Fundamental Analysis of CAMS

Welcome back to Traders Ideology, In this article, we will do a fundamental analysis of CAMS. If you have been reading my articles you would know that I strongly believe that from digital sectors we can get the next set of multibagger stocks.

From 2015 till 2021, the aim of the mutual fund industry in India has grown from 11.9 lakh crore to 31.2 lakh crore had a very good CAGR of 11.4%, and within that, the equity mutual fund segment has grown at an exceptional CAGR of 25%.

Clearly, mutual funds are getting popular in India, as more and more people have realized the importance of investment in the Indian economy.

This has created immense growth opportunities not only for AMCs in India, but the companies that support the AMCs and once its company is CAMS, that is a computer age management service.

As usual, we will first start with an understanding of the company and its business, its leadership, competitive strength, competitors, key risk, future growth prospects, and financials to decide if CAMS is fundamentally strong or not.

We will then cover valuation analysis to understand whether it is worth investing in the company at its current levels or not. But before proceeding further, I would like to clarify that my stock analysis is only for educational purposes.

I do not provide any target price, buy price, or sell price, and not also provide stock tips. It is useful for long-term investors and not for short-term traders.

Disclaimer: This article is only for educational purposes. I do not recommend buying or sell so please consult your advisor and do your own research before investing.

Also, Read: Fundamental Analysis of IRCTC & Fundamental Analysis of DMART

Introduction

Established in 1988, Computer Age Management Services Limited (CAMS) is a Registrar and Transfer Agency (RTA) of Mutual Funds.
In other words, it is a financial infrastructure and service provider for mutual funds and other financial institutions.
Let us now try to understand what exactly this registrar and transfer agency is?
Investors in mutual funds do multiple transactions on any given working day, they can buy and sell, or switch units, or even request their bank to change their residential address or email.
Each such request is a transaction in itself. The mutual fund House has to maintain records of such transactions.
The mutual fund houses or AMCs’ core business is to build the investment portfolio, market them to get more and more investors, and manage investors’ money.
Maintaining the transaction record and generating a report is not their core business. Hence, they delegate this task of report maintenance, data management, report generation, etc.
And that’s where RTA comes into the picture. Most mutual fund houses prefer to outsource this work to an agency that can handle these requests from investors on a regular basis.
This is done by the RTA agent on behalf of the mutual fund house.
CAMS is the biggest RTA with around 70% market share in the RTA business, that is CAMS provides support to more than 70% AUM of the Indian mutual fund industry.
RTA is one of the business aspects of CAMS.
Although 90% of revenue comes from RTA roll, where it charges a fee to AMCs for managing the records, CAMS earns maximum free from managing the equity fund and least from managing the ETFs or index fund.
It is also a technology-driven financial infrastructure service solution provider to alternate investment funds, insurance companies, banks, and non-banking financial companies.
Now sectors like alternate investment funds are expected to grow at a much faster rate of 30 to 35%.

Products

If you look at the products, its product solution includes:

My CAMS, which is a B2C mobile app to facilitate retail mutual fund transactions.
CAMServ is a self-service chatbot to help navigate through mutual fund services.
CAMSSmart, which is a tool for reporting, advanced analytics, and data mining activity.
DigiSIP helps in setting up SIPs.

Likewise, there are multiple other product offerings like Gocop, MF 360, MF compass, and so on. CAMS has a total of 275 Terabytes of data stored in its system as of June 2020.

Fundamental Analysis of CAMS are as follows:

