CAMS Business Model & Research Report
Created on 27 May 2021
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The back-end mechanism of a product is often overlooked but is of utmost importance. In the same line, Mutual Funds are futile without RTAs. The case in point is CAMS.
With an ever-increasing number of retail participants in mutual funds, it becomes a pretty arduous task for a fund house to keep track of all investor transactions. Investor transactions include buying units, redeeming units, switching between schemes, updating personal information, etc.
Rather than getting involved in this headache, fund houses outsource this work to Registrar and Transfer Agents (RTAs), who manage this back-office work. Such an RTA is Computer Age Management Services Ltd.
Computer Age Management Services Ltd (CAMS) - An Overview
Since its incorporation in 1988, CAMS is currently the largest Infrastructure and Services Provider in the Indian Mutual Fund Registrar and Transfer agent (MF RTA) space. With listing gains of 23 percent, the company's initial public offering was among the 2020's some of the most talked-about IPOs.
Computer Age Management Services has recently received the Certificate of Registration for Central Record Keeping Agency (CRA) under the National Pension Scheme (NPS). The company has a pan-India presence with its 271 service centres country-wide. With about 70% market share, it is the market leader in the MF RTA space.
The Business Model of CAMS
A substantial portion of the fees that CAMS charges its mutual fund clients is calculated and set based on the average assets under management ("AAUM") of the funds serviced. Therefore, the fee structure is not directly linked to its expenses and depends more on the mutual funds. In other words, lots of advertisements made by mutual funds & other organizations, and India's growing under-penetrated mutual fund sector will directly benefit the company.
Apart from providing services to mutual fund houses, they also offer certain other services that include:
- Alternative Investment Fund (AIF) services - accounting and reporting of the transactions
- Banking and Non-Banking services - facilitation of loan processing
- Electronic payment collection services - CAMS becomes the intermediary between banks for debiting amounts and purchasing the units of mutual funds, as in the case of a SIP.
- Insurance Repository services - converting physical insurance into dematerialized form & storing these policies into Demat Account.
- KYC registration agency services
- Software Solution
- Handling paper-based transactions of AMC's (comprises about 20% of total revenue)
What is the moat?
Their moat is a sound competitive barrier because their work is quite critical, so Mutual fund companies would not like to take it into their hands. Instead, they will be more focused on research and marketing for mutual funds.
They have a pretty sticky business model, and the chances of a new player entering the RTA space are difficult.
They are so involved in the paperwork that no company would switch to it as CAMS has its distribution channel from which customers directly invest in MF, and that can affect the business of the attempting-to-switch company.
What is good?
- The services all top 5 MFs and 9 of the 15 largest MFs.
- With rising disposable incomes and growth in the GDP, gross domestic savings are expected to rise. With higher focus saving instruments, the proportion of financial protection in household savings and the net household financial savings are expected to increase during the next five years. For FY 2015 to FY 2020, Assets under Management increased at a CAGR of 18% and is poised to grow this way for the next five years as well. And with this resultant increase in AUM, the total collection fees will also increase.
- The company is Debt-free and with Zero Promoter Pledge, and institutional Holders like Goldman Sachs, SBI Funds Management, HDFC Asset Management Co. have string holding in the company.
What is bad?
- Any future revenue and profit are primarily dependent on the growth, value, and composition of the AUM of the mutual funds managed by their clients. That means the company is highly reliant on the industry.
- In the future, SEBI may regulate fees they charge for some of their services, resulting in an adverse impact on the operation and profits.
- CAMS has a Strong Focus on Process and Risk Management, so any malfunction in information technology systems or data security breaches would negatively affect the business and its reputation.
With increasing AUM levels managed by the mutual funds, the company has shown a decent profit growth of 18.69% CAGR over the last five years; meanwhile, the company has delivered a robust 33.06% return on equity.
Except FY 2019-20, where overall business was impacted by the Covid-19 led lockdown company is continuously delivering good operating profits. Consolidated EBITDA increased by 5.4% CAGR in FY20. Depreciation increased by 9.8%. Other income increased by 15.5% CAGR, leading to a 9% CAGR higher Profit After Tax.
The company had a positive operating cash flow over the last five years, with an operating cash flow of 180.10 crores in FY20. The average operating cash flow over the previous three years was around Rs. 170.85 crore.
The company's balance sheet also looks good with zero Borrowings and with growing reserves of the company. The total assets of 716.07 crores and total cash Reserves of 440 crores look impressive as well.
CAMS has a technology-driven business model. It is the most significant financial infrastructure and service provider in India. A CRISIL report states that the RTA industry is expected to grow at a rate of 16% CAGR over the coming 5 years. This sounds good for the company as it is almost the single-player in that space. It has witnessed steady revenue growth in the last few years, and with its sound competitive barrier, it is expected to grow in India's under-penetrated mutual fund sector.
However, the company's future revenue and profit mainly depend on the growth, value, and composition of the AUM of the mutual funds managed by its clients.
Having said that, the high growth prospects of the Indian mutual fund sector suggest that the company could be an offshoot beneficiary, and hence, an attractive bet.
Anyway, what's your take? Is CAMS worth investing in? Tell us in the comments below
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