CAMS - Indirect Bet on Financialization?

Market did not react that well to results initially. But today stock price has given breakout, with 14% gains since last 5 days.
Is there any news?

Breakout

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So what would be the target for this stock basis the breakout on chart?

@Anubhav_Garg maybe near 3750 3800

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  • They have done a very large transformation in one of the top private sector banks, We will see some announcements in December
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Here, I try to dissect the latest conference call by separating it into 4 parts.

  1. Improve Business Understanding
  2. Forward-Looking Statements by the Management
  3. Possible Positives
  4. Possible Negatives

This is not a recommendation to buy/sell. Purely for educational and informative purposes.

1. Improving Business Understanding

  • E-Insurance is a new venue for the company. Earlier, eIA was relevant for the life insurance industry, but now it is seeing renewed interest from non-life insurers also. The company has tied up with the top 5 of the 50 insurers in India.

  • CAMS KRA is the fastest growing segment for the company which provides e-KYC solutions to brokerages and MFs. It has seen 100% growth in the last year (from a low base).

  • The margin for the MF business is the highest at around 44.5%. In the future, KRA and AIF businesses should also approach these levels of margins. Payments Business is currently at 30% but it can reach 40% with a limited amount of scaling.

  • There is a huge Total Addressable Market for the Account Aggregator Business. Services include - Verification, Digital Lending, KYC, NFO Onboarding, 3rd Party Verification of bank accounts.

  • It is the paper transactions which are generating revenue for the company. NOT Digital Transactions.

  • The Out-of-Pocket Expenses borne by the company while servicing clients are added to compensated for by the client himself and hence added to the Revenue of the Company.

2. Forward-Looking Statements by the Management

  • ~20% Revenue Growth in the next 12-18 months. MF Business should be slightly less than 20% and non-MF Business should be slightly more than 20%.

  • Margins are expected to hold at 44% or slightly improve from here. Payments and Insurance business can be at 40% margins in the next 3-4 quarters.

  • Operating Expenses (with Out-of-Pocket [OP] Expenses) / Revenue with OP Expenses) = ~12%

  • Operating Expenses less OP Expenses / Revenue less OP Expenses = ~7.5%

  • Fixed Expenses have peaked and will not see further increases (apart from inflation-driven). The only increase expected will be in salary expenses (~34% of Revenue). There is no big lumpy expense in the immediate future.

  • A very large transformation has been done for a large private sector bank using Fintuple. The announcement is expected in December.

3. Possible Positives

  • All Public Sector banks have come on board the Account Aggregator Platform. Huge TAM due to Fintechs.

  • Net Monthly SIP Collection at the CAMS level has grown 2.5x to 10,000 Croresin in the last 3 years.

  • There is no price resetting event in the next 4-5 quarters and the price depletion is now over.

  • The company is expected to benefit from Operating Leverage with a greater portion of incremental revenue flowing to Net Profit.

4. Possible Negatives

  • Digital Transactions such as SIPs, Triggers, etc do not create any incremental revenue for the company and there is no incremental cost either. In the future addition may have to be done in terms of server capacity (not in the immediate future).

  • There has been a huge price depletion in the Account Aggregator business to the extent of 80% i.e. company can charge only 2rs where it used to charge 10rs.

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CAMS among top 10 Mid-cap IT stocks with High FII holdings

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CNBC reporting stake sale by Great Terrain:

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Rs 250 SIP in MF could be a game changer for MF industry and CAMS/ Kfin?

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White Oak Capital Management Consultants LLP Acquire almost 6% stake in CAMS

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Thank you everyone for sharing your thoughts. Very insightful discussion.
I had questions regarding the current board structure and incentive for current management to perform. If we look at the current shareholding pattern, HDFC Bank and LIC are the biggest shareholders followed by Seafarer Overseas Growth & Income Fund and Ashish Parthasarthy.

Following are concerns:

  1. No entity has any significant share to be sufficiently incentivized and have skin in the game. Am I correct in my inference or there’s some other agreements/details that I am missing?

  2. Previously, Warburg was the majority shareholder (around 30%). Unlike Warburg which operates as active investor, HDFC and LIC seems like passive investors. Does this mean that the board oversight over management, business plans, and objective will get impacted?

It’ll be great to get some perspectives on these.
Thank you.

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The results are quite good, and I am surprised at the muted market response to the results. Gross margins are the highest ever, operating margins and PAT margins have improved further and are now close to 45 % & 30 % respectively. Non-MF revenues have shown strong growth, and the management says 4 of the 6 businesses have grown by more than 20 %.

