Buy CAMS Ltd For Target Rs.4,600 by Motilal Oswal Financial Services Ltd
Yield pressures likely; non-MF growth to remain strong
? CAMS reported operating revenue of INR3.7b in 3QFY25, up 28% YoY (in-line). For 9MFY25, operating revenue was up 29% YoY to ~INR10.7b.
? Strong revenue growth resulted in EBITDA of INR1.7b (in-line), up 34% YoY, with EBITDA margin at 46.7% (vs 44.7% in 3QFY24 and our est. at 46.8%). Management guided for EBITDA margins at ~15% for the Non-MF segment. For 9MFY25, EBITDA rose 36% YoY to INR4.9b.
? CAMS reported a net profit of INR1.2b, up 40% YoY (in-line) in 3QFY25, driven by strong top-line growth across segments and better cost control. For 9MFY25, PAT rose 42% YoY to INR3.5b.
? Non-MF businesses rose 22.3% YoY, led by strong growth in the CAMSPay, KRA, and AIF segments. Management guided for growth rate to increase to 30%+. The share of the Non-MF segment in overall revenue came in at ~12.3%, and the company guided for the contribution to increase to 20%+ over the next 2-3 years.
? We have cut our earnings estimates by 1%/7%/9% for FY25/FY26/FY27 to factor in: 1) lower AUM growth, given market sentiments, and 2) the decline in yields as guided by the management. We expect revenue/PAT to post a CAGR of 18%/23% over FY24-27E and reiterate a BUY rating on the stock with a one-year TP of INR4,600, premised at a P/E multiple of 38x on Sept’26E earnings.
Increasing focus on non-MF businesses
* AAUM grew 36.4% YoY and 3.3% QoQ to INR 46.3t in 3QFY25. The share of Equity AUM grew to 55.3% in 3QFY25 from 49.8% in 3QFY24. Equity AUM rose 51% YoY to INR25.6t.
* Transaction volumes increased 56% YoY to 240m, with SIP transactions up 57% YoY to 195.4m. Live folios grew 35% YoY to 90.9m.
* MF segment’s revenue grew 28% YoY to INR3.2b, contributing ~87.7% to the overall revenue, with yields remaining stable. MF asset-based contributions accounted for ~73.9% of total MF revenue, while non-asset contributions make up ~13.8%.
* CAMS alternatives continue to scale up due to strong signings (53 new mandates in 3Q) and the adoption of CAMS WealthServ and Fintuple offerings. Management guided for 20% YoY growth in revenue, with 30-35% growth in AIF AUM.
* CAMSPay registered stellar revenue growth of 53% YoY, driven by a surge in digital payments (150% YoY growth). During the quarter, it added 24 new logos and empaneled LIC for Authentication and Payment Gateway Services, which is expected to further boost transaction growth.
* CAMS KRA revenue grew 27% YoY despite a slowdown in new account openings during the quarter. Recently, the company signed one of the top five brokerages in the industry and expects 20-25% volume growth.
* CAMSRep witnessed strong momentum in policy additions, with the base crossing 10m and an expectation of adding another 10m policies over the next 12-18 months. The investor base at Bima Central has exceeded 0.4m, with transaction volumes up 40% QoQ.
* Other income came in at INR149m vs INR99m in 3QFY25.
* Overall expenses came in at INR1.2b vs INR997m in 3QFY25. The CIR for 3QFY25 stood at 53.3% vs 55.3% in 3QFY24 and 53.4% in 2QFY25. ? Employee costs/other expenses increased 20%/28% YoY (in-line) to INR1.2b/INR772m. Management guided for employee costs/operating expenses to remain at ~32-33%/8-8.5% of the overall revenue, with a minor increase of ~2% in 1QFY26 to factor in the impact of increments.
Key takeaways from the management commentary
* Management guided that if AUM grows 15%, it expects a decline of 100-200bp in MF revenue due to yield compression.
* Additionally, it has guided for an unusual decline in yields in FY26, attributed to backdated adjustments for 1-2 clients. Yield compression is expected to be higher than ~3.5%, though the impact on the margins will not be significant.
* On the MF front, it won 2nd MF-RTA migration mandate from the competitor. The reasons for migration include the quality of the platform, in-house integration of KRA and payment services, and better handling of client/investor concerns. CAMS is charging a premium for the transfer.
Valuation and view
* 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) the relatively low risk of market share loss, and 3) higher customer ownership compared to AMCs.
* Structural tailwinds in the MF industry are expected to drive absolute growth in MF revenue. With favorable macro triggers and the right investments, revenue contribution from Non-MF businesses for CAMS is expected to increase to 20%+ over the next 2-3 years, as guided by management.
* We have cut our earnings estimates by 1%/7%/9% for FY25/FY26/FY27 to factor in the decline in yields and slow growth in the Non-MF segments. We expect revenue/PAT to post a CAGR of 18%/23% over FY24-27E and reiterate a BUY rating on the stock with a one-year TP of INR4,600, premised at a P/E multiple of 38x on Sept’26E earnings.
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