CAMS act as a Registrar and Transfer Agent (RTA) for mutual fund houses in India.
What is RTA?
Registrar or transfer agents are the trusts or institutions that register and maintain detailed records of the transactions of investors for the convenience of mutual fund houses.
Investors in mutual funds do a number of transactions on any working day. They may buy, sell or switch units or even request their bank to change their residential address or e-mail. Each such request is a transaction by itself. RTA helps mutual fund houses in maintaining all these transactions.
Advantage of RTA to MF house
Mutual fund houses appoints RTA to maintain records all the transactions as:
- It is not their core operation (Their business is to invest money received from investors)
- They may not have necessary expertise to record and maintain such transactions (IT infrastructure, Risk management skills etc.)
Purpose of IPO
NSE is holding around 37% stake in the company. They want to sell shares of the company. The said transaction is called Offer for Sale.
Investors should keep in mind that company will not receive any money from IPO. It will be transaction between NSE and Investors.
1. Revenue Stream
RTA charges MF house for providing record maintenance service. It charges fees as a percentage of AUM of MF (AUM – Asset under Management i.e. total funds that a mutual fund is managing).
As can be seen from above, RTA is not able to keep pricing power with MF house. So RTA has to focus on volume (higher AUM amount).
As can be seen from below profitability ratios, CAMS is able to maintain its profitability which is good sign.
Revenue Growth is dependent on growth in asset under management of MF. If we compare Revenue Growth Vs AUM growth, revenue growth is lesser by 3 to 5% than AUM growth. For. E.g. AUM grows by 18 to 20% for next 10 years, then revenue growth will be between 13% -15%.
2. Cost Structure
As can be seen below, employee expenses forms 35 to 40% of total revenue.
3. Profitability Ratios
As can be seen from below chart, CAMS is having strong profitability numbers.
4. Competition Analysis
a. No of Competitors
b. Market Share
CAMS is able to grow its market share from its competitors. It shows management capability and leadership position enjoyed by the CAMS
c. Financial Ratios
CAMS is having better profitability as compared to its competitors. CAMS is able to acquire market share without compromising its profitability which is good sign.
5. Competitive Advantage (Moat)
Understanding competitive advantage of a company helps investor understand longevity and sustainability of growth and profitability of the company.
Usually one MF appoints one RTA. As can be seen from revenue charging model, RTAs do not have pricing power with MF house. But there is another source of competitive advantage which will ensure that MF will stay with their respective RTA. That competitive advantage is
1. High Switching Cost – MF may not be willing to take up the risk of transferring customer details with other RTA
2. Long term relationship – Long term partnership with clients implies that client is happy with services provided by the company.
3. Low cost as a % of revenue – Service charges for a very small % of MF’s revenue. Thus, MFs don’t have to bother much about the service charge.
As can be seen from competitor’s data, no new competitor has emerged in last 10 to 15 years
6. Management Quality
It is professionally managed company.
# Current blended revenue to AUM is 0.035%. As RTA do not enjoys pricing power, this charge will come down as AUM increase
$ Assuming company maintains higher ROE of over 25% and revenue growth of 8 to 10%
*Assuming no increase in market share (i.e. 70% market share after 10 years)
As can be seen investor can expect decent returns over 10 years by investing in the company at IPO price. We have taken few assumptions like profit margin & market share on higher side to demonstrate that even if the company is able to maintain high level of profitability going forward, returns from the stock will be decent.
To simplify the valuation, I have not used DCF valuation model.
If investor uses reverse DCF model to understand earnings growth implied in the stock price, earnings growth is coming to 24% which is quite high considering growth of AUM in the future
Whether to Invest or Not?
It is a tricky question under current market environment. In the short run, stock prices are driven by momentum or human emotions or fads.
Warren Buffet had said about IPO’s,
“You don’t have to really worry about what’s really going on in IPOs. People win lotteries every day…”
“If they want to do mathematically unsound things and one person gets lucky… it’s nothing to worry about,” Buffett said. “You don’t want to get into a stupid game just because it’s available”
Looking at higher valuation, investors should stay away from CAMS IPO. This is a classic case of “Good Company but not Good Stock”. Though CAMS is very profitable company, buying company at wrong price will not yield superior returns to the investors in long run.