KFin Technologies coming with an IPO to raise upto Rs 1582 crore

KFin Technologies

• KFin Technologies is coming out with a 100% book building; initial public offering (IPO) of 4,32,27,665 shares of Rs 10 each in a price band Rs 347-366 per equity share.
  
• Not less than 75% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 10% for the retail investors.
  
• The issue will open for subscription on December 19, 2022 and will close on December 21, 2022.
  
• The shares will be listed on BSE as well as NSE.
  
• The face value of the share is Rs 10 and is priced 34.70 times of its face value on the lower side and 36.60 times on the higher side.
  
• Book running lead managers to the issue are ICICI Securities, Kotak Mahindra Capital Company, J.P.Morgan India, IIFL Securities and Jefferies India.
  
• Compliance Officer for the issue is Alpana Uttam Kundu.
  

Profile of the company

The company is a leading technology driven financial services platform providing comprehensive services and solutions to the capital markets ecosystem including asset managers and corporate issuers across asset classes in India and 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 several critically important services to the Indian capital markets ecosystem. Its clients utilize its platform for its different service offerings for a substantial part of their operational requirements. It provide a wide array of investor and issuer solutions including omni-channel transaction origination and processing, channel management, which is mapping of mutual fund schemes of AMCs to distributors selected by the AMCs and related distributor management, including brokerage computation and channel servicing which includes brokerage pay-out, query solution and GST compliance assistance, customer onboarding with integrated KYC, unit allocation and redemption, reporting and compliance checks on a real time basis.

The company also offers asset servicing products including a distributor platform, an investor platform, and an online transaction platform together with data analytics. Its technology products, solutions and platforms help its clients to focus on their core business functions such as investment management and sales and marketing functions whilst entrusting bulk of operational front office, middle office and back office activities to its platform. The company has adopted a platform driven product design and delivery approach to service the varied needs of its clients. It has an end-to-end transaction management platform across multiple asset classes such as mutual fund, direct stock investments, alternate investment funds, wealth and pension across India, Malaysia, Philippines and Hong Kong. It provide its clients with a data driven technology solutions that combine its in-house platform technologies and several of its in-house value added services (VAS) products across different asset classes, including white label technology to meet client requirements.

Proceed is being used for:

• Achieving the benefits of listing the Equity Shares on the Stock Exchanges.
  

Industry overview

The Indian mutual fund industry started with the passing of an act for the formation of the Unit Trust of India (UTI), a joint initiative of the Government of India and the RBI in calendar year 1963. In calendar year 1987, other public sector banks entered the mutual fund space and in calendar year 1993, the industry was opened to the private sector. The year also saw the introduction of the first formal mutual fund regulations, namely, the Securities and Exchange Board of India (Mutual Fund) Regulations, 1993. In February 2003, following the repeal of the UTI Act, 1963, UTI was bifurcated into two separate entities, namely, Specified Undertaking of the UTI (SUUTI) and UTI Mutual Fund. With this bifurcation, and several mergers among private sector funds, the mutual fund industry entered its current phase of consolidation and growth. The aggregate AUM of the Indian mutual fund industry has grown at a healthy pace over the past 10 years, against the backdrop of an expanding domestic economy, robust inflows, and rising investor participation, particularly from individual investors. Average AUM grew at CAGR of 18% to Rs 39.05 trillion as of September 30, 2022, from Rs 6.65 trillion as of March 31, 2012. However, between March 2017 and September 2022, the growth has been slower comparatively at a CAGR of 15% as compared to CAGR of 22% between March 2012 and March 2017.

Mutual fund assets in India have seen robust growth, especially in recent years, driven by a growing investor base. This is due to increasing penetration across geographies, strong growth in capital markets, technological progress, and regulatory efforts aimed at making mutual fund products more transparent and investor friendly. Although mutual fund AUM as a percentage of GDP grew from 4.3% in Fiscal 2002 to approximately 16.9% at end of September 2022, penetration levels remained well below those in other developed and fast-growing peers. India’s mutual fund penetration (AUM-to-GDP) is significantly lower at 15.9% as of March 2022, compared to the world average of 75%; and lower than many developed economies such as the U.S. at 148.9% and the United Kingdom (U.K.) at 74.8%. In Southeast Asian countries and Hong Kong, Singapore has the highest mutual fund penetration of 179.9% whereas Indonesia and Philippines have the lowest mutual fund penetration of 3.8% and 2.3%, respectively. The mutual fund industry has been witnessing a strong growth. Within the mutual fund industry, in terms of overall AUM, the top five AMCs, which have a well-established business franchise with entrenched distribution and strong brand equity, continued to increase their market share from 48.7% in March 2016 to 57.0% till March 2021. This has come at the cost of other AMCs, cumulatively losing their share from 51.3% in March 2016 to 43.0% in March 2021.

