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

8 Aug 2023 , 01:09 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 Capital Services see limited scope for AMCs to cut RTA yields. Analysts of IIFL Capital Services 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 Capital Services 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.