Additionally, Kumar said CAMS continues to win 70% to 80% of new bids. They focus on execution and help clients grow their businesses. Despite all the economics and economies of scale, margin growth is around 1% to 1.5% per year.
The tagline “Mutual Fund Sahi Hai” is exactly applicable to your business. As your mutual fund grows, so will you. As your SIP grows, new folios are added. As they grow, so will your business. So, can we say that mutual funds sahi hai and CAMS are also sahi jaga par hai (mutual funds are correct and CAMS are in the right area)?Anuj Kumar: I also agree with you. For many years, our business has been closely linked to capital markets. And in the capital markets for mutual funds, about 86-87% of the returns are tied to trends in that industry. Over the years, the scope of distribution has expanded and the acceptance of the product has expanded. Therefore, our fate depends on this market and I agree with you.
Margins expanded in the quarter, but EBITDA growth was in the single digits. Why is single-digit EBITDA growth in a sector with double-digit growth?
Anuj Kumar: To give you a fair year-over-year comparison, I would say that Q2 revenue was up 32%. This is probably the best number we’ve ever posted in our lives. The book is also diversified as MF revenue increased by nearly 33%, non-MF revenue increased by approximately 31%, and blended revenue increased by 32%. Absolute EBITDA increased by approximately 40% year-on-year. Again, this was probably one of the best profit growths in my 9 years.
The percentage increased slightly to just shy of 47%. So I think these are encouraging numbers. Of course, we believe there has been some correction and some flattening of the mood in the market over the last two months, but as things return to normal, we need to maintain our expectations and expect that in FY25 One year we need to keep that prediction. It’s been the strongest period in our history over the past five or six years.
Given that you had a pretty good quarter, do you think this 20% revenue outlook is sustainable?
Anuj Kumar: Last quarter, revenue increased 32%. We plan to moderate that outlook a little bit this quarter. So obviously it’s not going to be in the 30s, but it should be in the mid to high 20s, as well as numbers between 26, 27, and 28. Similarly, earnings growth, which was 40% last quarter, has slowed again and should be in the mid-30s. So over the course of the year, there’s a good chance we’ll see revenue growth in the mid-20s and profit growth in the mid-30s, low to mid-30s. I think there are good times and bad times throughout the year, but this is probably the best consolidated year we’ve had in five or six years.
At the moment, the whole space that you represent, essentially the back office of mutual funds, is more of a two-player market. With CAMS on one side and KFin on the other, there is little chance of confusion. Or will new entrants emerge?
Anuj Kumar: Yes, in the medium term, that would be the correct conclusion. This is a very complex and nuanced business, and the execution is very multi-layered. You need a very deep small business. Platforms need to be very strong, and are being built over decades rather than years, so this market is likely to remain in terms of the kind of competitive intensity you describe for some time. There is no doubt that there is.
Since your business doesn’t require much capital investment, how else are you looking to utilize your cash flow? Profit margins are high, cash flow is strong, and return on equity is high, but beyond a certain point, the basic effects of existing businesses become apparent, so diversification is necessary, and additional business fields are needed. how are you going to do that?
Anuj Kumar: Now, the essential part of this book is mutual funds – about 86%. Others are about 14%, which includes payments businesses, KRA, AIF, private equity, and two to three other lines of business, such as account aggregators and insurance repositories. I believe we have our hands full. We believe that we are in the right market and have the right business area within India. Over the past three years, we have invested in other businesses outside of MF. As you can see, some of the revenue growth, which was in the low 30s last quarter, should stay in the mid to high 20s this year. The fact that we have been doing the right thing. Over a period of time, as you said, the base effect will start to show, but we are confident that we have the right diversification at the business level. From a cash perspective, we are a high dividend company. We invest when necessary, but we don’t just rush to invest cash in inorganic things unless it’s completely in line with the company’s character and focus. The company focuses on platform execution and cash generation. We want to bring into the fold businesses that are not attractive to us just because they have cash.
So how fast do you expect the mutual fund business to grow over the next three years? How fast do you expect the non-mutual fund business to grow?
Anuj Kumar: MF expects a growth of 14-15% over the next three years, considering revenue, or profit. For non-MFs, growth is expected to be more than 20%. The company can only deliver around 17% revenue growth, and everything else is fine.
When I was a student, I used to buy a 1 GB pen drive for Rs 100. Now I have 1 TGB of cloud on my phone and I pay 70 rupees a month. I am confident that such benefits will begin to emerge for companies like CAMS. When it comes to adapting AI technology, hardware, where can you get greater benefits from capabilities on both the hardware side and the software side?
Anuj Kumar: While that’s true on a macro level, our historical operating leverage translates into 1% profit growth each year. So it will stay in the 1% to 1.5% range. I don’t expect it to get too big. From a broader execution perspective, we operate three data centers. We are operating at twice our historical peak expected capacity. We’re setting up a fourth AI Gap data center just to keep things like malware away. We invest heavily in security of all kinds. So a lot of the requirements coming out of a digital-only world will require a lot of multi-layered investments in both security and infrastructure, and we’re mindful that that’s the cycle that we and everyone else is going through. Please keep it. Until operating leverage kicks in, we expect it to be around 1% to 1.5% per year, but not much more than that.
When I say CAMS is more like a back office management company for mutual funds, in a sense all mutual funds, whether it’s CAMS or KFin, go to some service provider. You will have to rely on it. Therefore, as long as the mutual fund industry is growing, so will your business. Would you say this is a very fair and simple summary of your business?
Anuj Kumar: It is very difficult for anyone to outsource this or do it themselves. This is a 100% outsourced model, and we expect it to remain that way for some time.
If you look at the emergence of Jio Financial Services, they are talking about distribution. They have technology and a strong backend. Is this a challenge where a new large competitor or competitor could come in and directly start managing another end that doesn’t need your services? Do you have it?
Anuj Kumar: This is a very multi-layered and nuancedly regulated business. Building platforms and digital infrastructure requires significant long-term investment. And if we sell at the price that we sell, which is effectively around Rs 120 per folio per account, but to fit these economies, fit the scale, fit the quality of the infrastructure. is very difficult. we built it. So it’s going to be a while before someone jumps in and starts doing it themselves.
For example, what are the global similarities in the US? How many players are there in the mutual fund banking business? Is there a two-player industry in Europe and the US?
Anuj Kumar: Even overseas, they are all sort of grouped together. Some commercial banks offer this as part of their retail banking suites, and overseas the business is run as an omnibus folio rather than a retail investor folio, but BNY Mellon, State Street and Australian computers I think players like Share are great examples of companies doing this. A kind of job.
I understand that you have a very large outside moat as far as your services are concerned, but given that you are operating at a very favorable profit margin of over 46%, how does the future hold for you? Are you considering giving up some of your margins and pricing in order to build more relationships and acquire more clients? Or, considering operating leverage, profit margins can reach 48-50%? Do you think you will?
Anuj Kumar: We’re gaining market share, and market share is the share of assets under management, and it’s been in the range of about 70% for the past three to four years. We believe in being competitive and being advocates. We continue to win 70% to 80% of new bids and are pleased with our performance. We focus on execution and help our clients grow their businesses. From a profit growth perspective, despite all economic conditions and economies of scale, it’s around 1% to 1.5% per year.
