CAMS — earnings call

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Prepared remarks

Moderator · Conference Operator

MR. NISCHINT CHAWATHE – KOTAK SECURITIES LIMITED Computer Age Management Services May 26, 2021

Ladies and gentlemen, good day and welcome to Computer Age

Questions and answers

Moderator · Conference Operator

Thank you very much.

We will now begin the question-and-answer session.

The first question is from the line of Ravin Kurwa from ICICI Securities.

Please go ahead.

Ravin Kurwa

My question is around, how many number of branches are operational now?

Since these branches were our key strength, so in this COVID times due to frequent lockdowns in various states, how has this number panned out?

And my second question is regarding the yields.

How has the yields behaved in Q4 and FY21 on equity and non-equity AUMs?

Anuj Kumar

Let me take that.

During the COVID phase last year, there was situation where we had shut down almost each one of our offices and that was because of the countrywide lockdown and the fact that almost all states had adopted it uniformly.

This year there are situations panning out in different manner.

One is that states which have adopted a complete Computer Age Management Services May 26, 2021 lockdown in a very serious manner, in the Madhya Pradesh for example, one of those states where this started happening early, we shut down our offices.

There were incidences where the city or the state has not enforced full lockdown but we may have staff just everyone or most of the people are impacted and therefore we are forced to shut.

And then there are containment zone issues and all those things.

However, if you take the aggregate picture, we have not exceeded more than one-fourth of our offices being shut at any one time.

So, think of it as a base of about 270 offices.

At the maximum, we had about 60 of them shut and I am talking about April and May right now.

So, the impairment trend has been smaller and because there is no concept about national lockdown this was happening in states.

That is about one of your questions.

On part two, on the yields, I will give you a broad picture and I will see if Ram or Somu want to add anything.

So overall it been an onerous year and within that like I said the first 7 to 8 months were very tough, both from an operating perspective.

There were large deployments of COVID remediation as an expense that we had to do and this included everything including enabling thousands of employees to work from home, wherever there were firm lockdowns either in Bombay or in Tamil Nadu and Chennai, we would put up large masses of our people in hotel.

We had to undergo mass amount of testing, provide additional transport and there were various cost heads and all of those we incurred which obviously were to our account and there are significant appreciations amongst our clients that we are making that extra effort in this area.

So broadly the way you should think about yields is, one way to think about it is that yields held and yields held because of 2 or 3 things.

One, between the debt and the liquid box, if you take them together which was nonequity, the fraction of debt improved almost every month and every quarter during the 12-months period including in the last quarter.

So, yields of the debt and liquidity box, the debt plus liquid box obviously went up.

Equity improved share of the total assets almost quarter-by-quarter and you would have seen that it improved in 4Q over 3Q.

So, that added to the improvement and the fact that overall, Computer Age Management Services May 26, 2021 in terms of any new rate negotiations they were muted.

If I put those three reasons together, that explains what happens to the yields, but I will see if Ram has anything to add to this?

Ramcharan

Anuj, I think the major points were covered in terms of the mix as well as the fee income, this covers main points.

Ravin Kurwa

And sir, what will be our concentration mix right now, top 5 AUMs contributing to the total yield AUM which we manage?

Ramcharan

I will get back with the exact percentage, but the concentration remains same as across in the last quarter.

Most of the revenue, as in the industry is also similar, which is just concentrated over the top 15 players and revenue is also similarly concentrated for us over the top 10-15 players.

The exact number I can get back to you on.

Moderator · Conference Operator

Thank you.

The next question is from the line of Shailaja from Concept Investments.

Please go ahead.

Shailaja

My first question is, like we see increase in CAPEX, so how much are we able to add in operating method and by when?

Ramcharan

Let me just, sorry, repeat your question.

So, is your question on our CAPEX plans?

Shailaja

Right.

Ramcharan

So, just to give you a context in the last year, given the circumstances that we had in the first couple of quarters, we actually been slow on the additional CAPEX investments.

But in the later parts of the year, this accelerated.

We started investing into the technology, into the information security.

So, in the end of the year, if you look at the last two quarters the CAPEX was kind of backloaded.

