Computer Age Management Services Ltd (CAMS) is the first mutual fund transfer and registration agent to go public. It is also the market leader in the segment. It has a market share of around 70% in the mutual fund segment, based on average assets under management (AUM) for which the company’s services are used.
Plus, with nine of the 15 largest mutual fund houses as its clients, diversification adds a bit of convenience. As such, it offers investors a unique game in the mutual fund industry.
While there are already a couple of publicly traded asset management companies, their fortunes have varied for a number of reasons. CAMS ‘large market share means that its fortunes are more closely aligned with the overall trajectory of the industry.
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Indeed, your business prospects are highly dependent on mutual fund inflows. CAMS charges a fee, which is higher for equity funds than other categories of funds, for its services to finance houses.
Lately, the COVID-19 hit economy has led to stock AUMs falling due to the market crash as well as redemptions.
CAMS also relies on the fees that mutual fund houses charge their investors, so any change in the fee structure could affect your business as well.
In the June quarter, CAMS ‘operating income fell 15% YoY (YoY). Its operating profit also plummeted. Earnings before interest, taxes, depreciation and amortization contracted 27% year-on-year in the first quarter of year 21.
This was due to a cut in rates, and investors should take this into account.
“There may be some headwinds for mutual funds; If the mutual fund industry doesn’t do well, CAMS will not do well. Due to covid-19, this year may not be so good. But it is a simple business that generates a lot of cash. As long as India’s financialization story continues, this business will do well in the long run, “said Nitin Rao, founder of alphaideas.in, an investment blog.
Being in the service sector, CAMS does not have large capital expenditures, except for the maintenance of IT and other infrastructure. As a result, the cash flows are relatively high. In the 2019-2020 fiscal year, free cash flow as a percentage of revenues was 25%.
At the offering price, stock valuations may seem a bit stiff at roughly 35 times fiscal year 20 earnings. But given the current frenzy over initial public offerings (IPOs), the problem is expected to fix.
The two IPOs that recently opened to the public last week saw large amounts of money locked into IPO applications, and some of that could also be transferred to CAMS’s IPO. Both issues were traded at a premium of more than 100%.
“These are rah-rah days in the IPO market,” Rao said. “Due to the demand, investors can see that the price is also skyrocketing with the CAMS problem.”
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