By Madhvendra

In India’s growing mutual fund (MF) sector, one company plays a vital role behind the scenes, making things run smoothly for some of the biggest names in asset management.

This company is CAMS (Computer Age Management Services), and it’s become the backbone of the industry, overseeing a major share of the country’s assets under management (AUM). CAMS operates in a market that’s almost a duopoly (the other player being KFin Technology), meaning it has a stronghold with limited competition.

Thanks to its solid client relationships, high barriers to entry, and a service model built around trust and efficiency, CAMs has grown alongside the mutual fund boom in India. But CAMS hasn’t stopped there—it’s also branching out into new areas like KYC registration and UPI payment, keeping pace with the rise of digital finance.

The company’s transaction-based revenue model has kept it stable while offering plenty of room to grow. This article will examine CAMS’s market position, business model, and future prospects for this key player in the financial services industry.

Let’s take a closer look at the role of RTAs and the key drivers behind their revenue.

Registrars and transfer agents (RTAs) offer backend data processing and record-keeping services to asset management companies (AMCs). Over the years, they have expanded to analytics, distributor management, and management information systems (MIS).

MF houses heavily depend on RTAs to service their clients, allowing them to concentrate on core operations. As a result, they foster long-term partnerships with RTAs, as the transition process is quite intricate. Currently, there is only one example where Franklin Templeton shifted its services from KFin to CAMS in 2021.

The Indian MF RTA operates as a duopoly, dominated by CAMS and KFin Technology. CAMS holds a significant lead in the market, boasting a 68% share (as of FY24), while KFin Tech accounts for the remaining portion.

However, although the industry operates in a duopoly, it faces bargaining power constraints due to its highly regulated nature and its clients—mutual fund houses—hold significant leverage. The pricing depends on how much they charge on their assets.

RTAs’ revenues correlate with AUM, making their income contingent on the AUM serviced and the fees charged (yields). These fees vary by asset class and are strictly regulated by SEBI, following specific slab rates.

This is intricately connected to the total expense ratio (TER) charged by MF houses, which also varies according to the AUM managed. The regulator ensures that yields are consistently monitored and are structured based on tiered pricing, meaning that as AUM increases, the yields decrease.

Furthermore, TERs differ by asset class, and RTAs adjust their fees according to these classes. Active and hybrid MFs incur the highest fees, whereas passive options have the lowest.

CAMS has many business segments, including MF and non-MF operations. Further, MF businesses are segregated between asset-based and non-asset-based.

The non-MF business includes alternate investment funds, Portfolio management services RTA, CAMS Insurance repository services, CAMSPay, and CAMS KRA.

It generates 87% of its revenue from the MF fund segment, of which 73.4% comes from asset-based, with revenue linked to average AuM (AAuM), and the rest 13.6% from transaction-based. Non-MF business (as of FY24) contributes 13% to its revenue.

We will look at its MF business, which is mainly asset-based.

CAMS leads the domestic MF RTA sector, commanding a 68% market share based on AAuM. CAMS services ₹33.4 trillion worth of AAuM, 49% of which comes from equity AAuM.

It also has a 62% share in new SIP registrations. However, it ranks second in client number, following KFin, and serves 21 of the 46 MF houses.

Despite its substantial market share of 68% of total MF AUM, CAMS only captures 63.9% of the revenue market share. This is because it generates lower yields of 0.029% (compared to KFin) as it services four of the top five and six of the top ten MF houses.

Nuvama reports that these top houses represent about 56% and 78% of the total AAuM, respectively. Consequently, the tiered pricing model results in larger AUMs being associated with lower expense ratios, which reduces yields for CAMS.

MF penetration in India stands at 17%, significantly lower than the global average of 65%. This presents a major opportunity for expanding AUM, which has risen since the pandemic.

Motilal Oswal Financial Services (MOFSL) anticipates an impressive AUM growth of 18% CAGR over the next decade, fueled by rising per-capita income, greater financial literacy, and other factors.

Notably, Active MFs AuM share in total MF industry AuM is projected ,to increase from 50% in 2023 to 61.4% by 2034. This shift will benefit RTAs, as they will experience higher yields tied to the growing active equity mutual funds.