CAMS KRA revenues more than doubled, and it added 25 new financial institutions and FinTechs as customers during the quarter. The PayTM issue will provide additional tailwind to this business, increasing the outsourcing of KYC requirements by all entities in the financial ecosystem to reliable external partners like CAMS.

The addition of multi-currency capabilities to fund accounting is another big positive, as it increases of the TAM manifold. Technically, this has a market not only in the GIFT City zone but CAMS can offer fund management services even to entities abroad like in global financial hubs, who are willing to outsource their back office to India.

As non-MF businesses achieve scale, margins should improve further as costs will not rise in the same proportion as revenues. Meanwhile in the MF space, the SIP mania shows no signs of slowing down.

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Thanks Chandragupta for sharing your insights.

I believe that the stock has limited but steady growth potential of 10%+ compounding returns for a very long time, which in my opinion is a very good outcome.
Following are my reasons:

  1. Slower PAT growth: 3 years (FY20-23) has seen PAT growth of 19%, which might be difficult to replicate going forward as the levers that helped have weakened - (a) Rapid growth in new retail investors post pandemic will taper from its peak, (b) rally in asset prices due to lower interest rates will be difficult to replicate in higher interest rate environment, and (c) non-MF business which is growing faster will put downward pressure on margins until they hit the required scale to become margin accretive.

  2. Case for PE de-rating: Due to slower PAT growth, we may see PE multiple de-rate from current LTM 45x.

  3. Secular growth drivers: I expect 10% minimum return basis following back of the envelop calculation - over the long term (Mar 2010-Mar 2019), MF AUM has grown at 16% CAGR and NIFTY delivered 9% CAGR. This implies that the volume growth has been around 7% (16%-9%). This in a way reflects new investors coming in, higher investment per investor, etc. Going forward, the growth will be slower given a higher base, hence we can assume a 1% reduction in this secular growth, implying 6%. And the NIFTY CAGR can also be assumed to be 1% lower over a long term, thus 8% CAGR. Thus, we can expect MF AUM to grow at 14% CAGR. Management highlighted that typically revenue grows at 4-5% lower than MF AUM growth due to tiered pricing structure (lower pricing for higher AUM). Thus we can expect revenue growth to be around 9-10% growth. On this we can expect some additional growth by non-MF business which is growing at 20%+, thus overall revenue growth can be higher than 10%. On this, we can expect operating leverage (although weaker than before). Hence, EBITDA and PAT can grow at 10%+ too. Thus, we have sufficient margin of safety to absorb any PE derating.

On top of these, as Chandragupta highlighted, the company can increase its TAM by serving foreign currency funds. Also, earnings predictability is immensely high in this business. And with good business models and good management, neither investors nor management can fully foresee all the amazing opportunities that might open up in the long term because we don’t have the crystal ball to predict the future :slight_smile:

Hence, I find totally worth it to hold on to wonderful businesses and ride both the strong and not so strong periods.

Disclosure: slowly building position in the stock

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Computer Age Management Services Limited Q3 FY ‘24 Earnings Conference Call February 07, 2024

  • Unifi is a very prominent PMS provider based in Chennai and has aspirations to operate a mutual fund. They were one of those 10, or 11 entities that had applied for a license in the last about 18 months

  • Mutual fund assets stand at about just short of INR34 trillion, INR33.95 trillion

  • Our overall market share stands at 68.2%

  • SIPs grew 29% year-on-year. The industry grew by 19%

  • Helios Mutual Fund and Zerodha, both went live during the quarter

  • Non-mutual fund businesses:
    This has grown about 3.3%, so 330 basis points. The share of non-MF is at the rate of 13% now

  • CAMS KRA:
    Where you’ve seen that we’ve declared over 100% revenue growth at 129%. From an entity, which used to largely cater to CAMS service mutual funds, we’ve gone beyond CAMS service mutual funds across all of them. But now that alone, from a fintech brokerage, and wealth advisory perspective, all these entities need KYC and KRA services, and CAMS KRA has brought in a large number of customers in the last 12 months to both broaden our clientele and scale revenue

  • CAMSRep:
    Has gained entry, and you know that the non-life segment also now has KYC as a mandatory step before you purchase insurance. So we have won the mandate for Oriental Insurance to do KYC for them, digital KYC. This is a joint go-to-market and a joint offering between CAMSRep and Think360

  • CAMSPay:
    We have won an exclusive partner status from LIC to execute customer account authentication. This is largely third-party verification of accounts of people who wanted to buy insurance and are stepping in digitally.

  • CAMS, the overall revenue book grew just short of 19%, at 18.9%. Within the MF, revenue grew 14.6% year-on-year. Non-MF grew a staggering 59% year-on-year

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Tweet From Analyst Mohalla

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