4 September 2020

CAMS IPO Review and Analysis

Computer Age Management Services Ltd. also known as CAMS Ltd. is a financial infrastructure provider. It is India's largest registrar and transfer agent (RTA) of mutual funds. The CAMS IPO is one of the most awaited IPO on Dalal Street as the company has a strong market share in a fast growing industry. We will also discuss the CAMS IPO grey market premium when we have data on the same.

CAMS IPO Details

The CAMS IPO is expected to be of Rs 2,000 Crores in size and NSE is looking to sell around 12.5% of its stake in the company. CAMS is promoted by Great Terrain Investments Ltd. We will update this section as more details of the IPO come out.

CAMS Business

CAMS provides business services such as dividend processing, empanelment of intermediaries, report generation, settlement and reconciliation, compliance services and KYC registration. At the end of 2019, CAMS Ltd. had a ~ 69% market share of the mutual fund RTA market. In 2015, CAMS had a share of 61% versus 31% that Karvy had. The second player Karvy had only a 14% market share. The recent news of Sundaram and Karvy merger doesn't impact CAMS much. The major clients of CAMS are: HDFC AMC, ICICI Prudential mutual fund, SBI mutual fund and ABSL mutual fund. CAMS derives nearly 80% of its revenues from transaction agency services. The average term of CAMS relationship with its client is ~ 18 years which shows the stickiness of the business relation.

CAMS has a growing presence in the insurance repository market, which is a small market with a huge growth potential.

CAMS Financials

In 2017, CAMS had a revenue of Rs 584.8 Crores which increased to Rs 736.3 Crores by the end of FY19. Because of it's asset-light model, CAMS enjoys high return ratios. The FY19 PAT stood at Rs 130.8 Crores indicating a PAT margin of 17.76%. However, the PAT margin was higher in FY17 at ~ 21.23%.

CAMS does nearly ~ 3x the business Karvy does on a per branch AUM basis with just 22% more branches than Karvy.

CAMS IPO subscribe or not?

What makes the CAMS IPO attractive is the business strength that the company enjoys:
  • Asset-light model - This makes it easy for CAMS to scale up its business without much CAPEX to meet the demands of the growing asset management industry
  • Lion's market share - CAMS enjoys nearly a ~ 69% market share of the mutual fund RTA industry. The second player is at a distant 14% market share
  • Growth industry - The asset management industry, a part of the larger financial services industry, has a long foreseeable growth runway. As the number of folios and people who invest grows, CAMS will get more business. The AUM of the mutual fund industry is expected to grow at ~ 15% to 17% p.a. for atleast the next 5 years.
However, CAMS has a low bargaining power with the asset management companies. Despite being a single supplier to most of the major mutual fund companies, CAMS doesn't have the headroom to increase it's pricing every year. SEBI's capping of the total expense ratio has added to the pricing pressure for CAMS. Also, in the long run, the mutual fund companies can always collude and create their own RTA (like Franklin and Sundram have) which can erode CAMS' market.

CAMS IPO Valuation

The CAMS IPO price is Rs 1,250 per share. The IPO opens for subscription on September 21, 2020. The estimated PE ratio at which CAMS is going to issue shares is around 35x it's FY20 earnings.
We look forward to the CAMS IPO and the final verdict will rest on the valuation at which the IPO is issued on the stock exchange. We will update this blog for CAMS IPO Date, CAMS IPO Analysis, CAMS IPO grey market premium, etc. when the company files the details with the regulators.

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