Verdict: Bull Market Pricing
Computer Age Management Services (CAMS) is entering the primary market on Monday 21st September 2020, to raise Rs. 2,244 crore via an offer for sale (OFS) of 1.82 crore equity shares of Rs. 10 each by National Stock Exchange (NSE) in the price band of Rs. 1,229-1,230 per share, with employee discount of Rs. 122 per share (no retail discount). The issue represents 37% of the post-issue share capital at the upper end of the price band and will close on Wednesday 23rd September, with listing likely by 1st October on BSE alone (not listing on NSE).
CAMS, 31% owned by PE giant Warburg Pincus, is India’s largest registrar and transfer agent (RTA) of mutual funds, with 70% market share (up from 61% 5 years ago) based on average assets under management (AAUM) of mutual fund (MF) as of July 2020. Company serves top 4 of India’s 5 largest MFs. Top 5 mutual funds, SBI, HDFC, ICICI, Aditya Birla and Nippon in that order, of the 41 player MF industry accounting for 55% of AAUM, which in turn is highly positive for CAMS as RTA earns ~80% of its revenue based on AUM handled and the AUM mix. Remaining 20% revenue is earned from volume of paper-work handled and fees on value-added services. Due to the concentrated nature of mutual fund industry, top 10 clients account for 70% of company revenue. Despite having presence in AIF, insurance repository, KYC registration and other verticals, mutual fund services remains the cash cow, accounting for 85-90% revenue, indicating lack of meaningful success in other verticals.
Essentially a duopoly market with leader CAMS at 70% market share and #2 player KFin (formerly Karvy Fintech) at 27%, while #3 Franklin only services its own mutual fund with 3% market share. High entry barriers such as technology and knowledge capability supported by extensive branch network, yield sticky customer relationship, making switch between RTA difficult for MFs. Thus, competitive pressure is low and company may be able to defend its market share comfortably. Moreover, rising MF AUM and top 3 MFs in particular gaining market share act as natural tailwinds for CAMS.
AUM mix vital for earnings, as equity and hybrid schemes fetch 0.06% of AUM as fees, while debt and liquid funds yield a third of it, at 0.02% while ETFs yield much lower. Overall, RTAs earn 0.035% to 0.04% of AUM as fees, which has reduced from 0.045% to 0.05% 5 years ago, but compensated by rising MF industry AUM. In FY20, though, pricing pressure was witnessed post SEBI’s reduction in total expense ratio (TER) that mutual funds were allowed to charge to the investors.
Objects of Issue and Shareholding:
IPO is being undertaken solely to facilitate NSE’s exit of 37% stake under SEBI directive, as NSE did not seek prior SEBI approval before investing in CAMS in 2013, hence not abiding by Stock Exchange and Clearing Corporation (SECC) Regulations.
Warburg Pincus’ Great Terrain, promoter in the company since Sep 2018, held 43.5% stake, but has sold 12.5% holding at Rs. 1,230 per share to a clutch of mutual funds (incidentally, its top 3 customers – MF of SBI, HDFC and ICICI) and other financial investors on 10th & 11th Sept 2020, trimming its holding to 30.98%. This is surprising on two counts, as it is outside the IPO document – as per DRHP dated 8th Jan20 it was looking to sell only 8.50% stake via the OFS. Also SEBI permitting such a sale is not a routine feature. Accounting for this 12.5% and 37% OFS, in one month, ~50% of company’s equity has//will be changing hands.
Other shareholders of the company are not participating in the OFS and continue to remain invested - HDFC 6%, HDFC Bank 3.3%, HDB Trust 3.2%, PE Fund Faering 4%, founding promoter Acsys Investments 1.9% and few key managerial personnel.
From FY17 to FY20, company’s revenue grew at 14% CAGR to Rs. 700 crore, mirroring MF industry AAUM growth of 14% during this period. However, this growth has not been linear, with FY20 revenue growth at 1%, FY19 at 8% and FY18 at 34% YoY. Despite 14% revenue CAGR between FY17-20, company’s EBITDA and PBT growth was lower at 11% and 10% to Rs. 300 crore and Rs. 250 crore respectively, due to higher growth in employee costs and depreciation. PAT however grew at 12% CAGR to Rs. 173 crore, thanks to lower income tax rates, leading to an EPS of Rs. 35.5 for FY20, on an equity of Rs. 48.76 crore. Despite reduction in fees due to lower TER, FY20 RoE was healthy at 32%.
