Can multibaggers KFin Tech & CAMS ride on MF tailwinds or will valuations play spoilsport?

Multibaggers Kfin Technologies and Computer Age Management Services (CAMS) are in a sweet spot, notwithstanding the stellar rally in the stocks in the last one year. The duopolistic nature of their business as Registrar and Transfer Agencies (RTAs) along with the booming domestic mutual fund growth story, discounts the current rich valuations and a potential upside of up to 26% and 42%, respectively, from the current levels, cannot be ruled out.

KFin Tech shares have rallied by 137% over a 1-year period while its year-to-date returns stand at 126% which is a significant outperformance over Nifty in the same periods. CAMS’ shares have grown by 77% and 67% in the said periods compared to Nifty which has delivered returns of 32% and 20%, respectively.

Brokerage firm B&K has initiated coverage on both stocks with a ‘hold’ rating. Industry-wise, RTAs are expected to continue riding on the domestic MF growth story, it said in a note, adding that the market remains a duopoly with high entry barriers for new entrants. Switching costs for asset management companies (AMCs) provides predictability of growth over a market cycle, the note added.

B&K’s base case scenario for Kfin Tech is a target price of Rs 1,373 which is a 26% upside while it could go up to Rs 1,490 in the next three years in a bull case situation. For CAMS, a base case target of Rs 6,260 is estimated which is a 42% uptick over current stock price. The stock could test Rs 6,955 in a bull case scenario.

The stocks are currently trading at an adjusted P/E of 69 and 58 and B&K finds valuations stretched.

KFin Tech’s domestic business is largely oriented to providing RTA services to mutual funds, alternative funds, issuer solutions to corporates, as well as footholds in NPS CRA (Central Recordkeeping Agency) and account aggregator businesses. Being technology focused, the company also provides platforms as value-added services to customers. Over and above this, KFIN also provides a suite of products including RTA and fund accounting to international funds largely in SE Asia.Faster than expected growth in the emerging businesses could lead to earnings upgrades, B&K said.CAMS is the largest RTA in the domestic mutual fund space with 68%/66% market share in terms of total/equity AUM. It also provides offerings to alternative funds, acts as a payment aggregator, KYC registration agency and technology service provider in the account aggregator as well as an insurance repository among others.

B&K expects total MF AUM to grow 4X in 10 years in a base case scenario to Rs 220 lakh crore from the current Rs 53 lakh crore, fuelled by retail participation.

Expert Nilesh Jain, Assistant Vice President (AVP), Equity Research Technical and Derivatives at Centrum Broking, sees CAMS is in a gradual uptrend and finds it a fit candidate for ‘buy on declines’ strategy. He sees resistance at Rs 4,800 while support at Rs 4,200. As for Kfin Tech, this analyst recommends buying at current levels and on declines. He has placed support at Rs 995 with an upside of Rs 1,200.

Nuvama in its latest report has also retained a ‘Hold’ rating on CAMS for a price target of Rs 4,700. It said that its MF RTA business is moving to upper orbit.

The industry has added 1.10 crore investors in the last one year, taking the total investor count to 4.9 crore.

“CAMS-serviced funds have delivered 40% growth in unique investors to 3.6 crore customers,” the Nuvama note said.

Also Read: Can multibagger HUDCO, 5 other housing finance stocks maintain their winning run on these two tailwinds?

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times) KFin Technologies and CAMS are well-positioned in the mutual fund industry despite their high valuations. With significant stock rallies over the past year, both companies benefit from a duopolistic market with high entry barriers. Analysts predict potential upsides of up to 26% for KFin Tech and 42% for CAMS.

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