Jefferies Maintains ‘Buy’ on KFin Technologies, Foresees Over 22% Upside – Key Drivers

KFin Technologies (KFin) has shown substantial growth since its listing in December last year, with shares up 25% from the IPO price of ₹366. Jefferies, a prominent brokerage, has reaffirmed its ‘buy’ recommendation on the stock and raised the target price to ₹560 from the previous ₹500, implying a potential upside of over 22%.

Key drivers behind the decision:

1. Overseas Expansion: KFin is making significant strides in expanding its client base in overseas markets, particularly in Malaysia, Thailand, and the Philippines. The company is gearing up for expansion into Singapore and Hong Kong, recognizing the potential in these larger markets. While entering major markets may involve a longer process due to local presence and regulatory factors, relationships are anticipated to be more enduring.
2. Revenue Diversification: KFin continues to diversify its sources of revenue, with 9% of total revenues coming from overseas in FY23. Jefferies forecasts this portion growing at a 30% CAGR from FY23 to FY26, reaching 14% of total revenues by FY26.
3. M&A Opportunities: KFin may explore merger and acquisition opportunities in Western markets (Europe and the US) to accelerate client acquisitions and eliminate the complex process of obtaining licenses.

Jefferies’ Outlook:

• Earnings Estimates: The brokerage has raised its earnings estimates by 1-2%. They anticipate a 17% CAGR in profits over FY23-26.
• Revenue Growth: A revenue CAGR of 13% is expected.
• Average EBITDA Margin: KFin is expected to maintain an average EBITDA margin of 42%.
• Cashflows for M&A: The company’s cashflows are expected to support mergers and acquisitions.

Stock Price Trend:

In 2023 year-to-date (YTD), the stock has witnessed a substantial 33% increase, delivering positive returns in six of the ten months so far.

While the stock saw a decline of approximately 3% in October, ending six consecutive months of gains, it had surged over 67% from April to September. It reached its record high of ₹493.25 on October 3, consolidating slightly since then but still maintaining a 7% gain from its all-time high. Furthermore, the stock has advanced by 69% from its 52-week low of ₹271.05, which occurred on March 29, 2023.

About KFin Technologies:

KFin Technologies is a technology-driven financial services platform that offers a wide range of services to the capital markets ecosystem in India and Southeast Asia. Its offerings include investor solutions to mutual funds, alternate assets, pension funds, wealth managers, services to corporate issuers, and third-party services to global partners. The company provides SaaS-based transaction management, compliance solutions, data analytics, and other digital services to asset managers across various segments. Additionally, it offers outsourcing services to global players.

Investment Rationale:

Jefferies acknowledges that KFin is a leader in registrar and transfer agent (RTA) services for asset management companies (AMCs) and corporate issuers. The company is gradually transitioning into a data processing and analytics solution provider, focusing on offering value-added services to clients. Their foray into global AMCs and the account aggregator segment has the potential to boost growth, as their strong product proposition and experience in providing investor solutions facilitate rapid scaling.

Bull and Bear Scenarios:

• Bull Case: In a bullish scenario, Jefferies sets a target price of ₹640, representing a 40% potential upside. This projection assumes a revenue CAGR of 15% over FY23-26E, an average EBITDA margin of 43%, and a PAT CAGR of 19% during the same period.
• Bear Case: In a bearish scenario, Jefferies sets a target price of ₹420, indicating an 8% downside. This outlook anticipates a revenue CAGR of 10% over FY23-26E, an average EBITDA margin of 40%, and a PAT CAGR of 10% during the same period.

View and Risks:

Jefferies rates KFin Tech as a ‘Buy’ with a target price of ₹560, based on a 33x Sep-25 PE. The brokerage suggests that faster conversion of order wins into servicing in international markets and limited dilution in yields in the domestic registrar and transfer agent (RTA) business could lead to a re-rating.

Potential risks include regulatory constraints on mutual funds, slower growth in new segments, heightened capital market volatility, an increase in IT hiring and labor costs, and the risk of overpaying for acquisitions.