So, on a given year, this year we kind of did around 25 crores of CAPEX, in the next year I think the investments will accelerate on the technology platforms as well as on the information security requirements as you know regulatory as Computer Age Management Services May 26, 2021 well as the current situation demands that we have the cutting-edge technology.

So, we expect that the CAPEX for the next year should be close to 40 crores.

Shailaja

You said it will be ready and added in operating assets?

Ramcharan

Yes.

Shailaja

My question is, is there a percentage that we keep on investing, a percentage that we keep on doing in CAPEX, a percentage of operating assets?

Ramcharan

Ours is a CAPEX light model, right?

So, it is not as if, it is a CAPEX intensive business that we run.

So, on a year-on-year basis we would assume that the CAPEX investment in normal year would be around 25 crores and these are all investments made in technology which is our software licenses, information technology tools that we need to procure and as well as the other cutting edge technology and software that we procure.

The major expense that goes into the platform if you recollect is the software development which is actually OpEx in our books which is the software programmers to actually work on code, they are actually employees offer 100% subsidiary Sterling and hence these expenses are actually in the P&L as salaries and wages.

Shailaja

So, I just wanted to get an average percentage that we always need to invest in, a percentage of asset that we always need to add on?

Ramcharan

On a given year, given the current year, you take for example, we have 700 crores of turnover, we would invest around 25-20 crores on CAPEX and a little higher in any intensive year, so that should be the range that we are doing.

Moderator · Conference Operator

Thank you.

The next question is from the line of Bharat Shah from ASK Investment Managers.

Please go ahead.

Computer Age Management Services May 26, 2021

Bharat Shah

Anuj Kumar at the beginning mentioned that two senior talents are being inducted – Chief Risk Officer and Chief Process Officer, so while that is good news, but I am surprised that this kind of positions did not exist before, because in a heavy process oriented business like yours that would have been an obvious position to always have, I would have thought?

Anuj Kumar

That is correct.

Think of the Chief Process Office as a backfill, this position existed.

It was created about 4 years back, we had an incumbent who left and then this was a vacant position for about a year.

The Chief Risk Officer provision is an upgraded position.

So obviously, there was a Risk Officer.

But the Chief Risk Officer is an upgraded position with significant capability from non-capital market financial services industry because we wanted to be sure that we are bringing on the board the benefits and the advantages of people who worked in banking and insurance beyond the capital markets just to be learning from them and imbibing the practices.

That is how Indeevar and Lal has come in.

So, this position used to be called the Risk Officer, the Risk Officer continue and then we have upgraded and created a layer of a Chief Risk Officer.

Moderator · Conference Operator

Thank you.

The next question is from the line of Prayesh Jain from Yes Securities.

Please go ahead.

Prayesh Jain

I had a couple of questions.

Firstly, there are views on the Franklin Templeton integration and possibly some point on how would it impact the profitability in H1 and for the full year of FY22?

And secondly, now that we are into, we have started tying up with for the account aggregator business with various parties now, what is the revenue potential of the business say in this year or possibly even 3 years down the road?

And lastly on the dividend payout, could you give the absolute dividend number declared for the last year and what are the payout policy for the future?.

Computer Age Management Services May 26, 2021

Anuj Kumar

So, on Franklin Templeton, we have got a verbal okay from Franklin in March of last year.

And we have signed a contract in August.

Between August to now, we have been transitioning the work and we think of it this way that we are close to being done.

We are about 4 weeks to 5 weeks away from bringing over the work and bringing over the people.

So, the transition has almost progressed in all its formats and there are then those baseline processes of submitting and sharing integrity of execution and integrity of identical execution as Franklin was doing to their committees and to their auditors etc. that is in progress.

So, all of that should get done in the next 4 to 5 weeks and therefore we are expecting, this date has got deferred a little about 8 weeks, just given the backdrop of the pandemic, work from home and those kinds of complications.

But we are expecting by end of June, this should be in.

Now, we typically do not give client-by-client financials and numbers, but I would encourage you to just delve into public information, you can see their asset size.

You know our asset size and if you add a and b, you will get the number.

We are expecting share to increment by close to couple of percentage points.

But all of that depends upon what is the value of the assets that come in at the times that they come in.

But we are advanced.

Prayesh Jain

Just on that part, my question was more with regards to the expenses that we would be incurring to get them on board in H1 so that the business will be profitable as well, as from day #1 or how the progress of profitability will move for that part of business?

