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CAMS IPO Review

CA KANJ GOEL 
on 22 September 2020

LinkedIn


Background

Computer Age Management Services Limited (CAMS) is set to launch its IPO on 21st September 2020. The IPO will be open for subscription to the public for 3 days i.e 21-09-2020 to 23-09-2020.

It is a technology-driven financial infrastructure and service provider together with being India's largest registrar and transfer agent of mutual funds holding approx. 70% mutual fund aggregate market share.

CAMS currently provides technology-based services including dividend processing, transaction origination interface, payment, transaction execution, dividend processing, intermediary empanelment, report generation, investor interface, settlement and reconciliation, compliance-related services, and brokerage computation.

The Company has offered to sell 1,82,46,600 equity shares by which NSE Investments will completely exit from the company following the SEBI guidelines whereby it stated to NSE to exit from CAMS in full.

Background of Promoter:

The Company is promoted by the Great Terrain, which was incorporated as a private company limited by shares, with a limited life, under the laws of the Republic of Mauritius on September 6, 2017. The registered office of Great Terrain is located at Warburg Pincus Asia Ltd, 8th Floor, Newton Tower, Sir William Newton Street, Port Louis, Mauritius. Great Terrain holds a Category I Global Business License issued by the Financial Services Commission. The principal activity of Great Terrain is that of investment holding and it is permitted to carry out investment activities under the provisions of the Republic of Mauritius' Financial Services Act 2007. Great Terrain is wholly owned by Harmony River Investment Ltd, a company that is incorporated and validly existing under the laws of the Republic of Mauritius.

The Harmony River Investment Ltd is owned by various companies that are managed/ controlled by Warburg Pincus Group, which have more than 50 years' experience in investing in private equity and managing the AUM of $ 53 Billion of assets having 14 offices in 10 countries globally.

Key Strengths of the Company:

CAMS IPO Review

1. Strong Industry Growth: The Company derives more than 85% of its revenue from the Mutual Fund Industry. The Mutual Fund Industry is one of the fastest- growing industries in India, which has witnessed an astonishing approx. 16.01% CAGR since 2000 and has clocked a growth of 17.9% since 2015 which is depicted by the below charts:

AUM Size of Mutual Funds

Category

Equity

Debt

Liquid / Money Market

Others

Total

March, 2015

3,715

5,316

1,626

171

10,828

March, 2016

4,255

5,835

1,994

244

12,328

March,2017

6,283

7,606

3,141

517

17,547

March, 2018

9,219

7,994

3,355

791

21,359

March, 2019

10,727

7,297

4,362

1,409

23,795

March 2020

9,740

6,797

6,272

1,818

27,628

Financial Year 2015-2020 (CAGR)

25.50%

7.10%

17.90%

62.50%

17.90%

The mutual fund industry in India had grown very rapidly in the past, however, the study states that the journey is not over and the best is yet to come.

India's AUM to GDP ratio is 11%, significantly lower than the world average of 63% which indicates how under-penetrated the market is and the scope of the growth in the segment is many folds.

AUM to GDP%

  1. Rising awareness among young India: India is the nation of young people. We have one of the youngest population of the world. Young India is more tech-savvy and knowledgeable about personal finance as compared to their ancestors. A decade or two ago, investments used to mean only endowment plans sold by the Insurance Companies, however, young India is exploring other means of investments and investing in mutual funds through SIPs instead of buying the endowment plans or keeping the money in FDRs only.
  1. Almost a Monopoly in the Mutual Fund Registrar and Transfer Industry: The Company derives more than 85% of its revenue from Mutual Fund Industry, whereof it holds a 70% market share. Among the top five AMCs, SBI Mutual Fund, HDFC Mutual Fund, ICICI Prudential Mutual Fund, and Aditya Birla Sun Life Mutual Fund are serviced by CAMS. The Company will be the sole listed company of the business segment in which it operates having no peer comparison which also favors the fortune for the Company.
  1. High Dividend Payout Policy: The company was paying out 65% of its profits made during the year as dividend to the shareholders of the Company. The management of the Company in a recent interview also claimed that they are going to maintain such dividend payout policy in the future as well after the IPO as well.
  1. The Company is exploring other avenues of revenue: Apart from the RTA of mutual funds, the Company has entered in other emerging businesses as well. The company is spreading it's business verticals in Insurance Repository, Alternate Investment Funds, banking and non-banking services, software solution business for mutual funds, etc. All of those may reap the exponential growth in the business of the Company.
  1. Strong Growth in key financial indicators and low debt: The Company has been generating good profits and has been indicating more growth in their business as compared to the growth of the industry. It is also yielding higher profitability and higher cash flows. Having a very low Debt to Equity Ratio, the market is always inclined towards such companies and gives a higher valuation to such stocks.