Pros and strengths

Scaled platform with strong track record of growth and market leadership: The company 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. In addition, it provides several investor solutions including transaction origination and processing for mutual funds and private retirement schemes in Malaysia, Philippines and Hong Kong. The company enjoys market leadership positions across a number of different parameters in its business. It is one of the two leading investor solutions providers in India as on September 30, 2022. It is providing 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. In addition, it signed on two new AMCs that are yet to launch operations as on September 30, 2022. It has 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, it has also on-boarded 15 of the last 21 mutual funds launched in India. Further, within investor solutions for Indian mutual funds, it had a market share of 32% based on overall AAUM managed by its clients and serviced by it during September, 2022.

Unique ‘platform-as-a-service’ business model providing comprehensive end-to-end solutions: The company’s “platform-as-a-service” business model provides its clients with comprehensive end-to-end solutions. Its technology offering enables transaction lifecycle management combined with highly secure data collection, processing and storage. It works with a data center which houses over 350 servers and data storage handling capacity of over 250 TB. It provides the flexibility of addressing all major asset classes for asset managers and corporate clients through its platform. It has implemented a platform based cross sell approach on a deep product stack. Its core service offerings provide end-to-end support across front office, middle office and back end combined with a suite of VAS. Its approach to developing its platform, products and services is to address its client requirements, treating them as a partner, thereby enabling it to understand their requirements, develop suitable solutions, and cross sell products and VAS to the client. Its VAS such as ‘white labelled’ digital platforms such as AMCs websites, mobile apps, distributor platforms, platforms for AMC employees for assisted sales, platforms for institutional investments, business insights reports to CXO’s of AMCs, electronic AGM, electronic voting, and compliance platform, have helped it to increase wallet share with its existing clients.

Deeply entrenched, long-standing client relationships with a diversified and expanding client base: The company serves its clients to support their customers’ needs across the lifecycle of a relationship in an increasingly complex compliance landscape. Due to the comprehensive nature of its platform and the reliance of its clients to source end-to-end services from its, it is integral to the business and operations of its clients which results in long-term engagement with limited client churn. It provides complex solutions and services with significant expertise that has been honed over the years of presence in the industry and experience of working with clients, several of which are some of the largest companies operating in their respective segments. In India, the investor solutions business that it operate 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.

Experienced management team: The company has a seasoned professional leadership team, consisting of its Chief Executive Officer, Chief Finance Officer and Key Managerial Personnel. They are supported by experienced senior managers who have extensive industry knowledge and have been associated with it as well as with leading multinational companies in India and outside India for a long period of time. Its Key Managerial Personnel have significant experience spanning decades in the financial services and related industries. Its management team has demonstrated its ability to develop and execute a focused strategy to grow its business and optimize costs through technology initiatives, enabling it to strengthen its market position and deliver consistent financial performance. Its CEO took over as the position in June 2020 and has been instrumental in driving business growth though new client wins specifically in alternatives and wealth management and new clients in Malaysia, Philippines and Hong Kong, attracting talent at senior management positions and driving technology transformation for a product platform-based go-to-market strategy.

Risks and concerns

Rely on third-party service providers in several areas of operations: The company relies on third-party service providers in order to conduct its business in several of its areas of operations. In compliance with applicable regulations, it has outsourced certain services, such as, data entry, messaging services, software and technology services, front office services, information security, recruitment, training and outsourcing. Pursuant to this, it has entered into Service Provider Agreements (“SPA”) with multiple third parties. While the SPAs that it has entered into have specific clauses that stipulate the quality of services to be provided by such third-parties, it does not have full control over the services provided by them. If the standard of services provided by such third parties is inadequate or not in compliance with applicable guidelines, it could suffer reputational harm and financial harm, which may adversely affect its business and prospects, and financial position, cash flows and results. Further, these contracts typically also contain conditions of indemnity, which it may not be able to enforce effectively.