Business Model

To understand the business model, I will ask you a question first.
If you are an MF investor, you might go to any MF website, choose your MF, and put a purchase order there saying you invest Rs 5000 in this MF. Once this payment is done, your job as an investor comes to an end.
There are many touchpoints that need to be covered for AMC. Say if you are investing Rs 5000 in an MF, it is said if you order in before 3 pm you can get NAV for the same day NAV stands for Net Asset Value. Fund managers decide where to invest your money to make a good return but there is a big process behind it managed by CAMS.
I will try to explain it in a simple manner. You put a buy order at Rs 5000. Your mutual funds’ values keep moving cause it invests in different equities which are dynamic in nature But how much money you will receive for your investment of Rs 5000 is decided by CAMS.
CAMS acts like a back office for every mutual fund. It helps in payment processing, NAV processing, It further helps in unit allocation.
The investor’s job gets over after putting in his money. After the processing and moved to the fund manager. After this fund manager can take care of his business on where to invest and the investor also doesn’t have to take any tension here. All the unit allocation work is handled by CAMS.
Reports are important for you as an investor for regulatory and compliance purposes.
CAMS takes care of it means CAMS connects the funds and the investors as well as fulfills all the processes in between as an RTA.
If we dis further about CAMS business then CAMS has innovated itself time to time.
Cause you know the technologically derived approach to invest these days. It’s getting improved.
Before people invest in mutual funds physically via the form. Then a unit is used to get allocated to you after which everything is now technologically driven thus CAMS was helpful in making that change.
It bought technology for MF investing and now it has more than 200 offices in tier 2 and tier 3 cities which simplifies the customer experience.
From this, you will understand how well CAMS business operations are streamlined.
One more positive thing here, you might have heard of the Chennai Floods cause of which all Chennai-based companies were impacted, But you might know, CAMS has the alignment of its major operations from Chennai.
Even after the floods, none of the investors got negatively impacted.
You can see how well CAMS disaster management is and how well it handles its backup processes
so that there is no adverse effect on their business of any situation.
After its RTA Business, it’s further going to expand itself to its KYC Business as well.
It has started with its PMS services as well, Portfolio Management Services.
If anyone wants to open an account, CAMS takes care of its compliance.
PMS businesses can concentrate on their core businesses.
It helps run their businesses from the back end. It has started its business with banks in the last few years.
CAMS’s main business is RTA. Its main competition is Karvy. Out of India’s top 5 MF companies, 4 companies are the customers of CAMS. Among the top 15 Mutual Funds, 9 of them are CAMS customers.
You can understand how big its concentration is in the mutual funds’ industry
One more important no. for investors, as of July 2020, it has processed Rs 19 lakh crores AUM
they would have allocated the money or withdrawn, the whole process was handled by them.

Competitive Strength

If you look at the competitive strength is…

Scalable technology-enabled ecosystem

The biggest strength of CAMS is its proprietary technology platform that is highly scalable.
For example, in 2015, they handled 98 million transactions and in 2020, they handled 328 million transactions just look at the huge rise in transactions, their platform is highly scalable to handle the huge volumes in the future that giving them a strong competitive advantage.

Market Leadership

CAMS is the market leader in the RTA business with a 70% market cap Which gives them a strong competitive advantage.
The most interesting part is that this business would continue to grow at a very good rate as the mutual fund sector is under-penetrated in India.

Experienced Management

CAMS has very experienced management with its CEO Mr. Anuj Kumar having 30 plus years of experience.
They also have a strong technology committee comprising specialists from IIT Bombay and IIT Madras to manage cybersecurity.

PAN India presence

CAMS has a network of 271 service centers spread across 25 states. This provides a competitive edge in terms of strong distribution.

Competitors

If you look at the RTA sector in India CAMS is the market leader with a 70% share in RTA. its competitors include kFINTECH technology, which was earlier known as karvi. kFINTECH holds around 27% market.
Among the top AMCs CAMS cater to the majority of them including SBI Mutual Fund, which is the largest fund housing terms of AUM, then HDFC AMC, ICICI Prudential, Aditya Birla Capital, and many more.
On top of that, there’s a high entry barrier in the RTA sector. This is due to the fact that RTA business is technology-intensive, that requires huge investment and technical skills to cater to the ever-growing high volumes of transactions.
Then there is a significant focus on data security and data management and strict compliance.
On top of that, the RTA business requires significant domain expertise and a good relationship with AMC. And that’s where CAMS would enjoy the market leadership.

Key Risk

If you look at the key risk is…

Dependency on economic performance

RTA business depends upon the growth of the mutual fund industry.
Now, mutual fund industry growth would depend upon the overall growth of the economy.
For example, due to COVID, the economy tanked and many investors pulled out money from the market during March 2020.
In the future, if there is a slowdown in the mutual fund industry, it would directly impact the RTA companies like CAMS.
However, due to increasing SIP, there is more stability in the AUM market, and that would result in stable growth for CAMS.

SEBI Regulation on expense ratio can impact profitability

Since SEBI regulates the mutual fund industry, they can put a limit on the expense ratio charges.
And if the expense ratio of mutual fund house decreases, it would directly impact the charges of CAMS and it would also reduce the profitability of the company.

Data security

Data security is the top priority of RTA as any compromise with data security and information theft could badly impact the RTA like CAMS.

Future Growth prospect

As per the Research Report, the Indian mutual fund industry is expected to grow at a CAGR of 17 to 18% for the next 4 to 5 years. The key growth drivers are…

Fastest growing economy in the world

India is the fastest growing economy and poised to become the third-largest economy after the US and China in the next few years. When the economy will grow, the investors would invest more money and that would result in the growth of the mutual fund industry. This will result in the growth of the RTA segment.

Digital economy

Earlier people used to transact in cash. However, due to a strong focus on digitization people have started online transactions. This has resulted in more inflow of money in online investment options like mutual funds.

