An old fintech learns new tricks: The CAMS story

“Given that there is no listed peer to compare, and based on stable financials, we assign a subscribe rating on this IPO," brokerage firm Geojit Financial Services had noted back then.

The IPO was subscribed 47 times.

Many of the metrics pointed out back then still remain relevant although CAMS could soon be joined by KFin Technologies (KFintech) as a listed peer. Earlier, known as Karvy Fintech, the company is awaiting Sebi’s nod for a ₹2,400 crore IPO.

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But this is not what’s worrying some analysts. They see a growing concentration risk for CAMS.

In investor calls over the last couple of years, most analysts grilled the management about its non-mutual-fund revenues. In the July-September quarter, the 34-year-old company gave a revenue break-up of its non-mutual fund businesses. CAMS earns 90% of its revenues from the RTA segment. An RTA takes care of all back-end processes for a mutual fund company from on-boarding customers, storing their data to facilitating transactions.

More specifically, the revenue break-up came at the bidding of Prayesh Jain, lead analyst at Motilal Oswal Financial Services, in the previous investor call. Other analysts too wanted the company to spell out its future bright stars, their revenue potential and how early they can contribute to the pie.

But here’s the thing: average assets under management (AUM) of CAMS have hit an all-time high at ₹27.1 trillion, as per its latest earnings report. So why is CAMS being compelled to diversify? Simple. It knows the clock is ticking.

Launched as a software development firm in 1988 by V. Shankar, CAMS beat early competition to establish itself as the country’s largest RTA for fund houses. The company was quick to enter the insurance services business after privatization of the sector over two decades ago. Its repository arm, CAMSRep, took off with electronic insurance policies in 2008, and the KYC registration business followed when market regulator Sebi-specified norms in 2011. It is a profitable fintech, still a rare thing in today’s world.

CAMS has been in the business long enough to know that to stay ahead, one must stay smart and spread out. Which is why, it is treading new ground in portfolio management services/ alternative investment funds, payments business and as an account aggregator while also strengthening existing businesses.

First-mover edge

The mutual fund RTA market wasn’t always a two-horse race. Initially, Datamatics Business Solutions, Citibank, Deutsche Bank and others received RTA licences around the same time as CAMS did but failed to prosper. The reasons were high entry barriers that involve intricate technology prowess, huge investment, high compliance requirements and extensive branch network.

In the case of CAMS, early-mover advantage and initial investment from the HDFC Group helped it scale faster. “The tech driven, solution-oriented and feet-on-the-ground approach has made the firm what it is today," says an analyst, who did not wish to be identified.

There used to be four RTAs till as late as July 2020—CAMS, KFintech, Sundaram BNP Paribas Fund Services and Franklin Templeton Asset Management (India) Pvt Ltd. Sundaram BNP Paribas sold its RTA business to KFintech in 2019, while Franklin Templeton merged the same with CAMS last year. “RTA has been a well-partitioned market. It has consolidated over the last 30 years because not many could keep up with the changing regulations and need for hefty investments," says Kumar of CAMS. If CAMS is a market leader in terms of average AUM, its peer KFintech isn’t far behind, representing 60% of the market in terms of number of clients. It serves 25 out of 40-odd AMC clients.

Revenue linearity

CAMS is a bigger player in terms of average assets under management having a market share of 69%. It services the top five AMCs and 10 of the top 15 AMCs. This brings us back to the question—why does it need more non-MF revenues when the core business is strong? It all boils down to the conundrum of revenue linearity.

The core business does have sizeable earnings for CAMS but there’s a catch— more business doesn’t mean more revenue. Simply because the commission it earns from fund houses falls as its AUM grows. The management, in its latest investor call, informed that they have renewed contracts with all but one major fund house for the next two-three years but price cuts have happened for some.

“Mutual fund houses tend to pay lower every year as the pricing mechanism moves in line with the TER structure of mutual fund schemes, which reduces as the AUM grows. So, we offer more and charge less every passing year," says Anuj Kumar, managing director and chief executive officer of CAMS.

TER, or total expense ratio, is the fee that a mutual fund company charges from investors for managing an MF scheme. Sebi has mandated fund houses to reduce TER as and when the AUM under a scheme crosses Sebi-defined limits. While this is positive for investors in mutual funds, it’s not so for asset management companies and RTAs like CAMS which earn progressively less each year even as the AUM kitty grows.