Significant disruptions in information technology systems could adversely affect business: The company is a leading technology driven financial services platform providing comprehensive services and solutions to the capital markets ecosystem including asset managers and corporate issuers across asset classes in India. It also provides investor solutions including transaction origination and processing for mutual funds and private retirement schemes in Malaysia, Philippines and Hong Kong. It provides several critically important services to the Indian capital markets ecosystem. Its clients utilize its platform for its different service offerings for a substantial part of their operational requirements. Its technology products, solutions and platforms help its clients to focus on their core business functions such as investment management and sales and marketing functions whilst entrusting bulk of operational front office, middle office and back office activities to its platform. Many of its services are provided through the internet, which also increases its exposure to potential cybersecurity attacks including viruses, ransomware and spam attacks.

Dependent on strength and recognition of brand and reputation: Reputational risk, or the risk to its business, earnings and capital from negative publicity, is inherent in its business. The reputation of the financial services industry in general has been closely monitored as a result of the global financial crisis and other matters affecting the financial services industry. Negative public opinion about the financial services industry generally or it specifically could adversely affect its ability to attract and retain customers and may expose it to litigation and regulatory action. While its brand was only established in November 2019, any negative incidents or adverse publicity could rapidly erode customer trust and confidence in it, particularly if such incidents receive widespread adverse mainstream and social media publicity or attract regulatory investigations. Although it takes steps to minimize reputational risk in dealing with customers and other constituencies, it, as a financial services organization with a high industry profile, are inherently exposed to this risk.

International operations involve risks that could increase expenses: The company offers a range of solutions and services such as KYC onboarding, applications processing, online transacting using the mobile application and portals, viewing of statement of account online and supporting all transaction types such as sales and redemption, agent onboarding, commission management, agents portal and mobile application, statistical summary of investor position and tax statement and value added services, mortgages, legal services, transfer agency and finance and accounting operations in a number of jurisdictions outside India, including to clients in the U.S., U.K., Australia, Canada, Malaysia, Philippines, Hong Kong, Oman and Maldives. Its global operations expose it to legal, tax and regulatory requirements and violations or unfavorable interpretation by the respective authorities of these regulations could harm its business. This might include difficulties in managing, growing, and staffing international operations, including in countries in which foreign personnel are, or may become, part of labor unions, personnel representative bodies or collective agreements, and challenges relating to work stoppages or slowdowns.

Outlook

KFin Technologies serves the mission-critical needs of asset managers with clients spanning mutual funds, AIFs (alternative investments), pension, wealth managers and corporates in India and abroad. The company provides SaaS based end-to-end transaction management, channel management, compliance solutions, data analytics and various other digital services to asset managers across segments, as well as outsourcing services for global players. It has proven tech expertise in the wealth management space and renders platform build, revenue assurance and operations support for several private wealth managers. It is expanding in insurance transaction processing and fund administration. It is also the mortgage Centre of Excellence for the world’s largest Registrar and mortgage management company handling lakh of transactions every year. It has become the de-facto choice for new AMCs, AIFs and Corporates, having been chosen as the partner for 15 of 20 newly launched AMCs and several large IPOs. On the concern side, the company’s business is exposed to the risk of employee misappropriation, fraud or misconduct. Its employees could make improper use or disclose confidential information, which could result in regulatory sanctions and serious reputational or financial harm. Besides, it is subject to credit risk of its customers, and its profitability and cash flows are dependent on receipt of timely payments from clients. Any delay, or failure, in payment by its customers may have an adverse effect on its profitability, working capital and available cash.

The issue has been offered in a price band of Rs 347-366 per equity share. The aggregate size of the offer is around Rs 1500.00 crore to Rs 1582.13 crore based on lower and upper price band respectively. On the performance front, the company’s total income increased by 32.78% to Rs 645.56 crore for Fiscal 2022 from Rs 486.19 crore for Fiscal 2021. The company’s profit for the year was Rs 148.54 crore for Fiscal 2022 as compared to loss for the year of Rs 64.50 crore for Fiscal 2021. Meanwhile, the company plans to continue on-boarding new clients across its various businesses and investing in its sales efforts so as to enhance its market share across businesses. It intends to deepen its presence in South East Asia and has expanded its international sales team by adding additional country sales heads in South East Asia. It also plans to expand internationally beyond the geographies it is already present by further enhancing its global delivery model wherein it will look to become delivery partners to global investor and issuer services providers, so as to enter other markets.