KFin Technologies shares shed 9% on block deal; Ventura advises buying – here’s why

As per media reports, around 3.3 crore shares, representing 20 percent equity in the company, changed hands at a floor price of ₹500 apiece. The floor price is at a 6 percent discount to its yesterday’s closing price of ₹532.25. The reports claim that global private equity firm General Atlantic is the likely seller.

However, the stock has surged over 44 percent from its listing price of ₹369 on BSE. It was listed on the bourses on December 29, 2022. From its IPO price of ₹366, it has advanced over 45 percent.

While the stock is down over 4 percent in December so far, it had surged over 17 percent in November. It also gave positive returns for 6 straight months between April and September, soaring 67.5 percent. However, it was in the red in October (down 3.7 percent) and in the first 3 months of the year.

The stock hit its record high of ₹562.30 on November 17, 2023. Currently trading at ₹506, it has advanced almost 87 percent from its 52-week low of ₹271.05, hit on March 29, 2023.

On the back of the overall strong stock performance, healthy financials, and business expansion, brokerage house Ventura Securities has initiated coverage on the stock with a ‘buy’ call and a target price of ₹704, implying a robust 39 percent upside in 12 months.

“The company is showcasing a compelling investment opportunity, supported by significant growth in its domestic investor solution sector, an expanding presence in international markets, and a dominant role in the issuer solution domain. The integration of technology played a pivotal role in this advancement, enabling the development of products and platforms and reducing operational costs by minimizing opex. This technological leverage not only elevates client interaction but also boosts revenue from current clients and augments KFINT’s operational profitability,” explained the brokerage.

This is Ventura’s base case scenario for KFin. It expects a revenue of ₹1,118 crore by FY26E, a net margin of 30.6 percent and 35X P/E.

Bull and Bear Case Scenario

The brokerage has also prepared likely Bull and Bear case scenarios for FY26 price, based on revenue growth, net margins and P/E multiples.

Bull Case: In this case, it assumes a revenue of ₹1,300 crore and a net margin of 32 percent at a P/E of 35X, which will result in a Bull Case price target of ₹987, indicating an upside of over 93 percent.

Bear Case: In this scenario, the brokerage assumes a revenue of ₹900 crore and a net margin of 30 percent at a P/E of 25X, which will result in a Bear Case price target of ₹441, a downside of 12.2 percent.

KFin Technologies is a technology-driven financial services platform providing comprehensive end-to-end services and solutions to companies in India and worldwide. KFin specialises in offering Data as a Service (DAAS) and Platform as a Service (PAAS), utilising technology to develop products and platforms designed to minimise manual handling.

Investment Rationale

Business expansion in the international market: To further accelerate revenue growth and diversify the business model, KFin is expanding its business in the international market. Over the past 3 years, the company has expanded its business in Malaysia, Philippines, Singapore, Hong Kong, Thailand, and Canada. As a result, the company’s international investor solution revenue grew at a CAGR of 27.7 percent to ₹65 crore due to increase in number of clients from 25 in FY20 to 41 in FY23, informed the brokerage. It also noted that in the next phase of growth, the company is targeting to expand its business in the bigger and more developed markets of the US and Europe. As a result, the company’s international investor solutions revenue is expected to grow at a CAGR of 20.5 percent to ₹114 crore.

Revenue visibility for issuer solution business: KFin, through its issuer solution division, aids companies in acquiring capital from both primary and secondary markets. Holding a dominant market share (NSE500 47.3 percent, mainboard IPO size 57 percent and mainboard IPO clients 26.3 percent in FY23), KFin is poised to gain from the escalating security issuance activities. Moreover, KFin also assists its clients with various corporate actions like dividend distributions, bonus issues, stock splits, etc., further enhancing its client relationships, it said.

Strong tech-driven operations improving profitability: KFin has adopted a platform-driven product design and delivery approach to service the varied needs of its clients. The company has an end-to-end transaction management platform across multiple asset classes such as MF, equities, AIF, wealth, and pension. The company provides data-driven technology solutions that combine in-house platform technologies/value-added services (VAS) products across different asset classes, including white label technology to meet client requirements, stated the brokerage.

FY20-23 – A period of high growth phase: During FY20-23, KFin’s revenue grew at a CAGR of 17 percent to ₹720 crore. This was mainly driven by a 20.9 percent CAGR growth in investor solution revenue to ₹551 crore on account of a rise in income from both domestic and international markets.

During the period, KFin’s EBITDA and net earnings grew at a CAGR of 23 percent and 251.1 percent to ₹295 crore and ₹196 crore, respectively, while EBITDA and net margins improved by 570 bps to 41 percent and 2618 bps to 27.2 percent, respectively. The use of technology for business operations improved the employee productivity and enhanced the company’s profitability. As a result, return ratios – RoE and RoIC – improved by 2139 bps to 22.5 percent and 2711 bps to 35.9 percent, respectively.

Estimates

For FY23-FY26, the brokerage expects KFin to demonstrate robust financial performance with a Compound Annual Growth Rate (CAGR) of 15.8 percent in revenue, 18.4 percent in EBITDA, and 20.5 percent in net earnings to ₹1,118 crore, ₹490 crore, and ₹343 crore, respectively. This growth trajectory will be accompanied by an improvement in EBITDA and net margins, with an expected increase of 288 basis points to 43.9 percent and 346 basis points to 30.6 percent, respectively, it predicted.

The implementation of technology-driven solutions is a key factor contributing to cost reduction and, consequently, enhanced profitability, noted Ventura. It added that the company’s strategic positioning in India’s dynamic financial markets, coupled with its expanding presence in international markets, signifies substantial growth potential.

The brokerage also estimates the Return on Invested Capital (RoIC) to improve significantly by 2007 basis points to 56 percent, underscoring the company’s effective utilisation of capital. However, It sees a slight dip expected in Return on Equity (RoE). RoE is likely to decline 291 basis points to 19.6 percent, forecasted the brokerage.

KFin’s decision to reinvest its cash flow into business expansion, rather than opting for dividend payouts, is a deliberate strategy contributing to a rapid increase in its net worth. While this positively impacts business growth, it does lead to a decline in RoE. Overall, the forecast paints a picture of sustained growth for KFin, driven by technological efficiency, market dynamics, and international expansion initiatives, stated the brokerage.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decision.

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Published: 15 Dec 2023, 02:16 PM IST