CAMS — earnings call

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Prepared remarks

Moderator · Conference Operator

MR. NACHIKET KALE – ORIENT CAPITAL Computer Age Management Services Limited August 07, 2023

Ladies and gentlemen, good day, and welcome to the Computer Age Management Services

We take the first question from the line of Mr. Abhijeet from Kotak.

Abhijeet

First question is on the MF RTA business.

Just to kind of get this right, what we are saying is that the current number on the yields effectively forms the base going forward, right, barring the remainder impact that will flow in, in the second quarter?

Anuj Kumar

That's correct.

That's correct.

Because like Ramcharan said, while our prices have been very competitive in the marketplace.

We've pointed out to you in the past that there were 1 or 2 contracts where we needed to reset.

The reset went on for a period of time.

And now we have culminated that reset.

1Q will be the last quarter for that.

So what you should see is yields holding fairly steady after.

Abhijeet

Okay.

Second is just on the RTA side.

There's good pickup on the non-asset based revenues.

And Ram mentioned something along the lines of application development and transaction.

But just wanted to check if this is really the base going forward?

Or there's been some bunching up that has happened this quarter?

Ramcharan SR

So Abhijeet -- when we speak about application development, it's things like the functionalities that we do, value add in terms of, for example, the MF tax or the suspicious transaction portal or the EIC, the front office portal, or things like that.

It is a part of MF -- or just in to the MF.

But there is no one-off in this.

There is no one-off in this.

This has seen a sustained interest in terms of the valuation that we do to our customers, and hence, there is a revenue coming in.

So this should be the base going forward.

We are sure of that.

Abhijeet

Okay.

That's good to see.

One question on the non-MF business.

So would you see the pickup in revenues here as well.

But just from a clarification point of view, this AIF tie up with Temenos.

How is that different from what fintuple was doing for you?

And a related question Computer Age Management Services Limited August 07, 2023 is that when we kind of back out the yield, it comes to about closer to 2 basis points.

So just wanted to check if that is really the ongoing rate for this sort of service in the AIF market?

Anuj Kumar

Sure.

So on Part 1, Fintuple's core business has been creating a digital onboarding platform, which is what they started with.

And now a very bespoke development of these onboarding platform.

So CAMS is a more industrialized product.

You either buy the product or you don't.

Fintuple is a bespoke product.

We work with banks, especially their custody functions to build the entire set of onboarding functions and digitization function.

That's what Fintuple does.

Multifonds is a fund accounting software, and it's a fund accounting platform, which is used globally.

We were wanting to do something in this area for a long time, especially with GIFT City requirements also emerging to be able to do fund accounting and multicurrency for people who are either raising or deploying monies in multiple countries in multiple currencies.

So that is a fund accounting product, which will now -- which has now become available to us.

It's very, very different to what Fintuple does.

Abhijeet

And the question on yields?

Ramcharan SR

Yes.

So see, the way we charge -- business yields on AIF, if that is the question.

Then the way we charge AIF is not entirely based on AUM, right?

So almost 60%, 70% of the billing happens on the number of investors who are onboarded to a scheme.

But from a calculation perspective, I think the yields that we are showing is consistent.

It's been always between 1.75 and 2, effectively.

Although, let me just clarify, the way we charge most of the AIF, it's not based on the AUM.

It's more based on the number of investors in a particular scheme, and a slab-base depending on the number of investors and the permanent charge that we do.

Moderator · Conference Operator

We'll take the next question from the line of Mr. Devesh Agarwal from IIFL Securities.

Devesh Agarwal

First question, again, on the mutual fund yields.

So we see on a sequential basis, we see a 5.5% decline.

The yields are more like 2.57 basis points versus a growth of 7% on the overall AUM.

Now my question is you said that this moderation can continue even in 2Q.

So are we kind of expecting a similar kind of moderation even in 2Q?

Anuj Kumar

Not really, Devesh.

So what we have said was, I mean, think of a longer period, think of maybe the last 5 to 6 quarters.

Whatever moderation you have seen was largely emanating, for like we said, 1 or 2 contracts.

That process is concluding -- have almost concluded, will conclude in 1Q.

So whatever impact you've seen in the past is on the books.

You will see a small impact in 1Q.

But after that, the yield should hold very steady, which means we are at the tail end of that adjustment process.

The last step is getting executed in this quarter, in 1Q.

Ramcharan SR

We had to add -- the -- most of the impact has already been seen, Devesh.

So to see that there'll be 0 impact is not true.

