- 10/23/2023
Catch KFin Technologies' Sreekanth Nadella Decoding The September Quarter Earnings And Outlook For H2.
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NewsTranscript
00:00 Hello and welcome to BQ Prime. You're watching Earnings with BQ and my guest today is from
00:04 KFIN Technologies, Shrikant Nadela, MD&C of the company. Shrikant, thank you very much
00:10 for joining us on BQ Prime. Let me begin with the quarter. You know, good set of numbers
00:16 of growth coming in, YOY and quarter on quarter. What's giving a push to this kind of growth?
00:22 Very good afternoon, Sajid, and thanks for having me over. We just concluded our Q2 with
00:31 a total operating revenue growing by about 16%, income growing by about 18%, EBITDA grew
00:38 about 32.5% and PAT numbers close to 30%. Happy with the results, satisfied. As always,
00:45 of course, there is more room for it to grow. What has contributed to our growth is our
00:53 focus on diversification. Our core business is of managing the operations for mutual fund
00:58 companies and as a share transfer agent continue to grow strong. But also the focus on a diversified
01:05 set of businesses, which is to drive international business and the emerging asset classes such
01:10 as Alternate Investment Funds and PMS and Pure Technology Solutions has been helping
01:15 us to grow much faster. The businesses which are not the mature ones have grown near about
01:21 48% as against a 16% plus of our largest share of business. So clearly a factor of three.
01:27 And that's what's helping us to exceed the industry growth and have business performance,
01:34 which is in line with our expectations. Are you seeing a trend, especially with respect
01:39 to MF, RTN, MF, AMC business, which you have, fund management business, which is now stabilizing
01:49 in a nominal growth rate going forward? We believe that the mutual funds business too
01:59 has not come to any sort of maturity, if I may. Today, every indicator that you look
02:06 at points to the fact that this is just the beginning. Our mutual funds overall, if you
02:12 see it in industry level has grown from about 40 trillion to 47 trillion in a matter of
02:17 six to seven months of sales dependence growth. And the estimation from the reporting of Crystal
02:24 and Amphi is that we will touch 100 trillion rupees worth of assets by 28, which effectively
02:29 translates to two and a half times increase in the overall assets during this period.
02:34 And at that level, we would have hit only about six to seven percent of our GDP. Whereas
02:40 for a good metric, in many economies, the factor of AUM to GDP, if you look at US, it
02:46 is three times that of the GDP. In many of the developing countries too, it is up north
02:51 of 60 to 70 percent. So I like to believe there is a significant room for the industry
02:56 to grow. And as the industry grows, as a proxy to the industry growth, entities such as us
03:03 who are licensed intermediary, we will continue to grow along with our clients.
03:08 Will there be any kind of pressure that can come in from the mutual fund industry with
03:13 respect to costs? Because the SEBI has been looking at the TER for the mutual fund industry.
03:20 They expected to come out with the second draft, basically based on the recommendations
03:24 there, which would try to bring in some economies of scale for the mutual fund industry and
03:30 the growth of TER or imposition of TER. And will that have any kind of impact on you going
03:36 forward?
03:37 Thank you, Sajid. So this is not a new phenomenon. I mean, every four to five years, you would
03:44 see there is a downward revision of expense ratios. It happened once in 2019. And if you
03:50 saw our track record of growth from 2019 to 2023, we have grown much faster than what
03:54 we have grown even prior to that. This is a natural business factoring that we ought
04:01 to do. A certain amount of yield compression is bound to happen as the volumes increase.
04:06 This is a volume business, as one would expect in a nation like us. And to that extent, passing
04:11 back the efficiencies in the form of end of the day, the investors stand to pay, as well
04:18 as the management companies. So there can be some amount of yield compression, which
04:22 is there every single year through this business. So nothing out of the ordinary I anticipate
04:27 from this.
04:28 And so there might be some impact on the EBITDA margins part of it, if there's any yield compression
04:34 coming in.
04:35 Yeah, that's what I'm saying, Sajid. So there is a certain amount of yield compression that
04:41 happens nearly every year. As the AMC's assets grow, our commercial model necessarily includes
04:49 certain amount of telescoping pricing, which means the yield we derive for the incremental
04:52 assets will be lesser than the yield that you derive from the existing base of assets.
04:58 So to that extent, our growth is in spite and despite of the yield compression that's
05:01 been happening. So what I'm stating is that the change in further expense ratios may not
05:08 have any material impact as compared to what we've been having over the years.
05:13 So you're winning some good clients in the pension space, LIC and SBI. When do you see
05:20 those coming up in terms of an impact, giving you some comfort with respect to yields coming
05:27 in from there? Have the operations begun for them?
05:30 Thank you. One small correction. It is LIC, BFM mandate for SBI. SBI was the mandate on
05:36 the share transfer agency as RTA.
