Kfin Technologies Limited (KFINTECH) Q3 FY23 Earnings Concall Transcript

Kfin Technologies Limited (NSE:KFINTECH) Q3 FY23 Earnings Concall dated Feb. 13, 2023.

Corporate Participants:

Venkata Satya Naga Sreekanth Nadella — Managing Director and Chief Executive Officer

Vivek Narayan Mathur — Chief Financial Officer

Amit Murarka — Head of Global Business Finance M&A, and Investor Relations

Analysts:

Abhijeet Sakhare — Kotak Securities Limited — Analyst

Aejas Lakhani — Unifi Capital — Analyst

Devansh N. — SIMPL — Analyst

Ajox Frederick — Sundaram Mutual Fund — Analyst

Sonal Minhas — Prescient Investment Management — Analyst

Sarang Sanil — RW Investment Advisors — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to the Q3 FY ’23 earnings conference call of Kfin Technologies hosted by Kotak Securities Limited. [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Mr. Abhijeet Sakhare from Kotak Securities Limited. Thank you and over to you, Mr. Sakhare.

Abhijeet Sakhare — Kotak Securities Limited — Analyst

Thank you, Michelle. Good evening, everyone. Welcome to earnings conference call of Kfin Technologies Limited to discuss the 3Q FY ’23 performance of the Company and share industry and business updates. We have the senior management with us represented by Mr. Sreekanth Nadella, MD and CEO; Mr. Vivek Mathur, CFO; and Mr. Amit Murarka, Head, Investor Relations. I would now like to hand over the call to Sreekanth for his opening comments, after which we will take your questions. Over to you, Sreekanth.

Venkata Satya Naga Sreekanth Nadella — Managing Director and Chief Executive Officer

Thank you, Abhijeet. Very good afternoon to one and all. This is Sreekanth. I lead up to the organization as the Chief Executive, and thank you so much for giving your precious time this evening. Over the next half an hour, we would walk you through in terms of our performance for the quarter as well as for the nine months ending 31st December and would leave the floor open for questions for the latter half of the call. So, I’m going to start with — given this is our very first earnings call, I would like to take this opportunity to walk everyone all through — a Little bit about our journey so far. Some of you might have heard about it, but we believe it’s important to set some context. As an organization, KFintech has been in existence since 1985, so long years in making, started our business with rendering issuer solutions, which is effectively what you call a share transfer registry in today’s world, [Technical Issues] into the mutual funds, started in 1995, and ever since managed to claw back some amount of lost time by winning quite a significant number of mandates. Sometime around 2010 [Phonetic], as the asset classes started expanding beyond the traditional asset classes of equity, debt and into mutual funds, the alternatives have started to expand and KFintech as an organization, which is largely a technology and a platform driven solutions provider, has expanded its solutions into all other asset classes as well starting 2010. We also took extreme pride in starting probably the first international foray for an organization of this style based in India by starting our business in Southeast Asia domiciled in Kuala Lumpur in Malaysia and thus started our international expansion, especially from Southeast Asia standpoint.

Around 2017, we have secured the license to become the second central recordkeeping agent for National Pension System. Over a period of time, we have expanded our footprint to a respectable 7% of the total market share over the last four years and will explain more in terms of what has been the specific and the growth associated with that in time to come. 2018 marked a very important year for us in terms of General Atlantic’s controlling stake buyout, which [Indecipherable] three definitive transformational items. One of that was our technology transformation. Second was creation of an independent board and a fit for purpose management, and the third being largely acquisitive by nature by outlook, which has resulted in [Technical Issues] buying out the Sundaram BNP Paribas RTA business back in 2020. Last year, we have acquired Hexagram, which is our fund accounting administration platform, which gives us a very unique ability to be one of the only RTAs in the country, who can handle both the asset side as well as the liability side of the book of a fund manager. 2021 also was an important year for us. So, with Kotak Mahindra Bank acquiring a sub 10% stake in us and of course, December 29 of the previous year, a momentous day for KFintech when the Company got successfully listed on the National Stock Exchange and the BSE. That’s largely our journey so far.

To sum it all up, investor solutions broad business, which covers the domestic mutual funds, international solutions in Southeast Asia and beyond, alternatives and the wealth management associated platform and the National Pension System, issuer solutions with a share transfer registry piece of work and the global business services, which is more an outsourcing side of work that we do for specific clients in the market space and some amount of F&A outsourcing as well as the generalized accounting outsourcing [Technical Issues] banks.

