KFINTECH — earnings call
The transcript as filed. Every paragraph is addressable: its link names the page and the position it sits at in the call.
Prepared remarks
Moderator · Conference Operator
MR. ABHIJEET SAKHARE – KOTAK SECURITIES
LIMITED · Management
KFin Technologies Limited February 13, 2023
Questions and answers
Moderator · Conference Operator
Thank you very much, sir.
We will now begin the question-and-answer session.
We have the first question from the line of Aejas Lakhani from Unifi Capital.
Please go ahead.
Aejas Lakhani
Congratulations on the numbers and thanks for the meeting call summary that you gave regarding the business.
Sreekanth couple of questions; first is if you could talk about Navi.
I thought that was a recent mandate.
What made them go to the competition, that's one?
On telescopic pricing, what we understand is that prices because of the telescoping nature are already there's no scope for further reduction.
But the regulator comes out and has made some statements, your thoughts on pricing.
Is there any scope for pricing to still come down?
Vivek, one question to you is on Hexagram, what was the revenue number this quarter?
Because it was not there last year this time, could you call the Hexagram number separately?
Thanks.
Sreekanth Nadella
No, Navi is not a new client.
Navi took over Essel.
Essel was KFin's client back in the day and with the change in the management of the organization, KFin Tech manages the Fund KFin Technologies Limited February 13, 2023 Accounting Administration side of the business for Navi.
It is possibly due to segregation duty typically, if you've seen Indian mutual fund industry, we don't do TA and FA together.
It could be possibly for that reason.
So, it's not a new client.
Second, in terms of the yield compression, see, telescopic pricing is what it is.
To that extent, as the value overall corpus increases, clearly there is an expected certain amount of compression that is to be seen.
In terms of the regulators commentary if you see, I think the request or the counsel sought on the consultation paper, it was largely with a view to stop or at least to manage miss selling, if I may, in terms of investors’ money being moved from one fund to the another with a view to secure higher TER.
The very specific purpose, as stated was that although it has no bearing on the registrar's operations, our operations and the cost and et cetera continue to be disengaged with on the selling side of the fund, so to speak.
We believe that beyond the telescopic pricing, we may not see any additional yield compression.
Vivek Mathur
Yes, on the question related to Hexagram revenue, it was 8.8 crores for the 9 months ended December ‘22.
Aejas Lakhani
Got it, thanks.
Sreekanth, just follow up on that, in renegotiations that you would have had with recent clients, has there been any pressure on yields when you've been having these conversations?
Just on the international piece you had mentioned earlier that you won some geographies, sorry some new clients in different geographies so when do those go live?
I mean, should we expect something in the next quarter or will it be in the year ’24?
Thanks.
Sreekanth Nadella
I'll answer the second question first.
We have already gone live with our client in Canada.
In the last meeting we've had earlier in the previous year, it was still under negotiation and early parts of transition.
We have successfully gone live as of January for two funds, for the client based in Canada.
In addition to that, I think in the Southeast Asian side, of course, we continue to look to expand our operations into Thailand subject to necessary regulatory approval.
So, that is yet to happen.
In terms of the contract renegotiations here, our contracts are largely now this question is very specific to domestic mutual funds.
It doesn't happen with any other business.
In fact, most of the businesses, the price actually goes up.
The contract negotiation itself is a factor of the contracting terms, which is anywhere between 3 to 5 years, depending upon which client you speak with, depending upon any amount of significantly higher growth or maybe even lower growth for that matter, we take certain steps to partner with our client so as to enable their growth faster.
So, short answer, can yield compression be possible at the time of contract renegotiation, the answer is yes, but by and large it would be minimal in comparison to the telescopic pricing and related impact.
Moderator · Conference Operator
Thank you.
We have the next question from the line of Devansh N from SIMPL.
Please go ahead.
Devansh N
In case of employee cost, can you share the headcount as on March ‘22 and March ‘21 and December ‘22?
KFin Technologies Limited February 13, 2023
Sreekanth Nadella
Yes, just give us a moment, please.
The dates you're looking for March 2022 last year beginning we were at 5,440 and December, for the period ending the previous month, we were at 5,300.
Sorry, what was the other period that you asked for?
