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An old fintech learns new tricks: the CAMS story

“Since there is no listed peer to compare, and based on stable financial data, we assign a tender rating to this IPO,” brokerage firm Geojit Financial Services had noted at the time.

47 times were subscribed to the IPO.

Many of the stats mentioned at the time are still relevant, although CAMS may soon be joined by KFin Technologies (KFintech) as a listed peer. Previously known as Karvy Fintech, the company is waiting for Sebi’s wink for a IPO of 2,400 crore.

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

During the phone calls from investors over the past few years, most analysts have offended management about its non-mutual funds. In the July-September quarter, the 34-year-old company released a breakdown of income from its non-mutual funds. CAMS gets 90% of its revenue from the RTA segment. An RTA takes care of all the back-end processes for a mutual fund, from on-boarding clients, storing their data to facilitating transactions.

More specifically, the revenue breakup came at the behest of Prayesh Jain, chief analyst at Motilal Oswal Financial Services, in the previous conversation with investors. Other analysts also wanted the company to describe its future bright stars, their revenue potential and how early they can contribute to the pie.

But here’s the thing: CAMS’ average assets under management (AUM) hit an all-time high at 27.1 trillion, according to the latest earnings report. So why is CAMS being forced to diversify? Easy. He knows the clock is ticking.

CAMS was launched in 1988 by V. Shankar as a software development company, beating early competition to establish itself as the largest RTA for fund houses in the country. The company quickly entered insurance services after privatizing the industry more than two decades ago. The repository arm, CAMSRep, started electronic insurance policies in 2008, and the KYC registration business followed when market regulator Sebi imposed standards in 2011. It’s a profitable fintech, still a rare thing in the world today.

CAMS has been in the business long enough to know that you need to stay smart and spread out to stay ahead. Therefore, it is breaking new ground in portfolio management services/alternative investment funds, payment operations and as an account aggregator, while also strengthening existing businesses.

First mover edge

The RTA mutual fund market has not always been a two-horse race. Initially, Datamatics Business Solutions, Citibank, Deutsche Bank and others received RTA licenses around the same time as CAMS, but it failed. The reasons were high barriers to entry associated with complex technological prowess, massive investments, high compliance requirements, and an extensive branch network.

In the case of CAMS, the early mover advantage and the HDFC Group’s initial investment helped to scale faster. “Its technology-driven, solution-focused and foot-on-the-ground approach has made the company what it is today,” said one analyst, who declined to be identified.

Until July 2020, there were four RTAs: 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 sold the same with CAMS last year. “RTA is a well-partitioned market. It has been consolidated over the past 30 years because not many people were able to keep up with the changing regulations and significant investments are needed,” says CAMS’s Kumar. If CAMS is a market leader in terms of average AUM, its colleague KFintech is not far behind, that represents 60% of the market in terms of number of customers and serves 25 of the more than 40 AMC customers.

Linearity of Income

CAMS is a larger player in average assets under management with a market share of 69%. It serves 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 revenue when its core businesses are strong? It all comes down to the conundrum of revenue linearity.

The core businesses have significant revenues for CAMS, but there’s a catch: more sales don’t mean more sales. Simply because the commission it earns from fund houses decreases as the AUM grows. Management said in its latest appeal to investors that they have extended contracts with all but one of the major fund houses for the next two to three years, but price cuts have been made for some.

Mutual funds tend to pay lower each year as the pricing mechanism aligns with the TER structure of mutual funds, which decreases as AUM grows. So every year we offer more and ask for less,” said Anuj Kumar, CAMS managing director and chief executive officer.

TER, or Total Expense Ratio, is the fee a mutual fund charges investors for operating an MF plan. Sebi has mandated fund houses to lower the TER once the AUM exceeds the limits set by Sebi under a settlement. While this is positive for mutual fund investors, it is not the case for asset management firms and RTAs like CAMS, which earn less and less every year, even as the AUM cat grows.

Nevertheless, the company’s mutual fund revenues are strong, with brokerage firm Motilal Oswal expecting it to grow at a compound annual rate of 13%. 1,190 crore against FY25, higher than current 912 million dollars. However, in view of concentration risk, CAMS directs a path to other sources of income.

New paths

First, there is the RTA business for portfolio management services (PMS) and alternative investment funds (AIF), or in other words, mutual funds for the wealthy. The first are premium products where investors give power of attorney to the fund manager to invest their money in the stock market, unlike retail mutual funds. AIFs invest in specialty investment vehicles beyond stocks and bonds, including start-ups, angel investments, private equity, venture capital funds and hybrid funds. The minimum investment in PMS is 50 lakh and that’s for AIFs 1 crore.

CAMS is already the market leader in this segment, with a market share of more than 50%. Sales in this segment grew by 32% year-on-year in the September quarter. The company launched CAMS Wealthserv this year, a paperless digital onboarding platform for AIFs and PMS.

It has become the first AIF service provider in GIFT City in Gujarat and has signed up five customers. To increase 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 register faster AUM growth compared to mutual funds.

In addition, there is no linearity of income here. PMS/AIF customers are willing to pay a premium to get a better customer experience compared to the MF sector where the TER is regulated.

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

CamsFinserv, the company’s account aggregator platform, has been awarded a license that could help it play a key role in sharing data between financial services companies. It currently ranks third in terms of volumes (with Onemoney at the top). It has already gone live at top banks such as HDFC Bank, Axis Bank and ICICI Bank and is soon more in line. “CAMSFinserv mobile app has had more than 12,000 downloads to date and is the most downloaded AA app,” says Kumar.

While he says it’s too early to make revenue forecasts for this segment, Motilal Oswal analysts are optimistic money will flow this fiscal year. Given its strong technical strength and expertise in dealing with large databases, the brokerage ranks CAMS in the top 5 in account aggregation.

Take it easy policy

The company also invests heavily in insurance. As of now, insurance penetration in India is decidedly low and so is the number of e-policies. But the push for insurance policy dematerialization — converting physical policies into digital records — and KYC requirements is likely to be a huge blow to the company’s repository subsidiary, CAMSRep. If there is a mandate to convert legacy policies into e-policies, it will certainly open floodgates for monetization.

There are two areas where rival KFintech has an advantage: in the central administration office sector and in global expansion. Central administration offices are authorized by the pension regulator to provide services such as customer onboarding, record keeping, account maintenance and customer interaction via web, mobile app and call center.

KFintech took the lead in the central administration of the National Pension System (NPS) early on, more than five years before CAMS did.

Meanwhile, CAMS has no plans to go global yet. “We deliberately did not build our practice in RTA services outside of India,” says Kumar.

Rival KFintech has a prominent presence in 13 countries. Using its draft red herring prospectus, KFintech has generated 12-15% of its revenues outside of India, underlining why opportunities abroad are worth trying.

Much like the way Fintuple took it, more such smart acquisitions in various segments are the way forward for CAMS, says an analyst who declined to be identified. A global push and dive into untapped territory, through an acquisition, could completely change the trajectory of CAMS, he says.

The company has taken all the right steps so far. It has reinvented itself to emerge as a true fintech – and even a profitable one – as even older fintech companies struggle to break even. It will also gain more with the increasing digitization of the economy. The question is, will the diversification gamble work?

We may know the answer in about a year – CAMS expects its insurance deposit and account aggregator business to generate revenue from FY24.

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