Ramcharan

So, if I can just take that question.

I think we have guided even in the last earnings call, two parts to it.

One is the transition cost which is already been incurred is a part of the P&L.

We are also doing a rebadging exercise for the FT employees.

So, what we had indicated is that it will take some time for the transition to be fully done and for steady state to be reached.

And you know the depleted state of the assets in FT also.

So, we expect in the course of the year, they should turn EBITDA positive.

Computer Age Management Services May 26, 2021 And if I may just answer your question on dividend also, so our stated dividend policy is to endeavor to distribute 65% of our PAT as dividend for the year which we endeavor to do even this year and we have kind of declared 65%.

The dividend for the current year if you see, could be little on the higher side.

But that is because of the special pre-IPO dividend that was given in the month of August.

But for that our dividend policy has always been consistently to give 65% of our PAT as dividend.

In some years, it is little more than that.

But the endeavor is to give 65% of our PAT.

Prayesh Jain

And my question on the new businesses, potential revenue?

Anuj Kumar

So, on the account aggregator side, just think of it this way that there are two parts of the business.

There is a vital inter linkage to information provider let us say a bank, there is vital linkage to information seekers or users which is the FIU and we are seeing now building up interest in the market on the user side, which means that is pretty obvious, the people would like to see what is the franchise somebody else has built, so that momentum we are beginning to see in the market.

Information givers or providers is a more muted progress.

It is progressing, but it is slightly muted compared to the enthusiasm that the users are presenting.

So, we signed up a set of users, we are testing a set of providers and hopefully should be signed up with them soon because there is a full test of both integrity and security and the kind of linkage that you have to maintain with the providers, all of that is happening.

We have thought of the rate cards and how the pricing will work.

So, our expectation is that revenue should happen in this year.

But will it start happening from 2Q, a little early to say.

We will continue sharing with you guys, but that depends on how many providers and users are seriously kind of architectured and integrated into the system for all of this to begin.

So, we are expecting that we should see revenue alliance within this year and we will continue sharing progress of that.

Moderator · Conference Operator

Thank you.

The next question is from the line of Siddharth Gupta from AS Stock Broking.

Please go ahead.

Computer Age Management Services May 26, 2021

Siddharth Gupta

I have a few questions.

The first one is, our share of operating revenue from mutual funds is roughly 90%, given that we are venturing into other areas such as payment aggregation etc. What is the management projection over the next couple of years our operating a revenue share would be, would it roughly go down to an 80:20 split or further?

Second, my question was, is there any plan for the management to increase the fee charged from mutual funds based on their AUM?

It is like in terms of the percentage that they wish to increase?

And thirdly, what are our reductions for the payment aggregation business which I believe is a brilliant endeavor that the management is making and my hearty congratulations.

But what is the management view on the competition that already exists in the industry and how are we placed to tackle it?

Anuj Kumar

So, let me take that.

The numbers that you would have heard pre-IPO at the time of the roadshow was, this was last year that non-MF revenue aggregated to about 13% of the total.

We voluntarily wound down the banking and NBFC outsourcing business and that caused some impairment.

So, this number is at 10%.

We certainly want to improve that; we certainly want to build that number and you can see that we have the right irons in the fire and the right efforts are being made.

We are cognizant that running 5 key initiatives at one time for any management team can be very destructive and we are also cognizant that if we chased only one, that may or may not be successful and therefore that would be a bad strategy.

So, I think we have the right mix and we are trying to scale these businesses.

Will this get to 80:20 soon?

So, do we want to get to 80:20, the answer is yes.

Do I have a timeframe right now in terms of specific roadmap on how this will get and will it take 3 years-4 years or 5-years, we are not making any specific commitment on that.

But the answer to your question is yes, we would certainly like to get to 80:20.

On the payment aggregation business while payments is a very growing space and I am sure all of us have reports and have read reviews of how much investment is chasing entities and how exciting it is.

Do remember that it is a crowded area and increasingly we are finding that Computer Age Management Services May 26, 2021 it is becoming a price sensitive area which means that beyond a point, once you have the platform and you have a set of merchants bank and customers integrated, differentiation is small.

Incumbents have some advantages and we are not very large incumbent.

