Kfin Technologies Limited (KFINTECH) Q2 2027 Earnings Call Transcript

Ladies and gentlemen, good day and welcome to KFN Technologies Ltd. due to an FI27 earnings conference call hosted by IIFL Capital Services Ltd. As a reminder, all participant clients will be in the lesson-only mode and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Divesh Agarwal from IIFL Capital Services Ltd. Thank you, and over to you, sir.

Thank you, Shorya. Good morning, everyone, and welcome to the Q2 F527 Earnings Call of KFIN Technologies Ltd. Today, from the company, we have with us Mr. Srikant Nadella, MD and CEO, Mr. Vivek Mathur, CFO, and Mr. Ram Gattani, Head of Investor Relations. I will now hand over the call to Srikant for his opening remarks and thereafter open the floor for your inner session. Thank you, and over to you, Srikant.

Thank you, Devesh. Very good morning and good evening if you're a darling interim officer of India and a very warm welcome. Well, and I'll bring to you, you know, yet another quarter of a certain sense of consistency. As I say, in those patients' consistency and hard work, I think that's pretty much the, you know, the need of the hour. That's pretty much what sets organizations that have a long-term vision to stay dogged at it and to ensure that we deliver to the promises we make. As your organization, you know, continues to make strident, you know, steps in the forward direction, you know, our market share expansion, our growth in terms of client wins, and steadfast focus on innovation, you know, driven productivity, not arbitrary, not based on the vagaries of the market, But in the scientific and clinical fashion of driving technology-driven productivity is, you know, it's pretty much the sum and substance of what we could do in the previous quarter. And we will continue to stay on course in terms of making sure that it's, you know, we deliver quantitative and qualitative results over a period of time. From a glance, you know, overall, if you see, you know, where Kefintech stands today, by and large, many of the metrics that we typically speak to you are, you know, in the similar range in terms of, you know, we are continuing to be the largest registrar and transfer agent in India and among the largest in the world in terms of the number of human beings, you know, we service, whether it's in India or abroad, And between the capital markets, the securities market, and the mutual funds, it has now crossed over 12.5 crores in India and roughly about 75 lakhs outside of India. So that makes us probably one of the largest maybe ex-China. In terms of our growth on the individual business lines, very heartening to see and hear and tell you that nearly every business line we have grown, albeit in an extremely challenging environment in the form of macros. Whether it's our win rates in the form of new client markets, whether it is mutual funds, whether it is issuer solutions, alternatives, international, so on, and so forth, had been one of the most striking features of this quarter. AUM growth and revenue growth in an environment where the markets have been significantly down, but obviously hints at the direction of net new wins. And hopefully in time to come when the markets do recover, we should have a compounding effect of significantly additional client-to-land volumes than with some help of market-to-market, again, that we may get. In terms of our market share initial solutions, you know, had been one of the, you know, big turnaround over the last 18 months, even excluding Jio Platforms IPO, you know, which is happening real time as we speak. And we've completed the entire activity 12 hours ahead, considering it's the world's largest IPO. One, we are extremely honored and privileged to have been chosen as the RTI, and two, to have delivered significantly beyond, you know, much of the expectations in terms of the timelines, and including the allotment stages as the investors are checking, where the latency time has been less than 40 milliseconds. Now, that obviously is going to be for the upcoming quarter, but by and large, I'm very happy with the progress to remain in terms of the wins in the case of Fisher Solutions. Same is the case with our international. We have added 18 new clients, you know, which are in the transition, and they're expected to go live into the coming, you know, quarter to two, depending upon the transition timelines, which will then go on to add, hopefully, additionally, even consequent revenue soon after that. And our acquisition of Ascent and its integration is one of the most strategically important initiatives that we've embarked on. Happy to inform you that we continue to grow the business, again, against an extremely challenging macro, especially given that 25% of our revenues come from Middle East for Ascent. And given the situation that one would have imagined, you know, maybe the growth would have been taken. But again, thanks to some really wonderful work by the business development teams in each of the operating geographies, you know, we continue to grow 30% plus on asset. And again, with a committed focus on cost optimization, the margin profile continues to expand. We hope to hit double-digit EBITDA numbers, you know, in the next couple of quarters or so. Pensions, too. You know, entire of last year, we grew 3x of the pace of the industry. Industry grew at about 12. Payton grew at 36. This year, we've grown faster than that. I think 42% has against similar 12 to 13% growth of the industry. So, again, it's a long haul when it comes to pensions. It tends to compound. But not only have you broken even about three quarters back, you know, growth continues to be significantly higher than that of the industry. Now, all of this gives us a fairly well-rounded, you know, growth across business lines. And, again, product transformation, driven productivity gains, and new future rollout has been, you know, one of the most important focus areas that we've had. The overall AUM, you know, for case-in-tech clients, you know, this quarter had grown at 15%, whereas industry grew at 13%, so that's very happening. Now, it is also, however, true that the share of the passives, you know, for our clients seem to be on the higher side, you know, as compared to that of industry, and, you know, so again, some of these dispositions tend to change, and if it were to come back towards more actively focused, again, that would be something that will add additional revenue bump up into the coming quarters and years. Overall, market share, you know, has grown, you know, in the last two quarters for Kfintech in the form of overall moving beyond 33% and the equity inching close to 33% as well. Market share on the SIP, which I continue to believe is the bellwether in terms of where long-term averages could be at, continues to be close to about 37%, which, you know, means that there is a corner basis points of, you know, bridge that I I expect to happen in order to build over the next three to five years, as the SIP is a strictly retail book, and the overall intent to gravitate and precipitate towards the overall market share on the SIPs. We have launched a couple of very important