Betting on proxy to India’s mutual fund industry can fetch you 18% returns

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If you are an investor in mutual funds, you would have surely heard about Computer Age Management Services or CAMS. It is India’s largest registrar & transfer agent (RTA) of mutual funds with around 70% market share of AUM. Just like the depository services, even the RTA services has only two players — CAMS & KFin Technologies (KFin).

CAMS is the best proxy to India’s mutual fund as its model is directly linked to growth of AUMs of the industry. It derives revenue by charging a fee on AUMs handled by asset management companies and charges for paper-based transactions of AUMs. Despite serving 17 clients compared to 24 by KFin, CAMS book size is almost 2.5 times of KFin.

“Under penetration and increasing financialisation are expected to drive mutual fund AUM, which is anticipated to grow at 12-15% CAGR in FY21-25E. Leadership in RTA business with ~70% share in a duopoly market with high entry barrier puts CAMS in a uniquely advantageous position. Technology expertise, client integration & relation act as a moat making CAMS a play on the Indian MF industry. With revenue based on percentage of managed AUM, topline is seen following AUM growth at ~12% CAGR in FY21-23E,” said ICICI Securities in a note.

The brokerage has set a price target of Rs 2,100 as it is of the v iew that CAMS is a structural growth story with the opportunity to participate in a relatively underpenetrated and high potential Indian asset management market.

Technological expertise, long-standing client relation and leadership in the duopoly RTA market with entry barriers remain key business strengths.

“PAT is expected to grow at 13.4% CAGR in FY21-23E to Rs 259 crore and Return on Equity at ~38%. Valuing the stock at ~40x FY23E PAT, the stock can deliver 18% returns,” added the note.

At the time investors should also note that CAMS growth and profitability is dependent on AUM size & mix. Technology disruption can hamper its operations and big client exit can impact its top & bottom line adversely.

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