An old fintech learns new tricks

“Given there are no listed peers to compare and based on stable financials, we assign a subscriber rating to this IPO,” brokerage firm Geojit Financial Services said at the time.

The IPO was subscribed for 47 times.

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

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

In investor calls over the past couple of years, most analysts have grilled management about the income from other funds. In the July-September quarter, the 34-year-old company gave an income breakdown of its businesses that are not mutual funds. CAMS earns 90% of its revenue from the RTA segment. An RTA takes care of all back-end processes for a mutual fund company from onboarding clients, storing their data to facilitate transactions.

More specifically, the earnings break came after bids from Prayesh Jain, principal analyst at Motilal Oswal Financial Services, in the previous investor call. Other analysts also wanted the company to explain its future shining stars, their revenue potential and how early they can contribute to the pie.

But here’s the thing: average assets under management (AUM) for CAMS have hit an all-time high ₹27.1 trillion, according to the latest earnings report. So why is CAMS being forced 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 quickly out of the insurance business after the privatization of the sector over two decades ago. Its custodian arm, CAMSRep, took off with electronic insurance in 2008, and its KYC registration business followed when market regulator Sebi specified norms in 2011. It’s a profitable fintech, still a rarity in today’s world.

CAMS has been in the industry long enough to know that to stay ahead, you have to be smart and spread out. That is why it is breaking new ground in portfolio management services/alternative investment funds, payment operations and as an account aggregator, while at the same time strengthening existing businesses.

First-mover edge

The equity fund RTA market was not always a two-horse race. Initially, Datamatics Business Solutions, Citibank, Deutsche Bank and others received RTA licenses around the same time as CAMS, but failed to flourish. The reasons were high entry barriers involving intricate technological skills, large investments, high compliance requirements and extensive branch networks.

In the case of CAMS, early-mover advantage and initial investment from HDFC Group helped it scale faster. “The technology-driven, solutions-oriented and down-to-earth approach has made the firm what it is today,” says an analyst who did not want to be identified.

There used to be four RTAs as of 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-divided market. It has consolidated over the last 30 years because not many could keep up with the changing regulations and the need for large investments,” says Kumar of CAMS. If CAMS is the market leader in terms of average AUM, its peer KFintech is not far behind ., representing 60% of the market in terms of number of customers, serving 25 out of 40 AMC customers.

Income linearity

CAMS is a major player in terms of 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 income outside of MF when the core business is strong? It all boils down to the conundrum of income linearity.

The core business brings significant income to CAMS, but there is a catch – more business does not mean more income. Simply because the commission it earns from the fund houses falls as its AUM grows. The management informed in their latest investor call that they have renewed contracts with all but one major fund house for the next two to three years, but price cuts have occurred for some.

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

TER, or total cost 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 AUM under a scheme crosses Sebi-defined limits. While this is positive for mutual fund investors, it is not so for asset management companies and RTAs like CAMS who earn progressively less every year even as the AUM kitty grows.

Nonetheless, the company’s mutual fund revenue is strong and brokerage firm Motilal Oswal expects it to grow at a compound annual rate of 13%. ₹1,190 crore by FY25, up from today ₹NOK 912 million. Nevertheless, considering the concentration risk, CAMS steers a path towards other sources of income.

New roads

First up is RTA’s business of 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 authorize the fund manager to invest their funds in the stock market, unlike retail funds. AIFs invest in special investment instruments beyond stocks and bonds such as start-ups, angel investments, 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 the market leader in this segment, and has over 50% market share. Revenues from this segment grew by 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, registering five clients. To increase its digital presence, it acquired a majority stake in Fintuple Technologies, a new-age start-up that offers 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/AIFs register faster AUM growth compared to mutual funds.

Also, there is no income linearity here. PMS/AIF clients are willing to pay a premium to get a better customer experience compared to the MF industry where TER is regulated.

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

CamsFinserv, the company’s account aggregator platform, has picked up a license that could help it play a key role in data sharing between financial services firms. It is currently ranked third in terms of volume (with Onemoney on top). It has already gone live with top banks like HDFC Bank, Axis Bank and ICICI Bank and is rapidly adding more. “The 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 technological muscle and expertise in handling large databases, the brokerage sees CAMS in the top 5 group in account aggregation.

Take it easy politics

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 dematerialisation of insurance policies – which involves converting physical policies into digital documents – and KYC requirements is likely to be a big hit for the company’s records subsidiary, CAMSRep. If there is a mandate to convert legacy policies into e-policies, it will surely open floodgates for revenue generation.

There are two areas where rival KFintech has an advantage—in the central record-keeping agency business and in global expansion. Central record keeping agencies are authorized by the Norwegian Pensions Authority to offer services such as customer registration, record keeping, account maintenance and customer interaction through the web, mobile app and customer centre.

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

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

Rival KFintech is prominent in 13 countries. Going by the draft red herring prospectus, KFintech has generated 12-15% of its revenue outside India, underscoring why opportunities abroad are worth pursuing.

Similar to the way Fintuple assembled it, more such savvy acquisitions in different segments are the way forward for CAMS, says an analyst who did not want to be identified. A global push and plunge into uncharted territories, through an acquisition, could completely change the trajectory of CAMS, he claims.

The company has so far taken all the right steps. It has reinvented itself to emerge as a true fintech – and a profitable one at that – while even legacy fintech firms are struggling to break even. It will also gain more with the increasing digitization of the economy. The question is, will the diversification play work?

We may know the answer in a year’s time – CAMS expects the insurance archive and account aggregator business to generate revenue from FY24.