CAMS is the market leader with ~70% market share in the duopoly market of Registrar and Transfer Agents (RTA). CAMS derives almost 72% of the revenues as a direct charge to AMC on their AAUM. Hence, it is a direct proxy on growth in AUMs for the asset management companies which it serves (total 16, 4 out of the top 5 AMCs in the country). Following a moderate growth in FY21 (COVID impact), we expect AMC industry to register 15% AUM CAGR over the medium term. CAMS is looking to diversify its revenue base with addition of AIFs and Insurance companies to its client roster. The company earns a healthy RoE of 35%+, has zero debt, has a dividend payout policy of at least 65% and generates robust free cash every year. The valuations are reasonable at FY22E P/E of 26x. We assign a SUBSCRIBE rating.
AMCs AUM growth key revenue driver
Given the low MF penetration, rising preference of financial savings over physical savings and huge opportunity to grow in B-30 cities, we expect AAUM of AMCs to grow at a healthy 15% CAGR over the medium term. CAMS would be a direct beneficiary, although the growth would be lower given that fees are generally tiered in nature. Also reducing number of paper transactions would restrict revenue growth, which would be offset by our expectation of increase in share of equities in AUM (higher fee for Equity AUM).
High entry barriers have led to duopoly structure of RTA industry
The RTA industry is a duopoly with 96% market share amid CAMS (70%) and Karvy's KFin Technologies (26%). Long term relationship with AMCs, high operational risks while shifting RTAs, wide branch network of RTAs and proprietary software systems are key entry barriers for any new player. For AMCs to carry out these activities inhouse, the RoI would not be lucrative enough to invest.
Strong relationships with 4 out of the top 5 AMCs
CAMS has been into long term relationships with AMCs and has been serving 4 out of top 5 AMCs in terms of AUM. It has seen its market share increase over the years owing to consolidation trend wherein the top 5 AMCs have seen a faster growth rate vis-à-vis the rest of the industry. We expect this trend to sustain as AMCs increase their penetration in B30 cities where brands are preferred.
AIFs and Insurance e-policies will lead to revenue diversification
Currently 90% of the revenues arise from the AMCs, rest comes from services provided to AIFs, insurance companies and others. Currently, the contribution from these segments is miniscule. However, with AIFs likely to witness a stronger growth than AMCs and expectation of significant increase in issuances of e-policies by insurers, the share of these segments can grow meaningfully. In the insurance repository business, it has a 39% market share with 2.9mn policies held. For AIF business, it has 77 clients with AAUM of Rs160bn.
Experienced management team
CAMS has a vastly experienced management team with an average work experience of 27 years. The team has demonstrated ability to grow and diversify the business and innovate services.
Falling share of paper based transactions
CAMS charges higher fees for paper based transactions as the effort required is significantly higher when compared with online transactions. The share of paper based transactions is reducing considering higher adoption of online platforms for investments into mutual funds given the ease of transactions. Resultantly, the revenue for CAMS could be impacted. However, the profitability will not be impacted as expenses will also be cut commensurately.
Existing promoters and investors could exit stake post lockin phase
CAMS had filed the DRHP in January 2020 which was primarily to provide partial exits to Warburg Pincus, NSE Investments, HDFC and Acsys Investments. However, since then, SEBI ruled that the NSE Investments have to completely exit their stake. Going ahead, the other promoters and investors may look to exit their stake partially given their previous intent post their lockin period of 1-year.
Cyber security is a material threat
Many of services offered by CAMS are provided through the internet, which increases exposure to potential cybersecurity attacks including viruses, ransomware and spam attacks. In past, the company has experienced cybersecurity threats to its information technology infrastructure and have experienced non-material cyber-attacks. A material lapse could create not only a financial burden but also loss of client.
Exit of one client can create huge impact on financials
As highlighted earlier, AMCs may not switch RTAs easily considering that the process will be time consuming and disruptive. However, in case of a major compliance lapse or cyberattack, the customer might switch, which could entail a huge loss of revenues. Top five clients account for 67% of the revenues for CAMS.
Financials & valuations
Strong financial track record
During FY17-20, CAMS registered a revenue CAGR of 13.5% and a PAT CAGR of 11.8%. RoE has been in the range of 34-35% and the balance sheet has zero debt. The company has stated dividend policy of paying minimum 65% of the PAT but empirically the payout has been higher. Going ahead, we expect to see revenue CAGR of 10% during FY20-23E and a PAT CAGR of 16.3%. RoE will improve further as benefits of operating leverage will drive margins and asset turnover.
At the higher end of price band, the stock will trade at FY22E P/E of 25.6x. While there are not listed peers for CAMS but given the sustainable profit growth, high RoEs and strong free cash flow generation, we find the valuations reasonable.