So, incumbents have some advantages, but taking share away from an incumbent is also not impossible.

So therefore, we also expect that while the market will continue to grow, some element of price sensitivity and the buyer will continue happening and that is not just theoretical.

We are seeing all of that happening.

But it remains a very exciting space, we want to continue remain invested.

We are taking all the right action to get that done.

But more than that we are engaging with the market broadening out the product portfolio, bringing more banks on the platform just to make sure that we are doing the right thing.

So, that really maybe are on the payment side.

Was there another part of your question that I did not answer?

Ramcharan

So, Anuj, I will take the pricing part of it.

I think his question was more on our customer pricing.

So, as you know this is a bilateral arrangement with the different MF customers that we have.

And there is already a telescopic pricing structure built-in which gives a share to the customer as and when the AUM grows.

In terms of specific customer contracts while these are bilateral discussions that will happen as and when it is due, we expect the year to be a normal year in terms of pricing.

As Anuj just mentioned last year, we had incurred a lot of expenses on the COVID related stuff on work from home, on DCP etc. So, you know it helps us to pull the yields.

So, we expect that the current year will be a normal year just like when there is a discussion of pricing, we will have the discussion but do not expect anything extraordinary in the current year.

Somasundaram

I will just add.

There was a question whether there could be an increase in price?

Just to give the industry context, the overall pie available to the ecosystem is determined by the SEBI regulations which specifies what can be the charge to a scheme and as you would be aware it is a telescopic pricing.

As the asset size keeps growing the charge to the Computer Age Management Services May 26, 2021 scheme keeps coming down and therefore within that framework all the players in the ecosystem which will play.

As the asset grows, the unit realization will come down.

And therefore, in a growing asset scenario increase in price is not a normal phenomenon.

It does not happen; it has happened in the past in very unusual circumstances like a continuous stagnation for couple of years in the asset growth which is not a usual phenomenon in the Indian Mutual Fund industry.

Most of the time asset keep growing.

So, price increase is little bit unusual.

It could happen for a given client because of any specific reason, but it is not a normal phenomenon.

Moderator · Conference Operator

Thank you.

The next question is from the line of Ashish Shah, an Individual Investor.

Please go ahead.

Ashish Shah

Sir, I had a question regarding the multiple new AMCs that are going to come up either from the distributor side like Funds India or Groww or ETMONEY or some of the PMS side like let us say Alchemy and all those guys have applied.

Is there any strategy to aggressively pursue, then add them to your clients list?

Anuj Kumar

We continue doing is, we engage with entities across the board and the new AMCs can come in several ways like you said some of the PMS operators will try to morph themselves into fund houses and then some of the new age people who have started as RIA distributors, digital RIA will also sense that they could be better off and be AMCs.

One or two of them just wait for the license to come and the others may potentially think of acquiring someone and you use a lot of that in the market.

So, the answer is yes, we continue engaging with everyone that we see.

That is interesting in this business.

Our track record of having won new AMC logos in the last 7 or 8 years have been very strong pretty much.

Most of the strong names, especially promoted by banks, corporate houses, etc., come to us so that is some normal part of the operation which continue to focus on.

Computer Age Management Services May 26, 2021

Ashish Shah

Sir, is there anything specific that you would be doing because from what I understand I believe CAM were little bit more expensive than the competitor and the product differentiation from, there is nothing like too much.

Will it be a pricing game or is it something etc. you would be offering that will attract these guys to you?

Anuj Kumar

See, conceptually as a philosophy we sell value.

We do not sell price anywhere.

That is the philosophy with which we approach market.

I would just give what the market thinks, not about what I think, that there is significant differentiation, and that differential exist because it is a very thick stack of services and it is a very broad platform.

So, within that for offering A and offering B to be identical, I mean it is like you may think that two email platforms are identical because both are sending emails, right?

What else do you do?

But when you go into the desk, you will see that there is just a lot of differentiation, slice-by-slice, scope-by-scope, we have very different view.

The market is pretty cognizant of that.

They are cognizant of what we deliver, what we stand for, the value that we bring to the table, whether it is day-to-day deliver, compliance, digital capability, sales and aggregation, quality of analytics and quality of platforms.

So, the market is aware of this because mostly people who are applying have been in these capital markets for several years if not several decades.

