India's financialization has just started. CAMS stands to gain from that growth. As the young population continues to find meaningful employment.
Background
Computer Age Management Services Limited is a technology-driven financial infrastructure and services provider to mutual funds and other financial institutions with over two decades of experience. With the initiative of creating an end-to-end value chain of services, the company has grown its service offerings and currently provide a comprehensive portfolio of technology based services, such as transaction origination interface, transaction execution, payment, settlement and reconciliation, dividend processing, investor interface, record keeping, report generation, intermediary empanelment and brokerage computation and compliance related services, through its pan-India network to its mutual fund clients, distributors and investors. It also provides certain services to alternative investment funds, insurance companies, banks and non-banking finance companies. The nature of company’s services to mutual funds spans multiple facets of their relationship with their investors, distributors and regulators. By providing a range of services, it plays an important role in developing and maintaining its clients’ market perception.
Market Share – 69%
Industry Structure – Oligopoly
Investor/Promoter – FII (47%) DII (23%)
Category – Mid Cap
MD Compensation – 4.12 Crores (March 2023) Reasonable 1.45% of Net Profit
Net Profit – Rs 285 Crores (March 2023)
Services to AMC – 90% revenue
Auditor – Not BIG5
CAMS enjoys competitive advantage related to Customer Lock-ins. There is no contract per se, but if an AMC or insurance company signs up, it is very hard for the company to change their backend provider due to massive operational dependency.
The company is not protected by any special rights, however customer relation that is asset management companies and insurance companies relationship with camps is there ultimate strength.
This advantage is reflective in high margins and ROIC.
Any growth impact has a positive contribution to the cash generation in the company. CAMS enjoys operating cushion, and this also create economies of scale advantage. The deployed capital can help service more AMC/Insurance and the cost of service may continue to decline due to low capital needs.
India's financialization has just started. CAMS stands to gain from that growth. As the young population continues to find meaningful employment.
And growing comfort with mutual funds, more people are expected to deploy there savings towards mutual funds.
CAMS must protect its market share of 68-69% and maybe grow it further. They have to continue to find opportunities within the related field of asset management whether it is working with financial advisors, portfolio management schemes, insurance companies, banks or AIFs.
Let’s look at the implied growth.
Average 5 years FCF ~210 crores, assuming a discount rate of 10% given that the company has predictable cash flow and is high ROIC and high margin company.
Implied growth using these assumptions is 20%, close to the recent past. Infact, different scenarios can be created by tweaking the assumptions.
Assuming a discount rate of 10%, terminal growth 5% but latest cash flow, expected growth is 14%, less than the historical average.
Irrespective, expected growth is closer to the historical average.
Analysis must also include arriving at the fair value of company. This includes discounting future cash flows and requires a bunch of assumptions. This is where analysis becomes ‘grey’ rather than give black or white solution. You must perform your own analysis and make your own judgement, continue to refine your analysis based on the new inputs.
Price is the most important piece of investing. A great company at a very high price is a bad investment. Similarly, an average company at cheap price can be a great investment.
How much margin of safety you want to keep depends upon the quality of company. A high quality will have low margin of safety (20% discount from fair value) whereas a lot quality will need a high margin of safety (50% discount from fair value).
