CAMS IPO is a good opportunity for long-term investors, say experts

The initial public offering (IPO) of Computer Age Management Services (CAMS) — India’s largest registrar and transfer agent (RTA) of mutual funds (MFs) — is a good opportunity for long-term investors. NSE Investments — a subsidiary of the National Stock Excha­nge — is selling its stake (18.25 million shares) in CAMS through this IPO (opening/closing on September 21/23) at a price band of Rs 1,229-1,230 apiece.

Dominant position in the duopoly RTA market, long-established relationship with top MFs, debt-free status, and good management track-record offer strong comfort. Sneha Poddar, analyst at Motilal Oswal Securities, says: “We recommend ‘subscribe’ for long-term because of CAMS’ first-mover advantage, asset-light business model, and high entry barriers in the business.”

Strong growth levers

Incorporated in 1988, CAMS is a technology-driven financial infrastructure and services provider to MFs and other financial institutions. In MF services, CAMS enjoys 70 per cent market share in terms of average assets under management (AAUM), backed by a long relationship with five of the country's top six MFs.

Anuj Kumar, chief executive officer, CAMS, says: “Service efficiency and client success have helped market share gains in the past 5 years — from 61 per cent to 70 per cent.”

MFs account for 87 per cent of CAMS’ revenue and a major chunk of this is directly linked to monthly AAUM. Over FY17-20 CAMS stayed well. However, Covid-19-led disruptions have hurt its June 2020 quarter performance, with its top-line declining 15 per cent year-on-year (YoY) to Rs 148.6 crore. However, lower costs protected its bottom-line, which was up 1.7 per cent YoY to Rs 40.8 crore. Though its near-term performance would likely remain muted due to Covid-19, analysts foresee sturdy growth over the long term. “The medium-term performance of CAMS would be propelled by growth of the domestic MF industry,” opines Suyog Kulkarni, analyst at Reliance Securities. CAMS’ business mo­del looks attractive driven by leadership in market share, strong return ratios, and a healthy balance sheet, he adds.

Analysts at Ventura Securities who also recommend ‘subscribe’ to the IPO expect AAUM serviced by CAMS to grow at a CAGR of 13.6 per cent to Rs 26.6 trillion during FY20-FY23, and the share of equity AUM (high margin segment) to expand to 40 per cent, from 33 per cent as of June 2020, translating into a net profit CAGR of 20 per cent. Client concentration (top five clients contribute 71 per cent to revenue), data sec­urity and privacy, and technological di­s­­ruptions could pose downside risk, say analysts. While peer comparison is un­­­­available, analysts believe the IPO is fairly priced at FY20 price-to-earnings of 35x.