Nevertheless, the company’s revenue from mutual funds is strong, with brokerage firm Motilal Oswal expecting it to grow at a compounded annual rate of 13% hitting ₹1,190 crore by FY25, up from the current ₹912 crore. Yet, mindful of the concentration risk, CAMS is steering a path towards other revenue sources.

New paths

First off the mark is the RTA business for portfolio management services (PMS) and alternative investment funds (AIF), or in other words, mutual funds for the rich. The former are premium products where investors give power of attorney to the fund manager to invest their funds in the stock market, unlike retail mutual funds. AIFs invest in special investment instruments beyond stocks and bonds such as start-ups, angel investment, private equity, venture capital funds and hybrid funds, among others. The minimum investment in PMS is ₹50 lakh and that for AIFs is ₹1 crore.

CAMS is already a market leader in this segment, commanding over 50% market share. Revenue from this segment grew at 32% year-on-year in the September quarter. The company launched CAMS Wealthserv, a paperless digital onboarding platform for AIFs and PMS this year.

It has become the first AIF service provider in Gujarat’s GIFT City, signing up five clients. To boost its digital presence, it acquired a majority stake in Fintuple Technologies, a new age start-up offering the same services as CAMS and KFintech to AIFs and PMS.

Motilal Oswal expects CAMS’ revenues from the AIF/PMS segment to grow faster than the MF space. This is because PMS/AIF are registering faster AUM growth compared to mutual funds.

Moreover, there is no revenue linearity here. PMS/AIF clients are willing to pay a premium to gain better customer experience as against the MF industry where TER is regulated.

Account aggregation is another area set to attain UPI-like success in the lending and wealth management spaces. Account aggregators are RBI-licensed entities, which provide a platform to different stakeholders, including customers, to interact with each other digitally for data sharing and consent management.

CamsFinserv, the company’s account aggregator platform, has bagged a licence which could help it play a key role in data sharing among financial services firms. It is currently ranked third in terms of volumes (with Onemoney at the top). It has already gone live with top banks such as HDFC Bank, Axis Bank and ICICI Bank and is quickly lining up more. “CAMSFinserv mobile app has had over 12,000 downloads till date and is the most downloaded AA app," says Kumar.

While he says it is too early to make revenue projections for this segment, analysts at Motilal Oswal are optimistic that money will flow from this financial year. Given its strong tech muscle and expertise in handling large databases, the brokerage foresees CAMS in the top 5 bracket in account aggregation.

Take it easy policy

The company is betting big on insurance too. As of now, insurance penetration in India is decidedly low and so is the number of e-policies. But the push for dematerialization of insurance policies— which involves converting physical policies into digital documents—and KYC requirements, is likely to be a huge shot in the arm for the company’s repository subsidiary, CAMSRep. If there is a mandate to convert legacy policies into e-policies, it is sure to open floodgates for revenue generation.

There are two areas where rival KFintech has an advantage—in the central recordkeeping agency business and in global expansion. Central recordkeeping agencies are authorized by the pension regulator to provide services such as customer on-boarding, record keeping, account maintenance and customer interaction through web, mobile app, and call centre.

KFintech took an early lead in the central record-keeping agency business for the National Pension System (NPS), a good five years before CAMS did.

Meanwhile, CAMS has no plans to go global yet. “We have consciously not built our practice in RTA services outside India," says Kumar.

Rival KFintech is prominent in 13 countries. Going by its draft red herring prospectus, KFintech has generated 12-15 % of its revenues from outside India, underlining why opportunities abroad are worth a try.

Like the way Fintuple bulked it up, more such savvy acquisitions in different segments are the way forward for CAMS, says an analyst who didn’t want to be identified. A global push and plunge into unexplored territories, through an acquisition, can completely change the trajectory of CAMS, he asserts.

The company has so far been taking all the right steps. It has reinvented itself to emerge as a real fintech—and a profitable one at that—while even older fintech firms are struggling to break even. It also stands to gain more with the growing digitalization of the economy. The question is, will its diversification gamble work?

We may know the answer in about a year’s time—CAMS expects its insurance repository and account aggregator businesses to yield revenues from FY24.

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