Quickly moving on, just in terms of what is this organization at very high levels [Technical Issues] we are the largest investor solution provider to the Indian mutual funds in the form of a number of asset management [Technical Issues]. 26 out of 46 asset management companies are KFintech’s clients. Of these, 41 are operational at this point in time. Of the 41, 24 are KFintech’s clients. We manage total AAUM of INR12.7 trillion and one that is expanding fast [Technical Issues]. Our win rate had been 15 out of 22 in the past x number of years, exemplifying the growth that has contributed not just by the clients’ growth but as well as new clients getting added and ergo, driving the expansion of our overall AAUM as well as equity AAUM. Our overall market share for the equity is 35%. In terms of SIP monthly inflow, which is the bellwether and the sticky retail book, which tends to compound over a period of time, stands at 41.6% for the period ending December 2022.

Overall number of folios if you add up between investor solutions and issuer solutions, KFintech has close to 225 million folios, which makes KFintech amongst the largest registrars in this world. Issuer solutions, we have a 49% market share when you count the market cap of the Nifty 500 companies at KFintech, so even by count, KFintech has a little around 43% market share on the total number of corporates listed on the Nifty 500. Overall base is about 5,100 clients and we are a little around 150 odd corporates every single quarter, these listed or unlisted together whilst investor solutions on domestic funds and issuer solutions have been our traditional businesses [Technical Issues] had our expansions into international and other investor solutions, which have been in the faster-growing businesses. Today, we manage 33 international clientele between Southeast Asia and beyond. In the case of central recordkeeping agencies, we are one of the three CRAs and we manage close to 0.9 million subscribers, which accounts for 7% of the total market share. On the alternate investment funds, we have about 348 AIFs secured, which marks about a third of the total AIFs, which has a composition of full scale model of TA plus SA value-added solutions. Some of these are purely for regulatory and compliance requirements on stamp duty. Overall, beyond the statistics, we have been an extremely innovative company at the core, launched over 20 products. Many of these are monetized directly or indirectly, contributing to the growth of our clients.

In terms of volumes of transaction, KFintech manages as many transactions as the industry — nearly as much as industry does at this point in time. And in terms of ESG rating, we are rated as the second-best corporate in the country rated A, and we pride in tracking to our internal security scores of our infrastructure which stands at a very impressive 770 plus as of December. Our growth largely had been on the on the back of very simple, keep it simple, but then executed well effectively by maintaining our market leadership through excellent delivery through relationship with our clients and that we believe we can do only and only through very effective technology, investments and process innovation.

We continue to expand internationally organically as well as inorganically in the form of acquisitions, and none of this is fully possible without retaining strong talent. As you will see, KFintech continues to invest in talent both in terms of additional new talent as well as in terms of retention of key personnel. We have also significantly enhance our sales capability, our products and transformation, innovation capability over the past 12 months.

Broadly, in terms of our highlights for Q3 and the nine months ending December, we continued to maintain our growth trajectory with a combination of growth on the traditional businesses as well as faster expansion of the younger businesses. Overall, our Q3 revenues grew by 12% year-on-year, EBITDA grew by 9%, margins for the Q3 stand at 42.9%, our PAT has grown 79% year-on-year and margins stand at 28.4%, the PAT margin at 28.4% for the Q3. For the ending nine months, our revenue grew 17%, EBITDA growth was at 5%, year-on-year and margins stand at 39.9% for the cumulative period of nine months, even as the PAT has grown by 42% and margins standing at 25.8%. As I’ve said, our business is broadly composed of domestic mutual funds, which has a total share of close to about 68%, and the rest of the business on the issuer, international, alternatives, etc., constitute the remaining 30% plus.

Our mutual fund business’ overall AAUM continues to expand faster than the industry; for example, our AAUM has expanded by 8.5% year-on-year as against an industry growth of 5.4%. Our AAUM market share on the other hand has expanded by a full 100 basis points from the previous year, which now stands at 31.7%, that’s a substantial market share gain in 12-month period, even as the market has expanded. Our equity AAUM market share is at 35%. Through this period, we have also won a new mandate of Old Bridge Capital even as one of our erstwhile client, Navi has chosen to partner with CAMS in terms of the new management intending to align on broader corporate relationships. Issuer solutions, which is one of our faster growing businesses, has grown over 40% year-on-year as well as quarter-on-quarter broadly. We have added 128 clients making our total client base to 5,000 plus, close 0.8 million investor folios have been added, making it one of the largest [Phonetic] registrars in the country, even as the market share in terms of NSE 500 companies stands at 49% of Q3 versus what was 43% Q3 for FY ’22. Our international investor solutions, we have added 33 clients. We have totally 33 clients at this point in time, which stood at 22 for the previous nine months ending December 2022. We have won our first client outside of India and Asia into Canada for providing full-scale fund administration services for two funds of this client. We believe this would be a good segue for us to expand into the Western part of the world where fund accounting administration is a fairly large addressable market. This is $6 billion plus ticket size.

