CAMS – A direct bet on “Mutual Funds Sahi he”

If you are a strong believer that the AMC Industry has a long way to go in India – CAMS should be a natural bet. CAMS is primarily a Mutual Fund Transfer agency – it essentially supports an AMC in the entire life cycle of a transaction – right from transaction initiation, processing, reconciliation, and redemption.

Let’s look at some data points that give a holistic view; The structure of the Industry – The industry is almost like a duopoly in terms of structure but with CAMS having a far superior lead in terms of a 70% market share in the industry. The barriers of entry are high not in terms of the cost of setting up such a structure but because of the stickiness of the clients.

The AMCs are so deeply integrated with the RTAs in all aspects of the business that there has to be a very significant reason to shift to another RTA.

The Industry has a long way to go – A bet on CAMS is a bet on the AMC industry. With Retail participation in the financial markets picking up, the general consensus is that AMCs will continue to see high inflows for the next few decades.

Since CAMS essentially manages the entire backend of the transactions of a MF and derives revenue from the expense ratio of a MF – it is natural that CAMS would grow in step with the industry. A added bonus here is that since it represents 9 out of 15

Largest AMCs in the MF industry, a slowdown in SIPs in one AMC can be mitigated by an inflow in an other AMC keeping the bottomline of CAMS intact and steady.

Moat – The economic moat here is that it not only has a pan India network of offices and the tech infrastructure but also the trust of its clients – reflected from the fact that the average relationship of its client base has been 19 years. CAMS has survived , thrived and built a lot of goodwill in a regulated environment and that will continue to serve them in a good shape.

Financials – The Balance sheet quality is pristine with zero net debt, positive free cash flow with a fantastic ROE and ROCE of 35% and 43% respectively.

Valuation – The issue is priced at a 35x Fy 21 earnings. While the PE would seem a bit of a stretch for any other IT services provider, we need to take in account the fact that CAMS works in a completely different environment with unmatched market share and a long growth story waiting to unfold. Keeping its similar to a monopoly structure within the Industry in mind and the Streets propensity to being comfortable with high valuations on such businesses, we think the IPO is definitely worth subscribing to.