Devansh N
March ‘21?
Sreekanth Nadella
March ‘21 was 4,900.
Devansh N
Okay, so over here, what is the annual appraisal cycle for us?
Sreekanth Nadella
Typically, it is April, like any other Indian corporate.
Yes.
Devansh N
Okay because if I exclude the employee cost, if I look at ex-ESOP cost, there has been a significant increase.
Can you help us understand where it's coming from?
Vivek Mathur
Yes, in terms of employee cost the increase is largely related to a reset for the IT employees that we have.
There is integration of Hexagram that has an additional cost of all the employees cost coming in and the regular increments that we give.
We have also seen increase in replacement cost during the year based on the demand supply situation that we experienced.
We have seen an average cost going upwards of 20% in terms of replacement cost.
This is all besides the ESOP cost, which is exceptionally different for this year being the IPO year and the vesting happening this year.
These are the main reasons for increase in employee cost.
Devansh N
Okay, but let's say if I look at standalone and if I exclude the ESOP cost, it was 52 crores in December ‘22, and December ’21 was 36.
No change in employee cost.
The cost increase at ESOP is actually 50%, 44%.
Sorry.
Vivek Mathur
Yes out of 44%, you can take about 9% to 10% increase in the average increment that was there for that was given in April.
You look at the reset of employee costs for IT folks was across the industry, almost doubled in some cases.
In cases where you really need skilled employee, and as a Company which is heavily into technology, we need to retain talent, and therefore we had to increase the salaries for those employees.
Although we have taken some corrective actions in terms of resetting the engagement with external resources, the consultants that we used to hire, so we have cut down cost on that front while retaining the talented employees and therefore the increase in cost.
We believe this is not recurring in nature.
This was one time reset that was necessary given the market demand and supply situation in this area.
This is something which we will see is already easing out.
Now we see in the last quarter, the cost is actually stabilized.
It is not going any further and we do expect that in the coming financial year we will not see something like this happening.
Devansh N
But even if I look at QoQ, what we hear is that now there has been lot of firing that has been happening globally but if I look at our QoQ employee cost ex-ESOP even that has increased 20% QoQ.
So, I'm just confused.
Vivek Mathur
QoQ the employee cost has come down.
KFin Technologies Limited February 13, 2023
Devansh N
Ex-ESOP, excluding ESOP cost?
ESOP cost is 16 crores for this quarter than 30 crores last…
Vivek Mathur
That's the impact of the increase that we have done visibly last year if you see.
Last year there was no reset of IT cost, this year there is a reset of IT cost so it will have that impact until the financial year ends.
You will continue to see this impact on quarter-on-quarter because of the one-time reset that was done.
It is not that it will have only one quarter impact, it is a reset of the entire cost.
Amit you want to add anything.
Amit Murarka
Yes so I think you are referring not really sure in terms of the numbers, on the employee cost for the quarter we had 72.5 crores versus 76 crores in the last quarter.
That's a 5% decline and if I reset the number, based on basically excluding the ESOP cost then basically still my cost is down by 3% because my ESOP cost was 1.6 crores for the quarter and last quarter it was 3.1 crores.
Excluding the ESOP cost also the overall employee cost has been down on a quarter- on- quarter basis as well.
Like what Sreekanth and Vivek was mentioning, that there are a couple of reasons why on a YoY basis for the full 9 months, why the cost has gone up for a couple of reasons in terms of the reset in the IT salary, the addition of the Hexagram team as part of the core team, and then the investment that the Company did in terms of setting up the whole sales organizations in terms of basically beefing up my AIF and the Fund administration team in India and then also adding up people in terms of for the Southeast Asian business as well.
Some of these elements have added up to the cost on a YoY basis against which the matching revenue we are yet to see.
I mean, we are already seeing a lot of traction in terms of building up the pipeline for the international market as well as the number of mandates that we have been able to add in the AIF business.
That is all because the last one, one and a half years, the way the team has been built and the organization that we have set up in these some of the new and the younger businesses, that is something that is adding up to the cost.
We'll see the corresponding revenue in the subsequent period as we go along.
Moderator · Conference Operator
The next question is from the line of Ajox Frederick from Sundaram Mutual Fund.