But at the same time, we will be nowhere near what you are seeing for the current quarter.

Devesh Agarwal

Understood.

And sir, any sense in terms of adjusting for this one to account, what would be the moderation that we would have seen in the quarter on a sequential basis?

Computer Age Management Services Limited August 07, 2023

Ramcharan SR

So in fact, given that most of the other customers are in line with what we expect, which is that, in fact, the AUM-to-AUM fee growth, which generally we expect around 70%.

And most of these customers are upwards of 80%.

So the moderation has been less on the other customers that we have seen.

Almost 70% to 80% of the moderation has been because of the resetting of the yield that's happened in these 2 or we would have seen a much larger EBITDA number that you're seeing now.

Devesh Agarwal

Understood.

Secondly, on your non-mutual fund business, this quarter, we saw an inch up to 12.5%.

So one, your target of reaching 20% over what duration?

And secondly, if you can help us understand what is the margin profile that we have currently in the non-MF business?

And what can this be, say, over the next 2 years?

Anuj Kumar

Devesh, we have said that -- and this we have said about a year, take it 6 quarters back that we want to get to 20% non-MF contribution over 4 to 5 years.

We think we are tracking well.

We are tracking well to get to 20% in, let's say, the coming maybe 2.5, 3 years, we will get there.

Some of the increase that you found this quarter is obviously going to Think because that revenue has come in for the first time.

The rest you have seen because you've seen revenue growth, and I showed you the numbers, you've seen Alternatives grow ahead.

You've seen Payments grow ahead.

And you've seen KRA grow ahead.

And over a period of time, there could be others, which will grow ahead of company growth rate, which is where the contribution is coming from.

From a profitability perspective, some of those businesses are at company profitability levels.

So for example, AIF is certainly over 40% of EBITDA.

But at an aggregate, I would still put this non-MF business in the mid- to high 20s, which means that there are small subscale businesses like account aggregator, etcetera, where obviously, we may not have large margins.

Over a period of time, as we stabilize and grow this unless the current non-MF revenue, which is in the early to mid 30s, will grow up to, let's say, INR50 crores a quarter.

We are expecting all of this to converge to about 35% to 40% EBITDA.

So it will not be very different to company EBITDA levels.

So of the subscale businesses, obviously, do not feel a lot of margin today, which is the reason why we are at the 20%.

Ramcharan SR

Just 1 more point to that.

We have constantly been saying that we will continue to invest in the new businesses.

And we specifically mentioned that last quarter was -- when I say last quarter, means that 4Q of last year was the quarter in which the gap between the income and the expense for the new businesses will be the largest.

And I'm happy to say that, that's been the case.

Because in this quarter, we will continue to spend this INR6 crores per quarter on these new initiatives, but the revenue has started flowing, and although it is not at a scale that you'll probably get a higher margins.

So we are on the right track on that, Devesh.

So we will get to a place where these would also mimic the other platform-based business margins.

Devesh Agarwal

Understood.

And the final one, sir, this Think analytics, we acquired 55%.

So are there plans to acquire the balance 45%?

Or this is how it will continue?

Computer Age Management Services Limited August 07, 2023

Anuj Kumar

So the plan is that we've had the same playbook in both Fintuple and this acquisition that we buy a little of a majority and then we have the call option over a year 3, 4 and 5.

We want the founders to stay and continue growing the business.

So a larger part of the pie for them will come in year 3, 4 and 5, that make sure that the founders stay and scale the business.

And it gives us time so that we are able to create a management team which will be able to learn and operate the business once the founders choose to exit.

So it's a long exit period plan, unlike by 100% upfront in most of those cases, as you are aware and you've seen many other companies that the founders tend to exit after the second day.

We don't want that.

So we have a call option, and obviously, we are expecting to 100% at both these companies.

Moderator · Conference Operator

We'll take the next question from the line of Prayesh Jain from Motilal Oswal.

Prayesh Jain

Sorry to harp on this yield question again.

So in your negotiations, are you -- are we seeing any change in the kind of telescopic structure that you have discussed in the past.

So now that the rates are being set on the lower side, is the band being expanded with regards to the telescopic structure?

Or it's still the same?

So the main thing I'm trying to understand as to whether we see -- if the AUM continues to grow, how much more fall can we see from the telescopic structure standpoint.

Anuj Kumar

Sure.

So before we get to the telescopic structure, Prayesh, I just wanted to be sure about 1 thing, which is that, what has given us all this?

What has given us, that there is a telescopic structure.

