Platform with strong track record of growth and market leadership
KFintech is a leading technology driven financial services platform providing comprehensive services and solutions to capital markets ecosystem including asset managers and corporate issuers across asset classes in India. Additionally, the company also provide several investor solutions including transaction origination and processing for mutual funds and private retirement schemes in Malaysia, Philippines and Hong Kong. The company provides services to 24 out of 41 AMCs in India, (as on September 30, 2022) representing 59% of market share based on the number of AMC clients (as per RHP). They have on-boarded seven (including two AMCs that are yet to launch operations) of the last 11 new AMCs in India (including one AMC that has not yet appointed a registrar and transfer agent for their operations) for domestic mutual fund solutions. As on September 30, 2022, KFIN has also on-boarded 15 of the last 21 mutual funds launched in India. Further, within investor solutions for Indian mutual funds, they had a market share of 32% based on overall AAUM managed by their clients and serviced by them during September, 2022.

Revenue from Operations in various Categories

Source: Company RHP

Asset-light business model with recurring revenue, high operating leverage, profitability and cash generation KFIN operates an attractive business model with a demonstrated track record of consistent profitability and returns. The management believe their business operations are highly resilient and predictable to a large extent due to deep client entrenchment and largely recurring nature of revenues. The company asset turnover ratio was 3.20x and 2.57x in FY22 and H1 FY23 (on an annualized basis), respectively. They undertook a buyback of 14,987,846 Equity Shares in FY22. In addition, they repair their outstanding borrowings aggregating to Rs 400 Crores along with interest payments by December 31, 2021. KFIN return on capital deployed and return on equity during H1 FY23 is 20.71% and 24.72%, respectively (on an annualized basis).

Long-standing client relationships with a diversified and expanding client base
In India, the investor solutions business that the Company operates in typically has two to three players, as it requires high technology intensity and a track record of delivery at scale, and are subject to stringent compliance and regulations, resulting in high barriers to entry for any new entrant (as per RHP). The company has been able to retain a large proportion of its clients across its businesses. KFin has never lost an AMC or MF client over the last three fiscals and H1 FY23 to competition except where its client had been acquired by another AMC that was not its client or where its client had ceased operations. Also, the Company’s issuer solutions business, client loss is minimal and primarily restricted to merger and acquisitions and other corporate changes. Sale of services from entities that have been clients for more than five years constituted 79.80% of its total income in H1 FY23.

Revenue Contribution by Top five clients in each segment & years of client relationship

Source: Company RHP

Unique “platform-as-a-service” model provides comprehensive end-to-end solutions enabled by technology solutions
The “platform-as-a-service” business model of the company provides its clients with comprehensive end-to-end solutions. The technology offering of company enables transaction lifecycle management combined with highly secure data collection, processing and storage. It has an integrated system of data centers which houses over 350 servers and data storage handling capacity of over 250 TB. They provide the flexibility of addressing all major asset classes for asset managers and corporate clients through its platform. The Company has launched over 20 new products over the last three Fiscals and six months ended September30, 2022, with two products in the pipeline. Further, it can onboard a client and customize its platform for their requirements and enable them to launch their business with quick turnaround times. KFin continues to automate processes and enhance its systems and risk management to ensure that all its obligations and regulatory requirements are completed on a timely basis. Its systems and infra -availability stands at 99.99% accuracy. Its 10 gigabyte enhanced intranet ensures data transactions to be processed with no latency.

Revenue contribution on the basis of services

Source: Company RHP

Peer Comparison

Risks

• The company’s erstwhile promoters are subject to ongoing investigations by enforcement agencies, and the outcome of such investigations may adversely impact the company and the market price of their Equity Shares.
• They are subject to extensive government regulation
• The company is subject to periodic inspections by SEBI and PFRDA, pursuant to their registration as an RTA and CRA, respectively.
• A decline in the growth, value and composition of AAUM of the mutual funds managed by its clients may adversely impact the average revenue earned by them from mutual funds and may have a significant adverse impact on future revenue and profit.
• Competition could negatively affect the company ability to maintain or increase its market share and profitability.

Valuation

Kfintech Technologies Ltd. has witnessed a good growth in its revenues in past two years. It is the only company to compete against CAMS in this space. The company’s business model is asset light and major part of its revenues are derived from mutual funds solutions and issuer solutions. But company is facing certain regulatory litigations which may impact the business severely. Although we have positive view on the company’s business , we highlight few pertinent issues which may remain an overhang on stock’s performance in future.

Issues faced by the company (in our opinion)

1. erstwhile promoter still holds 14% in co which is currently pledged with lenders
2. Valuation: The issue is priced to perfection leaving very little for subscribers to IPO. At offer price of Rs 366 the issue is priced at 39x its FY22 earnings which is almost equal to its peer (CAMS). We believe this offer price is expensive given the earnings level it has currently incomparison to its peers CAMS.
3. Entire issue is an OFS, this means nothing comes to the company.
4. Also, the promoter is an investor who will ultimately exit fully at some point in time. That means overhang of seller.

Recommendation: At this point we recommend AVOID this issue if in future the stock is available t favourable risk reward, we will reassess to enter into it.

Key Information

Use of Proceeds:

• The offer is purely an ‘Offer for Sale’ of up to 40,983,606 Equity Shares by the Selling Shareholders and the company intends to garner Rs 1500 cr from this issue.
• Achieve the benefits of listing the Equity Shares on the Stock Exchanges. Since the offer is an ‘Offer for Sale’ the company will not receive any proceeds from the Offer and all such proceeds (net of any Offer related expenses to be borne by the Selling Shareholders) will go to the Selling Shareholders.

Book running lead managers:
ICICI Securities, Kotak Mahindra Capital, J.P.Morgan India, IIFL Securities, Jefferies India

Management:
Vishwanathan Mavila Nair (Chairman and Non-executive Director), Venkata Satya Naga Sreekanth Nadella (Managing Director & CEO)