Please go ahead.
Ajox Frederick
Sir, my question is on the international solutions.
I noticed that the AUM has come down but still we were able to do very well on the year-on-year numbers.
So, what is the revenue model here?
How are we pricing the client?
It is on AUM or transactions or how do we do it?
Sreekanth Nadella
Yes, please read that as international and other investor solutions that also includes revenue pool coming from AIF business as well and National Pension System.
Ajox Frederick
Okay.
Sreekanth Nadella
The international business itself, yes the AUM has come down because of mark-to-market reduction in most of the operating geographies there.
Yet there has been an overall revenue increase close to 45% in the overall international piece.
Alternate investment funds have contributed to 42% + growth.
Wealth management pensions have grown nearly about twice as KFin Technologies Limited February 13, 2023 past in the previous quarter.
The International Mutual Fund solutions itself has had 5% growth, despite a mark-to-market reduction in the AUM.
Ajox Frederick
Which means that the yields have gone up for that international invest based solution?
Sreekanth Nadella
That's correct.
Broadly, our asset mix and the yield, our yield is roughly about 5 basis points in international operations and overall asset quality has improved more towards equity and also some of the clients who have been transitioned into later part of the year.
Now we have full year's revenue coming in.
Ajox Frederick
Got it.
That's very helpful.
Just one question on the ESOP, what's the pending ESOP outlay we have probably for the next quarter or for the next year?
Vivek Mathur
The ESOP pool is almost 85% utilized.
So, the balance pool is about 15%.
As and when the board decides to do anything new, it will come up.
As of now, it's 85% utilized.
Moderator · Conference Operator
Thank you.
The next question is from the line of Sonal Minhas from Prescient Investment Management.
Please go ahead.
Sonal Minhas
I had a question to understand your debtor cycle when compared to your leading competitor, which is CAMS.
I just wanted to understand the business practice at the nuts-and-bolts level to understand why there are such high debtors in this business compared to the only competitor we have.
We need to compare to them and what are we doing to actually bring this down or is this like a business kind of a call that we've taken this is what we basically would go ahead with.
The second part I think there is that there are also some write-offs we do take on a quarterly or yearly basis on these debtors.
I wanted to understand since we are dealing with high quality mutual funds, asset managers, EMCs and wealth managers, what is the need to actually write down those receivables at the end of the year?
Vivek Mathur
So, thanks for your question.
As you would know, about 68% of our business revenue comes from mutual fund.
There is still 32% of the business, which is non domestic mutual fund, and about 14% of the business comes from issuer solutions, which is the listed and unlisted clients that we service for folio management and corporate actions.
That is where the DSO cycle collection period is much higher.
It's upwards of 90 days on average.
That is what puts stress on the overall DSO while there are 5100 corporates that we service everybody has got a different cycle in terms of so we do unbilled revenue accounting, besides the billed revenue accounting to accrue for revenue, while the actual bill may get raised on a quarterly basis or half yearly basis or yearly basis.
That's how the impact of actual collections versus outstanding is reflected there.
As far as mutual funds are concerned, they are regular players.
There may be some delay.
We actually have a 40 days normal period, credit cycle period with the mutual funds.
Usually, they pay on time and in some cases where there are some negotiations going on, not just on mutual fund, but on large VAS product, that comes into play in terms of trying to put pressure to hold back some payment, which results in some delay.
But that's exceptional in nature.
That's not a regular feature.
KFin Technologies Limited February 13, 2023
Sonal Minhas
Even if you just assume 40 days for mutual funds, isn't that on the higher side?
Because if we talk about financial intermediaries and you are being one of them, when I compared to, let's say, other companies, typically financial intermediaries on the nuts-and-bolts businesses in the entire chain, they don't have such high working capital days when you're dealing with high velocity kind of transactions or kind of financials with companies.
So, please help me understand why even 40 days?
Vivek Mathur
Why I'm saying 40 days is, let's say 1st of December to the day the bill is raised it takes about 35 days from day one to the actual billing days.
Once the bill is raised, then the credit period is not more than ten days.
I am taking 30 days of the period of the month itself to say you are processing, you're working, you are processing the transactions, but the actual bill is raised after 30 days, then ten days of credit period.
