CAMS Q2 FY26: Strong Asset Growth and Margin Recovery Amidst Regulatory Watch

Computer Age Management Services (CAMS) demonstrated a robust performance in the second quarter of FY26. The total mutual fund Assets Under Management (AUM) serviced by CAMS rose by 16% year-on-year to Rs 52 lakh crore by the end of September, aligning with the industry's growth trajectory. CAMS successfully retained its significant market share of 68% in servicing mutual fund AUM. The company has also expanded its client base by onboarding six new Asset Management Companies (AMCs) in the last nine months, with three more expected to go live soon. Equity assets, which are generally higher-fee generating, constituted 55% of the serviced AUM in Q2 FY26. Although revenue growth did not keep pace with AUM expansion, this was primarily due to a pricing reset on a large contract. Following this price adjustment, the Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) margin recovered strongly to over 45%, marking a sequential improvement of 90 basis points (bps) as guided by the management. The management anticipates margin stability for the next 12-18 months, as no major contract renewals are scheduled. While yields might face some pressure due to the 'telescoping pricing structure' (where yields decrease as AUM increases), the impact is expected to be minimal.

CAMS is also making progress in its non-mutual fund businesses, which include services like payments (CAMSPAY), servicing Alternative Investment Funds (AIFs) and Portfolio Management Services (PMS), loans against MF, acting as the central record-keeping agency (CRA) for the National Pension Scheme (NPS), and offering e-KYC services. These non-MF revenues grew by 15% year-on-year in Q2 FY26, contributing about 14% to the total revenue. While these are early-stage platform businesses, their margins are expected to improve with increased scale. The potential earnings upside from these new ventures is not yet reflected in CAMS' current valuation, positioning them as potential long-term growth drivers.

A key concern for CAMS is the emergence of regulatory risks. Recent proposals by the Securities and Exchange Board of India (SEBI) to rationalize the Total Expense Ratio (TER) for mutual funds and gradually phase out exit loads could potentially impact the earnings of AMCs. As CAMS derives over 80% of its revenue from mutual funds, it faces indirect pressure. Historically, when AMCs face lower TERs, they tend to reduce costs, which can include cutting payments to service providers like CAMS. CAMS, similar to an auto ancillary supplier to an original equipment manufacturer (OEM), has limited pricing power against AMCs. Therefore, lower TERs could compress CAMS's yields on assets serviced.

Despite these regulatory concerns, CAMS possesses strong business moats. Its platform is integral to mutual fund operations, and the company's operational efficiency driven by technology and high volumes helps offset pricing pressures. Other advantages include the difficulty in replacing its Registrar and Transfer Agent (RTA) role, annuity-like revenue streams, a robust balance sheet with Rs 789 crore in cash as of June 2025, and high operating leverage. These factors have enabled CAMS to consistently deliver strong financial performance, with Return on Equity (ROE) averaging over 30% for the past five years.

The stock's current valuation appears reasonable, trading at 34 times FY27 earnings, which is below its historical forward Price-to-Earnings (P/E) multiple of 42x since its listing in October 2020. The stock's 24% year-to-date decline suggests that current valuations are already factoring in regulatory risks and potential market volatility. The report concludes that while short-term risks exist, CAMS's fundamental strengths and strategic position in a growing industry make it a long-term wealth creator. Investors are recommended to accumulate the stock in a staggered manner.

Impact This news is highly relevant for the Indian stock market, providing insights into the performance of a key player in the financial services sector and the outlook for the Indian mutual fund industry. The investment recommendation offers direct guidance to investors. Rating: 8/10

Difficult Terms:

* AUM (Asset Under Management): The total market value of assets that a person or company manages on behalf of clients. For CAMS, it refers to the total value of mutual fund assets they process and service. * YoY (Year-on-Year): A comparison of data from one reporting period to the same reporting period in the previous year (e.g., Q2 FY26 vs. Q2 FY25). * EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization. It is a financial metric used to measure a company's operating performance. * bps (Basis Points): A unit of measure used in finance, equal to 1/100th of 1% or 0.01%. Used to express small changes in percentages. * AMC (Asset Management Company): A company responsible for managing pooled investment funds for clients, investing in assets like stocks and bonds to achieve specific investment objectives. * NPS (National Pension Scheme): A government-backed voluntary defined contribution pension system in India. * CRA (Central Record Keeping Agency): The entity designated to maintain records and account for contributions for the National Pension Scheme. * SEBI: Securities and Exchange Board of India. The primary regulator of the securities market in India. * TER (Total Expense Ratio): The annual fee charged by mutual funds to cover their operating expenses, expressed as a percentage of the fund's average net assets. * RTA (Registrar and Transfer Agent): An entity that maintains records of shareholders or bondholders for a corporation or fund and handles the transfer of ownership of securities. * ROE (Return on Equity): A measure of a company's profitability that shows how much profit a company generates with the money shareholders have invested. * P/E (Price-to-Earnings) Ratio: A valuation metric that compares a company's stock price to its earnings per share, indicating how much investors are willing to pay for each dollar of earnings.