Shares of Kfin Technologies Ltd. gained on Thursday after Kotak Institutional Equities initiated coverage with a 'buy' rating, citing that the company's diversified financial structure would help build scale and strengthen its business model.
The brokerage has set a fair value of Rs 400 apiece on the stock, implying an upside of 20%.
"Kfin's disadvantage in the mutual fund registrar and transfer agent duopoly is counterbalanced by a diversified revenue profile that mitigates regulatory risks, lower client concentration, and offers strong growth options arising from its presence in international, alternative, and issuer solutions businesses," the brokerage said in the note.
The diversified revenue profile includes MF RTA (65-70%), followed by corporate registry (15%) and fast-growing international and domestic alternatives (10%).
The company operates in duopoly or oligopoly markets with high entry barriers and switching costs for clients. It is the second-best player in a MF-RTA duopoly with a 30% market share, according to Kotak Institutional Equities.
Kotak expects mutual fund RTA revenue to grow at an 8–9% compound annual growth rate over the next decade, as against 13% growth in the past five years.
The brokerage sees revenue and client diversification as the only way to build scale and strengthen the business model against the secular yield pressure facing the asset management industry.
Key risks for KFin include:
Faster-than-expected yield compression due to adverse pricing regulations for mutual funds, accentuated by high client concentration.
Spotless execution is critical to Kfin's growth journey as it operates in 6-7 distinct business segments, spanning across client segments and geographies.
Operational lapses (errors, outages, and cyberattacks)
Loss of large clients due to M&A.
Adverse financial outcomes in pending litigation.
Kfin's Revenue Support:
Expansion of the MF investor base, new listings and direct equity participation, the global trend towards outsourcing of non-core functions, and increasing regulatory complexity and compliance burden are some of the macro drivers that support the company's revenue growth, according to the brokerage.
Base Case:
Kotak predicts greater yield pressure for RTAs in comparison to MFs under the base case assumption, leading to a decline in the share of RTA costs as a percent of MF revenues. "The duopoly nature of the industry helps KFin extract better operating leverage from the business". the note said.
Key Aspects:
KFin continues to focus on augmenting its client base in the already established business segments (MF RTA and issuer solution business) and ramping up new client additions in the new business segments.
The share of recurring revenues remains high due to the nature of contracts, which are linked to AUM size and transaction volumes. The share of recurring revenues accounts for 96–99% of total revenues over FY2020-1HFY23.
Along with the organic business growth, revenue retention rates in MF RTA have improved significantly as well.
Divergent growth trends across businesses; mid-teen earnings growth overall.
Stock Reaction:
Shares of Kfin Technologies rose 3.93% as of 11.54 a.m., compared with a 0.38% advance in the benchmark Nifty 50 on Wednesday.
The stock advanced as much as 5.43% intraday, while the total traded volume stood at 2.1 times its 30-day average.
Out of the two analysts tracking the company, one maintains a 'buy' rating while the other recommends a 'hold,' according to Bloomberg data. The average 12-month consensus price target implies an upside of 4.6%.
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