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FY25 should be one of strongest years; expect 1-1.5% margin expansion a year: CAMS CEO

Anuj Kumar, Director & CEO of CAMS, highlights that despite recent market corrections, the company expects FY25 to be one of its strongest years. CAMS continues to dominate by winning 70-80% of new bids, focusing on execution and margin expansion, and anticipates significant revenue and profit growth driven by mutual funds and associated business lines.Anuj Kumar, Director & CEO, CAMS, says there has been some market correction and some flattening of the mood in the last two months. But as things come back, we should be holding our projections and FY25 should be one of the strongest years in the last five-six years in the history of the company. Kumar further says that CAMS continues to win 70% to 80% of the new bids. They are focused on execution, and helping their clients scale their businesses. Margin expansion, despite all the economies, etc, and scale benefits, will be about 1% to 1.5% a year. The tagline mutual funds sahi hai, really applies to your business. As mutual funds are growing, you will grow. As SIPs will grow, new and new folios will get added. As they will grow, your business will grow. So, can I say that mutual funds sahi hai and CAMS is also sahi jagah par hai (Mutual funds are right and CAMS is in the right space)? Anuj Kumar: I would agree with you. For years, our business has been tightly tied at the hip with the capital markets. And within the capital markets to mutual funds, about 86-87% of the revenue is tied to the movement of that industry. Over the last many years, the broadening of distribution, the acceptance of the product has grown. So, our fortunes are dependent on this market and I would concur with what you said. The quarter gone by margins have expanded, but the EBITDA growth is in single digit. For a sector that is growing in double digits, why is your EBITDA growth in single digit? Anuj Kumar: I would say that if you look at a fair year-to-year comparison, the second quarter had revenue growth of 32%. It is perhaps the best number we posted in life. And it is a diversified book because MF revenue grew by about close to 33%, non-MF grew by about 31%, blended 32%. Absolute EBITDA year-on-year basis grew almost 40%. Again, that is perhaps in my nine years, one of the best logging in of profit growth that we saw. A bit of percentage grew to just short of 47%. So, I think those are encouraging numbers. We believe that with the market, of course, there has been some correction and some flattening of the mood in the last two months, but as things come back, we should be holding our projections and this year, which is FY25, should be one of the strongest years in the last five-six years in the history of the company. Given that it has been a pretty decent quarter gone by, do you think that this 20% revenue guidance can be maintained? Anuj Kumar: Last quarter, revenue grew 32%. In this quarter we will moderate that outlook a little. So, it obviously will not be in the 30s, but it should certainly be mid to late 20s, like any figure between 26, 27, 28. Similarly, profit growth, which was 40% last quarter, again we are moderating, and it should be in the mid-30s. So, for the whole year, it is quite possible to deliver a mid-20s revenue growth and a mid, early to mid-30s profit growth. I would say there are good times and bad times during the year, but as a consolidated year, it will perhaps be the best year in the last five-six years. Can I say that right now, the entire space which you represent, essentially the back office for mutual funds, is more like a two-player market - CAMS on one side and KFin on the other side and there is very little possibility of a disruption or a new entrant emerging? Anuj Kumar: Yes, for the medium term, that is the correct conclusion to come to. It is a very complex, nuanced business, with very multi-layered execution. A significantly deep SMEship is needed. The platform has to be very strong and it has been built over decades, not over years, so that is a safe assumption that for some time this market could remain in terms of competitive intensity the way you described. How else are you looking at utilising your cash flow because your business is such that it does not require too much of capex commitment. Margins are strong, cash flows are strong, return on equity is strong, but there would be a point beyond which the base effect for the existing business would kick in, which means you need to diversify, you need to add more business lines. How are you planning to do that? Anuj Kumar: Today, the book is essentially mutual funds - about 86%; everything else is about 14%, which includes payments business, KRA, AIF, and private equity and then there are two-three other business lines, including account aggregator and insurance repository. We believe our hands are full. We believe that we are in the right market, which is India domestic, that we have the right business lines. In the last three years, we made investments in the other businesses outside of MF and some of the revenue growth, which you saw, was in the early thirties in the last quarter and