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Prepared to succeed in conjunct opportunities

* CAMS, with a 70% market share (v/s 64% in FY15), is the leader in India’s MF registrar and transfer agent (RTA) industry. The addition of new customers and rising market share of its incumbent customers has led to the company consistently gaining prominence in this duopoly market. The company is entrenched with four out of the five largest MFs as well as 10 of the 15 largest MFs based on AAUM.

* This makes it is a direct play on the growing financialization of savings in India, and is also a key enabler for digitization in the MF industry. With MF penetration in India at just 16% as against the global average of 63%, we expect a strong 15% CAGR in AUM for the industry in the coming decade.

* Akin to its MF business, CAMS has a strong presence in the AIF and PMS RTA segment (50% market share among funds utilizing RTA services). We expect strong growth in this segment, led by: 1) increasing adoption of RTA services by existing funds, and 2) a significant increase in launches.

* The Account Aggregator business has the potential to revolutionize lending and financial planning, the way UPI did for payments. Given its strong technological capabilities and expertise in handling large databases, we expect CAMS to be among the top five players in this segment.

* We expect the MF/non-MF business to register a FY22-25 revenue CAGR of 13%/20%, with 15%/13% CAGR each in PAT/operating cash flow, as operating margin is expected to remain flat. We expect RoE to touch 45% by FY25. Dividend payout is healthy at 65%.

* We initiate coverage with a Buy rating and a one-year TP of INR3,000 (36x Sep’24E EPS). We value it a premium to AMCs (14-25x one-year forward P/E), given the duopoly nature of the RTA industry and large growth opportunities in new segments.

Commands 70% market share in the fast-growing duopoly for MF RTAs

* The Indian MF industry is expected to clock 15% AUM CAGR over the next decade on the back of: 1) rising financialization of savings, 2) expanding presence of AMCs in lower tier cities, and 3) favorable regulations, significantly reducing the cost for investors.

* A robust RTA services have been the backbone of the growth of the AMC industry as it allows companies to focus on two core activities: 1) investment management, and 2) marketing. Having long-term relationships with AMCs allows RTAs to be ingrained into the entire AMC ecosystem. This makes it difficult for AMCs to switch RTAs.

* The RTA industry in India is a duopoly, with CAMS commanding 70% market share and the rest with KFin Technologies (KFin). CAMS is entrenched with 17 AMCs, including four out of the five largest MFs, as well as 10 of the 15 largest MFs based on AAUM.

Account Aggregator and AIF and PMS RTA segments offer huge potential

* The Account Aggregator business is at a nascent stage in India. Given the regulatory push towards implementing it, we see huge opportunities here.

* The company has gone live with its platform. We see it among the top five players, given its strong technological capabilities and expertise in handling large databases.

* CAMS commands over 50% market share among AIFs and PMS, which avail of RTA services. We are excited about the growth in this segment as: 1) the HNI base in India is expected to grow at a brisk pace, 2) HNI affinity towards AIF and PMS is on the rise, 3) many new players have entered this space, and 4) existing players incrementally adopt RTA services, with an increase in scale

NPS, CAMSPay, and Insurance repository are solid long-term businesses

* CAMS recently launched its CRA services for NPS. Pension planning in India is at a nascent stage and is expected to gain significant traction going forward. Subscriber addition and a rise in AUM will be key drivers for this business.

* CAMSPay is a highly automated ECS or NACH platform, which manages end-toend ACH transactions. With the rising adoption of online transactions, this business has the potential to deliver strong revenue growth.

* The Insurance repository business lacked strong momentum in the past, but the recent regulatory push to mandate the issuance of e-policies will be a key trigger.

The share of non-MF revenue to increase, outlook on margin steady

* We expect 15% revenue CAGR over FY22-25E, led by MF/non-MF revenue CAGR of 13%/20%. The share of the non-MF business is expected to increase from 10% at present.

* Operating margin is likely to stabilize as scale benefits from the MF business will be offset by investments in the scaling up of new businesses as well as sustained spending towards technology enhancements.

* EBIDTA margin is expected to improve to more than 45.5% in FY24-25 after falling to 44.8% in FY23.

Deserves premium valuations, initiate coverage with a Buy rating

* Empirically, CAMS has traded at a premium to listed AMCs in terms of one-year forward P/E. This premium is well deserved, given: 1) the duopoly nature of the industry and high-entry barriers, 2) relatively low risk of a market share loss, and 3) higher customer ownership as compared to AMCs.

* Based on one-year forward P/E multiple, the premium enjoyed by CAMS over HDFC AMC has narrowed to 20% from 60% over the last one year. This was on account of the weak environment in the AMC space, given the pressure on yields, outflows from the Debt segment, and a MTM hit on Equity AUM. We expect these factors to reverse in the coming months, as the intensity of the fall in yields abates, Debt inflows increase with the topping of bond yields, and a rebound in the Equity market.

* CAMS is expected to deliver a revenue/EBIDTA/PAT CAGR of 14%/13%/15% over FY22-25, with a RoE of 45.2% in FY25. We initiate coverage on the stock with a Buy rating and a one-year TP of INR3,000 (36x Sep’24E EPS).

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