platforms in the mutual fund space. Aria.ai is India's and probably world's first, you know, generative AI intelligence platform, not just for purchase and redemption and commercial transactions, but also for all non-commercial transactions, which means that you can literally speak to your phone and then ask your agent to change your bank account, add a bunch of nominees, buy-ins, and a bunch of things, all of this through natural language processing and just talking to the firm. To the application. And the beta stage has gone live, and we are doing a public launch into later part of this month. Now, that marks the first of the consumer-facing AI tech rollout by KFIN Tech, even as there are several inward-looking AI transformational solutions we have implemented, which were principally one of the important reasons for the margin expansion. If you saw the overall margin moving from about 34% to 40% thereabout on EBITDA profile, part of that is the scale benefits in the form of our international business, and part of it is productivity, again, to run through, you know, large-scale RPA and AI native solutions. These are in early stage in terms of implementation. There are several more, as I've called up in the previous quarters, too. Nearly every business line and the underlying platform in our organization is under a massive rework and a rebuild, given many of these are, you know, couple of decades old. So we will be live with the issue of solutions, pensions, and wealth in the next three months. So by January, we should have gone live with many of these, you know, next generation AI native, cloud native, you know, platforms, which should help us with significant faster go-to-market and productivity as well. For mutual funds, it's a little bit more challenging and much more complex given the size and scale of it. But we have already deployed about 30 to 35% of the total use case and have seen some benefits associated with that. Again, you know, by end of Q4 this fiscal year, we would have rolled out, you know, nearly all of the transformational platforms that we've been working on. Our growth on issuer solutions have already called out. You know, we continue to have a significant market share expansion on the IPOs, and especially the large ones. You know, nearly all the largest IPOs have been orchestrated by KFintech in terms of both volumes and value. And there are several more in the pipeline, which I guess, you know, should the prevailing market conditions improve, should see a tangible progress from there. We have, you know, been at the forefront in terms of expansion in the GIF City because it falls right in the alley of our international business. And again, happy to inform you that our market share, there have been, you know, we are currently the single largest, you know, provider for solutions for GIF City funds in addition to several digital solutions that we've been working on. I will just add a little bit of color in terms of our international pipeline. The pipeline itself currently stands at roughly $47 million, U.S. million, that is. Now, that used to be roughly around $20 million about 12 months back. Now, it speaks about, you know, increase in the, you know, pipeline of several new deals where the deal size is, you know, substantially larger than a typical GFS deal that we have seen thus far. There are at least six deals, which are over $4 to $5 million in the total contract value. Some of them are in advanced stages. Some of them, you know, are progressing in that direction. We have had several successful RFP and client presentations in our operating geographies in the last three to four weeks. Again, you know, we have been down-selected to the final two in many of those. And in time to come, hopefully, you know, there will be a closure on some of those. One of the earlier projects on the Philippines-based pension that I've called out, there may be questions around that. So that deal is still under works. It neither has been awarded nor has it been canceled. It is something that we are discussing with the local authorities in terms of the next steps, and I'm still very confident that we should be able to turn that around in the coming few weeks or so. So, overall, you know, in terms of the productivity gains, you know, our total count in terms of the headcount has come down to a certain extent, but we have used that opportunity to scale up our faster growing businesses, given the number of net new clients in addition have been substantial, whether it is wealth or whether it's alternatives, whether it is pensions, so on and so forth, which are still, you know, subscale in order to, you know, from the standpoint of trends, Significant operating leverage. We have, you know, some of our pure transformation and AI-led platform rollout into the coming weeks and months. We should be seeing an immediate rollout of the ARIA.AI 2.0. As I said, that's one of the most important ones, followed by our platform rollout of FinEx, which is for mutual funds, and the GFS, that is the International Business Review Platform, is something that's underway as well, something that we believe will add substantial might in terms of progress towards winning new deals elsewhere in the world. Our total share of the international business now is 20%. And I think I've called out mutual funds share of revenue purely from the standpoint of AUM driven revenue is just under 52%. I expect this number to get to 50% into the next two to three quarters, which in some sense had been our, you know, an internal target to get that far over a five-year period, but happy to inform you that, you know, we're getting there in under three years. We would also be working on, obviously, expanding the total price so that the concentration risk of any one single client does not go beyond 2.5% to 3%. And that's also something that I believe could be accomplished in the next, you know, probably about six quarters, if not earlier. So that's probably the update at my end. Into the coming quarter, we foresee some headwinds, obviously, you know, given where the markets have been the past, you know, 10 odd days. But as I said, in our growth, we are not necessarily hoping and praying for the markets to turn around, but do everything that we can do to close the contractual conversions real quick, focus on productivity so that our margin commitments, you know, remain sacrosanct. And so far, this quarter gives us a lot of heart that, you know, strategy had been on the right path. And even as I look at our upcoming forecast for this quarter and the subsequent quarter, despite the headwinds, I'm still confident that we do not have to change any of the estimates at this point in time, unless there is a continual protracted downtown, you know, from here on as well. So, we have enough buffers to cushion any kind of a blow like this, you know, tactical market correction over the last 10 days. But, of course, anything that passes significantly longer given our capital markets per year will impact. But at this point in time, we continue to stick with our estimates. I will now request Vivek to cover the financials and then we'll leave the floor open.