Investment shift from traditional instruments to the Indian economy

Earlier people used to invest in traditional options like our FD, EPF, Insurance, etc. But then there is a radical shift in investment pattern and the young generation now like to invest money in mutual funds. Moreover, the return from FD is now so low that it is hardly able to beat inflation.

Rising income and awareness level

Today the young generation has become aware of the importance of investment in the Indian economy. Moreover, there is a rise in income levels and that is going to drive the growth in the mutual fund industry.

Easy of investment

A few years ago, it was a pain to invest in mutual funds. But today, due to multiple FinTech firms, investment in mutual funds is a matter of a few clicks. This has created a lot of convenience for investors. And hence, we have seen a surge in the total number of mutual fund investors. Moreover, due to rising internet penetration and smartphone usage, there’s a huge growth in the mutual fund sector.

Various products catering to different risk versus return profiles

Today, you have multiple mutual fund categories and multiple products within each category catering to various risk versus return profiles. On top of that, there are various new mutual funds being launched frequently. This would again drive the growth of the mutual fund sector.

AUM sector is still in the nascent stage

India’s mutual fund penetration that is AUM to GDP is around 10 to 12%, which is significantly lower than the world average of 63% and also lower than many developed economies such as us with an AUM to GDP ratio of 120%.

Even the emerging economies such as Brazil as a 68% AUM to GDP ratio. For simplicity, just understand that the US has an AUM of $25 trillion, whereas the Indian mutual fund industry is just $0.4 trillion.

Now, just imagine the kind of growth we can expect in the mutual fund industry. CAMS has been consistently increasing the product and service offering for its investors, distributors, and AMC, along with process automation, risk management, advanced analytics, and so on.

For example, they launched an anti-money laundering service that detects, invest and report a suspicious transaction in a separate chargeable service.

CAMS is also focusing on services apart from mutual fund including alternate investment fund, Insurance depository services, and other banking and non-banking financial services that also has a bright growth prospect.

Company Financials

Company Financials of Cams are as follows:

Revenue Growth

If you look at the revenues, CAMS revenue has consistently grown from 372 crores in March 2015 to 674 crores by March 2020, at a CAGR of 16.3%.
Although the revenue growth is slightly stagnant in the last few years, CAMS profits have jumped from 70 crores in March 2015 to 219 crores in March 2021, at a very good CAGR of 21%.
Although there is a dip in profit during March 2019. But since then, the recovery has been good. Overall, both revenue and profit have grown at a very good rate.

Operating Profit Margin

CAMS’s operating margins have been exceptionally high. It is consistently about 30%. The recent margins are 40%, which is simply brilliant.

ROE and ROCE

If you look at the ROE and ROCE, both ROE and ROCE are exceptionally great with consistently about 30% invite the latest ROE is 44% and ROCE is 57.7% which is phenomenal.
The reason for high operating margin and high profitability is due to the asset-light model, where the core function of the company is technology-based.

Debt to equity ratio

If you look at the debt to equity structure, CAMS is a completely debt-free company.

Reserves

Its reserves have increased from 106 crores in March 2015 to currently at 933 crore companies cash rich with a total cash balance of 142 crores by March 2021.

Promoters Holding

If you look at the promoter shareholding promoters hold 30.98% shareholding in the company. So the promoter shareholding is on the lower side.
FII has consistently increased the stake in the company from 8.67% to 23.9%. In the last three quarters, DII also hold a significant amount in the company. However, they have reduced the shareholding from 32.17% to 24.03%.

Valuation

CAMS recently had its IPO on September 20 at a price band of rupees 1230. It was opened at 1500 at a 23% premium.
Since then the share has jumped to the current levels of 2950 in the last ten months at the current price point, it is trading at a PE ratio of 56. Now, this PE ratio looks expensive to me.
CAMS is a growing company, it would continue to command premium pricing. As an investor, the better strategy would be to make an entry in the share and keep buying periodically or buy on dips.
In this article we did the fundamental analysis of CAMS, CAMS is in the business of mutual fund transfer and register service where it manages the transaction reporting and various other services related to mutual funds.
It has a 70% market share in the business. It has a strong competitive advantage due to its in-house technology platform and vast experience in the business.
The mutual fund industry in India is still in the nascent stage and there’s huge growth potential in the next 10 to 20 years due to increasing awareness and ease of investment along with a nice ecosystem built around the mutual fund industry.
The financials of the company looks solid with very high profitability and zero debt.
The valuations of the company are on the higher side due to high growth potential but look like a good chair to invest in for long-term wealth creation. What is your take on this company? Have you invested in CAMS?

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