KFin Technologies: Powering long term growth

1 Sep 2023 , 11:04 AM

Recommendation: Buy; Target price: Rs 525

Analysts of IIFL Capital Services initiate coverage on KFin Technologies Ltd. (Kfintech) with a BUY; and value the company at 30x FY26 EPS with target price of Rs525. They like company’s diversified revenue model which lowers earnings concentration risk and offers higher growth optionality. It would benefit from the financialisation of savings trend in India given its leading position in multiple financial asset servicing; as well as is likely to deliver a stronger growth in the international business given potential for market share gains. 

Market infrastructure play with diversified revenue model: 

Kfintech provides comprehensive solutions to capital markets ecosystem including asset managers and corporate issuers across asset classes in India and abroad. It has created a well-diversified business model with market leading position in MF RTA (30% market-share on AUM serviced and 60% market share on AMCs serviced) & Corporate RTA (47% market-share) segments. Leveraging on its domain expertise and cost effective technology led solutions, Kfintech is now targeting the alternatives space, pensions, fund administration and is also rapidly expanding its RTA operations in South East Asia (SEA). Given Kfintech presence across financial assets i.e. MF, direct equity, alternatives, pensions, etc. – analysts of IIFL Capital Services see it as a key beneficiary of the financialisation of household (HH) savings trend in India. 

New businesses to grow at ~2x the overall growth: 

The MF RTA and Corporate RTA segments, which contributes 85% of revenues, are already scaled-up businesses and would grow at 12-13% pa – in-line with industry growth. However nascent businesses such as alternatives, fund administration and international investor solutions have high growth potential given the possibility of market share gains (company is seeing traction in new clients wins in each of these businesses). In last 3 years these businesses grew by 28% Cagr and their revenue share increased from 7% to 9%; going ahead analysts of IIFL Capital Services estimate a similar growth (30% pa vs. 13% for firm), thus the share of new businesses would increase to 14% by FY26. 

Initiate with a BUY: 

Analysts of IIFL Capital Services value Kfintech at 30x FY26 EPS with target price of Rs525. They estimate its earnings to grow at 15% pa over FY23-26, however given high PAT-to-FCF conversion (~100%), robust core ROEs (35-40%) and strong growth optionality in newer businesses the stock warrants premium valuations. Analysts of IIFL Capital Services target multiple for Kfintech is at a 15% discount to CAMS (similar earnings growth with dominant position), however valuation discount can narrow if Kfintech surprises on growth.