05:42 These contracts are live immediately. So we expect to see the impact of financials to
05:46 kick in into the coming quarter for both of them.
05:48 So not just these two, of course, we've had several wins in the international space, very
05:56 excited about our maiden win in Thailand, where we won the mandate of the fourth largest
06:01 asset management company in Thailand. And we are in conversations with at least 15 more
06:07 asset managers internationally. And should any some of them fructify in the near future,
06:12 it will have hopefully a positive impact on our further growth from here.
06:16 What about Canada? I mean, how is that business coming up?
06:21 So Canada, we have been rendering shadow accounting solutions for a few funds. And we have gone
06:27 live in the month of March, February, March, around that time frame, the beginning of the
06:31 year. So we have improved our overall platform to meet the requirements of several more fund
06:38 managers in that part of the country. We are yet to add more clientele at this point in
06:43 time. And we are obviously building the pipeline to add more clientele. So obviously, the successful
06:49 go live of the current client and the feedback was going to be critical, which we believe
06:53 we have at this point in time. In time to come, we should see a lot more wins on the
06:57 western part of the world, as against largely an eastern, you know, landscape that we have
07:04 today across the nations of Malaysia, Philippines, Hong Kong, Singapore and Thailand.
07:09 How do you plan to bring up or scale up this fund administration part of it because you
07:14 have entered into it in a big way? What kind of opportunities does bring in and because
07:19 fund administration also gets gets you the same or better margin? How do you plan to
07:24 scale it up over the next year or two?
07:28 Thanks Ajit. Very, very, you know, interested to be in that space. And that was the reason
07:34 why we acquired the company called Hexagram in 2021. As an RTA, you largely manage the
07:40 investor side of it, which is the liability side of any asset manager. But of course,
07:45 the operations of an asset manager includes predominantly the asset side of it, which
07:49 is your investment management operations and the accounting aspects of it all. With the
07:54 acquisition of Hexagram, you know, we have since then become the only QRTA and an RTA
08:00 at scale who can render both transfer agency and fund accounting services with a complete
08:05 overlay of technology and the digital stack on top of it. This gives us the unique opportunity
08:11 to grow internationally, especially when you move into the asset classes such as alternatives.
08:18 It is very, very critical for a fund manager to look at one entity who can provide end
08:22 to end services. And that truly is the model of many global fund administrators, you know,
08:26 who've been in this space. We believe this business is large addressable market, you
08:31 know, with about close to 10 to $15 billion worth of revenue. And, you know, no Indian
08:38 player being there at that space at this moment in time. Our intention and our ambition and
08:43 our strategic direction and the work we've been doing over the past five years is to
08:47 get into that space. And hence, creating the capabilities for fund accounting and administration
08:53 is extremely important. Today, we manage a little over 15% of the alternative investment
08:58 funds in the country on our proprietary fund accounting administration. 70% of the pension
09:05 fund managers use our platform, 60% plus of insurance companies use our platform. Several
09:10 large mutual fund asset managers also use Empower platform of fund accounting administration,
09:15 three of which are K-FinZone clients and three of them are my competitors' clients. So it's
09:22 a scenario that, you know, helps us to not just improve the yield, but also more importantly,
09:30 provide end to end services and solutions to a client under the construct of everything
09:34 as a service, which is our proprietary ways of working and we call it XAAS.
09:39 Give me a sense of is it way to scale up this entire fund administration service by bringing
09:45 more consultancy, tax consultancy or other services on top of it and get a much more
09:51 better spread or a margin here?
09:55 Very important question again. So yes, as I said, transfer agency does your liabilities
10:01 and accounting and administration does your asset side. But as a fund manager, there are
10:06 several other aspects of operations you need to look into, right? I mean, tax is one such
10:10 thing. Legal advisory is the second thing. Compliance vis-a-vis your local regulators
10:14 could be another thing. Working with analysts and research reports to provide your fact
10:19 sheets, what have you. So there is a plethora of other work that needs to be brought into
10:23 the service and a true global fund administrator, you know, renders many of the other services
10:28 and not just transfer agency and fund accounting too.
10:32 GiftCity offers us a phenomenal opportunity to build those capabilities, which is what
10:36 we are doing at this moment in time. As many a global fund is re-domiciling into India,
10:41 they are finding a definitive gap in terms of how they were being serviced, say if you
10:47 were to be based in Mauritius or Hong Kong, versus how you're being currently serviced.
10:51 And that's largely a factor of many an administrator not having the capability or haven't built
10:57 the capability because that wasn't the model in India all along. So a big yes in terms
11:03 of building those capabilities are extremely crucial and critical for us to not just provide
11:08 services outside of India, just as importantly within India in GiftCity and then eventually
11:16 extrapolating them into the domestic funds as well.