We want the mutual funds to buy slightly cheaper as they grow and we will sell slightly cheaper.

And that depletion is part of the overall plan.

So there's no change to that.

However, the slightly steeper depletion that you saw in the last 5 to 6 quarters was going to a reason that we've given you.

So the answer to your question is that there is no change in these telescopic structures.

They are more or less what they used to be.

And you have seen that we had a very healthy figure in incomes -- almost -- you've seen that 70% to 80% of the AUM growth turns to revenue growth for us.

And that formula will broadly hold.

So don't expect that yields are under any pressure.

But I would say that outside of the couple of contracts that we're referring, yields have been holding very well across the portfolio for the last almost 1.5 to 2 years.

Outside of the telescopic structure, we see no other stress.

For the 2 contracts or 1 that we're talking about, it was premeditated and agreed.

And like we said, most of this impact has now been taken.

What you will see is a small adjustment in 1Q, which is the current quarter -- sorry, in 2Q.

And after that, you will not see much.

So that's really the message overall on the yields profile.

Prayesh Jain

Got that.

That's helpful.

Secondly, on the -- if I look at your expenses, both operating expenses and the other expenses have seen a very sharp jump on a Y-o-Y basis.

And even on a sequential basis, where operating expenses have increased, the other expenses have been flattish.

But the operating expenses have been surging.

So what's the reason for that?

And what kind of run rate we should look at it?

Computer Age Management Services Limited August 07, 2023

Ramcharan SR

So, Prayesh, the operating expenses -- see, operating expenses for us, there is some variable component to it.

So 2 things: for example, operating expenses, the major contribution for the increase has been out-of-pocket expenses, okay, which is reflected in a similar number in the top line.

That is the sponsored bank charge expenses, if you see the small uptick that happened in the payment businesses, that's the corresponding variable cost that we incurred by paying the banks.

That's also been a part of this.

And the entire software cloud charges that we're investing in, right?

The new businesses that are there are, be it CRA or account aggregator or all those things are on the growth and the tools that we buy or an operating expense.

So these are expenses which are either variable or done from an overall business long-term perspective.

And hence, you will see a small uptick that keeps happening on the operating expenses even on a quarter-on-quarter basis.

But if you remove the OP part of it, and if you see the percentage of operating expenses, they are -- generally operating expenses to be around 11% of main.

But if you move to OP part, the same number as the numerator and denominator, we are quite appointed as an income and expense.

The operating expenses always are around 7.5 to 7.8 percentage.

And that's the trend that's been holding throughout, right?

Even if we see the last year or this year, it's been within this range of 0.5%, 7.5 to 8 kind of percentage if you remove the OP part of it.

OP is more kind of a compensating entry.

From other expenses, these are the real fixed expenses.

These are the expenses on power and fuel, the legal, consultancy, etcetera.

Largely, as you said, we have had this number last time in the earnings call, we again said that you will see only a small inflation-driven increase.

But overall, you won't see a large increase.

We stick to the same commentary.

The only point that you note there is there's a lot of requirement now for an audit, right?

For example, PFRDA will recover a CMMI audit.

There will be a VAPT audit that is required.

All these are very expensive.

And there are 3 other things that we've done from an information security perspective.

These expenses are in the base now.

So these were some things which are not there probably 1.5 years or the year earlier, which are in the base now.

And then there is all these things also, just recollect 1 thing that we include the Think Analytics numbers.

For example, the other expenses include around INR63 lakhs of Think Analytics numbers.

So -- but for that, you have to be very flat or lesser.

The operating expenses also includes around INR65 lakhs of Think expenses.

So if you take that away, the increase is a little more moderate.

So 2 reasons: one is from operating variable plus Think Analytics expenses coming in.

Other expenses is broadly fixed expenses that you will see a small inflation-driven increase going forward.

But in the case, we have various other audits and information security-related orders, power and fuel.

There is a big tariff increase that's happened in the state, which is cutting a lot of increase from our power-base tool.

These are that the base now.

So going forward, I don't think you will see such a big increase.

Prayesh Jain

Okay.

On the non-MF side, on the E-Insurance thing, you've mentioned that the digital loan assignment is a new service that you've started.

Does -- so what I'm trying to understand is, does this kind of give you additional revenue or it's part of the existing charges that you would get?

Computer Age Management Services Limited August 07, 2023 So trying to understand whether from a longer-term perspective, this could be an opportunity, which will be, say, larger than the account opening for EIA charges?

So that is the question.

Anuj Kumar

Right now, so you know just like there is loan against security, and loan against mutual funds.

