KFin Tech to focus on growing the more profitable value-added segment

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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KFin Technologies hopes to increase the share of the more profitable value-added services (VAS) segment to 15% of revenue over the next three years from 6% now.

Vivek Mathur, the CFO of the tech-driven financial services company, said gross margins of the VAS segment typically ranges from 60-65% and can go up to 70%.

He highlighted the scalability of these services, operating on a Software as a Service (SaaS) model, contributing significantly to overall profitability.

Mathur expects revenue growth to remain in the 15-20% range with profit margin of around 30%.

During April-March 2023-24, the company’s revenue grew 16% to ₹838 crore on a year-on-year (YoY) basis, while the net profit rose 26% to ₹246 crore over the previous year..

The company posted 20% year-on-year (YoY) revenue growth for January-March, and profit growth of 31%. The earnings before interest, tax, depreciation, and amortisation (EBITDA) margin expanded to 45.8% from 44.8%.

The overall asset under management grew to ₹17.4 lakh crore.

In a note released in March, brokerage firm Nuvama initiated coverage on the stock with a buy rating citing strong moats and potential for improved margins.

“It is set to benefit from higher retail participation in equity markets via both MF and direct investing route,” Nuvama stated in the note.

The current market capitalisation of the company is ₹12,693.34 crore. So far this year, the shares have gained over 54%.

Below is the verbatim transcript of the interview.

Q: What kind of revenue growth do you expect to see? The international business as a percentage of your total mix – what is it? Where is it headed? And in that case, what kind of impact can it have on margins?

A: We expect the revenue to continue to grow in the range of 15% to 20%. And as we have seen in FY24, we have grown around 17% YoY, we expect that will continue to grow at a pace of 15% to 20% in terms of revenue.

The international growth is evident, it used to contribute 9% of the total revenue until FY23. It has increased to 11%, and we expect that with our entry into Singapore, and once the regulatory approvals are given for IFSCA and Gift City and followed by application for Thailand, we will look at expansion beyond Southeast Asia into Europe and the US. And we expect that the international business should contribute to about 15% of the total revenue.

We have grown the number of clients and therefore, our margins overall, on an accretive basis, are also growing. We have seen our margins coming back in the last quarter to more than 45%. And we expect that in times to come the operating leverage will play out where you don’t need to incur disproportionate expense revenue. So margins should go up. Even now you see PAT margins touching 30% and we expect that the EBITDA margin and PAT margins should continue to be range bound – when the times are good, it will be 45% plus, and when the market is tough, it will be in the range of 40 to 45%.

Q: What’s your own internal assessment? Is it going to be north of 45%?

A: We think so. As the market remains bullish and the consumption story in India remains intact, in terms of the guidance given by the Association of Mutual Funds in India (AMFI), the domestic mutual fund market will continue to grow. And, we expect that we will also outgrow the market, we have been outgrowing the market. And we feel that our margins should improve.

Q: I wanted to also talk about inorganic opportunities to expand your reach, are you evaluating anything because you do have cash of almost ₹400 crore on your books? What do you plan to do with that and anything in this calendar year?

A: Definitely we continue to explore opportunities in India and outside India towards M&A. And, the philosophy is that if there are new geographies, which are better to go to market through acquisition, and it is going to be value accretive then we’ll go to the inorganic route.

So either it is a client acquisition or geographical expansion or product acquisition, which helps in terms of expanding our horizon, both in terms of reaching out to our current clients with more bouquet of products, or going to new geographies and acquiring new clients rather than building the market organically. So, even now, we continue to explore at least two or three acquisitions. So, the growth capital out of ₹400 crore is set aside. So, there will be some payout for the dividend that we have declared ₹5.75 paisa per share. But beyond that, there is still enough dry powder for us to do acquisitions.

Q: So, you had said earlier that you’re looking to expand to places like US, Europe, etc. So, when you look at an acquisition, which is the geography of choice for you, and anything that will materialise in this fiscal year, FY25?

A: It depends on what kind of acquisition opportunity we get. If we get something which is small to medium with a fund administrator kind of service, which can help us foray into fund accounting in Europe and the US, we will seriously look at it. It also depends on what value it comes to and what kind of management we get rather than building the market there, we will look at it. So there’s a Business Development Strategy Committee of the board, which looks at every M&A opportunity that we bring to the table. And if we see that there is value in terms of going inorganically and developing shareholders’ value through that acquisition, then we will get a go-ahead from the board.

Q: Tell us about the plans to scale up XAlt, that’s the platform that you have.

A: XAlt is basically a fund administration platform, that is something where right from digital onboarding of clients, to front end, mid office, back office, compliance reporting, everything can be handled. It’s a unique platform that we have developed. And as you will see it’s not just this XAlt, even Guardian – the Big Four audit firms use our insider trading platform. Even the Securities and Exchange Board of India (SEBI), as a regulator has – we have built a platform called Portal for Alerts, Reports and Analytics for SEBI (PARAS) for alert reporting of the regulator. So, we have moved gears in terms of just being a registrar and transfer agency (RTA) to a tech fin company, where the diversity of business in the product innovation that we do is unique in India.

Q: Are some of these initiatives more profitable than the RTA business?

A: Definitely, value-added services are always more profitable, they have gross margins of almost 60-65% going up to 70% because you build the chassis and then you get on the customers on a SaaS basis. That’s how the overall profitability also is supposed to go up as the contribution of VAS to the total revenue is already 6% against 5.3% last year, we want to take it to about 15% In the next three years.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow