With CAMS IPO, investors to get a unique play on India’s MF industry

Computer Age Management Services Ltd (CAMS) is the first registrar and transfer agent for mutual funds to go public. It is also the market leader in the segment. It has a market share of around 70% in the mutual fund segment, based on average assets under management (AUM) for which the company’s services are used.

Besides, with nine of the 15 largest mutual fund houses as its clients, the diversification adds a bit of comfort. As such, it gives investors a unique play on the mutual fund industry.

While there are already a couple of asset management companies that are listed, their fortunes have varied for a number of reasons. CAMS’ large market share means that its fortunes are more closely aligned with the general trajectory of the industry.

Effectively, its business prospects largely depend on mutual fund inflows. CAMS charges a fee, which is higher for equity funds than other fund categories, for its services to fund houses.

Of late, the covid-19-struck economy has led to equity AUMs dipping on the market’s fall, as well as due to redemptions.

CAMS also depends on the fees mutual fund houses charge their investors, so any change in fee structure could also impact its business.

In the June quarter, CAMS’ revenue from operations fell about 15% year-on-year (y-o-y). Its operating profit also slumped. Earnings before interest, tax, depreciation and amortization contracted 27% year-on-year in Q1FY21.

This was because of a cut in fees, and investors should bear this in mind.

“It is possible that there could be some headwinds to mutual funds; if the mutual fund industry doesn’t do well, CAMS won’t do well. Due to covid-19, this year may not be all that good. But it’s a simple business that throws up a lot of cash. As long as India’s financialization story continues, this business will do well in the long run,” said Nitin Rao, founder of alphaideas.in, an investment blog.

Being in the services sector, CAMS does not have huge capital expenditure, barring maintenance on IT and other infrastructure. As a result, cash flows are relatively high. In financial year 2019-20, free cash flow as a percentage of revenue stood at 25%.

At the offer price, the stock’s valuations may appear a bit stiff at about 35 times FY20 earnings. But given the current frenzy for initial public offerings (IPOs), the issue is expected to sail through.

The two IPOs that opened recently for the public last week saw large amounts of money locked in IPO applications, and some of that could be rolled over to the CAMS IPO as well. Both issues was listed at a premium of over 100%.

“These are rah-rah days in the IPO market,” said Rao. “Due to the demand, investors may see that listing pop with the CAMS issue as well.”