CAMS – Indirect Bet on Financialization?

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. Views and opinions are personal.

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.