We would like to discuss a stock from a long term investing perspective. We believe that the simpler a story is the better it is. So let us explain the company and its business model. It is just an attempt to spread our thought process and should not be construed as a recommendation to buy or sell. Every individual is expected to their own judgement, however we are open to help them in making that judgement.
It is an IT platform
The company is an IT platform which means that the costs are more or less fixed. The increase in cost is not in line with the increase in revenues. It has, what we call operating leverage; i.e. with increase in revenues, its margins should improve.
Who are the customers?
Mutual Fund industry of India. They provide their services to the mutual fund industry of the India. Ever wondered when you buy a mutual fund in India, who process the transactions, who has the record of all your fund holdings for easy viewing, who creates the monthly statement for a mutual fund company about your holding that you receive? It is done by CAMS.
Whom did you buy Mutual fund from? A bank or broker? Who helps the mutual fund calculate and settle the commissions that these intermediaries should be getting?
Who provides Mutual fund companies with insights on market trends and what kind of funds to launch or promote? How NFO gets managed at the back end?
All these services are provided by CAMS and many more such. These are all platform based and recurring in nature.
Market Structure
CAMS has almost 70% market share in the Mutual fund industry. Another 30% is serviced by Kfin Tech. There is some licensing requirements which may not be that difficult to get but to garner the scale and get clients like HDFC Mutual Fund, ICICI Pru MF, SBI MF etc onboard is not an easy task. Hence I think the market shares with remain more of less static and any movement will be more of a function of a particular MF gaining market share. There could be some small players but only a large player of this magnitude can disrupt the market, which seems unlikely as of now. By the way Kfin Tech is also coming for an IPO soon. One can get more information by trying to access Kfin Tech DRHP on SEBI website when it is being filed.
Market Growth
Since demonetization we have seen a consistent investment in equity markets. People are now looking at it as an investible asset class besides real estate and gold. A quick analysis on NIFTY/Sensex suggest at that it is not difficult to assume a 8%-10% return in Indian market over a 5 to 10years. This can be further supported by IPO hence more opportunity to invest, NFO, and SIP. Thus, it may be possible to have a 15% annual growth in MF AUM over 5-10years. On a macro basis, we are still below 20% of our asset allocation to this segment.
Company revenues and business model
Company get 90% of revenues from MF industry. They charge a few basis points of AUM as fee to manage and provide services like the ones mentioned above. Hence as AUM growth, fee will grow. Everyone understands that it is a platform. Hence the company shares part of that benefit with clients. As AUM grows, fee charged in terms of BPS (100BPS = 1%) comes down in a structured manner and hence growth will be lower than AUM growth, but still a double digit growth. Since it has operating leverage, profit growth should be higher than the revenue growth as margins should improve. The change in fee is a two way road. When AUM goes down, fee move up. Hence the company is secured to that extent.
Growth drivers
Besides the growth in the AUM of Mutual fund Industry, the company has some additional levers to play. These account for about 10% revenues as of now and will remain small but after a critical mass has the potential to explode.
AIF/PMS: There are many AIF and PMS which has been launched recently. SEBI requires them to be regulated. I am sure some of your friends might also be investing with a friend of theirs as a PMS service. These are small boutiques with low capital and cannot afford a large team to manage compliance, regulatory filings etc. CAMS is entering into this segment and trying to capture this market. It is not expected to be substantially more profitable but should be looked as merely a growth driver.
Insurance repository: Most of you might have an insurance in India. As per the regulation one can hold all their insurance policies in a repository. These are being provided by CAMS, CDSL, NSDL etc. As of now it is voluntary but it may anytime become compulsory. It is good from a perspective that companies can know how much an individual is insured for. Is he over or under insuring him. This can be another fee generator. As of now they have about 500k policies in their repository.
NPS Aggregator: The company is also an aggregator for the National Pension scheme launched by the government.
There are some more revenue streams but smaller.
Story in Charts:
Please find below the performance of the company so far in charts. It is give you a sense of what they have done so far.
What we think:
Sales: We are assuming about 18% revenue CAGR for the company between FY21 and FY24. Now this is more than what I have mentioned above of 15%. This is because the company has already shown a strong growth in 9m of this fiscal year. Between FY22 and FY24, we are actually assuming a 12% revenue CAGR. This is driven by AUM growth and fee reduction. There are buffers of non MF business doing better.
OPM: We are assuming a flat or marginally declining Operating profit margin. This is against our hypothesis that its margin should improve. We are assuming that the company will possibly spend some money towards growing other revenue streams. Between FY21 and FY22, there is almost a 300bps improvement in OPM. We expect that company will maintain that and any extra will be deployed to grow other businesses.
Profit: The expectation is about 21% profit CAGR between FY21 and FY24. However one can say that FY22 is almost over and has been a significant growth driver with high revenue growth and margin expansion. Between FY22 and FY24, we are assuming a 15% profit CAGR.
Other parameters: The Company will continue to make more than 30% RoE. It has mentioned about 65% dividend payout in their annual report but even assuming 50% we get about 1.5% dividend yield. They have more than INR300 of cash per share on balance sheet and this is expected to grow unless they increase dividend which is a very likely scenario.
Governance: It was initially promoted by HDFC Bank and now owned by some large PE players. The CEO has been there for long. There has not been any issues with the company so far. They are also not involved with anything related to environment so they are expected to be ESG compliant.
Valuation: Based on our expectation, we expect the company to show an EPS of INR75 in FY24. Since they have a strong revenue visibility, we feel comfortable valuing the stock at 35x which gives us a target price of INR2625. It is about 10% upside, plus 1.5% dividend yield. I think it is an interesting company to look at. There is no large upside in short term but It is a compounding story and one can expect about 10-15% capital gain on an annual basis plus the dividend.
One more thing, just wait for the Kfin Tech IPO. This may give an alternate way to value the company and also know how profitable the competitor is.
Sorry for the long but simple analysis on the stock. Please feel free to post your questions/feedback if any.