KFin Tech aims to maintain margins in 42-45% band, eyes entry into US and Europe soon

Registrar and transfer agency KFin Technologies is keen on expanding its international presence, which has a higher margin. While it is well-positioned in Malaysia, Thailand, and the Philippines, it also recently entered the Canada and Singapore markets. Looking ahead, the company is setting sights on the United States and Europe as well.

“Foray into new markets will happen sooner than expected. It could happen as early as end of this financial year or Q1 Y25,” said Sreekanth Nadella, chief executive officer and managing director of KFin Technologies, in an interview with Moneycontrol.

For the quarter ended September, KFin Tech reported 28 percent year-on-year jump in consolidated net profit at Rs 61.4 crore. The company’s revenue from operations grew 16 percent YoY to Rs 209 crore in Q2FY24 from Rs 180 crore in Q2FY23.

Also Read: Problem of depth: Active mutual fund schemes outnumber the stocks they invest in

It added 172 new corporate clients and 4 million investor folios under issuer solutions. The company’s margin expanded by 540 basis points YoY to 44.8 percent.

Edited excerpts from the interview follow:

Can you break down the company’s recent financial results? You’ve mentioned maintaining margins in the 42-45 percent range. Could you elaborate on how you plan to do that, while also expanding operations?

First, it’s important to understand that our margin improvement has been driven by a combination of factors. We’ve seen an expansion of revenue and effective cost-containment measures. This has allowed us to improve our margins from around 37 percent to where we want to maintain them, in the 42-45 percent range.

We’re not a mature, established company that can simply coast on existing operations. We’re a company in a phase of growth and diversification, which necessitates ongoing investments in several areas. These investments include the creation of new capabilities, expansion into new geographical regions, business development expenditure, and the development of new products and platforms. Additionally, we incur significant professional charges as we engage with leading service providers, such as major consulting firms, to understand how various businesses work in different countries. Our growth and diversification require us to keep investing in our business.

One specific change we made was in our wage bill, which constitutes about 50 percent of our total costs. It’s important to note that this increase in wages was not due to increments or headcount reductions. Instead, we underwent a pyramid restructuring. This restructuring involved moving a significant amount of work to tier two cities and emphasising a pyramid model, which allows us to achieve more work through junior employees while implementing a significant component of automation. The goal is to ensure that we maintain quality standards even as we optimise costs.

Also Read: Blue Jet Healthcare IPO opens today: Should you subscribe to the Rs 840.27 crore issue?

Currently, what is the split between your domestic mutual fund business and your international operations. Can you provide some insight into the current division between the two, and how do you foresee this shifting in the future? Additionally, what initiatives are you planning to focus on in the international markets?
Currently, domestic mutual funds make up 70 percent of the topline. Our strategy revolves around achieving a balance and ultimately parity between domestic mutual funds and other businesses, led by international investor solutions.

In the most recent quarter, we saw a 16 percent increase in revenue from domestic mutual funds, which is a core business. But our international and other investor solutions achieved nearly 50 percent year-on-year revenue growth.

The international component tends to offer higher margins, and several factors contribute to this. First, the yield derived from the international business is higher than that of the domestic market. Second, we’ve learned from our experience in India not to engage in constant volume discounting, as often happens in the domestic market. Instead, we practice price escalation in international markets, which works to our advantage.

Furthermore, the nature of these economies in international markets, where there are fewer investors but higher value per investor, translates to larger ticket sizes. In many of the countries we operate in, the typical ticket size is approximately eight to nine times that of India. This results in fewer transactions and less effort, which in turn leads to lower costs associated with those transactions.

Could you provide more insight into how pricing in international markets differs from domestic pricing? How does this impact your business strategy in those markets?
In India, the typical commercial model for mutual funds, for instance, involves charging a fee based on the assets under management (AUM) or basis points. It might work like this: for AUM in the range of 0 to Rs 20,000 crore, the fee could be set at, for example, four or five basis points. For AUM in the range of Rs 20,000 crore to Rs 50,000 crore, it might be slightly lower, say 3.8 or 3.85 basis points. The pricing decreases as the AUM increases.

In contrast, in international markets where we operate, this model does not exist. The work in these countries is performed in-house by the asset management companies themselves and is not outsourced to third-party providers like us. In essence, this is a model we introduced to many of these countries, and it’s not something they had in place. As a result, there’s no room for a discount.

What strategies are you implementing for growth in international markets, and what services are you looking to offer?
In India, if you see the RTA model, we manage the investor side of mutual funds. So, if you have invested a certain amount of money in a mutual fund, the entity that does the entire processing underneath that would be someone like a KFin Tech.

Now, as a fund manager, you also need to look at the fund accounting and administration side of it. We believe this is a very, very critical competency to possess, if we want to grow internationally, and we are moving in that direction. We have acquired a company called Hexagram, which is a multi-currency, multi-asset, and multi-geography compatible platform.

We intend to position ourselves to be that one partner to whom the client can basically give away all of their work—managing operations, technology, marketing, CRM (customer relationship management), and so on and so forth—and focus on basically the core of it, which is to make money for their investments.

Also Read: Midcap meltdown: Should investors look at largecaps now?

What is the market size and what is the outlook going ahead?
Fund Administration is a $12 billion industry globally and the share of Indian capital market infrastructure players is not even 1 percent. So, the potential to grow is huge.

COVID-19 set us back a bit in international expansion. The order pipeline shrank during COVID-19, which meant that a certain number of clients couldn’t go live and hence the revenue did not come by. The company’s growth was limited to the growth of the domestic mutual funds business.

Now, we believe we are firing on all cylinders. We have even won nearly 65-70 percent of all alternate investment fund mandates that have launched in the recent past. Our AIF revenue has grown by 90 percent. Once the international segment starts growing consistently, we will grow at a much faster pace to achieve 20-percent-plus topline growth.