We started our operations in Gift City in February, and we have already onboarded six funds in there, four being Gift City domicile and two international funds. On the alternatives, one of the asset classes we are very very excited about in terms of the growth prospects as well as the value that we can offer to the asset managers assigned to the distribution network and the investors. 47 funds have been added in Q3 alone taking the total number of funds to 348 for the period ending December 2022.

Our market share stands at 33% versus what was 30% in the previous year, and our AAUM correspondingly has grown 28% year-on-year and 3% quarter-on-quarter. Our spectrum of services for alternatives also has grown beyond the traditional transfer agency work with the acquisition of Hexagram where now we render our end-to-end solutions of transfer agency, fund accounting administration and [Technical Issues] of digital onboarding and all the other value-added solutions. National Pension System, we continue to add a sizable numbers with each passing day, our market shares stand 7% as are already called out. We look at expanding the — not just the market share, but also creating the market itself quite substantially. We have launched a corporate specific product called, Futur. We have been adding a little around 100 odd corporates every single quarter, even as we intend to transition from [Technical Issues] model into the corporate model through very very specific and targeted solutions we believe will help the corporate employees to [Technical Issues] National Pension System through that particular platform. Overall mutual funds itself from an India performance standpoint as one can easily read from the public domain has seen sizable growth this year for the period ending 2023, 5% year-on-year, 3% quarter-on-quarter, a little subdued compared to the past three years broadly, but as I’ve already explained, in comparison to 5.4% of industry growth, KFintech had grown over 8.4%, which effectively marks much higher net flows into KFintech’s serviced funds.

Equity AAUM stands at 35% per KFintech even as the overall growth had been 12% year-on-year. KFintech’s market growth also had been similar, slightly higher than 12.4%, standing at 12.8%. SIP inflows, I have already called out; KFintech’s number in overall share of the wallet is about 42%, even though overall — equity AAUM stands at 35% and the overall AAUM stands at 31%. The retail book, which is usually sticky and compounding, it’s something that we believe will overtime help KFintech’s overall AAUM share to increase beyond where it currently stands today.

In terms of the number of folios and number of transactions, however, we have near parity in the industry in terms of the total number of transactions we process as well as the total number of folios, we manage both in terms of overall AAUM as well as on the equity side of things, which effectively speaks about again a lot of retail book, right, and in terms of the other asset classes, even as the overall AIFs registered continue to expand, our win rate doesn’t necessarily justify the revenue, it should be higher as we believe many of AIFs will go on to launch their funds into the coming months and quarters, which effectively should drive the revenue higher up than [Technical Issues].

Now, given we operated every asset class in a decentralized manner, a number of DMAT account expansion is very important for us. As that impacts our revenue for issuer solutions, which has grown over 40% as I’ve already called out. So, increase in the number of clients as well as the much broader retail participation helps issuer solutions grow even as our technology-enabled products and platforms we created for the corporates at large have been helping us to drive our value-added solutions as well. International mutual funds specifically on the Southeast Asian side, we see the opportunity size, if you add up the geographies of Singapore, Hong Kong, Malaysia, The Philippines, Indonesia and Thailand, to be around $1.3 trillion, which is a little over two times the size of India, and KFintech renders both transfer agency and fund accounting administration services in this part of the world. It’s a very young nascent business, one that has been growing quite rapidly. Notwithstanding the fact that last year this orchestration markets — mark-to-market has come down by over 5%, but our win rates and a pretty significant pipeline hopefully will augur well in terms of the growth that is potentially possible into the coming quarters in this line of the business.

Our own business highlights, overall AAUM, as I said, has increased by a full 100 basis points compared to nine months of the previous year from 30.7% to 31.7%. Overall — equity AAUM market share is stable at 35%. For the quarter ending December, we stand at 31.7%, 35% on equity and overall mix of equity to our AAUM stands at 56%, which has seen our expansion by a little around 240 basis points for the previous year.

In terms of the SIP, overall inflows both in terms of the folios and in terms of the value, we stand close to 42%. Folios itself has been growing much faster than the value, which [Indecipherable] over a period of time will catch up with the total value itself. In terms of our transaction volume, we have seen a significant rise in the overall volumes by a little over 15% in mutual funds. And if I aggregate all the businesses together, it is a 28% increase in volumes across our lines of businesses.