11:19 And I guess that you're investing heavily in the GiftCity part of it so that you can
11:23 bring that services across to all funds who are coming into India, right?
11:29 Absolutely, Sajid. So we've, you know, we manage about 60% of all the GiftCity funds
11:35 today and when we also have a significant international business, GiftCity allows us
11:42 to render the operations of those international clients out of GiftCity as ancillary services.
11:49 So we are working on the licensing part of it with the regulators as we get it. We believe
11:55 in time to come we will have a very strong presence of Gift in Tech in GiftCity with
12:01 plans to add anywhere between 700 to 1000 people in GiftCity, you know, to service both
12:07 the GiftCity clients as well as international clients.
12:09 Sriganth, give me a sense of the investor breadth within the Indian market, you get
12:16 access to all the investors, right? Whether it's mutual funds, whether it's equities or
12:20 shareholders of companies. Are we seeing a gradual increase in that kind of investor
12:26 base as such because from a market point of view, we are seeing that, okay, in the cash
12:32 market we are seeing a decline of active clients. Mutual funds, the portfolios are increasing
12:37 but are we seeing active, you know, clients getting added to that segment? Can you give
12:44 us a perspective of what's happening there?
12:47 Absolutely. I believe there has been a continued expansion of investor interest to invest in
12:55 financial asset classes. The data points clearly to that angle. For example, if you see the
13:04 DMAT accounts, you know, which is one of the leading indicators in terms of financialization
13:08 and the expansion of retail investors, we have seen an increase of 26% year on year
13:13 in terms of the number of DMAT accounts that have opened up new. If you see mutual funds,
13:19 both in terms of the number of folios which have seen a 23% increase, as well as the unique
13:24 investor account which has now surpassed, you know, 3 crores odd number, you know, basically
13:30 points to a significant interest amongst the retail investors to partake in India's growth
13:36 story coming in the form of capital markets. There has been a significant growth in the
13:42 investor account even for alternate investment funds and pensions too, if I may.
13:47 So all across, I see a substantive interest, maybe more in equity markets and probably
13:54 a little decline interest in money market, you know, and the bond market side of things.
13:59 But again, that's a cyclicality and then I'd like to believe that, you know, there would
14:04 be expansion even in that market as investors understand the market in terms of fixed income.
14:10 I'd like to believe there is still a significant gap in understanding of a retail investor
14:16 in terms of money market. And, you know, there are going to see the gap in terms of number
14:23 of investors who invest in money market versus not is significantly high.
14:28 And another factor, if you take a look at it is, you know, people, you know, who invest
14:32 up to a crore, you know, predominantly enter equity markets, but investors with an AUM
14:40 of, you know, greater than 2 crores plus, you would see at least a 20% of the allocation
14:45 going to money market. So in some sense, that also explains, I guess, the importance of
14:50 the portfolio diversification and how a more nuanced investor would look to enter into
14:57 the bond and the fixed money market as against just pure equities.
15:01 And it's alternatives getting really good interest from high HNI's or ultra high HNI's?
15:08 Oh yeah, I mean, without a doubt. I mean, the overall AIF market I'm talking about now
15:15 is 13. 10 years back, Sajid, was 831 crores. Yeah, today you're talking about 3 trillion,
15:22 right? So that's the kind of, you know, increase that you've seen. A cagger of over 55% over
15:28 the past four years in terms of the assets and the management has increased. Only in
15:33 this quarter Q2, there hasn't been a substantial growth. I think it has seen only the capital
15:39 inflows of only about 1.3% increase, which is definitely tepid compared to that of the
15:45 mutual funds or pensions for that matter. And I probably think that's, you know, I would
15:50 probably attribute that more to do with the interest rates in the US and the inflationary
15:53 trends and some of the capital commitments that have been made, you know, have been,
15:59 have not necessarily been honored in some cases. Or the deployment process too had been
16:04 a little slow, I think in the context of a significant increase in the small and mid-cap
16:09 sectors and especially the Cat 3 funds have, you know, a pretty large exposure to this
16:15 particular segment of funds. And that probably would have contributed to a little less of
16:18 growth in Q2 for alternatives. But by and large, expansion of the number of funds has
16:24 increased in the last 24 months, 500 plus new AIFs have registered themselves with the
16:30 regulator. Many of them have gone live. AUM has gone up. A significant number of retailing
16:35 investors have come into the alternatives. Srikant, it was a pleasure talking to you.
16:40 Thank you very much for joining us today on BQ Prime. Always a pleasure. Thank you so
16:45 much, Sunil.
16:45 Thank you.
16:53 Thank you.
16:54 Thank you.
16:56 Thank you.
16:57 [BLANK_AUDIO]
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