Initiating Coverage: KFin Technologies Ltd
24-03-2023

About

KFin Technologies Ltd (KFIN)is a technology-driven financial service platform that provides comprehensive solutions and services to the capital market ecosystems. The Company provides service to asset managers and corporate issuers including transaction origination, processing for mutual funds and private retirement schemes across asset classes in India and provides investor solutions in Malaysia, Philippines, and Hong Kong.

KFIN services 24 out of 41 AMCs, within investor solutions for AMCs (59% market share based on number of AMC clients). The company serviced INR 12,29,900 Cr of AAUM (as on Sep22) representing 32% market share. In the AIF space, company serviced 301 funds of 192 AIFs in India (as on Sep22) representing 30% market share based on the number of AIFs being serviced.

It is also one of the three operating central record keeping agencies (CRAs) for the National Pension System (NPS) in India.

Industry Overview

Indian MF industry is expected to grow AUM at 14% CAGR, reaching approximately INR 74 trillion by FY27, similarly 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%. This provides significant growth trajectory as savings in financial assets has increased from 36% in FY14 to 52% in FY21.

Indian AIF market currently stands at AUM of INR 2.8 Trillion (FY22), expected to grow at 28% CAGR to reach 9.7 Trillion by FY27. Rising share of UNHI-HNIs to increase creating demand for investment products.

Increasing middle class and disposable income is on rise in India. This has been witnessed by number of NPS account subscribers at 16.40 million with AUM of INR 7.76 trillion, from 10.57 Million accounts with AUM of 1.72 Trillion in FY17.

Business Model

Mutual Fund solutions - Under MF investor solution KFintech provides mutual fund solutions to investors, distributors, and asset management companies (AMCs).. Their main services include maintaining and verifying unit holder accounts, helping with the buying and selling of mutual fund units, and preparing and sending out account statements. They earn revenue through a fee-based model that is linked to the assets under management of the asset management companies.

Pension services- KFIN is a Central Recordkeeping Agency (CRA) for the National Pension Scheme, providing data maintenance and record-keeping services for various NPS subscribers. It holds a 5% market share, with the remaining market share being held by Protean e-Gov Technologies Limited. KFIN earns revenue based on the number of accounts opened, account maintenance charges, and fees charged on the number of transactions made by the subscribers.

Alternatives and wealth management - KFintech offers customized services to Alternative Investment Funds (AIFs), Portfolio Management Services (PMSs), and Wealth Management companies. These services include acting as a Registrar and Transfer Agent (RTA) and maintaining a repository of information on investor behavior and preferences. Through these services, KFintech helps these companies to manage their client relationships better and provide them with personalized investment solutions.

Issuer solutions - KFintech acts as an independent financial institution appointed by a company launching an Initial Public Offering (IPO) to maintain records of the issue and ownership of shares. Company’s responsibilities include processing IPO applications, allocating shares to applicants based on SEBI guidelines, processing refunds, and transferring allocated shares to the demat accounts of investors.

Global business services - KFintech offers global business services, including mortgage services, legal services, transfer agency services, and finance and accounting services on a fully outsourced basis. It charges fees based on per full time employee basis.

Business Performance

	Mar-19	Mar-20	Mar-21	Mar-22

Gross Sales	162.43	449.87	481.14	639.51
Total Income	164.76	455.27	486.20	646.28
Total Expenditure	96.74	291.20	268.70	352.29
EBITDA	68.01	164.06	217.50	293.99
EBITDA Margin %	41.28%	36.04%	44.73%	45.49%
PAT	8.96	4.52	-64.51	148.55
PAT Margin %	5.44%	0.99%	-13.27%	22.99%
ROE	1.72%	1.11%	-18.78%	23.49%

Company reported a 40.7% growth in Sales over FY19-22, on account of growth in mutual fund solution segment (70% of FY22 revenue).

Risks:

Significant concentration of revenue contributed by top 5 clients (53% in FY22)

Exposure to potential cyber security attacks including viruses, ransom ware and spam attack. Technological disruption or obsolescencecould affect revenue and margins.

Lower growth in financial assets like MF, PMS, and AIF.

AUM share decline for KFintech clients and lower IPO issuance in market.

Competition

KFintech faces competition from CAMS in account aggregator space in MF service space. It competes with Linkin Time and Big shares in issuer solution segment.