The initial public offer of Computer Age Management Services or CAMS was 2020’s most raved listing. With gains of 23 per cent on listing, there was high demand for the stock and it has delivered 46 per cent gains from its issue price.
Lately, with asset management companies (AMC) or mutual fund industry recording significant redemption pressure, and seven consecutive months of net equity outflows till February 2021, the spotlight is on CAMS. Seen as a better proxy to capture India’s AMC theme, better than even the listed players in the sector, CAMS’s market leadership, steady-state revenue model and meaty profitability positions, it the best play on the country’s financialisation theme, a badge that AMC stocks have specifically held so far.
CAMS is a mutual fund registrar and transfer agent (MF RTA), an industry whihch has a duopolistic market dynamic, similar to depository services. With KFintech as its closest competitor, CAMS holds 70 per cent market share. The company has two major revenue streams – fee charged on assets under management (AUM) handled by AMCs and charges for paper-based transactions of AUMs.
Even if CAMS deals with 17 AMCs as against 25 by KFintech, with assets under management (AUM) exceeding Rs 22.89 trillion, its book is almost three times larger than KFintech. Top five AMCs account for 80 per cent of CAMS’s total AUMs. Fee income generated per transaction accounts for 88 per cent of total revenues, and fee as a percentage of AUM declines with the increase in the size of the AUM, clearly CAMS a volume driven business.
Therefore, the absolute growth may not be meaty given that from FY16 – 20 its revenues have increased by 11.84 per cent on an annually compounded basis, whereas the AMC sector witnessed over 15 per cent growth during this period. Analysts at ICICI Securities factoring nine per cent growth in FY20-23.
Being a human intensive segment, employee costs account for 38 per cent of total revenues, though there are no other major costs. Yet, CAMS’s operating margin in the December quarter stood 42 per cent, thus making the stock best suited for investors looking at steady revenue growth, but a highly profitable franchise.
That said, investors should also be aware of some of the inherent risks in CAMS stock. For instance, with higher client concentration, analysts at Kotak Institutional Equities note that it could lower the negotiating power of CAMS. “It could face risks endemic to the MF like weak financial savings, shift to passives, volatility in capital markets and adverse regulations,” they add.
Yet, given the advantages of a market leader, CAMS may be better positioned to ward these risks. This is why even if the stock trades at 36x FY22 estimated earnings, the Street is upbeat about it, disregarding the pricey asking rate.