Ebix (EBIX): Ebixcash IPO In The Context Of Recent Paytm IPO | Seeking Alpha

2022-04-26 07:57:29 By : Mr. Kevin Lee

lakshmiprasad S/iStock via Getty Images

lakshmiprasad S/iStock via Getty Images

A confluence of multiple events has made India’s fintech one of the hottest areas for innovation and investment in the last few years. The demonetization of the rupee by the Modi government in Nov 2016 and the introduction of Unified Payments Interface ( UPI) with a sophisticated personal id verification system have created a digital revolution in India. The low penetration of financial services, including digital payments, insurance, stock ownership, and a sharp increase in the use of smartphones, has given rise to enormous opportunities for fintech companies. As a result, several startups have come up in India, many with unicorn status.

One of the biggest beneficiaries of the recent changes is Paytm, a decade-old fintech player in India. Paytm went public in November, which turned out to be one of the worst IPO performances ever in the history of the Bombay Stock Exchange.

The Paytm IPO debut debacle has taken some sheen off the Indian IPO market. But, will it impact upcoming IPOs in India, particularly from other fintech players such as Ebixcash, which is planning to go public early next year? As Ebix (NASDAQ:EBIX ) prepares for the Ebixcash IPO, it might be worthwhile looking at its prospects in the context of the recent Paytm IPO.

Paytm was started in 2010 by Vijay Shekar Sharma as a prepaid mobile recharge company. It has grown steadily and mostly organically from there. Year after year, Paytm added more features and new services such as mobile wallets, events booking, e-commerce, and train ticket purchases. In 2015, Paytm introduced QR code-based payment for its mobile wallet, and Paytm continued to add more and more vendors, which attracted more end customers to use their services. As mentioned before, the growth exploded in 2017 after India’s demonetization. Paytm was ready for this and successfully scaled the services as the demand increased exponentially.

Paytm currently has over 330 million consumers and 21 million merchants supported on its platform. Paytm derives a significant part of its revenue from the payments service. With the introduction of UPI, the competition has increased. The key competitors include Google Pay, PhonePe, which Walmart owns, and, more recently, WhatsApp Pay. As a result, the market share of Paytm has gone down in the overall payments space. However, Paytm has maintained more than 50% of the all-important customer-to-vendor payments. This is because Paytm has put a lot of effort and innovation in POS, payments management, and other vendor-focused features to maintain its market share in this vital space. Though Paytm is able to grow its revenues substantially, it has not reported any profits. In fact, the losses are expected to continue for some time.

Paytm management and investors decided to take the company IPO as the Indian investors seem receptive even for companies that are not making a profit. Given the enormous reach of Paytm and the potential for the fintech space in India, multiple international institutional investors piled on to the initial offering from Paytm. However, the retail and institutional investor appetite within India itself was lukewarm.

The $2.5Billion Paytm IPO is the largest stock offering in the Indian stock market history. The IPO was subscribed more than two times prior to the listing. However, after the Paytm shares were listed for trading on November 18th, the stock lost more than 30% of its value in the first two days of trading. Since then, Paytm stock price has recovered but is still down significantly from the IPO price.

Ebix is a US-based technology company primarily focused on insurance and annuity exchanges enabling cloud-based transactions internationally. Large banks and insurance companies use Ebix exchanges and their consulting services to get on to these exchanges. These exchanges have provided a steady stream of revenue for Ebix. Ebix has been highly profitable as it consolidated its engineering in India, keeping the operational costs very low.

In early 2017, Ebix acquired Itzcash, an Indian fintech company providing mobile wallet, remittance, and gift card services in India. Since then, Ebix has acquired more than 25 companies, mainly in the fintech space, to create a wholly-owned subsidiary called Ebixcash.