Thank you, Shurikand. On the financial performance, you know, the revenue from operations has gone up sequentially, you know, including Ascent, by 30%. And, you know, excluding Ascent, it has gone up by 10%. Expenses were pretty much controlled in terms of the cost optimization initiatives. Sequentially, the expenses have gone up only by 3% quarter on quarter, while the revenue quarter on quarter went up by about 13%. And, you know, we believe that this will continue to play out in Q3 and Q4 as well. As a result of that, the EBITDA improved by about, you know, sequential basis about 18.7%. Against last year, same quarter, 32% growth. Half year ended, FY27, there was a 13.4% growth year on year for the half year. The EBITDA margins for Q2, excluding ASCENT, were 45.8%, and including ASCENT were 40%. That's the aim that we are targeting, that we will end the year including ASCENT with a consolidated EBITDA margin of 40%, and that's where, you know, it gets demonstrated from Q2 onwards. So there is an integration of ASCENT in Q2, but also, you know, the margins are maintained at the guidance level. Pat has touched 100 crores for the quarter and has gone up by 7.5% year-on-year, 33% as compared to the same quarter last year. For the half-year, it's a 2.3% growth year-on-year. Pat margins, including ascent, at 25% and excluding ascent at little more than 30%. For H1 FI27, consolidated margins are at 23%, including a cent. We maintain healthy cash and cash equivalent situation of about 550 crores after the liquid end was paid out. And the value to DPS at the end of H1 stands at Rs.10.12.

Thank you very much. We will now begin with the question and answer session. Anyone who wishes to ask a question may press star and 1 on the touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. First question is from the line of Karthik Shailappa from Indus Capital Advisors Limited. Please go ahead.

Yeah, hi. Thank you for the opportunity. Good morning, team. Am I audible? Yes, I audible. Please go ahead. Okay, excellent. Just a quick question from my side. The first question is, we have seen the domestic MF yields, this business stabilize and probably even grow a bit sequentially. How much of this is coming from mix? And how much of this is basically any other factor? And can we reasonably conclude that from here on, the yields will more or less stabilize sequentially? That's my first question. The second one is on the issue of solutions. We have seen a very good quarter this quarter, both on margins as well as growth. Given the visibility you have on pipeline, can we extrapolate this resilience to the rest of the year as well? And my third question is, in the beginning of the year, our aspiration was to grow our earnings in low double digit. And it's heartening to see that, Srikant, you actually reiterated that that is pretty much on track. You also mentioned you have some buffers in case of capital markets were returned for the worse. What would some of those buffers be if you could give us some additional color? Thank you very much.

Thank you. Thanks, Karthik. Always great to hear from you. So I'll take the first one in terms of the yield and its marginal expansion, roughly about 2% sequentially. As I always say, there are three important factors. If I were to put a weightage, you know, the weightage may change depending upon, you know, quarters and times of the year. But, you know, roughly about half of the, you know, reason in terms of the yield stability or otherwise is going to the pricing discipline. And about 30-odd percent more than, maybe even a little more than that towards, you know, which particular asset manager is growing. And the third one, of course, is the asset mix itself. Depending upon, you know, which of these three levers, you know, work in favor against or neutralize each other is usually how the yield moves. The quarter that had gone by in some sense has had all of the three positive effects in the sense that obviously the pricing discipline was maintained. As we've confirmed in the previous year, you know, those contracts have been closed and negotiated, and hence there is a consistency on the pricing. But definitely, we had positive tailwinds in the form of both asset mix as well as in the form of the AMC's growth as to which AMC has grown, depending upon the size and scale. As we all know, there are differentiated rates. So, will it remain similar in the coming quarters? On the pricing trend, yes, but of course, on the asset class mix and the AMC mix, as we all know, it is how the manufacturers grow as against what we grow. So, given there is no substantive reason for anything to change at this point in time, in the sense that we had an improvement in the form of metal ETFs may be getting way too active, and that was the reason why the asset class mix. And, you know, younger, faster-growing AMCs are continuing to grow faster. Six out of the 10 fastest-growing AMCs are currently with KFIN. And that obviously has been having a little bit of, you know, positive, you know, help now. It can even get better into the coming quarter if, you know, depending upon, you know, which AMCs grow. But I do believe that, you know, given we are already in near end of October and we have some visibility into the last 20 days of the world that has gone by, I believe that yields will remain largely consistent. On the issue of solutions, I think, you know, we are looking at a 20% total year-on-year growth, and again, with a little bit of luck from the market, you know, and depending upon, you know, how some of the other larger IPOs, you know, are also around the corner, including the GO1, of course, I believe that, you know, we should get to a 20% plus, you know, top-line growth, which means that by and large, you know, So we can assume that our current numbers can be, you know, accomplished in the coming quarters as well and that then leaves us with the third question, which is in the form of the buffers. The buffers are, you know, these are basically, you know, a couple of items. One in terms of the discretionary versus the non-discretionary spend. As I've always maintained, there is a certain element of our expenditure, which is something that we will incur if and only if, you know, our financials permit. Now, these are obviously for the future benefit. So, transformational items, discretionary IT projects, discretionary automation, discretionary expansion of, you know, probably a particular geography, which we have planned for so on and so forth. Or even launch of certain products which cost, you know, certain amount of business development dollars. So if we see, you know, an ongoing, you know, market downturn, those are the things that, you know, from a lever standpoint, we will pull so that it will release some amount of, you know, additional expenditure that we may have budgeted into the next five months, which we will not incur. And that's what I'm referring to, Karthik. And, you know, should we get that far, then definitely we will probably withhold or at least prioritize the most important ones and still do it and probably defer some of those into the coming quarters, at which point in time, should the markets permit, we will then spend that.

