CAMS Share price: Kotak initiates coverage with ADD rating and price target of Rs 1850
CAMS’ prospects are directly linked to those of India’s Mutual Fund industry, with a market share of 70% in Mutual Fund AAUM. As a dominant operator in a duopoly RTA market, its breadth offers protection against market share volatility. Kotak Institutional Equities notes that its revenue concentration among top AMCs limits its pricing power and compresses yields
CAMS’ prospects are directly linked to those of India’s Mutual Fund industry, with a market share of 70% in Mutual Fund AAUM. As a dominant operator in a duopoly RTA market, its breadth offers protection against market share volatility. Kotak Institutional Equities notes that its revenue concentration among top AMCs limits its pricing power and compresses yields. Kotak Institutional Equities expects its improving productivity and unit economies to mitigate slower MF AUM growth to drive 14% EPS CAGR over FY2021-24E. Kotak Institutional Equities initiate coverage with an ADD rating and DCF-based Fair Value of Rs 1850. CAMS share price today is Rs 1785, up Rs 16 or 0.9%.
Initiate with ADD rating: Leading MF play
Kotak Institutional Equities has initiated coverage on CAMS with an ADD rating and Fair Value of Rs 1850 (5% upside). CAMS have a dominant position in India’s registrar and transfer agent (RTA) market duopoly, which reduces risks of market share movements. This makes it one of the best MF plays and provides visibility for its earnings. Kotak Institutional Equities continue to be cautious about medium-term challenges to India’s mutual fund industry, which will likely pressure CAMS’ revenues, driving (moderate) 14% EPS CAGR during FY2021-24E.
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CAMS: Lion’s share in the RTA duopoly
CAMS’ model is intrinsically directly linked to Indian MF AAUMs, serving about 70% of Indian MF AUMs, this makes it broadly agnostic to market share movements among AMCs. Its MF revenues (87% of total in FY2020), although mostly linked to served AUMs, have lagged asset growth due to persistent yield compression. This is a result of the high revenue concentration from top clients (36% from top-2 AMCs and 67% from top-5), which limits its pricing power vis-a-vis AMCs. Along with its subsidiaries, CAMS provides several value-added services to mutual funds, insurance companies and AIFs as well as related stakeholders like distributors and investors. Its business proposition is underscored by wide distribution, diverse product bouquet, domain expertise and proprietary software and technology platforms.
Improving productivity to mitigate yield pressure and slower AUM growth:
CAMS’ strong profitability (40-44% RoEs over FY2021-24E) is supported by low capital requirements with inherently strong operating leverage of the RTA business (EBITDA margins of 41.4-43% during FY2021-24E). Moderation in broad AUM growth (16% CAGR over FY2022-24E compared to 23% over FY 2015-20) and compression in yields (2.45 bps in FY2024E from 3 bps in FY2020; 4.5 bps in FY2015) will likely constrain revenue growth to 12% CAGR over FY2021-24E. Kotak Institutional Equities expect its strong focus on expense management and consistent productivity improvements to boost PAT growth to 15% CAGR during the period, although CAMS’ share of the non-MF business remains muted at 10% of revenue.
Risks:
Excessive yield compression, concentration, adverse regulation, operating risks
Key risks for CAMS are:
(1) faster-than-expected yield compression due to brisk digital adoption or otherwise
(2) lower negotiating power due to high client concentration
(3) operating risks— including cyber-attacks. Additionally, it could face risks endemic to the MF like weak financial savings, shift to passives, volatility in capital markets and adverse regulations.
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