KFin Technologies IPO review (May apply)

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Review By Dilip Davda on December 14, 2022

•    KTL is a leading technology-driven financial services platform. 
•    It posted a roller-coaster ride in the bottom lines for the last three fiscals.
•    Based on its financial performance so far, the issue appears fully priced.
•    Cash surplus investors may consider parking funds for long-term rewards. 

PREFACE:
As per the offer document, KTL took over the erstwhile known Karvy Computershare Pvt. Ltd. (KCPL), - a company of the Karvy group, which had many litigations against the company. According to the management of KTL, Karvy group no longer has any direct or indirect connection to any investment in KTL and hence any outcome of litigations will have no impact on KTL's working. (Refer to p26 and p31-32 of the offer document).

ABOUT COMPANY:
Kfin Technologies Ltd. (KTL) 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 provides several investor solutions including transaction origination and processing for mutual funds and private retirement schemes in Malaysia, Philippines and Hong Kong, on account of the following:

• As on September 30, 2022, it is India's largest investor solutions provider to Indian mutual funds, based on the number of AMC clients serviced. (Source: CRISIL Report). KTL is providing services to 24 out of 41 AMCs in India, as on September 30, 2022, representing 59% of the market share based on the number of AMC clients. (Source: CRISIL Report) In addition, it signed on two new AMCs that are yet to launch operations as on September 30, 2022. (Source: CRISIL Report) Further, through its acquisition of Hexagram, KTL serves six AMCs in India on fund accounting, of which, three are existing AMC clients in India for investor solutions.
• As on September 30, 2022, it is the only investor and issuer solutions provider in India that offers services to asset managers such as mutual funds, alternative investment funds ("AIFs"), wealth managers, and pension as well as corporate issuers in India, besides servicing overseas clients in South East Asia and Hong Kong. (Source: CRISIL Report).  
• KTL is servicing 301 funds of 192 asset managers in India as on September 30, 2022, representing 30% market share based on the number of AIFs being serviced. (Source: CRISIL Report)
• The company is one of the three operating central record-keeping agencies ("CRAs") for the National Pension System ("NPS") in India as on September 30, 2022. (Source: CRISIL Report)
• As on June 30, 2022, out of the 60 AMCs in Malaysia across wholesale funds, unit trust funds, and private retirement schemes as specified in the CRISIL Report, KTL is servicing 18 AMC clients in Malaysia in addition to three clients in the Philippines and Hong Kong as on September 30, 2022. In addition, it has signed two new AMCs in Malaysia and one AMC in Singapore that are yet to launch operations as on September 30, 2022.
• The company is the largest issuer solutions provider in India based on the number of clients serviced, as on September 30, 2022. (Source: CRISIL Report). It is one of only two players of scale in India's issuer solutions space where KTL holds a 46% market share based on the market capitalization of NSE 500 companies and a 37% market share based on the number of clients serviced within NSE 500 companies, each as on September 30, 2022. (Source: CRISIL Report) Player of the scale corresponds to entities with a minimum 25% market share (in terms of serviced clients) within NSE 500 companies in the Indian issuer solutions space. (Source: CRISIL Report) KTL also had a 40% and 29% market share based on the number of mainboard initial public offerings handled in Fiscal 2022 and six months ended September 30, 2022, respectively. (Source: CRISIL Report). As of the said date, it has 5155 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
To avail listing benefits and provide an exit to some of its stakeholders, KTL is coming out with a maiden IPO via the book-building route. The issue is a pure secondary offer as the company is doing an Offer for Sale (OFS) worth Rs. 1500 cr. (approx. 40983607 shares at the upper cap). It has announced a price band of Rs. 347 -Rs. 366 per share of Rs. 10 each. The issue opens for subscription on December 19, 2022, and will close on December 21, 2022. The minimum application is to be made for 40 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 24.46% of the post-issue paid-up capital of the company. KTL has allocated 75% for QIBs, 15% for HNIs, and 10% for Retail investors. 

The joint Book Running Lead Managers (BRLMs) to this issue are ICICI Securities Ltd., Kotak Mahindra Capital Co. Ltd., J.P. Morgan India Pvt. Ltd., IIFL Securities Ltd., and Jefferies India Pvt. Ltd., while Bigshare Services Pvt. Ltd. is the registrar of the issue. 

Having issued initial equity shares at par, the company issued/converted further equity shares in the price range of Rs. 70.36 to Rs. 185.35 between November 2018 and January 2022. The average cost of acquisition of shares by the selling stakeholder is Rs. 74.06 per share. 

Post-IPO, KTL's current paid-up equity capital of Rs. 167.57 cr. will remain the same as this is a pure secondary offer. Based on the upper band of the IPO price, the company is looking for a market cap of Rs. 6133.02 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, KTL has (on a consolidated basis) posted a total income/net profit - (loss) of Rs. 455.27 cr. / Rs. 4.52 cr. (FY20), Rs. 486.20 cr. / Rs. - (64.51) cr. (FY21), and Rs. 645.56 cr. / Rs. 148.55 cr. (FY22). For H1 of FY23 ended on September 30, 2022, it earned a net profit of Rs. 85.35 cr. on a total income of Rs. 353.76 cr. 

For the last three fiscals, KTL has reported an average EPS of Rs. 3.30 and an average RoNW of 9.47%. The issue is priced at a P/BV of 8.33 based on its NAV of Rs. 43.96 as of September 30, 2022. 

If we annualize FY23 earnings and attribute it to post IPO paid-up capital of the company, then the asking price is at a P/E of around 35.92. Thus the issue is fully priced discounting all near-term positives.

DIVIDEND POLICY:
The company has not declared any dividends for the reported periods of the offer document. It will adopt a prudent dividend policy based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per the offer document, KTL has shown Computer Age Management as their listed peer. It is currently trading at a P/E of 39.37 (as of December 14, 2022). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKERS' TRACK RECORD:
The five BRLMs associated with the offer have handled 80 public issues in the past three fiscals. Out of which 26 issues closed below the offer price on the listing date. 

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