should remain in the mid to high twenties this year, vindicating the fact that we have done the right things. Over a period of time, you are right, the base effect will start kicking in, but we are confident that we have the right diversification at the business level. From a cash perspective, we have been a high dividend company. We will make investments as and when they come by, but we are in no rush to just deploy the cash in something inorganic, unless it completely abides by the character and focus of the company. The focus of the company has been execution in platforms and cash generation. We want to bring something like that into the fold and not just any business that appeals to us just because we have cash. So, for the next three years, at what rate do you expect your mutual fund business to grow? At what rate do you expect a non-mutual fund business to grow? Anuj Kumar: In MF, if you take earnings, which is profits, we are calling a 14-15% growth in the next three years. Non-MF, we are calling over a 20% growth; blended about a 17% earnings growth is what the company can deliver, everything else remaining okay. When I was a school boy, I would buy a pen drive of 1 GB for Rs 100. Now I have a cloud of one TGB on my phone where I pay Rs 70 a month. I am sure that kind of a benefit would start kicking in for a company like CAMS. Where are you in terms of adaptation of AI technology, hardware, where you could be a big beneficiary because of the functionality both on the hardware and the software side? Anuj Kumar: At the macro level, yes, but our historical operating leverage has shown up in the way of 1% profit expansion every year. So, it will remain in the 1% to 1.5% range. We do not expect it will kick up too much. Just from a broader execution perspective, we run three data centres. We run them at 2x of the past peak expected capacity. We are setting up a fourth AI gap data centre just to keep things like malware away. We have significant and deep investments in security of all kinds. So, do keep in mind that a lot of the requirements emerging from a digital only world require a lot of multi-layering of investments, both in security and in infrastructure and that is a cycle that we and everyone else is going through. We expect that while the operating leverage will kick in, it will be of the order of 1% to 1.5% a year, but nothing more significant. If I say that CAMS is more like a back-office management company for mutual funds and whether it is CAMS or whether it is KFin, every mutual fund in a sense will have to go to one or the other service provider. So, as long as the mutual fund industry is growing, your business will grow. Can I say this is a very fair and easy summary of your business? Anuj Kumar: It is very tough for anyone to insource this or do it themselves. It has been a 100% outsourced model and we expect it will continue like that for some time. When you see the advent of, Jio Financial Services, they are talking about distribution. They have technology, a strong backend. Could that be a challenge that a new large competition or competitor could come in and may directly start managing their different ends where they may not require your services? Could there be disruption coming from Jio? Anuj Kumar: It is a very multi-layered, nuanced, regulated business. You require significant and long-term investments in the platform and building the digital infrastructure. And then to sell at the price at which we sell, where effectively our per folio per account price is of the order of about Rs 120, it is very difficult to match these economies, match the scale, and match just the quality of the infrastructure we built. So, it will take some time before somebody just jumps in and starts doing it themselves. What are the global parallels, let us say, in the United States? How many players are there in the mutual fund banking business? Is there a two-player industry in Europe and the US? Anuj Kumar: Overseas too, it is a bit of a lumped business. While some commercial banks offer this as part of the retail banking suite and the business is run as an omnibus folio and not individual investor folios overseas, I think players like BNY Mellon, State Street, Computershare in Australia are good examples of companies who do this kind of work. I understand that the moat is quite large as far as your services are concerned, but given that you are running at a very lucrative margin level - above 46% - what is the way forward? Are you looking at letting go of some of the margins and pricing to get more relationships and get more clients onboarded? Or do you think the margins can head to 48-50% given the operating leverage? Anuj Kumar: We have been in a market share and market share is a share of AUM, a range of about 70% for the last three or four years. We believe that it is competitive and we are defenders. We continue to win 70% to 80% of the new bids, so we are happy with the performance. We are focused on execution, and helping our clients scale their businesses. From a margin expansion perspective, despite all the economies, etc, and scale benefits, it will be about 1% to 1.5% a year.

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