Replicating the 15% drop in AAUM of equity oriented schemes, Q1FY21 revenue declined 15% YoY to Rs. 149 crore, resulting in 11% YoY drop in both EBITDA and PBT to Rs. 64 crore and Rs. 53 crore respectively. PAT stood at Rs. 41 crore, translating into an EPS of Rs.8.4 for the June quarter. This highlights volatility in quarterly financials based on broader market conditions, despite secular growth story of MF industry remaining intact. Operating leverage in the business is high, as majority of expenses remain fixed in relation to earnings which vary on AUM serviced.
As of 30-6-20, company’s net worth stood at Rs. 528 crore, resulting in BVP of Rs. 108, of which, cash and equivalents stood at Rs. 82 per share. Since company has an asset light business model, its need for funds is limited and hence has been generous in dividend payments, with payout ratio averaging 66% for the past four fiscals till FY20. In FY21 so far, company has already paid Rs. 37 per share as dividend to existing shareholders. In future, it has stated 65% payout as part of its dividend policy, implying ~2% dividend yield on IPO price.
At Rs. 1,230 per share, company’s market cap will stand at Rs. 6,000 crore, implying PE multiple of 35x on FY20 earnings and about 32x on FY21E earnings, which is quite aggressive for the scale of operations. While there are no direct peers, it can be broadly compared to CDSL, a leader in duopoly depository services industry, having high operating leverage and market cap of Rs. 4,900 crore, trading at FY20 PE multiple of 46x. Since CDSL share price has jumped 27% in the past 1 month, important to note that the historic PE multiple just last month stood at 36x. Also, CDSL reported growth in revenue (12% YoY) and EBITDA (56% YoY) in Q1FY21 whereas CAMS reported 15% and 11% contraction respectively.
One of the important growth drivers for CAMS is volume of MF AUM serviced and AUM mix, which is also an important metric for valuing an asset management company (AMC). Hence, it will not be inappropriate to benchmark valuation multiples of CAMS with listed AMC who also operate an asset-light and high RoE business. Market leader HDFC AMC, with 35% RoE and market cap of Rs. 47,000 crore, is trading at FY20 PE multiple of 37x, despite operating in a B2C environment. Thus, on relative basis, CAMS’ PE multiple of 35x makes the issue fully priced for a B2B operations.
While CAMS has sound fundamentals and is a play on growing financialisation of domestic savings via the MF route, it is important to understand that company’s growth is primarily dependent on external factors, beyond its control, such as MF AAUM growth (expected to be in low-to-mid teens). FY20 demonstrated limited pricing power in company’s hands, despite duopoly, due to again external factors such as reduction in mutual fund scheme’s TER (total expense ratio). Going forward, growth will be steady-state and not extraordinary, as scope for market share gain is also limited.
If we look at CDSL IPO undertaken 3 years ago at Rs. 150 per share at then historic PE multiple of 18x, CAMS’ PE of 35x is again aggressive, without leaving anything on the table for prospective investors. While CDSL gave a bumper listing at Rs. 250 as against IPO price of Rs. 149, share price has been quite volatile. After listing at 250 in July 2020, it rose to 370 in Jan 2018 but corrected to 180 in Aug 2019 before swiftly moving to 280 in Feb 2020 and now to 460 in Sep 2020. This highlights that CAMS returns may also be volatile based on broader market movement, and it is not immune to market volatility. Thus, paying such a high valuation multiple for volatile returns purely due to current primary market frenzy supported by ample liquidity is unwarranted.
While CAMS is a unique play on financial services and an alternate to AMC to ride the financialisation theme, pricing is very aggressive leaving limited scope for short term gains. Those with a long term view may wait for an attractive entry price post listing, as it qualifies as a quality mid-cap.
Grey Market Premium (GMP) of CAMS: Grey Market Premium of CAMS is an unofficial figure, against guidelines of SEBI. We strongly recommend investors against following the grey market premium. To know more about grey market premium and how it operates, read our article on ‘grey market premium’ in Pathshala column.