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Play on industry AUM growth

Computer Age Management Services (CAMS) is the leading Mutual Fund Registrar and Transfer Agent (MF RTA) of India (69.2% market share as of Jan’21). A play on the Indian MF industry (~90% of CAMS’ 9MFY21 revenues are based on a percentage fee of AUM of client MFs), CAMS has clocked revenue/EBITDA CAGRs of 14%/19% from FY16 to FY20 against comparable 18% CAGR in India’s overall MF AUM. Through strong, longstanding integration with client MFs and widespread distribution infrastructure / technological expertise, CAMS enjoys strong business moat with healthy financials (5-year average RoE at 32% / 5-year average dividend payout at 60%). As business limitations, the earnings growth will likely remain capped to the AUM growth while monetisation of new initiatives will remain constrained in medium term. Based on 14% earnings CAGR between FY20-23E, we initiate coverage on CAMS with a ADD rating and target price of Rs2,085 based on 40x FY23E EPS of Rs52.

* CAMS is a play on increase in mutual fund AUM, whose strong growth levers are: underpenetration, increasing financialisation of savings, and improving equity mix. Mutual fund AAUM has increased from Rs6trn in FY11 to Rs30trn as of Jan’21. We expect the theme of financialisation of savings to continue hereon due to lower returns offered by other asset classes like bank FDs/ real estate. Our macro model (refer page 11) suggests that Indian MF AUM is expected to grow at 15% CAGR between FY21E and FY30E from the current Rs30trn to Rs100trn by FY30E. Even after achieving the scale of Rs100trn and assuming domestic GDP to grow at 7.4% CAGR between FY20E and FY30E, MF AUM as a percentage of GDP works out to 24%, which is still lower than the current global average of ~55%.

* Strong entry barriers and high market share lend a definite growth outlook. Entry barriers to MF RTA business include high technology intensity, compliance requirement, extensive branch network and already existing deep integration with the mutual fund ecosystem (industry has gone through consolidation and no MFs have migrated between RTAs). Further, CAMS offers many services online and through several mobile applications to investors, clients, distributors and channel providers. Continued development of proprietary platforms and applications has furthered its competitive technology advantage. (for details of CAMS applications, refer page 21)

* Global evidence confirms oligopolistic industry structure with sustained profitability: Evidence from BNY Mellon/State Street shows that players are able to maintain market share and profitability despite fall in asset servicing fees.

* Combination of certain outlook of core business growth and possible new opportunities justify expensive valuations. There are new business opportunities within the Indian MF ecosystem targeted by wealth managers, exchanges and depositories, but CAMS remains better placed to harness the same due to its established relationships with MFs/subscribers. Increasing digitisation, record keeping and financialisation of savings provide attractive opportunities within the core capability of CAMS. Yet, direct customer data monetisation is unlikely to play out in near term as CAMS is not the principal owner of any data.

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