Five days you take to raise the bill and another five days you give credit.
That's why I'm looking at credit period.
It's not from the day the bill is raised, we give 40 days.
Sonal Minhas
The second part was just to understand, is there a way in which the cycle should be reduced or is there an intention to reduce the cycle over time, just to understand.
Vivek Mathur
Yes.
We are working with our team and the corporates to reduce the payout period from 90 days to 60 days and eventually coming down to 30 days.
But it is a journey where clients who are specifically unbilled clients, where they pay based on their convenience, or unless there is a corporate action, they don't bother to pay.
We are now sending reminders and formal reminder notices.
There are regular follow-ups, engagement in terms of selling them value added services, at the same time we request for payment.
So, there is enhanced focus.
This period used to be much higher in the past.
We have now brought it down considerably and we expect that between now to next year when we meet, there will be substantial improvement in the DSO.
Moderator · Conference Operator
Thank you.
The next question is from the line of Abhijeet Sakhare from Kotak Securities Limited.
Please go ahead.
Abhijeet Sakhare
Just a question on OPEX, we are coming out of a fairly, strong growth as far as OPEX is concerned, not just for you, but more generally at an industry level as well.
Now that the revenue outlook is probably a little more muted or a lot more volatile, given the AUM linkage, what is your visibility?
Or let's say flexibility, to put it that way, to kind of manage OPEX more in a much more better way, so that the operating leverage or the margin trajectory remains within a fairly guided range?
Vivek Mathur
Abhijeet for your question, we are constantly working on cost optimization initiatives.
We have given up two floors in Selenium head office.
We are now at the end of December, almost flat in terms of headcount as we were last year, December.
Whatever increase that we have seen during the year has been normalized by taking action in the last quarter of the calendar year.
This will flow into Q4 as well.
There are constant initiatives being explored to cut down on cost.
Having said that, we stick to our overall guidance on 40% to 45% EBITDA margin, so whatever stress we have seen because of the AUM movement or because of any pressure coming because of KFin Technologies Limited February 13, 2023 reduced VAS revenue as compared to what we’re expecting and augmentation in terms of investment in technology that we have done, we constantly look at all the parameters to ensure that we maintain that range of 40% to 45% EBITDA margin having said that, Amit Murarka himself is leading many of these cost initiatives that I talked about.
I have talked about two or three.
We are constantly looking at enhancing VAS revenue.
There is a strong pipeline of VAS revenue that will emerge in terms of culmination of contracts and revenue in quarters to come.
Therefore, we are not depending purely on AUM based fee.
There is a strong pipeline even in Southeast Asia as we know, it takes time.
We are working both and what I want to say is we are working on both revenue as well as cost side how we can add more value to our client by giving value added services.
How we can win back clients in the issuer solutions both from new IPOs as well as from existing clients of other RTAs.
Through our value proposition we are constantly looking at, how do we optimize cost both in terms of headcount and operating expenses.
Like what I mentioned to you that although the cost reset was done for IT employees where the cost went up but we have taken a parallel action in terms of reducing dependency on outsourced IT manpower.
That's how these initiatives being taken, results in maintaining the EBITDA margin that we really want to grow over a period of time.
I hope I am able to answer your question.
Abhijeet Sakhare
The second one is on capital allocation.
I think there was a comment earlier in the day from Sreekanth around potential M&A opportunities.
Some more color around, some more details around which are the potential areas you're looking at.
I think account aggregator was one space that you had previously mentioned as well, but that space anyways, I don't know in terms of pricing rationality, if you have any strong views there and in terms of generally how it adds to your overall revenue diversification efforts as against, let's say, paying out higher dividends.
Sreekanth Nadella
Sure.
First of all, as an organization, we want to be focused largely on asset management space first and foremost, and hence dabbling into other businesses which may seem incidental and ancillary to this business, but we believe that we would want to play to our strengths, which is to kind of drive more and more depth as well as breadth into the asset management space.
Within this space already every asset class is important for us and expanding geographically for the same asset classes is the second most important thing.
The third thing is expanding the scope of services across the same asset classes, across multiple geographies is the most important thing for us.
