more transparent and investor-friendly. Although mutual fund AUM as a percentage of GDP rose from 4.3 per cent in the financial year 2002 to approximately 12 per cent in the financial year 2020, penetration levels remain well below the global average of 63 per cent.

Besides giving service to MFs, CAMS also offers services to cater to a variety of other financial services sectors, for example, electronic payment collections services business, insurance services business, AIF services business, and KYC registration agency business.

Going ahead, the key growth drivers of the company will majorly come from the growth of the MF industry in India. The Indian mutual fund industry is expected to include anticipated economic growth, a growing investor base, higher disposable incomes, and investable surplus, increasing aggregate household and financial savings, increase in geographical penetration as well as better awareness, ease of investing, digitalisation, and perception of mutual funds as long-term wealth creators.

Financials of Company

Over FY18-20, CAMS Revenue/EBITDA/PAT grew at a CAGR of 4.4 per cent/4.1 per cent/8.9 per cent. The company has a strong balance sheet with zero debt and negative working capital thus, resulting in healthy return ratios. Return on the net worth of the company has been at 32.13 per cent at the end of FY20 and has remained in higher twenties earlier also. The company follows an asset-light model and has been able to consistently generate strong free cash flow over the last four years. It is a consistent dividend-paying company with an FY20 payout at 40 per cent.

                                                                                                                            Figures in Rs Crore

In terms of segregation of revenue, more than 80 per cent of the company’s revenue in the first quarter of FY21 came from data processing.  Customer care and Miscellaneous contributed more than five per cent each.

The following table shows how the company is placed against its only competitor.  In every aspect, the company seems to have an edge over its competitor.

Valuation and recommendation

At the higher end of the price band of Rs 1,230, the issue is valued at 34.64 times its FY20 earnings per share of 35.5, which seems to be fairly priced. The market cap to sales (FY20) will come around 8.5 times. There is no listed company from which we can compare CAMS but by looking at the market structure of the duopoly, in which the company is operating, we may compare it with CDSL. The PE ratio of CDSL is 63 times with market cap to sales of 20 times. The issue of CAMS though does not look cheaper looking purely at valuation, however, given its leadership position, the high entry barrier to the business, and strong balance sheet with high return ratios, we recommend readers to subscribe to the issue with limited exposure.