Q1FY24 Review: Computer Age Mgmt: MF yield moderation offset by non-MF biz

8 Aug 2023 , 01:14 PM

Although CAMS reported in-line PAT growth (+18%), higher than expected decline in MF yields led to miss in core business. This was offset by the strong and ahead-of-estimate growth in non-MF business (+42% YoY). Mgmt expects yield in the core MF business to remain stable going ahead; while share of non-MF business to increase to 20% by FY27. The pending finalisation of MF TER regulations weighs on stock valuations; though analysts of IIFL Securities see limited scope for AMCs to cut RTA yields. Analysts of IIFL Securities value CAMS at 32x 2YF EPS and maintain BUY. 

Inline results; yield compression in MF business offset by higher contribution from non-MF businesses: 

Although CAMS’ Q1FY24 PAT growth of 18% YoY was in line with expectations, yield compression in the core MF business (down 7% YoY and 5% QoQ to 2.57bps) was higher than estimate. The company shared that this was due to renegotiation of a contract with a large AMC after 5 years. The impact of this will wear out from Q3 onwards. Weakness in the MF business was offset by strong growth in the non-MF business (including revenues from Think Analytics) – up 42% YoY (up 22% YoY ex-Think Analytics). Resultantly, share of non-MF business has increased by 280bps YoY to 12.5% in Q1FY24. 

Reiterates target of 20% revenues from non-MF business; wins new MF mandates: 

The company reiterated its target to increase the share of non-MF revenues to 20% (vs 12.5% in Q1) by FY27. Among the existing non-MF businesses, it is confident of AIF and Payments business. In new initiatives, it sees potential in the Account Aggregator (AA) business. To further strengthen its AA offerings, CAMS has acquired 55% stake in Think Analytics (for Rs520mn) – this would offer analytics solutions to the AA users. As such, increasing share of non-MF business is likely to be margindilutive in initial years as the current margin profile is in mid-20s; but with scale, the margin would increase to 35-40% - vs. ~45% in MF business. In the MF business, company has won 2 new mandates – Angel One and Torus Oro MF, with this it has won 4 of the last 6 new MF-RTA mandates. 

Clarity on new MF regulations to improve earnings visibility: 

Analysts of IIFL Securities trim FY24-26 EPS by ~2% as they moderate yield assumption in the core MF business; however impact of this is partly negated by higher revenue growth assumed in the non-MF business (though margin dilutive). They value CAMS at 32x 2YF EPS (10% discount as finalisation of new TER is pending). Clarity on regulations would improve earnings visibility and drive re-rating.