So, to give you a short answer, we sell value.

We expect to be paid for the value.

That belief has been vindicated over the last 2-2.5 decades and we believe that belief will continue to be vindicated.

Ashish Shah

And one other question, on the GoCorp, CAMSPay and edge360, is there any strategy to monetize it or would it just be add on services to your client because them being your clients?

Anuj Kumar

Initially when we had started, we were okay to just put it on the plate for these offerings to be consumed.

Over a period of time, they have become substantive in size, GoCorp I am sure you have seen that metrics which we have been publishing saying over 20% of our share of the liquid and overnight transactions to go through GoCorp, so that Computer Age Management Services May 26, 2021 is a significant share a single platform has.

And that took us about 5 or 6 years of hard work.

So, our aspiration is obviously that we should monetize and again it is obviously that a customer should see value in that part of the delivery and pay for it.

So, we continue to engage in those dialogue, success takes time, so it is taking time there too.

But to answer your question in brief, yes, it is aspiration for that part to be monetized.

Moderator · Conference Operator

Thank you.

The next question is from the line of Saket Kapoor from Kapoor Company.

Please go ahead.

Saket Kapoor

Sir, firstly, if we take the employee cost, what should be the percentage we should look forward as a percentage of revenues, the employee cost, sir?

Ramcharan

So, on a historical trend I can tell you again this is dependent on the investments that we continue to make in talent and this is also a function of the staffing that you have to do from transaction perspective.

As and when there is a growth is transaction there will be a requirement of additional staffing, but there will always be a lag.

There will not be a one-to-one correlation on a quarter-to-quarter basis.

But historically our employee cost has been in the range of 35% plus or minus a few percentage points.

Saket Kapoor

And sir, under these employee benefit only the managerial, the KMPs are also, the renumeration have been debited?

Ramcharan

Yes, that is right.

Saket Kapoor

And sir, what constitute the major part of the operating expenses?

Ramcharan

Operating expenses consists of two major parts, one is the OPE, the out of pocket expenses that we incur, this is compensated by a similar revenue line item for us and another component is of software expenses that we incur which is basically the various licenses that we buy, those Computer Age Management Services May 26, 2021 things actually constitute the operating expenses, main part of the operating expenses, then there is some amount of claims.

Saket Kapoor

Sir, those are clubbed in the other income that you are telling…?

Ramcharan No. OPE, that is out of pocket expenses is what we pay, but we get reimbursed.

So, that is compensated by a revenue line item.

That is in the other income, clubbed and other income.

Ramcharan

That is a part of the total operating revenue, it is not other income.

It is a billing to the customer.

Saket Kapoor

And sir, the entire data processing and all, everything is cloud based, how is the data storage, the safety and servers are and the backup systems have been created, what steps have we taken?

How much have we invested into it because the entire, everything is in the digital format?

So, god forbid if there is any kind of, any cyber-attack, then the restoration work, how well are we prepared for that and how much is on the cloud system?

What is the strategy there, sir?

Anuj Kumar

Think of it this way, all mutual funds is an entire on-prem model.

And by that, I mean that all the applications, all the data and all the computing power is now in data center, three of them.

Primary, backup near and far.

So, three data centers mostly on-prem, every part of the stack which is everything related to the internet applications, data and computing.

On newer offerings, which is payments aggregator, CRA, still new for me to what architecture we will go with.

But we are deeply evaluating the cloud.

DCP, security and every other part of the protocol that execution does not change too much because the principles remain the same.

So, think of it as our password policy, storage policy, restoration policy will remain the same on whether we are working on-prem or we are working in the cloud, in the cloud of course there are restrictions and they are still an evolving thought on how much data you can place on the cloud which is why mutual funds continues to remain on-prem.

But wherever there is regulator acceptance and wherever the market Computer Age Management Services May 26, 2021 practices are consistent, we are moving close to the cloud especially in the newer business line.

Moderator · Conference Operator

Thank you.

The next question is from the line of Dipen Sheth from Crystal Investment Advisors.

Please go ahead.

Dipen Sheth

I have a question, when I look at what you achieved over the last 3 years, from FY18 to FY21 and I want to take a longer perspective because I understand that the year that has just ended has seen all kind of disruptions and you have done good and you faced trouble but you have done some good things, you have taken up initiatives, that is great.