Below tables indicate the growth of the Company:

a. Cash Flow Summary (Rs. In Millions)

Particulars

For the period ended 31.03.2020

For the period ended 31.03.2019

For the period ended 31.03.2018

Profit / (Loss) before

extraordinary items and tax

2507.77

2008.73

2265.82

Net Cash flow from Operating activities

2011.52

1868.01

1619.48

Net Cash flow from Investing activities

(838.52)

(311.92)

(189.45)

Net Cash Flow from financing activities

(989.40)

(1581.44)

(1383.69)

b. Summary of EPS for past

Period ended

Basic EPS

Diluted EPS

March 31, 2017

25.32

25.32

March 31, 2018

29.93

29.93

March 31, 2019

26.75

26.75

March 31, 2020

35.57

35.54

  1. Strong Infrastructure and other key factors favoring the fortune: The Company has a pan-India physical network comprising of 271 service centers spread over 25 states and five union territories as of June 30, 2020 which is very difficult to build and operate for a new player. The Company is having long term contracts with the existing clients (top AMCs of India) which gives an edge to the company as the clients are not going to switch to the new entrants leading the entry barriers for the competitors. AMCs are not going to switch their RTA and KYC agents easily due to huge data sensitivity issues as well.
  1. Strong Management Commentary, Anchor Book, and profile of shareholders: In a recent interview the management of the Company stated that they haven't come up with the IPO because of the market situation, rather they had to come up with the IPO due to compliance with SEBI instructions and they assured that the company will continue to outperform the industry in the upcoming future as well. The Company raised Rs. 666.57 Crores ahead of the IPO through Anchor investors @ 1230 per share. Anchor investors consist of well promising names of the Industry i.e Small Cap World Fund, the Government of Singapore, Abu Dhabi Investment Authority, and 13 Mutual Funds through a total of 30 schemes, have given the overwhelming response to the IPO. The existing list of shareholders consists of prominent names of the industry 1. HDFC 2. HDFC Bank 3. Great Terrain 4. HDB Trust 5. Faering Capital fund 6. ACYS.

Key Risks Factors should be considered before investing:

  1. Valuation: The equity price per share @1230 per share will be trading at a P/E ratio of 35 based on the FY 2020 EPS will be trading at a very expensive valuation.
  1. The decline in the Mutual Fund Industry: The company derives more than 85% of its revenue from the mutual fund segment. The decline in equity valuation, sudden rise in interest rates, redemptions/withdrawal of funds from mutual funds by the investors may result lowering the size of AAUM which will reduce the revenues of the Company.
  1. Low Saving Rate in the Country: The world is in the middle of the COVID-19 pandemic, resulting in the downsizing of economies worldwide and job losses/decline in the earnings of the Individuals. Individuals are having lower income which may further reduce the saving rate at the macro and micro level, leading adverse effects on the mutual fund industry and lowering the income of the Company.
 
  1. Market Risk: The Company has launched its IPO at a time where the fundamentals are near zero, economies are witnessing a de-growth in their GDP, but the market has seen a sharp rise arising out of the liquidity pumped by the Central Banks of the countries globally. Any bad news may lead to a sharp correction in the market which is going to affect the stock as well.

Concluding Remarks: The Company almost enjoys a monopoly in the segment where it operates. Hence, an investor building the long term portfolio shall always invest in such stocks that have a niche in their segment and accumulate such stock on all dips.

 

Disclaimer: All the information has been compiled from red herring prospectus of the Company, AMFI data, and other public reports, authenticity of the content lies on the authenticity of the information processed. No information whatsoever published anywhere here should be construed as an offer to buy or sell securities, or as advice to do so in any manner whatsoever, it may be. All matter published here is purely for educational and information purposes only and under no circumstances should be used for making investment decisions. Readers must consult a qualified financial advisor prior to making any actual investment decisions, based on information published here. Any reader taking decisions based on any information published here does so entirely at its own risk.


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