What makes CAMs a better bet than AMCs for financialisation theme

Viewed as a proxy to asset management business, steady financial record is the USP

The initial public offering of Computer Age Management Services (CAMS) was among 2020’s most talked-about listing. With gains of 23 per cent on listing in October, there was high demand for the stock. It has delivered 46 per cent returns from its issue price of Rs 1,230.

Lately, with asset management companies (AMCs) or the mutual fund (MF) 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, CAMS’ market leadership, steady-state revenue model, and meaty profitability position it as among the best plays on the country’s financialisation theme — a badge that AMC stocks have held so far.

CAMS is an MF registrar and transfer agent, an industry that has a duopolistic dynamic, similar to depository services.

With KFin Technologies (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 (AUMs) handled by AMCs and charges for paper-based transactions of AUMs.

Even if CAMS deals with 17 AMCs, against 25 by KFintech, with AUMs exceeding Rs 22.89 trillion, its book is almost three times larger than KFintech’s. The top five AMCs account for 80 per cent of CAMS’ total AUMs. Fee income generated per transaction accounts for 88 per cent of total revenue, and fee as a percentage of AUM declines with the increase in the size of the AUM, clearly indicating CAMS is a volume-driven business. Therefore, absolute growth may not be meaty, given that from FY16–20 its revenues have increased 11.84 per cent on an annually compounded basis, whereas the sector witnessed over 15 per cent growth. Analysts at ICICI Securities factor in 9 per cent growth in FY20-23.

Being a human-intensive segment, employee costs account for 38 per cent of total revenue, though there are no major costs. Yet, CAMS’ operating margin in the December quarter stood at 42 per cent, making the stock best suited to investors looking at steady revenue growth, but a highly profitable franchise.

That said, investors should also be aware of some inherent risks. For inst­ance, with higher client concentration, analysts at Kotak Institutional Equities note 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.

Still, given the advantages of a market leader, CAMS may be better positioned to ward off risks. This is why even if the stock trades at 36x its FY22 estimated earnings, the Street is upbeat about it.