This, if you read in the context of our overall operations and the productivity we drove, with a net headcount reduction during this period, and it’s largely on account of the technological transformation we are able to bring clients. Partnering with CAMS on the MFCentral, we have launched the CAS API together as partners in this journey. And in times to come, all commercial and non-commercial transaction APIs will also be expanded and extended to all the digital and the FinTech ecosystem in the country, which we believe will add certain amount of revenue base for both the organizations. Issuer solutions has moved, as I said, we’ve added about 12% year-on-year and about [Indecipherable] quarter-on-quarter. Full-year expansion has been a little over 13% in terms of the number of clients itself on Nifty 500 from December 2021, wherein the market share was 35%, today it stands close to 40%.

In terms of number of folios, it too has expanded from 37% to 43%, market cap of the Nifty 500 has moved from 42.9% to 49% speaking volumes about the quality of the clientele and the wins we’ve had through this period, even as revenues have seen close to 40% growth during this period. We have seen an expansion of our international clientele from 22 to 33. This is largely on the back of our acquisition of Hexagram, which has added international clients as well as organic growth of KFintech’s own — all clients.

Overall AAUM itself has seen a slight dip, that’s largely in the context of the mark-to-market reduction in most of the operating geographies in that part of the world. But we believe that it’s sporadic and probably a one-time within the radar that should correct itself in time to come even as the transaction volumes during this period having increased fourfold from 0.9 million to 4 million between FY’20 and December FY 2023.

In terms of other solutions, broadly alternatives, our revenues have grown AIF little around 42%. And our AAUM also has expanded in terms of the operating AAUM has expanded around 28% year-on-year. The fund administration has moved from 23 to 32 during this period from March to December ’22, that is, which also has eight international clients between Southeast Asia and Canada, so to speak. In terms of pensions, we have gone live with the State of Madhya Pradesh the previous year. We have nearly doubled our subscriber count from 0.35 to close to 0.9 during — sorry 0.45 to 0.9, nearly double both the subscriber count as well as our revenues during this period on the National Pension System, even as we have added a sizable number of corporates and POPs during this period of time.

That’s broadly the business highlights. I would request Mr. Vivek Mathur to walk you through on the financials.

Vivek Narayan Mathur — Chief Financial Officer

Thanks, Sreekanth. On the financials, if you look at quarter ended FY ’23 and nine months ended December 31st too, the revenue has gone up by 17.1% year-on-year, and quarter-on-quarter, it has gone up by 12.1% in terms of last last nine months versus this period nine months. And if you look at Q2 to Q3, within the same financial year, it has gone up by 5%. It’s largely backed by the increase in domestic mutual fund business by about 5% quarter-on-quarter. Issuer solutions has gone up by 6% quarter-on-quarter. International and other investor solutions has gone up by about 11.5%. If you look at year-on-year, the domestic mutual fund has gone up by 11%, issuer solutions about 39%, international and other investor solutions by about 46%; this includes the integration with Hexagram and besides other businesses of AIF and pension and Southeast Asia business. So overall growth is 46% year-on-year. On the global business services, there is a growth of 7.7% for the year, while there is a slight dip in the quarter-on-quarter over 5% [Phonetic]. That’s more because of the FX gain that we have that we see the year-on-year increase, while the number of seats that we have been operating with for the mortgage servicing business still remain the same. On the — if you look at the EBITA, the EBITDA has gone up by about 5%, but if you see quarter-on-quarter, it has gone up by 13.6%, and on the year-on-year basis, if you see same period of nine months and same period of nine months last year, that growth of 5% is there, but if you see year-on year, it is 9%, same quarter last year with the same quarter of this year. However, our EBITDA margin continued to be in the range of 40% to 45% as we maintained its 39.9% for nine months ended December ’22. And for the quarter, it is 42.9%. So, typically, Q1 and Q2 see the stress of increments and expenses coming in and as the business grows and revenue grows in Q2 and Q3, it catches up and that’s how Q3 FY ’23 sees an EBITDA margin of 42.9%. That has touched 42% growth year-on-year. In terms of quarter-on-quarter, it is 11.4%, but as compared to last year same period, same quarter, it’s 78.6%. PAT margins have touched 25.8% while for the quarter, it is 28.4%, and we maintain healthy cash flows of about INR229 crores, and therefore the EPS on a diluted basis has gone up by 29% from INR3.15 for this quarter and nine months is INR8.20.

That sets a high level summary of the financials, and we are happy to take questions now. Abhijeet, over to you.

Questions and Answers:

Operator

Thank you very much, sir. [Operator Instructions]. We have the first question from the line of Aejas Lakhani from Unifi Capital. Please go ahead.

