Financialisation as a theme has helped many stocks garner market interest, thereby ensuring successful listing in the bourses. First it was the stocks of insurance and asset management companies to gain from the theme. Then surrogates such as stock exchange, depositories and registrar and transfer agents (RTAs) latched on. On these lines, KFin Technologies, the second largest RTA, plans to roll out its initial public offering (IPO) next week, nearly two years after the listing of its largest competitor and market leader Computer Age Management Services (CAMS) debuted the market. RTAs are intermediaries who facilitate electronic maintenance and management of shares and units of stocks/mutual funds.

The question is whether KFin can repeat the success of CAMS, which had a good listing; and its share price has appreciated 64 per cent since then.

When benchmarked purely in terms of valuations, priced at 32x FY23 annualised earnings per share, KFin is at a discount to CAMS (39x) and this is a positive. However, a deeper reading of financials and its business suggests that the IPO valuation doesn’t leave much on the table for investors to gain in the near term. Also, factoring in how some of the recent public issues have performed, we recommend investors can wait and watch for now and need not subscribe to the IPO. A sustained improvement in financials, demonstration of the ability to garner better share among top-10 mutual funds and better visibility on the litigation pending on its erstwhile promoters may lend support to the valuations of KFin, post listing.

Business

KFin Technologies was earlier known as Karvy Computershare. Computershare is an Australian company and is a market leader in the RTA space globally. Meanwhile, General Atlantic made an investment in Karvy Computershare and in 2019, when the Karvy group was scam-hit, US-based PE major General Atlantic ensured that Karvy Computershare was removed from the group and renamed as KFin Technologies, as Computershare has exited the company. General Atlantic holds 73.41 per cent stake in the company and now plans to exit 24.46 per cent stake by offering shares for sale in the IPO. There is no fresh issuance.

Managing 24 out of 41 asset management companies (AMCs), KFin is the market leader in number terms. But this being a volume industry, investors need to assess KFin from the perspective of assets under management serviced and by that parameter, CAMS is the market leader with nearly 60 per cent share. Based on top 10 AMCs, KFin services only three out of 10. Mutual funds business accounts for 76.4 per cent of KFin’s revenues (with 67.75 per cent coming from domestic AMCs). The rest is earned from issuer solutions and global business services (see chart). Focused on technology-led growth and expanding its footprints globally, the upside for KFin in the long term is likely to be led by these verticals.

Growth in AMC business will depend on more AMCs coming up and a robust equity market (critical factor for new accounts to be registered). With 2022 being tepid, it’s already having some impact on the financials of KFin, given that it has just about crossed the half-way mark of FY22 so far in the current fiscal in terms of revenues. Even in terms of profitability, at 39.15 per cent operating margin, it lags that of CAMS. With just four years of history under the new management and the first two years being very tepid, investors should wait for a few quarters to get clarity on its earnings trajectory.

Risks

KFin is now completely cut off from the Karvy group. However, with the investigation still on, its rub-off effect cannot be ignored. Further, any financial liability that arises from the investigation may have to be bankrolled by KFin, if Karvy Computershare is named in the proceedings. While Karvy’s erstwhile promoters are not promoters at KFin, they hold over 14 per cent stake in the company which is currently locked-in. Once the encumbrance is lifted, there could be a risk of oversupply of KFin shares in the market, which could dampen the stock price.

In terms of financials, when seen from margins or return profile, there is a reasonable gap between KFin and CAMS. While this is getting captured to an extent in the valuations, whether there is room for KFin to bridge the gap in terms of financials isn’t very clear for now. Further, the business of RTA hinges on the fortunes of equity market performance. With the MF industry already faced with redemption pressure and slowdown in SIP volumes, growth prospects for RTAs, including KFin and CAMS, could come under pressure.

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