However, CAMS yields have also decreased due to a surge in passive funds. They have declined from 0.032% to 0.029%. As passive funds, known for their low TER, become popular, they also lower CAMS yields.

Nuvama reports that passive funds are growing at an impressive 50% CAGR and are expected to continue at a 19% CAGR over the next decade.

If this trend continues, the increasing share of passive funds in total AUM could undermine not only CAMS’s yields but also the TER of the entire MF industry.

Nevertheless, the return on AUM creates an annuity-like revenue directly linked to the growth of the MF industry. MOFSL expects CAMS yields to remain under pressure and expects MF revenue to grow at a slower pace of 18% CAGR than MF AUM.

However, it’s not all gloom—there’s good news, too.

A growing number of MF houses are either awaiting launch approval from SEBI or have already received it. They will likely choose between KFin and CAMS.

Notably, CAMS has secured five of the last seven AMC mandates, with clients including Zerodha, Helios, Torus Oro, Angel One, and Unifi Capital. This creates a significant opportunity for CAMS to expand its market share.

Now, let’s take a look at some non-MF businesses.

This market is rapidly growing, fuelled by an increasing number of high-net-worth individuals (HNIs) and ultra-HNIs in search of specialized investment options.

Investment inflows are increasing with significant capital directed towards AIFs and PMS, aiming to achieve alpha over traditional actively managed mutual funds.

According to PMS Bazaar, the PMS and AIF sectors are growing at a CAGR of about 33%, with combined AUM increasing from roughly ₹1 trillion to ₹18.87 trillion between FY14- FY25.

Moreover, this segment is anticipated to accelerate even more, reaching around ₹100 trillion by 2030 with a projected 40% CAGR, driven by a growing population of affluent Indians.

Thus, CAMS is expected to benefit from this fast-growing market. It is a leading player in serving AIF/PMS clients using RTA services and integrates all custody, clearing, fund accounting, treasury and forex services.

In FY24, the company managed assets totalling ₹2.2 trillion. This segment accounts for 3-4% of CAMS’s FY24 revenues. The company aims to boost AIF/PMS revenue share to achieve the ₹1 billion revenue target.

However, unlike KFin, this segment’s revenue is not tied to AUM. Instead, it is primarily driven by the number of investors and transaction volume, which limits its scalability. Nonetheless, its margins are comparable to those of the MF business.

CAMS, via its wholly owned subsidiary, offers services to verify and maintain investors’ KYC records for financial institutions. As of FY24, CAMS held 18 million KYC records and saw a 3x increase in monthly volume. It has delivered 90% revenue growth compared to last year.

This segment contributes 3-4% of the company’s revenue. Additionally, CAMS KRA is expanding its services by adding fintech companies, brokerages, and wealth advisors as clients.

The margins align with MF’s business, and it expects its revenue share to increase as digital KYC is likely to gain as digitalisation keeps pace.

CAMSPay is the payment solutions division of CAMS. It offers digital payment services designed explicitly for MF and has a market share of over 50%. In FY24, it processed ₹18 billion worth of UPI transactions, with a 1.4 million UPI autopay mandate.

It provides solutions for automated recurring payments, e-mandates, UPI transactions, and payment processing. Additionally, it has entered the payment aggregator market, holding in-principal approval from the Reserve Bank of India (RBI).

Moreover, CAMSPay is gaining traction among fintech companies and third-party platforms, driven by its expansion into sectors like insurance, brokerage firms, and financial intermediaries.

The preference of UPI Autopay as a preferred mode of mandate is also contributing to this growth. The figures illustrate this growth: in 2024, it gained 40 new clients, including LIC, which chose it as its exclusive partner for customer account authentication.

The margins in this sector are higher than those in the overall non-MF segment but lower than those in the MF sector. Revenue is based on a per-transaction basis, contributing 3.3% to the overall revenue.

CAMS expects this share to grow with the rise in digital payments, which, according to Statista, is expected to grow at a 16% CAGR through FY29.

Besides the above, it has a presence in other non-MF segments, which is gaining traction.