Excellent. Thank you for the detailed responses. Wish the team all the very best for the rest of the year. I'll come back and look at you for more questions. Thank you, Karthik.

Thank you. The next question is from the line of Sanil from Diamond Asia Capital Limited. Please go ahead.

Good morning. Good afternoon, sir. Thank you for the opportunity and congrats on a good set of numbers. I have two questions. So, firstly, sir, if I look at your presentation, this quarter we are seeing a good increase in your value-added status with everything. So, as a percentage also, it has increased. Now, how do we, you know, look at this? Is it seasonal or, or is it, you know, what has driven this growth? And secondly, this value-added services is majorly related to the mutual fund business, or where does this lie in the revenue breakup? Can, you know, give me some clarity about this revenue?

Sure. So, the reason for, okay, so first, I think I should answer the second question first, so that it's easier. So the VAS is not just mutual fund alone. It's both issuer solutions and mutual funds. And Q2, typically you will see a rather large spike in the value-added solutions because included in the VAS for the issuer solutions is our entire platform-based revenue solutioning around EAGMs, EVO things, and any large corporate, you know, Not the regular corporate actions like different declarations and buybacks, but, you know, there are other items where our platforms and solutions are used, including inside trading platforms and so forth. So Q2 typically is also a good quarter in terms of VAS. So that's what you have seen given the issue of solutions related. Many of these annual general meetings, etc. happen into the second quarter. That said, in spite and despite of it, it is also a good show in terms of the overall revenue pool itself. It is now 7.5% of the total revenue of the organization. Again, I remember probably three or four quarters back talking about one of the other internal goals, subgoals we have is to get the value added solutions, you know, to double digit figure in the next three to four quarters. We are working in that direction. Again, you know, it's very important, you know, for us to look at such avenues of revenue because they do not depend on the vagaries of the market, but adds a certain amount of predictability and consistency in our revenue earnings and the quality as well.

Okay, thank you. That was helpful. So, just circling back. So, the increase which we see on a quarter-on-quarter basis, so the major increase would be driven by the issuer solution at a quarter-on-quarter level. Is that a bit correct? I understand. Oh, yes, that is helpful. And secondly, if I look at your ascent business, so as you know, in your opening remarks, you said there are a lot of events in the Middle East where, you know, 25% of the revenue is coming. So if I look at the PPT disclosure, this quarter, if you see there are no new client additions. So is it mainly because of the Middle East issue? And how are you tackling it? Because if this war continues for, let's say, Next six months or a year, how are we looking at Accent as a business? What are the strategies we have for this macro event?

Yeah, so we model in worst-case scenarios and obviously have calibrated and purposeful responses for each one of them. And one of that was obviously to look at geographies, you know, which are rather unfurtered by such events and, you know, drive growth in those areas. Yes, not to say that, you know, we should be pushing, you know, we should be putting some of the, you know, stress geographies on the sidelines. But obviously, you know, all we can do in that scenario is just keep the client conversations live and warm and, you know, continue to solution, continue to engage. And as and when things turn around, you know, it will and had traditionally been, you know, positioning us in the right way then to go on to win deals. Now, what have we done to combat, given, you know, large presence in over 18 geographies? It is quite possible there are always some local events that happen, whether it is the market movements or local politics or, you know, anything at all. And that offers the risk diversification. So if you saw the last quarter, especially U.S., you know, we have won a pretty large number of deals. We went about, you know, five deals, and two of them are reasonably larger, up north of, you know, about rather close to half a million plus. And, you know, as the numbers, you know, as the deal sizes of some of these funds increase, so will the intent of several medium and large fund managers as well. So what you have seen is, in spite and despite of the challenging times, even in Middle East also we have seen growth, but we could have grown more if not for the situation. But it got largely overcompensated by, you know, much faster growth in the Americas, as well as in Singapore.

Okay, yeah, that was it. But just lastly, you know, why was the client addition, you know, very flat this quarter? Was it any reason for that? I mean, are they in pipeline or how do we look at that?

So, this is, that metric is not the number of deals we have already won, which are yet to launch. What's happening is that given essence, you know, core business is largely in the alternate investment funds. And in many of the geographies, you know, again, whether it's AI trade or a whole bunch of things, a lot of fund managers have held back in terms of launching their funds. Okay. But we have even today a little around 80 plus funds, 80 or 90 funds, which have been already contracted, but the fund manager is here to launch and or is expected to launch into the coming weeks or a month or so. So that's pretty much it. There's nothing, you know, untoward. And if anything, you know, the repeat business from the same clients who are launching new funds or their referrals to many of their, you know, network in terms of the new fund managers who are coming, that had been on the steady rise. Our net retention rate had been higher than ever before. So, by and large, you know, we're very satisfied with the growth, and typically Q3, Q4 tends to be a, you know, or the H2 tends to be a better season, you know, for recent, as you might have seen into the last couple of years as well. So, we're waiting for a probably better set of results in the coming few quarters.

Okay. Thank you, sir. It was very helpful. All the best.

