IPO Size: Rs. 1,500 cr – Entirely offer for sale (OFS)
- By investor promoter General Atlantic (74.4% holding to shrink to 49.9%)
Price band: Rs. 347-366 per share
- Only 10% for retail and 75% for QIBs, as intangible assets are at Rs. 620 cr on net worth of Rs. 740 cr.
M cap: Rs. 6,133 cr, implying 24% dilution
IPO Date: Mon 19th Dec to Wed 21st Dec 2022, Listing Thu 29th Dec 2022
Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.
Registrar and Transfer Agent (RTA)
Kfin has 31% market share in Indian mutual fund AUM (69% by CAMS in the duopoly industry), accounting for 2/3rd of Rs. 640 cr FY22 revenue. Company earns ~3.5 bps of assets under management (AUM) serviced, depending on the mix (equity 6 bps, debt 2 bps).
Risk of ‘Past Life’
Formerly Karvy Fintech, Kfin Technologies is 74% owned by General Atlantic, looking to part-monetize its 4-year old investment, while former promoter Mr. C Parthasarathy’s 14% stake in the company is subject to non-disposal encumbrance by the regulator. Criminal cases under CBI, related to Yes Bank and IDFC IPOs, among others, remain pending as of date, while Kfin has also received many administrative warnings from SEBI, in its new avatar. Any adverse outcome may have negative implications.
Smaller Size and Lower Margin than CAMS
Sole peer CAMS clocked revenue of Rs. 910 cr and Rs. 480 cr in FY22 and H1FY23 respectively, with 32% and 29% net margin. As against this, Kfin’s revenue was at Rs. 640 cr and Rs. 350 cr for FY22 and H1FY23 respectively, with 23% and 25% net margin. While Kfin’s topline is nearly 70% of CAMS, PAT is ~60%, due to lower margin. Kfin’s RoE is also lower at 30% (FY22) vis-à-vis 49% for CAMS. Kfin serves 3 of the top 10 India asset management companies (Nippon, UTI, Axis) whereas CAMS serves 7 of top 10. Given the present industry structure, larger players continue to gain market share, implying slower growth outlook for Kfin, in comparison to CAMS.
Smaller size, lower margin and slower growth outlook calls for a lower PE multiple for Kfin, but its PE of 37x is same as CAMS. Thus, pricing is not at all attractive and additionally, nothing is left on the table, for incoming primary market investors.
PRIMARY at lower multiple, SECONDARY at higher?
Kfin issued shares (representing 9.98% stake) to Kotak Bank on 10th Nov 2021 at Rs. 185.35 per share, implying a PE multiple of 26x on the then TTM PAT of Rs. 105 cr. In Nov 2021, CAMS was ruling at a PE multiple of 59x. Why were shares than issued at a PE multiple of half its peer? Whereas now in the IPO, PE multiple of 37x is the same as CAMS, based on Kfin’s TTM PAT of Rs. 166 cr.
98% jump in share price in 1 year, when CAMS share price has dropped 30%, is also unjustified, as Kfin’s PAT has not doubled during this period. Rather PE multiples, in the sector, have contracted.
Ironically, General Atlantic sold 1.5% stake on 28-29 Nov 2022, at Rs. 389 per share. This means secondary sale, proceeds of which flow to promoter’s pocket, is undertaken at a premium, while primary issue is undertaken at a discount. What corporate governance can be expected from such companies and their management, post listing?!
Also, it is incorrect to view IPO price as a 6% discount to last transaction price, as relative comparable multiple is not supportive, as elaborated above.
Selling pressure from the financial promoter
General Atlantic invested in the company in Nov 2018. Half of its 50% post IPO holding is locked-in, only for 6 months, while other half is locked-in for 18 months. Since the fund would have held this investment for ~6 years (post 18 months lock-in), residual stake will come up for sale, which may be a big overhang on the share price.