IPO. Should you subscribe to CAMS public offer?

The ₹2,200-crore initial public offer (IPO) of Computer Age Management Services (CAMS) is open for subscription during September 21-23.

It is purely an offer for sale of 1.83 crore shares held by NSE subsidiary NSE Investments, which is exiting the company. CAMS’ promoter is private-equity firm Warburg Pincus.

The share sale has a price band of ₹1,229-1,230, valuing CAMS at 34 times its FY20 earnings per share, which is expensive.

The company is valued at around ₹6,000 crore at this price band. The high valuation comes from the fact that CAMS is a unique play in the listed space, is a market leader and has good margins and return on equity.

CAMS is a registrar and transfer agent (RTA) for mutual fund companies and also acts as a financial infrastructure and service provider to mutual fund houses, insurance companies and alternative investment funds. It

also performs functions of a KYC Registration Agency (KRA) for financial services companies.

With more than three-fourths of its revenues coming from RTA and other services provided to mutual funds, the company is a play on the penetration of mutual funds as an investment vehicle in the country. The propensity of the Indian saver to move from physical to financial assets, which is catching on in recent times, could be a long-term driver. For many investors looking for equity market exposure, mutual fund is a less risky route than investing in direct equity.

Investors with a long-term perspective can subscribe to the IPO. The company has a policy of paying a minimum of 65 per cent of its consolidated profit after tax as dividend to shareholders.

The business

Nearly 87 per cent of the company’s revenues comes from RTA and other services it provides to mutual funds. Its growth in revenues is linked to the growth in the average asset under management (AAUM) of the mutual fund industry. The AAUM of the MF industry grew at a CAGR of 18 per cent, from ₹11.9-lakh crore as of March 2015 to ₹27-lakh crore as on March 31, 2020.

CRISIL expects the AAUM of the MF industry to grow at 18 per cent CAGR till the end of 2024-25 to ₹52-lakh crore.

CAMS services four out of the top five mutual funds in the industry, and nine of the 15 largest mutual funds.

CAMS has a 70 per cent market share in this space, which makes up to around ₹19.2-lakh crore AAUM of the mutual fund industry.

Revenues from providing services to MFs come mainly in the form of fees as a percentage of the AUM handled. The mix of AUMs across mutual fund categories matters here as fee from servicing equity and hybrid mutual funds is higher than that from servicing debt mutual funds.

The company serviced ₹6.2-lakh crore of equity mutual fund AUM as of July 2020.

The remaining comes from debt funds. (with liquid funds being the largest here)

Non-mutual fund businesses such as payment processing for NBFCs and some banks, KYC registration agency and maintaining electronic insurance account repository for insurers (37 per cent market share) make up for 12-13 per cent of revenues currently and is expected to remain around similar levels in future.

Financials

CAMS has high earnings before interest, tax, depreciation and amortisation (EBITDA) margins as well as net profit margins (both above 30 per cent).

As the company does not have much debt and operates on an asset-light business model, its net margins are quite high.

CAMS has posted a compound annual growth rate of 4.4 per cent in revenues from 2017-18 to 2019-20 to nearly ₹700 crore from ₹642 crore. In the same period, its consolidated net profit grew 8.9 per cent CAGR to ₹173 crore from ₹146 crore.

The company’s return on equity has been around or above 30 per cent for the past three financial years.

In the quarter ended June 30, 2020, CAMS’ business took a hit because of the impact of the market crash on the AAUM of equity mutual funds. This saw its revenues fall 15 per cent year-on-year to ₹149 crore during the quarter. Consolidated net profit for the quarter rose 1.7 per cent y-o-y to ₹40.8 crore. The company’s EBITDA came in at 30.3 per cent.

Key points

For investors who are looking to invest in CAMS’ IPO, there are some points worth considering.

As per SEBI’s norms on Total Expense Ratio (TER), RTA fee will tend to decrease as a percentage of AUM with growth in AUMs. However, in absolute terms, the fee revenues could show growth.

Also, since the revenues are also a function of the AUM mix across categories, investor inclination to take the index fund or ETF (exchange-traded fund) route instead of the active equity fund route may dent the proportion of revenue from servicing equity funds, over the medium to long term.

The company paid dividend to its existing shareholders just a month before its IPO. The dividend pertaining to NSE Investments (exiting investor) has been parked in an unpaid dividend account on the directions of the regulator SEBI (Securities Exchange Board of India).

The company usually pays dividends thrice in a financial year, according to its prospectus.

The company already paid the third interim dividend for 2020-21 in August 2020. The third interim dividend paid for FY 21 is at 226 per cent of the face value of ₹10 each, a level not seen in the past three financial years.

When asked by BusinessLine as to why the company chose to pay the dividend just before the IPO, CAMS said the action had been under discussion since March 2020 and the resolution was passed in August 2020.