Thank you. Participants, in order to ensure that the management is able to address questions in the conference, Please limit your questions to two per participants. The next question is from the line of Swarnab Mukherjee from 361 Capital, Market Private Limited. Please go ahead.

Hi, sir. Thank you for the opportunity and congrats on a great set of numbers. So, sir, I have questions on ASIN business in terms of the cost. So, when I look at our consolidated cost structure, I think even at an employee expense level, The delta is coming from ASEN. Given that I think the expectation was that ASEN should now gradually start to see ramp up in margin. Just wanted to understand why at the employee cost level this cost is continuing to increase and given that margin at least from you know the data that we have in hand appear that margins have been reasonably plattish quarter on quarter. So, So how should we think about the trajectory of margin for Ascent over the next two, three years, if you could give some color on? That is the first question. And secondly, I also wanted to understand, as you mentioned that you expected to, you are expecting to maintain a similar run rate in the issuer solutions business in the subsequent quarters. So, if you could give some color on, you know, what would be the share of folio-based revenue this particular quarter and corporate action-driven revenue this quarter, because if I understand correctly, I think there is a feasibility in corporate action revenue and the folio-based revenue is dependent on the IPO pipeline and at what time it flows too. So, just wanted I wanted to understand that, you know, how should we expect that, you know, there could be some visibility for third quarter, but then in the subsequent quarter, how should we expect this to happen? These will be my two questions.

Sure, thank you. Okay, so the two ways to look at Ascent, right? One, it's a five-year-old organization, okay, founded by young entrepreneurs, you know, who also had a similar vision as K-Fintech does, which is to create a large global fund administrator and be in that $40 billion addressable market time space. And, you know, there are very few or no one who have done from this part of the world and hope and hence, you know, together we can join our hands to, you know, grow this business order period of time into that space. Now, they specialize on one specific asset class, which is largely private mandates. Okay, that includes AIFs, PMSs, private equity, hedge funds, venture capital, digital currency funds, so on and so forth, which are largely non-public, like mutual funds and pensions and insurance, so on and so forth. Now, the disposition of that business, by and large, as you have seen, even with K-Fintech's own AIF business, it is small mandates and several of them. I have 30 mutual fund clients, and you could see the revenues are closer to $200 million. And we have 758 alternate investment funds, and yet the revenues are very small. So that kind of a nature of work requires a certain amount of scale, which is more than what we have, by the way. It may look like, you know, having 1,000-odd clients for us and having another 2,000-odd clients. Overall, including Ascent, is a very large number, but you'll be surprised with the amount of bespokeness that exists in automated investments in general. And for us to be able to draw synergies and drive operating leverage, we need to horizontalize the business processes. Otherwise, it tends to be one-to-one relationship, that is client-server kind of a relationship. Now, that does not tender itself to significant operating leverage at a certain base. But as the scale increases, you know, the operating leverage tends to be much, much larger. And given much of what we also deal with are public market funds, and given there have been no market market gains at all in most of the operating geographies, the overall AUM, you know, continued to be a little pepid. And in that context, so combination of both operating leverage to be at a much larger scale to kick in, And the fact that there have been absolutely no AEM growth because of the mark-to-market is one of the reasons why what it is. But if you see the overall SN-specific, you know, cost optimization and hence where the productivity stands, yes, the overall EBITDA margin had been, you know, similar to that of last quarter. Last quarter, it was around 7.7.5%. This quarter, it's around 8%. But last year, this time, it was minus 12%, right? And for us, we have to look at such optimizations in a purposeful manner where we have to drive in a methodical manner rather than just taking arbitrary decisions around it, which will be counterproductive for a fast-growing company. For a fast-growing company, what it needs is capital. What it needs is flexibility. What it needs is the G&A spend so that we capitalize on all the markets we have started, having spent money and obviously certain amounts of intangible assets sitting on the capex at this point in time. No point in building geographies and tying the local CEOs down without the necessary support, which is largely a CNSI, to grow. So in spite and despite of that, you know, for us, this is nearly, you know, minus 10, minus 12 percent to plus 8 percent in about, you know, four quarters. And as I've already given in my commentary, we are looking at getting into double digits as well sooner than expected. So, this acquisition, again, by no means, you know, is going to get to KFIN margin levels in the next three or four quarters. It is a very different business, but a business that has significantly long-term compounding gains. As per our base case, we will touch double digits, and we are looking at about 20% plus thereabouts into the next fiscal year. And the next two years after that, you know, we'll work towards getting it somewhere closer to KFIN's overall margins. By which time, both the things would have fallen in place, hopefully, that is the scale and the transformation we are doing, which is largely around the re-platforming of the current solution they have with KFIN's proprietary platform, in addition to having horizontalized many of the business processes. So, that's broadly the Ascent story. So, the overall, when you add the overall cost of, you know, Ascent, obviously, this is a full by TD, and hence the first two quarters where, you know, they were, you know, loss-making to that extent. Obviously, the cost addition was probably looking to be higher than the revenue addition. But even if you look at standalone S&M numbers, the overall EBITDA has run positive. The overall gap from turning cash positive is roughly about 3.5 to 4 crore rupees, which isn't substantial and something that, you know, we should be able to turn EPS positive as well to the coming quarters. On the issuer solutions, what I had called out was that, you know, we should look at our overall Y2, you know, year-on-year numbers close to about 20% on S&M. This quarter, of course, the percentage was higher. But if you take a look at it again on an year-on-year basis, I'd like to believe that we should continue to grow. Corporate actions are predominantly a Q2 phenomenon with some spillover into Q3. It won't be as large, but there will still be some. But given we have just done the largest IPO in the world and, you know, some more to come, and the folio expansion was largely also because of the net new IPOs that we have done in the last 12 months or so, Will mean that there would be a year-on-year revenue growth, both on the count of, you know, folio-based revenue and some more on the form of corporate actions, corporate actions of the net new IPO clients we have added, not just the old ones we have had. It is with that confidence that I'm saying that, you know, we should be able to still look at a 20% year-on-year revenue growth. Again, you know, in a year where there has been a reasonable exodus of retail investors from the existing companies. So our total folios grew, but that's because we won a lot more times, not because the shareholders of the existing clients actually grew. They actually have de-grown.