This new vertical was launched as e-insurance became mandatory starting in FY24. It has a 40% market share based on the number of policies held in the repository.

Additionally, CAMSRep introduced Bima Central, a comprehensive platform designed to streamline insurance portfolio management.

Bima Central enables users to handle life, health, and motor policies through their secure e-insurance account (eIA). This represents a significant growth opportunity for eIA signups and policy servicing customers.

Furthermore, the insurance sector in India remains underpenetrated, presenting substantial growth potential. According to MOFSL, the e-insurance policy market is about 500 million, with an annual revenue potential of ₹5 billion. With e-policies now mandatory, this segment is expected to expand exponentially in the coming years.

Think360 is a data-driven platform developed by CAMS that delivers insights and intelligence for mutual fund companies and other financial institutions.

It utilizes data analytics, AI, and machine learning to provide actionable insights that assist asset managers in analyzing investor behaviour, estimating income, and assessing risk.

This platform creates synergetic opportunities for CAMS to enhance value-added services and reach new markets. Although its contribution remains minimal, CAMS management anticipates significant growth for this business in the upcoming years.

The company wants to increase its share of non-MF business to 20% from the current level of about 13%. It believes that all business segments, including AIF/PMS RTA and CMSPay, will lead the growth path for this segment going forward.

CAMS has strong financials underpinned by a capital-efficient business model and consistent, annuity-like revenue. In FY24, total income rose at an 11% CAGR, reaching ₹10.5 billion, driven by significant inflows into equity assets.

Profit increased by an impressive 21% CAGR, reaching ₹3.53 billion. This can be attributed to improved operating leverage from an increasing mutual fund AUM and a broader client base.

Moreover, CAMS revenue and profit increased by 17% and 24%, respectively, compared to the previous year in FY24 as well. This growth was driven by a strong 29% rise in transaction volume and a 25% growth in unique investor services.

As a capital-light firm, CAMS has a strong EBITDA margin of 44.4% and a return on investment of 41.7%, highlighting its ability to generate returns from its investments.

CAMS is currently valued at a price-to-earnings (P/E) ratio of 41.7x, approximately 10% lower than its 5-year median P/E of 45.4x.

When comparing its valuation to HDFC AMC and KFin Tech, we observe that CAMS trades at a 17% premium compared to HDFC AMC’s P/E of 35.5x and at a 36% discount to KFin’s P/E of 65x.

The recent market correction has resulted in a decline of over 35% in its stock price, making CAMS’s valuation attractive based on risk-reward dynamics.

According to MOFSL, CAMS has historically traded at a premium compared to listed AMCs, but this premium has diminished recently, which they believe is unjustified.

MOFSL anticipates that CAMS’s revenues and profits will grow by 20% and 26%, respectively, during FY24-27. This growth will be driven by increasing mutual fund AUM and a greater share of non-MF business in its portfolio. MOFSL has set a target price of ₹6,000, reflecting a 64% increase from its current market price of ₹3,663.

Additionally, they contend that CAMS should command a premium due to the industry’s duopolistic nature and significant barriers to entry. Furthermore, the minimal risk of losing market share positions CAMS for a favourable revaluation as market conditions improve.

However, the present market volatility poses challenges to CAMS revenue, which may experience fluctuations due to its reliance on MF AUM. Currently, MF AUM is facing increased SIP closures and lower inflows, potentially affecting revenue in the short term. Nonetheless, this is a company worth monitoring closely.

Disclaimer:

Note: We have relied on data from www.Screener.in throughout this article. Only in cases where the data was not available, have we used an alternate, but widely used and accepted source of information.

The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educative purposes only.

Madhvendra has been deeply immersed in the equity markets for over seven years, combining his passion for investing with his expertise in financial writing. With a knack for simplifying complex concepts, he enjoys sharing his honest perspectives on startups, listed Indian companies, and macroeconomic trends.

A dedicated reader and storyteller, Madhvendra thrives on uncovering insights that inspire his audience to deepen their understanding of the financial world.

You can connect with Madhvendra on LinkedIn to explore more of his insights and engage in meaningful discussions.

Disclosure: The writer and his dependents do not hold the stocks discussed in this article.

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