Loan against insurance is today an experimental product, which means that as of now, it does not have IRDAI permission for people to go ahead with in this format, in the digital format.

What we had done was along with the regulator and a few key clients, we set up a sandbox, and this is demonstrating the success of the sandbox.

We have now applied to the regulator to allow us to convert this into a commercial product, which is where we are.

And if it's converted to a commercial product, it would, perhaps, mirror the success of, let's say, loan against mutual funds.

Of course, the scale could be bigger.

It will mirror the success of that.

We are expecting to hear from them, let's say, in the next quarter or 2.

And then there will be enough commercial viability of this.

But today, this is not a revenue source per se.

Moderator · Conference Operator

The next question is from the line of Dipanjan Ghosh from Citi Group.

Dipanjan Ghosh

Two questions from my side.

First, on the new deal wins, I just wanted to get some sense.

When you onward this new customers, is there any front-loading of cost that is associated with it, while obviously, I mean I understand that this will be yield accretive from a medium-term perspective.

But I wanted to get some sense of the upfront cost from setting up the business and all.

Second, if I can get some sense of -- you mentioned that in the near term, your margins on the non-MF businesses are around mid-20s and gradually maybe scaling up to 35% to 40%.

In the period when you kind of scale up these businesses and take the share up from 13% to 20% of revenues, should one see the overall margins maybe compressing a bit or do you kind of expect some leverage benefits to play out in the domestic mutual fund business?

Anuj Kumar

Okay.

So let me answer the second one first.

If you take the last 2 years, and I'll give you order of magnitude, we've perhaps been investing annually in the range of INR18 crores to INR20 crores in the new businesses.

This is essentially account aggregator in TSP as one, NPS as a second, MFCentral as a third and some amount in insurance.

What started happening now is that we are seeing the color of revenue, which means -- some color of revenue.

So let's say, a business which had INR20 crores cost and maybe INR1 crores of revenue will grow from INR20 crores and INR1 crore to INR20 crores and, let's say, INR4 crores revenue this year and probably will grow to INR7 crores or INR8 crores next year.

So the gap between what we are spending and what we are earning will become narrower.

And that should contribute to the overall profit pie of the non-MF businesses.

At the peak, like we said, we have a steady state shift in Alternatives, which is making upwards of 40% EBITDA.

We have Payments, which is making upwards of 30%.

And then we have others.

KRA would also be making close to 40% and above.

So when they become steady state and get to a certain mass, the expectation is, because the labour component will always be small, they will be platform-based businesses, and they have a steady kind of cost and revenue profile, they will get to 40%.

Computer Age Management Services Limited August 07, 2023 So you have 2 examples there.

You have KRA and AIF, which are both in that range, you have payments, which is a lot more competitive.

It's somewhere in the 30s.

And then you have others, which may not be making margins today.

And what I have given you was an overall basket level margin yield.

As we continue the journey, obviously, there will be some profile improvement in the scaled businesses.

And the smaller ones, which are subscale where we're actually investing money today, will start returning some additional revenue.

So we're expecting that overall margin profile, I have to give you a single-line answer that the margin profile of non-MF should improve from here.

And therefore, at a company level, it will be a net contributor, slightly net accretive than net depletive.

Dipanjan Ghosh

On the first part regarding new deal wins and if there is a front-loaded cost attached to it on the MF side?

Anuj Kumar

Correct.

So all the new deal wins, what happens is that typically when an AMC sets up business, of course, there is a lot of preset of work to be done.

But they get set up, and then they launch what is called a new fund offering.

Typically, people come out with a single new fund offering, most of the times it's equity.

Most of the times, and don't take it as a rule, people will target, let's say, INR400 crores, INR500 crores accumulation from that, a very successful first, and it could be a INR1,000 crores, but they're not very, very common.

So you have a new AMC which comes in, we do the prep work.

And then, obviously, we deploy all the technology capability. which is getting them to plug into our platform, but doesn't really create a lot of cost.

Of course, we have to employ that unit, and we have to employ a set of people.

Let's say, starting maybe 12 to 15, 20 people will get into a unit.

We'll wait for that INR500 crores to INR1,000 crores of AUM to happen, let's say, in Year 1.

So there will be a bit of a response in terms of when that AMC becomes revenue accretive and when you put in costs, but those are not chartering numbers.

Those are numbers that we can manage in the overall book quite comfortably.

Moderator · Conference Operator

We take the next question from the line of Lalit Deo from Equirus Securities.