Understood. This is very clear. Just one thing I additionally wanted to ask was on our literacy international business, I mean, I think if I look at the revenue numbers for last three quarters, there seems to be some volatility that last quarter it went down, and then this quarter it has bounced back. So, just wanted to check if there was some kind of a one-off in last quarter's number, and I think for that, it hasn't been actually a linear group.

I'm sorry, and this is the first part. Was that for alternatives, your question, or mutual?

No, no. So, our legacy international business. So, X of essence, the international part of it.

Yes, that's again two important factors. One was the go-live of some of the deals which were under transition. And second, fortunately Malaysian markets actually looked good in the last quarter compared to India at least. So both the factors basically successful transitioning and hence going live, and hence the revenue kicking in, in conjunction with the mark-to-market gains that we've gotten in Malaysia. Those are the two reasons why the numbers have gone up. And as I've called out, there are still 18 more transitions underway, and as they go live, there will be incremental revenue coming from that, in addition to the organic AUM growth for the existing clients.

Yeah, that's very clear. Thank you so much. Thanks, and all the wisdom.

Thank you. The next question is from the line of Supratim Datta, from Jeffrey's group. Please go ahead.

Yeah, thanks a lot for the opportunity. My first question is, you know, with respect to grassland business, you indicated that ASEAN has started winning large contracts. I wanted to understand that what has changed or, you know, what has changed at ASEAN that is allowing them now to win these large contracts, and how does the economics of these contracts differ with the smaller contracts in terms of yield or profitability, if you could give us some That would be helpful. Secondly, you know, on the tax rate, you know, the tax rate seems to be increasing. You know, the last reporters wanted to understand that, you know, is there anything that's there? And, you know, how would the full year tax rate look like? And is there something that we need to take into consideration here? So those are my two questions. Thank you.

Thank you, Supraten. On the, okay, on the, when I say large contracts, again, everything is relative, you know, relative to the size of the deals that, you know, that entity had been traditionally winning. Basically, in the last 12 months, you know, there were two deals which are worth a little over a million dollars each. And U.S. market, you know, a single alternate investment deal giving you anywhere around half a million to a million is reasonably sizable. Otherwise, typically the funds, as you know, are reasonably small. Even if you look at India, a 2,000 crore, 3,000 crore fund itself is considered reasonably large in the alternative side of it. So in that You know, anything around a million dollars for a single deal is, you know, reasonably lucrative. And those are the deals we are bringing. The economics, they work better for the very simple reason that the fund size does not necessarily dictate the underlying effort. There will be some variabilization, obviously, in the form of probably additional, you know, volumes. And hence, there's a little bit more effort given much of it is, you know, tech-based solutions that we have. And, you know, obviously, large fund size comes with large risks. So there is a certain amount of risk premium that we have to bake in, which translates in the form of additional quality control costs, so on and so forth. But all of them put together still does not necessarily mean the cost will go commensurate to the size of the deal. So I would, you know, the large deals, you know, anything around a million dollars typically tends to give you nearly two times the margin profile of that of five different deals together, basically having a similar revenue profile. I guess what I'm saying to them is, you know, one deal, you know, a million dollars versus, you know, five deals with $200,000 each, you know, both of them will translate to the exact same AUM, probably the same revenue, but the efforts would be, you know, nearly probably just about half of what it would be for five different deals otherwise. So that's the focus area in terms of winning large deals. That's how it impacts the operating leverage. On the tax rate part, I'd request Vivek to do, you know, cover that in addition to one of the other things about our, you know, plan to move into Gift City, the entire international business, which has certain tax benefits associated. But Vivek, would you want to cover the tax rate part?

Basically, you know, there are some new businesses like KFIN Services, the Gift City entity, and some of the, you know, like KFIN Thailand. So, these entities are basically still not profitable, and therefore, we are not recognizing the deferred tax on these entities, which is resulting in a slightly higher tax rate than 25.64 for KFIN India. Ascent itself is currently loss-making in Singapore, and therefore, whatever they pay as tax in India, we can't take foreign tax credit. So, as a result of that combined impact, you know, you will look at tax rate being slightly higher than normal. We are looking at moving time to the gift city, which should give us the advantage of 20-year tax holidays. So it's a process that has been initiated, but it will take some time. So we can't give you guidance on when we will optimize, you know, in terms of the tax rates. But that's a strategy which is in the pipeline. But as of now, it is largely to do with loss-making entities, therefore, tax not being accounted for.

Understood. That's very clear. And just one follow-up on the asset business. So, when you were acquiring this asset, you had indicated that certain roles from Singapore would be transitioned to India. Where are we in that process? Has that been completed?