But when I look at 3 years, over a period of 3 years, FY18 to FY21, I can see that consol revenues have risen just about 10%.

And PBT has risen about some 16%-17% and that too is driven by a cut back in Opex and other expenses which is creditable.

But for a business which has 30%-35% kind of margins and does not consume any capital, I do not think you have even 200 crores of hard assets on your books right now and I do not see you adding substantially to this number even as you invest in new initiatives.

So, for a business that does not have hard assets which means it does not require reinvestment to compound its growth, until topline comes what is the excitement of owning a 30% margin business which is not growing.

I am looking at it as a greedy shareholder of course.

The worry I have is that this is a fantastic business but it is kind of a utility and as you create extra volumes and you grow along with the mutual fund industry, you do not post non-linear growth in profits for me.

Is that a fair criticism or am I missing something?

You did allude to telescopic pricing as well.

I understand that.

But even within that pressure of having telescopic pricing I would have expected a company working at high margins and close to zero consumption of capital to be able to figure out avenues to grow topline rather than just cut back on expenses and deliver a growth in bottomline.

Somasundaram

Let me take it.

If you look at the way mutual fund industry grows, I am going now slightly backwards.

Typically, the way the industry grows is Computer Age Management Services May 26, 2021 that it goes through a period of sort of a consolidation and then there is a very fast paced growth and then again it gets into some sort of a consolidation for couple of years.

That has been the trend which we are seeing over a long period, 15 years’ kind of a scenario.

Now the last is 3 years, has come on the back of the previous 5 years.

I am talking about starting from March 2014 to March 2019.

If you look at that period, our revenues were growing at 19% CAGR.

So, that was the kind of growth we were having and the bottomline was also slightly a tad above, the operating profits were growing at 20% kind of a level.

Now, what it reflects.

It reflects essentially in a way industry.

We are play on the mutual fund industry.

Our performance in a very large way reflects the industry and assets that we manage.

Of course, not exactly the industry because during the same period our share has grown very substantially, almost 4%-5% which means we would have grown faster than the industry.

So, the fact is, the last 3 years has come back on a period of 5 years which saw a hectic pace of growth and we want to give some numbers to you.

Just one second.

Let me give you some of the AUM numbers.

If you were to look at FY14, the assets that we were servicing was 6,57,000 crores, in that equity was 1.75 lakhs crores.

Then we went all the way up to 6.23 lakhs crores in equity and overall assets grew by 15.8 lakhs.

That is the kind of growth we had and then it was followed by a sort of consolidation especially on the equity assets.

While the overall assets may not show that kind of a slowdown, if you look at just the equity assets, it grew by almost just about 10% kind of a level over the 3-year period, FY18 to FY21 if you look at.

So, your observation on 3 years is correct.

But if you go back slightly backwards you will find that this company has been growing at a very healthy high double digit, high double digit is a wrong one, high teens kind of a growth.

That is the way we would look at it.

The other one which I would like to mention is that our efforts in growing non-mutual fund revenue has not been too successful.

So, I will not deny the fact, we ventured into some of the businesses and we scaled it back.

One prime example was banking and NBFC outsourcing businesses, that we saw that it is not scaling up and nor was it making profit.

We are a company which chases profitable Computer Age Management Services May 26, 2021 growth, not growth for the sake of the growth.

Therefore, we scaled it.

So is the case with some adventure that we took on the software side of the business for Sterling.

So, question is a fair question.

But I just want you to slightly go further backwards and you will find that the growth has been satisfactory kind of a growth.

Moderator · Conference Operator

Thank you.

That was the last question.

I would now like to hand the conference over to Mr. Nischint Chawathe for closing comments.

Nischint Chawathe

Thank you very much for joining in this call today.

We thank the management for providing us an opportunity to host the call.

If you have any further questions, feel free to reach out to the management directly or you can email them on shareholder relations at camsonline.com.

Thank you.

Ramcharan

Thank you, Nischint.

Thank you, everybody.

Somasundaram M

Thank you.

Moderator · Conference Operator

Thank you.

On behalf of Kotak Securities that concludes this conference.

Thank you for joining us and you may now disconnect the lines.