Basically, if you were to put an X,Y axis those are broadly right, every asset class as many countries as possible, every scope of service that is possible to be rendered for X and Y axis is truly what we are very keen to do.
In terms of capital allocation our M&A strategy had been and will continue to be.
For example, when we acquired Hexagram, that was to add a layer of a service which we hitherto never used to do, which is the fund accounting administration side of things.
We're looking at scope of services on the issuer solutions, for example, where there are more domains and tricks of business for example, are there things that we can do to provide credible, to give solutions like ESOP Administration for example, or investor relations side of things.
Or if you look at ordinary investment funds, both the TA and FA aside, the entire administration layer, especially if you were to move to Gift City and so on and so forth.
I do not believe that we are intentful at the moment to look at insurance and others not our forte.
We want to be a more focused asset management space.
Account aggregation, yes, where we continue to be interested that's more from the standpoint of value addition we can render to the KFin Technologies Limited February 13, 2023 entire wealth management and asset management space and not just by virtue of an AA itself.
We believe it will be a reasonably commoditized business over a period of time, accepting of course, the value-added component as a TSP that you can render to the asset management space.
Vivek Mathur
So, Abhijeet, just to add to what Sreekanth mentioned on your question on capital allocation to dividend policy, we believe that if we can create future modes through acquisition rather than paying out is always a preferred mode.
However, the board reserves the right along with the shareholders to decide what is the balancing act the board wants to play on the dividend payout.
But it's always our preference to create value for shareholders through constant evaluation of available M&A opportunities in the market.
That's what Sreekanth alluded to that we continue to evaluate, but in those areas where we feel that we need to get into.
Moderator · Conference Operator
Thank you.
We have the next question from the line of Sarang Sanil from RW Investment Advisors.
Please go ahead.
Sarang Sanil
Could you please provide the absolute number for legal professional expenses?
The reason I'm asking is that over a period of time, this is one of the component that dragged our margin.
Will it be possible for 9 months or Q3 of FY 23.
Amit Murarka
Legal and professional fees.
For the quarter, I mean, for specific number we will come back to you.
Sarang Sanil
Sure.
Also would it be reducing as a percentage of revenue going forward?
Vivek Mathur
So, there is an increase of about 11.4 crores in the legal and professional expenses year-on-year for the 9 months period ended.
It's obvious, as I mentioned that we have taken certain actions where we are reducing our dependency on external help and therefore this number is likely to come down quarter-on-quarter.
Sarang Sanil
Sure.
Also, regarding the three litigations against the Company that mentioned the DRHP any recent update on that.
Also, what is the material amount related to this litigation that could impact our business?
Vivek Mathur
I don't know which litigation?
Specifically, if you can mention which litigation.
Sarang Sanil
There are three against the Company.
Those are related to IPO issue Yes Bank, IDFC.
Vivek Mathur
Okay.
There is nothing.
We have filed discharge application in all the cases.
We don't expect any liability on the Company or its existing directors.
It is something which is related to past where the corporate veil is lifted and the people who are in charge at that point of time are held liable.
Whatever may happen in terms of the court taking its own decision, there is nothing we expect as a result of that happening on the Company.
As far as the status is concerned, there is no change in status.
There is a new date which we get, so far I have seen it in the last three years.
There is no decision or hearing which has happened, except that we filed discharge application that is yet to be argued and decided upon.
KFin Technologies Limited February 13, 2023
Sarang Sanil
Sure.
So, my final question, any reason as to why the margin of data processing business segments have been volatile over the period?
Amit Murarka
I think that is something that we reported as part of the financials and all, the data processing it includes all the different the line of businesses which gets clubbed into the data processing.
If you look at the mutual fund, issuer solutions across all these businesses, we are kind of similar. gross margins is something that we run within the range of around 40% to 45%.
Moderator · Conference Operator
Thank you, ladies and gentlemen, that was the last question for today.
I would now like to hand the conference over to Mr. Abhijeet Sakhare for closing comments, over to you, sir.
Abhijeet Sakhare
Thank you all for joining the call today.
Goodbye.
Sreekanth Nadella
Thank you.
Moderator · Conference Operator
Thank you.
On behalf of Kotak Securities Limited that concludes this conference.
Thank you for joining us and you may now disconnect your lines.