The initial public offer (IPO) of Computer Age Management Services (CAMS), a technology-driven financial infrastructure and services provider to mutual funds (MFs) and other financial institutions, is set to open today. On Friday, the company raised Rs 666.56 crore from anchor investors.
Last week, the public offer of CAMS was upsized by 50 per cent to allow NSE, one of its key shareholders, to divest its holdings. In February, capital markets regulator Securities and Exchange Board of India (Sebi) had directed the NSE to divest its entire 37.5 per cent stake in CAMS within a year. READ MORE
Here’s a look at the key things you need to know before you subscribe to the issue.
About the Company
CAMS is India’s largest registrar and transfer agent (RTA) of mutual funds with an aggregate market share of about 70 per cent based on mutual fund average assets under management (AAUM) managed by clients and serviced by the company during July 2020, according to a CRISIL report. Headquartered in Chennai, 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. That apart, it also provides services to alternative investment funds (AIFs), insurance companies, banks, and non-banking financial companies (NBFCs).
As of June 2020, CAMS services four out of five largest AMCs – HDFC MF, ICICI Prudential MF, SBI MF, and Aditya Birla Sun Life MF. In terms of top 15 AMCs, CAMS services nine out of the top 15 AMCs, translating to nearly 70 per cent market share in MF RTA business.
About the Offer
CAMS’ IPO comprises an offer for sale (OFS) of 18.247 million shares, representing around 37.4 per cent of its post-issue paid-up equity shares of the company. On the direction of Sebi, NSE will divest its entire stake in the company through this IPO. The price band of the offer is Rs 1,229 – 1,230 per share. At the upper price band, the IPO size stands as Rs 2,244.38 crore. The bid lot has been fixed at 12 shares and in multiples thereof. The offer closes on September 23.
Why analysts suggest subscribing to it
Proxy play on MF industry
As 85-90 per cent of CAMS’ revenues are contributed by the MF industry, it is a proxy play on the Indian MF industry. Its growth is directly linked to the AUM growth of the MFs it services. According to Crisil Research, robust mutual fund inflows, continued growth in household savings, increase in financial assets as a percentage of household savings, and improved mutual fund penetration in smaller cities are expected to lead the mutual fund industry’s AUM to grow from Rs 27 trillion in FY20 to Rs 52 trillion by FY25E, at a compound annual growth rate (CAGR) of 14 per cent.
During FY17‐20, CAMS registered a revenue CAGR of 13.5 per cent and a PAT CAGR of 11.8 per cent. Return on equity (RoE) has been in the range of 34‐35 per cent and the balance sheet has zero debt. The company has stated the dividend policy of paying a minimum of 65 per cent of the profit after tax (PAT) but empirically the payout has been higher, observe analysts at YES Securities.
“Going ahead, we expect to see a revenue CAGR of 10 per cent during FY20‐23E and a PAT CAGR of 16.3 per cent. RoE will improve further as the benefits of operating leverage will drive margins and asset turnover,” the brokerage said in a September 18 report, assigning a “SUBSCRIBE” rating to the issue.
At Rs 1,230 /share, CAMS is priced at 35x FY20 earnings per share (EPS), at a 10-15 per cent discount to listed AMCs, stock exchanges, and depositories, notes IIFL Securities. The brokerage expects the stock to trade in-line with other comparables and further re-rate. “In our view, premium valuations are justified given the dominant market share in a growing industry, low risk of competition, strong parentage, strong free cash flow generation, and robust RoEs. Subscribe,” it said.
Poised to generate consistent returns
Nirali Shah, a senior research analyst at Samco Securities, notes that CAMS has a robust business with strong market leadership. “Given the high entry barriers and the near duopoly nature of the market, the moat of the company remains intact. With growth being linked to the rise in AUMs for Mutual Funds, the company is poised to generate consistent returns going forward. Investors just need to be cautious regarding the slower pace of growth as paper-based transactions that contribute a large part of revenues sees a decline over time,” Shah added. The analyst, too, has a “SUBSCRIBE” rating to the offer.
Subdued economic growth and poor financial investment market, consolidation in the mutual fund industry, a decline in retail systematic investment plans (SIPs), and accelerated withdrawals or redemptions, unfavorable regulatory environment, and inability to maintain the profitability levels are some of the key risks and concerns that should be taken into consideration.