CAMS shines on upbeat mutual fund prospects, but risks lurk
For equity investors optimistic about the mutual fund industry’s prospects but uncertain which asset management company (AMC) to back, indirect plays like registrar and transfer agents (RTA) offer a viable alternative. A case in point is industry leader Computer Age Management Services Ltd (CAMS), whose shares have surged 80% over the past year.
CAMS serves 10 of the top 15 AMCs and held a commanding 68% market share of the mutual fund industry’s ₹45 trillion assets under management (AUM) as of August. The company recently met analysts and shared its strategies beyond the usual business operations, even as the plans are closely linked to its existing RTA business. For example, CAMS is well positioned to cater to any likely shift in favour of alternative investment funds (AIF), which are gaining traction alongside mutual funds and portfolio management services (PMS).
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Similarly, CAMSPay, the company’s payment aggregator, streamlines transactions for mutual fund investments. Meanwhile, CAMS KRA, its KYC registration arm, has introduced the industry’s fastest 10-minute KYC process.
AIF, CAMSPay, and CAMS KRA are each expected to contribute around ₹50 crore to FY25 revenues. However, these new initiatives are unlikely to significantly reduce the reliance on mutual fund (MF) revenues in the near term. In FY24, MF accounted for 87% of CAMS’ total revenue of ₹1,137 crore, and even by FY27, it is projected to remain substantial at around 80%.
Over the three years leading to FY24, mutual fund assets grew at a 19% CAGR, compared to an 11% increase in bank deposits.
Nevertheless, there are potential risks to CAMS’ revenue growth.
The Securities and Exchange Board of India’s increasing scrutiny on the total expense ratio (TER) of AMCs could reduce payouts to RTAs. The mutual fund revenue yield has already declined from 4 basis points (bps) in FY18 to 3 bps in FY24. However, CAMS managed to offset some of the pressure on yields by enhancing employee productivity, leading to an Ebitda margin expansion from 40.3% to 44.4% over the same period.
Additional risks include a potential slowdown in mutual fund inflows due to equity market downturns, a shift towards lower-revenue passive funds, and the threat of AIFs cannibalizing mutual fund inflows.
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CAMS shares trade at 42 times FY26 Bloomberg consensus earnings per share (EPS) estimates, below its rival Kfin Technologies, which trades at 52 times.