Lalit Deo

So on the Think Analytics business, like, could you give us more color like how do we earn revenue and in terms of the new contract and what kind of margins do you make in those businesses?

Anuj Kumar

So when you think of Think, they come from a very different segment, although they are within financial services, largely cater to fintechs, banks, NBFCs on the lending side, not so much in the capital market.

So it's a very complementary operation.

Four core products: Algo360, you saw that mentioned, is a core platform.

We have perhaps one of the 2 in the country who offer a commercial service, where based on Android SMS inboxes etcetera.

Information contained there.

Computer Age Management Services Limited August 07, 2023 We give analytics based on what is the behaviour of the person from a financial metrics point of view in terms of income spending investments and a lot of related things.

So that's a very popular platform.

That's product number 1, for which you saw, we mentioned things like SBI Cards and Kreditbee to be the new entrants.

Of course, there are many established customers.

There is a second product called Kwik.ID, which is basically a video onboarding, video KYC product, where you saw us mention Canara Bank as the third public sector bank in the country, which has joined hands with us.

Of course, there are many other private sector clients, but we choose to make these 3 or 4 big ones.

And as you know, the paper-based KYC will continue to be displaced by video-based and electronic KYC.

And that just creates significant scale opportunities for that product.

There is a third product called Flow Expert, which basically helps companies integrate a number of external feeds coming through API in a straightforward way.

It's a new product, has about 3 or 4 installations.

And then there is Analytics where we sell business intelligence kind of products and platforms to both the financial services industries in India and in the U.S. and then we have a few pharma and health care clients too.

So those are the 4 product lines.

The first 3, you can think of them as a product.

Analytics, you can think of it as a service, more a consulting and doing service.

So it has attributes of service, which means it needs headcount.

The others are typically product based, the first 3.

From an acceptance perspective, you've seen some of the clients.

And of course, if you go to the website, you'll be able to get a lot more view in terms of what they done.

But a very, very promising young company, no debt, completely bootstrapped.

And then from a public profile award recognition perspective...

Lalit Deo

Yes.

Sir, currently like what is the kind of revenue potential do we expect in this business like going ahead over the next 3 to 4 years?

Anuj Kumar

So broadly, think of them as a company at a current year run rate of maybe INR28 crores to INR30 crores of revenue.

Over a period of time, of course, we would expect it to grow in high double digits, so upwards of 30%.

On that base of INR30-odd crores.

So in 3 to 4 years, you can expect that in a reasonable way, it should be at least a INR50 crores operation of that form.

Moderator · Conference Operator

The next question is from the line of Mr. Chandragupta, an individual investor.

Chandragupta

I just want to ask 1 question about this Slide number 36 that you have, proprietary technology platforms and mobile applications that you have mentioned.

So is there -- have you explored the option of monetizing these platforms at any point of time, like outside India, of course, like a supply product company that -- could there be another revenue vertical for us?

Is there such a potential?

Anuj Kumar

We have made a small attempt in the past to open up European office and one in the Middle East, too.

And we had some success.

So then we've been completely focused on India domestic right now.

As you would see, we have 1 core business and about 7 adjunct businesses.

A couple coming from acquisitions, the rest of our own core business.

So we've chosen to focus on India Computer Age Management Services Limited August 07, 2023 domestic.

But right now, we are not selling overseas.

So there is no go-to-market attempt to sell these platforms overseas.

Chandragupta

Okay.

But it can become in future if we choose.

I mean, if we decide to, then that's also possible, in case?

Anuj Kumar

Yes, will certainly be possible.

Think Analytics, by the way, has a small American subsidiary, where we do consulting contracts with financial services and health care people.

That's a very new and a small part of the overall mix, so I didn't call it and it has nothing to do with this chart.

But just so that there is a small amount of U.S. revenue.

But as far as this platform is concerned, right now, we are not selling it overseas.

Moderator · Conference Operator

Ladies and gentlemen, that was the last question for the day.

I would now like to hand the conference over to Mr. Ramcharan, CFO of CAMS.

Over to you, sir.

Ramcharan SR

Thank you, Seema.

And thanks a lot to all the participants for your participation and involvement in this earnings call and your continued interest in CAMS.

In case of any questions, please feel free to reach out to Anish Sawlani or to Orient Capital or our IR.

Thanks once again for the time you spend.

Anuj Kumar

Thank you, everyone.

Moderator · Conference Operator

Thank you, sir.

On behalf of CAMS, that concludes this conference.

Thank you for joining us, and you may now disconnect your lines.