Aejas Lakhani — Unifi Capital — Analyst

Yeah, hi, congratulations on the numbers, and thanks for your — the maiden call summary that you gave regarding the business. Sreekanth, a couple of questions, first is, if you could talk about Navi, I mean, I thought that was the recent mandates. So what made them go to the competition. That’s one and on telescopic pricing, what we understand is that prices because of the telescoping nature are already in — there is no scope for further reduction. But the regulator comes out and has made some statements, so your thoughts on pricing that — is there any scope for pricing to still come down? And, Vivek, one question to you is Hexagram, what was the revenue number this quarter because it was not there last year this time. So could you call the number separately? Thanks.

Venkata Satya Naga Sreekanth Nadella — Managing Director and Chief Executive Officer

Thank you, Aejas. 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, KFintech’s managers see fund accounting administration side of the business for Navi. It is possibly due to segregation duty, typically if you see in 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 it’s — telescopic pricing is what it is to that extent as the as the value — overall corpus increases, clearly there is an expected certain amount of compression that is to be seen. In terms of the regulator’s commentary, if you see, I think the request or [Technical Issues] on the consultation paper, it was largely with a view to stop or at least to manage misselling, if I may, in terms of our investors’ money being moved from one point to the another with a view to secure higher TER, if I may, right. and very specific purpose as stated was that and it has no bearing on the registrar’s operations. Our operations and the parts and etc., continue to be disengaged with — on the selling side of the fund, so to speak. So we believe that beyond the telescopic pricing, we may not see any additional yield compression.

Vivek Narayan Mathur — Chief Financial Officer

Yeah, on the question — this is Vivek. On the question related to Hexagram revenue, it was INR8.8 crores for the nine months ended December ’22.

Aejas Lakhani — Unifi Capital — Analyst

Got it. Thanks. Sreekanth, just a 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? And just on the international piece, you had mentioned earlier that you won some geographies. So when do those — 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.

Venkata Satya Naga Sreekanth Nadella — Managing Director and Chief Executive Officer

Thanks. So, I’ll answer the second question first. So, we have already gone live with our client in Canada. In the last meeting, we’ve had earlier in the previous year, it was — it’s still under negotiation and early parts of transition. So, 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 approvals. So that is yet to happen. In terms of the contract renegotiations, 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 [Technical Issues]. The contract negotiation itself is a factor of the contracting terms, which is anywhere between three to five years depending upon which client to 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 renegotiations, the answer is yes, but by and large, it would be minimal in comparison to the telescopic pricing-related impact.

Aejas Lakhani — Unifi Capital — Analyst

Got it, thanks, Sreekanth. I’ll fall back in queue.

Operator

Thank you. [Operator Instructions]. We have the next question from the line of Devansh N. from SIMPL. Please go ahead.

Devansh N. — SIMPL — Analyst

Yeah, sir. Thanks for the opportunity. Sir, in case of employee cost, can you share the headcount as of March ’22 and March ’21 and December ’22?

Venkata Satya Naga Sreekanth Nadella — Managing Director and Chief Executive Officer

Yeah, just give us a moment please. So, the dates you’re looking, so March 2022 last year beginning, we were at 5,440, and December for the period ending the previous month, we were at 5,300 and sorry, what was the other period that you asked for?

Devansh N. — SIMPL — Analyst

March ’21.

Venkata Satya Naga Sreekanth Nadella — Managing Director and Chief Executive Officer

March ’21 was 4,900.

Devansh N. — SIMPL — Analyst

Okay. Sir, over year, what is the annual [Technical Issues].

Venkata Satya Naga Sreekanth Nadella — Managing Director and Chief Executive Officer

Typically, it is April, like any other Indian corporate is.

Devansh N. — SIMPL — Analyst

Okay, because if I exclude the employee cost, if I look at [Technical Issues], also there has been a significant increase. So can you help us understand where it’s coming from?

Vivek Narayan Mathur — Chief Financial Officer

Yeah, this is Vivek. [Technical Issues] related to a research for the IT employees that we have. Then there is integration of Hexagram that has an additional cost of all the employees’ flight [Phonetic] costs 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. So we have seen an average cost going up upwards of 20% in terms of replacement cost. So — and besides — this is all besides the ESOP cost, which is exceptionally different for this year being the IPO year and [Technical Issues] happening this year. So these are the main reasons for increasing employee cost.

Devansh N. — SIMPL — Analyst

Okay, but I mean [Technical Issues] if I look at standalone [Indecipherable] the ESOP cost, it was INR52 crores in December ’22 and December ’21 was INR36 crores. The more change in the employee cost or cost increase ex ESOP is actually 50%, so 44% [Speech Overlap].

