An old fintech learns new tricks: the CAMS story

Brokerage firm Geojit Financial Services had then noted, “Given that there is no listed peer to compare, and based on Stable Financials, we assign a membership rating on this IPO.”

The IPO was subscribed 47 times.

Many of the metrics previously reported are still relevant, although CAMS may soon be included as a listed peer by KFin Technologies (KFintech). The company formerly known as Karvy Fintech awaits SEBI approval 2,400 crore IPO.

But that’s not a concern for some analysts. They see an increased concentration risk for CAMS.

In investor calls over the past few years, most analysts briefed management on its non-mutual-fund revenue. 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 revenue from the RTA segment. An RTA takes care of all the back-end processes for a mutual fund company from on-boarding customers to storing their data to facilitate transactions.

More specifically, the revenue break-up came on the bid of Prayesh Jain, principal analyst at Motilal Oswal Financial Services, in the previous investor call. Other analysts also wanted the company to look at its future bright stars, their revenue potential, and how quickly they could contribute to the pie.

But here’s the thing: CAMS’s Average Asset Under Management (AUM) has reached an all-time high 27.1 trillion, according to its latest earnings report. So why is CAMS being forced to diversify? easy. It knows the clock is ticking.

Launched by V. Shankar in 1988 as a software development firm, CAMS beat early competition to establish itself as the country’s largest RTA for fund houses. After the privatization of the sector two decades ago, the company was rapidly entering the insurance services business. Its repository arm, CAMSRep, started with electronic insurance policies in 2008, and the KYC registration business followed the norms specified by market regulator SEBI in 2011. It is a profitable fintech, which is still a rarity in today’s world.

CAMS has been in business for a long time knowing that to stay ahead, one must stay smart and spread out. That is why, it is treading on new ground by consolidating existing businesses as portfolio management services/alternative investment funds, payments business and an account aggregator.

first-mover edge

The mutual fund RTA market was not always a two-horse race. Initially, Datamatics Business Solutions, Citibank, Deutsche Bank and others received RTA licenses at the same time as CAMS received but failed to prosper. The reasons were high entry barriers which included complex technology skills, huge investments, high compliance requirements and extensive branch network.

In the case of CAMS, HDFC Group’s early mover gains and initial investment helped it grow rapidly. “The technology-driven, solutions-oriented and off-the-ground approach has made the firm what it is today,” said one analyst who did not wish to be identified.

As of July 2020, there were four RTAs – CAMS, Cfintech, Sundaram BNP Paribas Fund Services and Franklin Templeton Asset Management (India) Pvt Ltd. Sundaram BNP Paribas sold its RTA business to Kefintech in 2019, while Franklin Templeton merged. Same was the case with CAMS last year. “RTA has been a well-divided market. It has consolidated over the past 30 years as many people cannot keep up with the changing regulations and the need for huge investments,” says Kumar of Cams. If CAMS is a market leader in terms of average AUM, its peer Cfintech is not far behind. , represents 60% of the market in terms of number of customers. It serves 25 out of 40 AMC customers.

revenue linearity

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

The core business for CAMS is significant earnings, but there’s a catch- more business doesn’t mean more revenue. Simply because as his AUM increases, the commission he gets from the fund house goes down. The management, in its latest investor call, informed that they have renewed contracts with all major fund houses for the next two-three years, but have cut prices for some.

“Mutual fund houses pay less every year as the pricing mechanism follows the TER structure of mutual fund schemes, which gets reduced as the AUM increases. Hence, we offer more and charge less with each passing year,” says Anuj Kumar, managing director and chief executive officer, CAMS.

TER, or Total Expense Ratio, is the fee that a mutual fund company charges investors for managing the MF scheme. SEBI has mandated fund houses to reduce the TER when the AUM under a scheme crosses the threshold defined by SEBI. While this is positive for investors in mutual funds, it is not the case for asset management companies and RTAs like CAMS, which earn progressively less every year despite the AUM kitty rising.

Still, the company’s revenue from mutual funds is strong, with brokerage firm Motilal Oswal expecting it to grow at a compound annual rate of 13%. 1,190 crores till FY25, up from present 912 crores. Nevertheless, taking into account the concentration risk, CAMS is paving a way towards other revenue sources.

new avenues

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

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

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

Motilal Oswal expects CAMS revenue from the AIF/PMS segment to grow faster than the MF space. This is because PMS/AIFs are registering faster AUM growth than Mutual Funds.

Also, there is no revenue linearity here. PMS/AIF customers are willing to pay premium to get better customer experience, whereas MF industry where TER is regulated.

Account aggregation is another area that is set to achieve success like UPI in the lending and money management realms. 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.

The company’s account aggregator platform, Camsfinserv, has received a license that could help it play a key role in data sharing between financial services firms. It currently ranks third in terms of volume (with OneMoney at the top). It has already gone live with top banks like HDFC Bank, Axis Bank and ICICI Bank lining up fast. Kumar says, “The CAMSFinserv mobile app has been downloaded over 12,000 times and is the most downloaded AA app.”

While they say it is too early to estimate revenue for this segment, analysts at Motilal Oswal expect the money to flow out from this fiscal. Given its strong technical strength and expertise in handling large databases, the brokerage places CAMS in the top 5 bracket in account aggregation.

follow a simple policy

The company is also betting big on insurance. As of now, the penetration of insurance in India is definitely less 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 bigger shot in the arm for CAMSREP, the company’s repository subsidiary. If there is a mandate to convert old policies into e-policies, the floodgates are sure to open for revenue generation.

There are two areas where rival Kefintech has an advantage – in the central recordkeeping agency business and in global expansion. Central recordkeeping agencies have been 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.

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

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

Rival KFintech is dominant in 13 countries. According to the draft of its red herring prospectus, cfintech generates 12-15% of its revenue from outside India, underlining why the opportunities overseas are worth a try.

Similar to the way Fintuple grew it, more such more sensible acquisitions in different segments are the way forward for CAMS, says one analyst who doesn’t want recognition. He says a global push through an acquisition and a plunge into unexplored sectors could completely change the trajectory of CAMS.

The company is taking all the right steps so far. It has reinvented itself to emerge as a true fintech – and a profitable one at that – while older fintech firms are struggling to break even. It stands to achieve more with the increasing digitization 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 stores and account aggregator business to generate revenue from FY24.