Yes, so that is the rationalization topic that I spoke on, you know, two important counts. One was the payroll level rationalization, which means basically do, you know, department to department mapping between both the independent entities and look for those departments which can be done by a singular unit. For example, you know, two separate finance functions, two separate HR functions, two separate tech functions, so on and so forth. As you could imagine, as you consolidate, you know, you would, you know, have certain amount of redundancy. And that job has already been completed. For example, you know, much of the finance function is managed by Amit Murak, you know, who sits in India. And likewise, you know, aspects around tech and HR, and even certain aspects on operations also given, since also has its operations in India, in Hyderabad, in Mumbai, so on, and so forth, many of the locations that we are organically be part of. So both in terms of movement into the same physical location, and wherever there are roles that could easily be handled by a single person instead of two different people, that amount of rationalization has already been secured.

Got it. Thank you.

Thank you. The next question is from the line of Lalit Mohan Deo from Accurator Securities, Private Limited. Please go ahead, sir.

Congratulations on a good set of numbers.

Mr. Deo, we are not able to hear you loudly. Yeah, please proceed, sir.

Yeah, yeah. Hi, sir. Congratulations on a good set of numbers. Sir, there's two questions. One clarification, sir, like when we have mentioned that the overall margins will be around 40% by FF27, so does it mean the exit quarter or like or should we assume 40% for the full year? And the second question is more on the issuer solution business. So now, could you just explain the unit economics in terms of the, during the IPOs, like what kind of a revenue which we make in terms of new volubriation or in terms of applications over there?

Sure. On the IPO, the IPO itself as an event or an episode does not necessarily generate any significant revenue. Much of, again, it's largely the competitive dynamics. Many of these We always get, you know, tagged at just a few lakhs of rupees. But of course, the larger ones, we probably would earn a little bit more. But by and large, it's the annuity that we focus on, right? So, you know, for example, if you would have, you know, any of the more retail-focused stocks, you know, some of them can go, you know, have as large as 30, 40, 50 lakh individual chain holders. And, you know, that's the broader revenue model. It It isn't as much about the individual IPO itself. So I wouldn't factor more than say 2% of the total issuer solutions revenue in a year because of the IPOs. At a stop, it is all the polio maintenance, the corporate actions, and the valuative solutions revenue that we drive. I'm sorry, I seem to have missed your first question. What was that about?

Yes. So that was on the clarification part on the capital margins. So, whether that 40% is...

Yeah, yeah, yeah. Sure. So, no, it's average. It's not the run rate on Q4. As you've seen, this quarter itself is already at 40.6, right? So, what we have to do is expand these numbers into the coming quarters to basically compensate for the Q1, you know, EBITDA, which was only 34%. So, we are working towards basically having a full year average of 40% and not just the landing water.

Thank you.

The next question is from the line of Deepanjan Ghosh from Goldman Sachs. Please go ahead.

Hello.

Am I audible? Yes, sir, you're audible.

Yeah, hi. A few questions from my side. First, in terms of your core ex-asset international business or the legacy international business, I just wanted to get some sense of the client concentration in terms of revenues, top five, top ten, if you can give some color on that and how that would have changed, let's say, over the past few years. The second question is on your ex-assent EBITDA margins. Would it be possible to break it up between the mutual fund business and the issuer solutions business and maybe the rest, which would probably be a little bit subpar, for example, the pension business? And the third question is in terms of the mutual fund margin business. I mean, how much more scope do you see in terms of efficiency, realization, or constructionalization in that portion of the business?

Sure. The exact numbers, you know, I think it's probably better for Ram or Agribeck to get back to separately one-on-one. But by and large, the numbers, you know, are there, you know, published for each of the businesses. And in terms of the overall margin profile, if you take a look at the mix of the revenues, 52% for mutual funds, 13% for ratio solutions, 20% international, including Ascent, 7% other businesses like alternatives, pensions, and so on and so forth. So that's been the revenue mix, and, you know, it will, as I said, will be more skewed towards the remaining non-neutral funds business, which will grow, continue to grow faster than the mutual fund business, and hence the overall revenue and the margin profile, you know, shakeup will still be there. Our, you know, intent and commitment towards 18 to 20% top-line growth and above, 40 to 45% broad range of EBITDA numbers, you know, continue to hold good despite a change in the mix in terms of, you know, which one will give you more operating leverage versus the other. The reason why the operating leverage or the margins for other businesses, you know, is just transient simply because it's very important to understand the nature of, you know, Those revenues and margins. At the individual contract level, including the GFS, they are far more profitable than most of the Indian contracts we have. However, you will see a consolidated margin percentage lower. However, it is for the very simple reason that there are constantly transitions that are happening. And hence, there is always certain element of cost that is currently being incurred, the revenue for which will be coming into the coming quarters. So my position that should we not win anything, for example, in a quarter or two, you will actually see the margins of the other businesses to be at par or even higher, you know, than our traditional core businesses, so to speak. So you will see this anomaly of reported profits lower than that of the core businesses' profit, till such time we continue to grow. But obviously, as the scale increases, you know, that margin will, you know, reduce because the transition-driven cost as a percentage of the revenue will continue to drop as the overall five-self, you know, expands, right? So that's the point. In terms of the core, the GFS, you know, businesses, largely the concentration risk is substantively lower as compared to that of the domestic mutual funds. Our top five clients, you know, contribute around 23 to 24 percent in total, with the largest client, you know, probably around 5 percent thereabouts. Even in India, obviously, there has been a substantive reduction in the overall concentration risk, with the top client contributing to around 5.5 to 6 percent, and the second one probably around, you know, 3.5 to 4. I would expect these numbers to come down close to 2 to 2.5 percent in the next.