Vivek Narayan Mathur — Chief Financial Officer

Yeah. Yeah. Out of 44%, you can take about 9% to 10% increase as the average increment that was there for — that was given in April, and then you look at the reset of employee cost 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 sources, 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 onetime reset that was necessary. Given the market demand and supply situation in this area and this is something, which we will see is already easing out. Now, we see in the last quarter, the cost has 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. — SIMPL — Analyst

But even if I look at Q-o-Q, what we heard is that now there has been lot of fighting [Phonetic] that has been happening globally and but if I look at our Q-o-Q employee cost ex ESOP, even that has increased 20% Q-on-Q. So, I’m just a bit confused.

Vivek Narayan Mathur — Chief Financial Officer

I’m sorry, Q-o-Q the employee cost has come down.

Devansh N. — SIMPL — Analyst

Q-o-Q, Ex ESOP, ex ESOP. Excluding ESOP cost. ESOP cost is INR16 crores for this quarter and [Speech Overlap].

Vivek Narayan Mathur — Chief Financial Officer

Ex the impact of the increase that we have done vis-a-vis 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. So you will continue to see this impact on quarter-on-quarter because of the one-time reset that was done. So 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 — Head of Global Business Finance M&A, and Investor Relations

Yeah. So, I think you are referring, not really sure, I’m not really sure in terms of the numbers. Right, I mean on the employee cost, I mean, for the quarter, I mean, we had INR72.5 crores, right versus INR76 crores in the last quarter. So 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 INR1.6 crores for the quarter and last quarter it was INR3.1 crores, so excluding the ESOP cost also, the overall employee cost has been down on a quarter-on-quarter basis as well. So like how — what Sreekanth and Vivek were mentioning that there were a couple of reasons why on a Y-o-Y basis for the full nine months, I mean why the cost has gone up [Technical Issues] in terms of the reset in the IT salary, the addition of the Hexagram team as part of the quoting [Phonetic] and [Technical Issues] the investment that the Company did in terms of setting up the whole — the sales organizations in terms of basically beefing up my AIF and the fund administration team in India and then also adding people in terms of — for the Southeast Asian business as well. So some of these elements have added up to the cost on a Y-o-Y basis against which the matching revenue we are yet to see. I mean, we are already seeing 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, so 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, but will see the corresponding revenue in the subsequent period as we go along.

Devansh N. — SIMPL — Analyst

Got it. Got it. And in case of [Speech Overlap].

Operator

Mr. Devansh, I’m sorry to interrupt, sir. I would request you to kindly rejoin the queue, please, as we have many other participants. Thank you, sir. The next question is from the line of Ajox Frederick from Sundaram Mutual Fund. Please go ahead.

Ajox Frederick — Sundaram Mutual Fund — Analyst

Hi, sirs, thanks for the opportunity. Sir, my question is on the international [Speech Overlap].

Operator

Sir, I’m sorry to interrupt. Sir, your audio is not clear, may we request you to use your handset to ask a question, please.

Ajox Frederick — Sundaram Mutual Fund — Analyst

Yeah. Sure. Is this better now?

Operator

Thank you, sir.

Ajox Frederick — Sundaram Mutual Fund — Analyst

Yeah. Sir, my question is on the international investor solutions. I noticed that the AAUM 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? Is it on AAUM [Phonetic] or transactions or how do we do it?

Venkata Satya Naga Sreekanth Nadella — Managing Director and Chief Executive Officer

Yeah, so please read that as international and other investor solutions, so that also includes revenue pool coming from AIF business as well and National Pension System [Speech Overlap].

Ajox Frederick — Sundaram Mutual Fund — Analyst

Okay. Okay.

Venkata Satya Naga Sreekanth Nadella — Managing Director and Chief Executive Officer

And the international business itself, yes, the AAUM 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% plus growth. Wealth management/pensions — pensions have grown nearly about twice as fast from the previous quarter. The international mutual fund solutions itself has had 5% growth despite the mark-to-market reduction in the AAUM.

Ajox Frederick — Sundaram Mutual Fund — Analyst

Which means that the yields have gone up for that international MF based solution?

Venkata Satya Naga Sreekanth Nadella — Managing Director and Chief Executive Officer

That’s correct. [Speech Overlap], So, broadly, out asset [Speech Overlap] 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 — Sundaram Mutual Fund — Analyst

Got it, sir. Got it. That’s very helpful, sir. Just one question on the ESOP. So what’s the pending ESOP outlay we have probably for the next quarter or for the next year?

Vivek Narayan Mathur — Chief Financial Officer

See, ESOP pool is almost 85% utilized, so balance pool is about 15% and as and when the Board decides to do anything new, it will come up, but as of now, it’s 85% utilized.

Ajox Frederick — Sundaram Mutual Fund — Analyst

Got it, sir. Thank you very much and all the best.

Venkata Satya Naga Sreekanth Nadella — Managing Director and Chief Executive Officer

Thank you.

