As equity investors look towards the future prospects of the mutual fund industry, many may find themselves in a dilemma when it comes to selecting an asset management company (AMC) to support. For those hesitant about direct investments in AMCs, indirect opportunities such as registrar and transfer agents (RTAs) present an attractive alternative. One prominent example is Computer Age Management Services Ltd (CAMS), which has experienced remarkable growth, with its shares rising an impressive 80% over the past year.
CAMS holds a significant position in the market, servicing 10 out of the top 15 AMCs and commanding a noteworthy 68% market share of the mutual fund industry’s substantial ₹45 trillion assets under management (AUM) as of August. The company has engaged with analysts recently, unveiling its strategic vision that goes beyond its existing core operations. Notably, CAMS is well-prepared to ride the wave of increasing interest in alternative investment funds (AIF), which are gaining traction alongside traditional mutual funds and portfolio management services (PMS).
CAMS has also introduced CAMSPay, a payment aggregator designed to simplify transactions for mutual fund investments. Furthermore, CAMS KRA, the firm’s KYC registration body, has implemented a groundbreaking 10-minute KYC process, which is the fastest in the industry.
These new initiatives, including AIF, CAMSPay, and CAMS KRA, are anticipated to contribute approximately ₹50 crore to the firm’s revenues for FY25. However, it is essential to note that, while these efforts may diversify income streams, they are unlikely to drastically diminish CAMS’ current dependence on mutual fund revenues in the short term. In FY24, mutual funds represented a substantial 87% of CAMS’ total revenue, amounting to ₹1,137 crore. Projections suggest that this reliance will remain significant, expected to hover around 80% by FY27.
Market Trends and Growth Potential
Looking back over the past three years leading up to FY24, mutual fund assets have witnessed a robust growth rate of 19% compounded annually, outperforming the 11% increase observed in bank deposits. This trend underlines the escalating demand for mutual funds as a preferred investment vehicle among investors.
Challenges on the Horizon
Despite CAMS’ commendable growth trajectory, potential risks could dampen its revenue expansion. The Securities and Exchange Board of India (SEBI) has intensified its scrutiny on the total expense ratio (TER) of AMCs, which may result in reduced compensations to RTAs. Furthermore, the mutual fund revenue yield has seen a decline, dropping from 4 basis points (bps) in FY18 to 3 bps in FY24. Nonetheless, CAMS has managed to alleviate some of this pressure on yields through enhanced employee productivity, contributing to an EBITDA margin increase from 40.3% to 44.4% over the same timeframe.
Additional headwinds include potential downturns in mutual fund inflows brought on by equity market corrections, a shift towards passive investment strategies which yield lower revenues, and the emerging threat of AIFs siphoning off mutual fund investments.
CAMS Valuation in the Competitive Landscape
At present, CAMS shares are trading at 42 times the Bloomberg consensus earnings per share (EPS) estimates for FY26, which is notably lower compared to its competitor, Kfin Technologies, whose shares are valued at 52 times. This valuation difference presents an attention-worthy opportunity for investors looking for growth in the emerging financial landscape.
