CAMS’ profits hinge on growth in mutual funds’ assets under management

MUMBAI: As a registrar and transfer agent for mutual funds, Computer Age Management Services Ltd is one of the first to go public, offering a little over 18 million shares. The firm’s business largely depends on growth in assets under management of mutual funds, which could at times get patchy.

For now, the business ticks a few growth boxes such as having a nearly 70% aggregate market share of average assets under management. As a registrar, it keeps a track of dividend payments, transaction executions and the likes, largely for fund houses.

Besides, with nine of the 15 largest mutual funds as its clients, the diversification adds a bit of comfort. Being in the services sector, CAMS does not have huge capital expenditure, except for maintenance on IT and other infrastructure.

However, its business largely depends on mutual fund inflows. CAMS charges a fee for its services to fund houses, which is higher for equity funds when compared with other categories. Of late, the pandemic-struck economy has led to equity AUMs dipping tracking the fall in stock market and also due to redemptions. CAMS’s revenue also depends on the fees mutual fund houses charge their investors, so any change there could impact its business.

In the June quarter, CAMS’s revenue from operations fell about 15% year-on-year (y-o-y). Operating profits also slumped. Earnings before interest, tax, depreciation and amortization contracted from 13.5% in the year-ago quarter to 8.5% in Q1 FY21.

“It is possible that there could be some headwinds to mutual funds; if mutual funds don’t do well CAMs won’t do well. Due to covid-19, this year may not be all that good. But it’s a simple business that throws up a lot of cash. As long as India’s financialisation story continues, this business will do well in the long run,” said Nitin Rao of Alphaideas.

At the offer price, the stock’s valuations may appear a bit stiff–at about 35 times FY20 earnings–given the current market conditions.

But investors are likely to overlook that. Surely, the appetite for initial public offerings is one huge factor that will play on their minds. The two IPOs that opened recently have seen robust repose some of that could roll over to the CAMS IPO as well.

“These are good days in the IPO market,” says Nitin Rao, “Due to the demand, investors may also see that listing pop.”

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