Operator

Thank you. [Operator Instructions]. The next question is from the line of Sonal Minhas from Prescient Investment Management. Please go ahead.

Sonal Minhas — Prescient Investment Management — Analyst

Hi, sirs. This is Sonal. Am I audible?

Venkata Satya Naga Sreekanth Nadella — Managing Director and Chief Executive Officer

Yes, you are.

Sonal Minhas — Prescient Investment Management — Analyst

Hi, thanks for taking my questions. I had a question to understand your debtor cycle. When compared to your leading competitor, which is CAMS, I just wanted to understand like 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, so 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 that this is what we basically would go ahead with? And 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, so I wanted to understand, since we are dealing with high-quality mutual funds, asset managers, AMCs and what is the need to actually write down those receivables at the end of deals [Phonetic]?

Vivek Narayan Mathur — Chief Financial Officer

Yeah, so thanks for your question. As you would know that 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 [Indecipherable] and that is where the DSO cycle collection period is much higher. It’s upwards of 90 days on an average, and that is what put stress on the overall DSO, while there are 5,100 corporates that we service. Everybody has got a different cycle in terms of — so we do unbilled revenue accounting besides the build revenue accounting to accrue for revenue, while the actual will may get raised on a quarterly basis or half yearly basis or yearly basis and that’s how the impact of actual collections versus outstanding is reflected there. As far as mutual funds are concerned, they are regular payers. 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 they are some negotiations going on, not just on mutual fund, but on large [Technical Issues] 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. So — and [Speech Overlap].

Sonal Minhas — Prescient Investment Management — Analyst

[Speech Overlap] 40 days, even if we just assume 40 days for mutual funds, isn’t that on the higher side, because if we’re talking about financial intermediaries and you are being one of them and I compare to, let’s say, other companies, typically financial intermediaries on the nuts and bolts business is in the entire chain, they don’t have such high working capital days and we are dealing with, like high velocity kind of transactions, kind of financials with companies, so please help me understand why even 40 days, if you can [Speech Overlap].

Vivek Narayan Mathur — Chief Financial Officer

Why I am saying 40 days is, let’s say, 1st of December to the day the bill is raised is — it takes about 35 days from the day one to the actual billing days and then the bill is raised, then the credit period is not more than 10 days. So, I’m 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 10 days of credit period. So five days you take to raise the bill and another five days to give credit. That’s why I’m looking at credit period. So, it starts from the day the bill is raised, we give 40 days.

Sonal Minhas — Prescient Investment Management — Analyst

Okay, got it. I understand that. And the second part was just to understand, is there a way in which the cycle should be reduced or is there intention to reduce the cycle overtime? Just trying to understand.

Vivek Narayan Mathur — Chief Financial Officer

Yeah. So 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 court protection [Phonetic], they don’t bother to pay. We are now sending reminder — 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.

Sonal Minhas — Prescient Investment Management — Analyst

Got it, sir. That’s it from my side. Thank you.

Operator

Thank you. The next question is from the line of Abhijeet Sakhare from Kotak Securities Limited. Please go ahead.

Abhijeet Sakhare — Kotak Securities Limited — Analyst

Yeah, hi, thanks. 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. But now that the revenue outlook is probably a little more muted or a lot more volatile, given the AAUM linkage. What is your visibility or let’s say, flexibility to put it that way to kind of manage opex in a much more better way so that the operating leverage or the margin trajectory remains within a fairly guided range?

Vivek Narayan Mathur — Chief Financial Officer

Yeah, thanks, Abhijeet. for your question. We are constantly working on cost optimization initiatives. We have given up two floors in Selenium Head Office. We have — we are now at the end of — December — almost flat in terms of headcount as we were last year December. So whatever increase that we have seen during the year has been normalized. We’re taking action in the last quarter of the calendar year. And this will flow into Q4 as well and 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 AAUM movement or because of any pressure coming because of reduced VAS revenue as compared to what we were 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. And therefore, we are not depending on — purely on AAUM based fee. There is a strong pipeline even in Southeast Asia, as we know it takes time. So we are working both — 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 clients 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 election in terms of reducing dependency on outsourced IT manpower and that’s how these initiatives being taken result in maintaining the EBITDA margin that we really want to grow over a period of time. I hope I’m able to answer your question.

Abhijeet Sakhare — Kotak Securities Limited — Analyst

Sure, thanks. The second one is on capital allocation. I think there was a comment earlier in the day from Sreekanth around potential M&A opportunities. So some more color around — some more details around other 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 then [Technical Issues] generally how it adds to your overall revenue diversification efforts as against, let’s say, paying out higher dividends?