Got it. And just one question on the, you know, the last question on the possible efficiencies in the core mutual fund business. How much do you think the margins can improve?

So margin, as you know, is a factor of both the price and the cost. I'll talk about the productivity and, you know, price. I mean, the unit price, as I told you, itself is a factor of asset class, which AMC is growing and the pricing. So given there is a certain amount of non-controllable item in it. We focus on the controllables, which is effectively the productivity and hence the cost takeout associated with that. I've called out the planned rollout of FinEx, which is basically rebuilding the entire mutual funds platform bottom up based on the latest and greatest technologies that we have available at this point in time. And that is about roughly a It occurred, done, and deployed. A certain bit of the gains associated with that productivity, you could see, you know, is part contributing to the basis point expansion. We have the rest of the program to be concluded into the next six to seven months, at which point in time I would like to see there's going to be a little bit more productivity gains that we will get. Of course, there have been compensatory offsetting because of, you know, So cloud costs, infra costs, as we all know, the memory and compute space and energy and all of these costs have doubled and tripled. So a good part of what we are doing, however, is also getting negated because of the market courses. Should they get benign, which means that, you know, with the AI trade, et cetera, if it slows down a bit and the memory compute costs come down a bit, we will see, you know, benefit at that point in time. Otherwise, a large part of what we are trying to accomplish is also getting offset because of the absolute uncontrollable items beyond our hand. But I believe that pound to pound, you know, the human element into our services is coming down and it's getting more and more on the non-payroll cost. So I guess what I'm going to say is that you will see headcount optimization because of the straight-through that we are doing. However, a part of that is getting compensated by large-scale cost increases in the case of cloud and non-cloud computing costs.

Got it. Thank you and all the best.

Thank you. The next question is from the line of Mohit Mangal from Centrum. Please go ahead.

Yeah, good afternoon and thanks for the opportunity. I've got two questions. First is on the AIF and the wealth management business. So, we've seen the number of funds, you know, they have kind of consistently increasing, even though the revenue growth was good, and the yields expanded. But if I look at the AEM growth, it was kind of flat to marginally negative on a sequential basis. So, just wanted to know what are your views on this business growth and yields, you know, going forward. My second question is, basically, we have spoken about our new offices in the past couple of calls. So, I just wanted to know when the depreciation expenses come into the picture and what would be the quantum of it?

Sure, I'll take the question and I'll request Vivek to cover that second question in terms of the depreciation effect. See, nearly about 80% plus of all the funds that we manage are category funds. And of course, by definition, they're all exposed to public Now, last quarter mark-to-market gains, you know, obviously had been tippet. In the case of mutual funds too, it had been tippet, but it got offset by the net flows being slightly higher. Whereas in the case of alternatives, based on the commitments and, you know, that schedule, the net flows did not compensate for the loss of mark-to-market gains. So it was a very tactical, you know, blip on the radar, something that I won't read too much into it. The fact that the number of clients, the yield and the revenue has grown, despite a dip in AUM, I think actually all as well, as I said, because as the markets run around, you'll have a compounding effect of net new clients being there, their revenue coming, as well as the organic growth of the individual client themselves. Vivek, if you could address a point on the- Sure, Shekhar.

Yeah. On the new office, new Hyderabad office, that is likely to become operational effective 1st of December. And we expect two kinds of increases. One is in the increase in the rent, which will be about 80 lakhs per month. And on the operating lease for the asset build-out, this will also start from 1st of December. However, this year for FY27, there will be an impact of about 7 crores. Next full year, it will be about 18 crores, and then you can say every year it will keep coming down by 7% because of the discounting. So, you know, starting this year 7 crores, next year, which is FY28, 18 crores, and then you can reduce it by 7%. The total lease period is 9 years.

Okay, just one follow-up on this. Basically, the 80 lakh per rent, you said. So, basically, for the next two to three years, at least we should expect the rent to be up 10 out crores for the entire year, right?

This is 80 lakhs per month for the next 15 years. That's the additional rent over and above what we are already paying for selenium because of the largest space that we have taken. So, that's the hit to the P&L for the rental lease impact, which you will see in the depreciation, amortization, lease, you know, the part of it, and the CapEx build-out, which is through operating lease, is the other piece which I talked about.

Understood. That's very clear. Thanks, and we see all the best.

Thank you. As there are no further questions from the participants, I now have the conference. Over to Mr. Vivek Mathur for closing comments.

Thank you. As you would have seen, the results have consistently been improving in Q2 over Q1, where we have regained the EBITDA margin of 40%, and we have been giving the guidance that we want to end the full year with 40% EBITDA margin. The growth in revenue will continue to be in the range of 18% to 20% with EBITDA margins in the range of 40% to 45% and PAT margins in the range of 25% to 30%. We remain, you know, buoyant about the Indian market and as the market plays out in terms of mark to market and net inflows with the fundamentals being intact, corporate actions are back on track and that is why you see issuer solutions business doing well. Q2 is typically a great quarter. Q3, Q4 comes down a little bit on co-production, but our overall guidance remains where we stand. Thank you very much for attending the call today.

Thank you. On behalf of IIFL Capital Services Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.