Kfin Technologies’ IPO doesn’t tick all the boxes for investors

The theme of financialisation and digitisation has ensured that firms that provide such services have become a favourite among investors of late. Successful market listings over the past few months augur well for companies looking to explore the capital markets. In this backdrop, the promoters of Kfin Technologies Ltd, a registrar and transfer agent (RTA), are looking to unlock value through an initial public offering (IPO), which opens for subscription today.

RTAs are intermediaries that provide maintenance and management services for shares and units of mutual funds, through the use of technology. The market is currently duopolistic, with Computer Age Management Services (CAMS) being the market leader and Kfin the other service provider.

So, what does Kfin hold for those who wish to subscribe to the IPO?

The pros

Analysts believe that Kfin offers timely exposure to the growing market of end-to-end electronic maintenance and record-keeping of financial transactions involving shares and mutual fund units. Incrementally the share of financial assets has increased in household savings as Indians have begun to participate in equities directly or through mutual funds. In short, as more and more Indians invest in financial instruments through systematic investment plans (SIP) or otherwise, the resulting transaction volume needs end-to-end processing and servicing by financial entities. This is where RTAs such as Kfin come in and therefore have a visible runway for growth.

Kfin has tie-ups with 24 of the 41 mutual funds in India to process their transactions. Besides, the company also has multiple revenue sources from global operations and alternative investment funds. “One can subscribe for the long term as it is India's largest investor solutions provider to Indian mutual funds, based on the number of AMC clients serviced,” said a note from Prabhudas Lilladher on the IPO.

Kfin’s growth in revenue and profit over the past three years indicates strong growth. According to the prospectus, Kfin’s revenues grew at a compound annual growth rate of 20 percent between FY20 and FY22.

To be sure, Kfin’s business prospects are closely tied to the mutual fund industry as fund houses contribute more than 70 percent of its total revenue. The company’s profit margin has improved substantially with its earnings before interest, tax, depreciation, and amortisation (EBITDA) margin increasing to 45.53 percent in FY22 from 36.03 percent in FY20.

But that’s where the good news ends.

The cons

Kfin’s revenue sources are diversified but the company is heavily dependent on the asset management industry, with 70 percent of its revenues coming from the 24 mutual fund houses it has tied up with. Further, its top five clients account for more than 50 percent of its revenue. In short, Kfin’s revenues rely heavily on the growth recorded by five fund houses’ assets under management (AUM).

Indeed, the management has listed the concentration risk in the prospectus as one of the risks that investors should be willing to take. “The loss of one or more of our significant clients or a reduction in the amount of business or fees we obtain from them or an adverse change in the determination of the fees that we receive from them could have an adverse effect on our business and results of operations,” the prospectus said.

Peer comparison

Both CAMS and Kfin offer the same set of services with CAMS commanding a larger market share. Kfin falls short in convincing prospective investors about its valuation when compared with its listed competitor.

The company’s promoters are offering 16.8 crore shares through the IPO at a price of Rs 347-366 per share. This values Kfin at Rs 6,133 crore, which is a deep discount to CAMS’ current valuation in the market. CAMS listed two years ago and the company’s valuations, too, have taken a hit.

Shares of CAMS are down over 20 percent so far in 2022 although they have still returned a stellar 63 percent to the company’s IPO investors. Concerns over its growth emerged after a lacklustre performance by fund houses. Even so, the growth prospects of the RTA businesses remain intact. “There are enough tailwinds for the two companies (CAMS and Kfin) for growth. Kfin needs to show solid growth to interest investors and distinguish itself from CAMS,” said an analyst.

Kfin’s chief executive officer Sreekant Nadella believes that there are factors that sets them apart from competition. “We are the only ones present in issuer solutions. We are differentiated by our international operations which the other players aren’t there and a decent amount of revenues has started to from our technological offerings,” said Nadella in an interview with Moneycontrol.

While Kfin is a market leader in terms of the number of customers (24 fund houses), it lags behind CAMS in fund houses’ AUM share. CAMS services 65 percent of the equity AUM of mutual funds and 69 percent in total. Its profit margin also trumps Kfin’s margin. The improvement in its market share over the past two years also augurs well for the company. Kfin will need to get into contracts with large MF players to move the needle on market share and growth, said analysts.

For now, even a valuation 32 times its FY23 earnings per share, at a deep discount to CAMS’ 39 times, isn’t attractive enough.