Venkata Satya Naga Sreekanth Nadella — Managing Director and Chief Executive Officer

Sure, Abhijeet. This is Sreekanth. Let me take that question for you. See we — first of all, as an organization, we want to be focused largely on asset management space. First and foremost. Yeah. And hence dabbling into other businesses, which may seem incidental and ancillary to this business, but we believe that we will — 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. So 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. Third thing is expanding the scope of services across the same asset classes, across multiple geographies is the most important thing for us. So, basically if you were to put an X, Y, Z 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’re very keen to do. In terms of capital allocation, our M&A strategy had been and will continue to be so, for example, when we acquired Hexagram, that was to add a layer of [Indecipherable] we used to do, which is the fund accounting administration side of things. So we’re looking at scope of services on the issue solutions, for example, where there are more domain centric services, for example, are there things that we can do to provide credit to give solutions like ESOP administration, for example, our Investor relations side of things or if you look at alternate investment funds, both the PA and FA aside, the entire administration layer, especially if you were to move to Gift City and so on and so forth. So, I do not believe that we are intent full at the moment to look at insurance and others, not our forte. We want to be a more focused management space. Account aggregation. yes, when we continue to be interested, that’s more from the standpoint of value addition we can render to the 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, excepting, of course, the value-added component as the TSP [Phonetic] that you can render to the asset management space.

Vivek Narayan Mathur — Chief Financial Officer

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 moats through acquisition rather than paying out is always a preferred move. However, 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 and that’s what Sreekanth alluded to, that we continue to evaluate, but in those areas where we feel that we need to get into.

Abhijeet Sakhare — Kotak Securities Limited — Analyst

Got it. Thanks a lot.

Operator

Thank you. We have the next question from the line of Sarang Sanil from RW Investment Advisors. Please go ahead.

Sarang Sanil — RW Investment Advisors — Analyst

Good evening, sir. Am I audible?

Venkata Satya Naga Sreekanth Nadella — Managing Director and Chief Executive Officer

Yes. You are.

Sarang Sanil — RW Investment Advisors — Analyst

Yeah. Thank you for the opportunity. Sir, could you please provide the absolute number for legal and professional expenses? So — the reason I am asking is that over a period of time, this is one of the component that dragged our margin. So, would it be possible for nine months or Q3 of FY ’23, legal and professional fees?

Vivek Narayan Mathur — Chief Financial Officer

So, for the quarter, I mean that specific number, we will come back to you [Phonetic], Sarang.

Sarang Sanil — RW Investment Advisors — Analyst

Sure, also would it be reducing as a percentage of revenue going forward?

Vivek Narayan Mathur — Chief Financial Officer

Yeah, so I’ll tell you there is an increase of about INR11.4 crores in the legal and professional expenses year-on-year for the nine months period ended. It’s obvious, as I mentioned, that we have taken certain actions. We are reducing dependency on external help, and therefore, this number is likely to come down quarter-on-quarter.

Sarang Sanil — RW Investment Advisors — Analyst

Sure, sure. Okay, sir. Sir, also regarding the three litigations against the Company that mentioned the DRHP, any recent update on that and also what is the material amount related to this litigation that could impact our business?

Vivek Narayan Mathur — Chief Financial Officer

I don’t know which litigation, specifically if you can mention which litigation you are talking about?

Sarang Sanil — RW Investment Advisors — Analyst

Sir, there are three against the Company. Those are related to IPO issue, bank IDFC [Phonetic].

Vivek Narayan Mathur — Chief Financial Officer

Okay. Okay. So there is nothing that — 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 wheel 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’ve seen that 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.

Sarang Sanil — RW Investment Advisors — Analyst

Sure, sir. Sir, my final question, any reason as to why the margins of data processing business segments have been volatile over the period?

Venkata Satya Naga Sreekanth Nadella — Managing Director and Chief Executive Officer

Sorry, margins of data processing?

Sarang Sanil — RW Investment Advisors — Analyst

Yes.

Vivek Narayan Mathur — Chief Financial Officer

See, Sarang, I think, that is something that we reported as part of the financials and all. Right? The data processing pieces, that includes all the different — the line of businesses, which gets clubbed into the data processing, but if you look at — I mean, the mutual fund issuer solutions, I mean, across all these businesses, I mean, we are kind of — similar gross margins is something that we run with between in the range of around, say, 40% to 45% [Technical Issues].

Sarang Sanil — RW Investment Advisors — Analyst

Sure, sure, sure. Thank you, sir. And all the best.

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 — Kotak Securities Limited — Analyst

Thank you all for joining the call today. Goodbye.

Venkata Satya Naga Sreekanth Nadella — Managing Director and Chief Executive Officer

Thank you.

Operator

[Operator Closing Remarks].