Ebix CEO Robin Raina has been talking about Ebixcash IPO for a while now. He plans to use the IPO proceeds to expand Ebixcash through potential acquisitions within India and internationally. In a recent Ebix earnings call and interviews, he has indicated that the Ebixcash IPO will happen sometime in early 2022. While the IPO market in India has been hot, the Paytm IPO has put a damper on the investor appetite. It would be interesting to see how well an Ebixcash IPO might be received in this context.

Though both Paytm and Ebixcash are in the fintech space in India, they have very different business models making it difficult to make direct comparisons. However, looking at the company, target customers, current revenue, income, projected growth, and management style will give some idea of how the investors could value and perceive them.

Paytm has grown mostly organically, introducing new services and features year after year, steadily gaining customers. Paytm leads the consumer to merchant payment space with more than 50% of the market share. They provide POS machines, payment management software for merchants and support a single QR code for different types of payments. However, the introduction of UPI has increased the competition resulting in lower margins.

To combat this, Paytm has put more focus on providing additional higher-margin services to its large customer and merchant base. Paytm sells Gold, mutual funds, and insurance. Lending is one of the areas of focus for Paytm. Initially, Paytm was serving as a middleman for the banks. However, in 2017 Paytm got approvals from the Reserve Bank of India for its own bank, Paytm Payments Bank, for offering the loans. Paytm mall is another initiative of Paytm along the lines of Amazon to provide consumer goods providing an online avenue for its vendor base to reach its large customer base.

Paytm made several acquisitions along the way. One of Paytm’s most significant acquisitions was Ticketnew, a movie and event ticket booking service provider, for $40M. Other key acquisitions, including Nearbuy, Little, and NightStay, have expanded the reach of Paytm in Groupon type of services and hotel stays in travel. However, most other purchases are smaller aqua-hire types of acquisitions more for the talent than the actual business. This is in tune with the Paytm management style, which prefers organic growth over acquisition-based growth.

Unlike Paytm, Ebixcash has grown mostly inorganically, starting with the acquisition of the mobile wallet company Itzcash. The parent company Ebix bought 80% of Itzcash for $120m and named it Ebixcash. This provided a large footprint of 75000+ outlets in 3000 cities and towns in India, offering gift cards, bill payment, mobile wallets, and remittance services. Ebixcash went on to buy Centrum Direct for $175m and a host of smaller players to become a leader in the foreign exchange space.

Source: Ebix investor presentation, modified by author

Ebixcash then acquired Paul Merchants and You first money express and a few other companies to become the largest remittance company in India. In travel, Ebix bought Via.com, and Mercury travel which are focused on corporate and luxury travel. In addition, Ebixcash has built up a core financial technologies group formed by acquiring Indus Software, Miles Software, and Trimax IT. The financial technologies group serves many banks and other financial institutions in lending, wealth management, insurance, and IT services.

As could be seen, Ebixcash has been aggressive and bold in its acquisitions, with multiple additions above the $100m mark. Building on the experience of the parent company Ebix, it has grown from around 2000 people headcount in India to over 9000 now in just four years. Ebixcash seems to be managing the breakneck growth well so far despite the pandemic. However, it will take more time to know how well these acquisitions are able to integrate and grow organically.

Paytm has grown its customers and vendors at a fast pace resulting in increased revenue. However, the margins have eroded in the payments space with the introduction of UPI and increased competition.

Paytm is putting more focus on other services outside of payments. This has compensated for the drop in the margins for the payments revenue. As could be seen, the overall revenue has only been growing marginally. The recent decline in revenue in fiscal 2021 is due to the pandemic. In the most recent quarter ending in Sept, Paytm announced a 64% increase in revenue compared to the same quarter the previous year. In addition, Paytm announced a 250% increase in non-payment financial services revenue primarily driven by lending. The loans dispersed grew by seven fold year over year. The cloud service revenue increased by 47% year over year led by advertising. Though losses increased by 8% over prior quarter, as a percentage of revenue losses improved by 23% year over year. "We have maintained the growth momentum in our payments services business, expanded our financial services business aggressively and are on our way to pre-COVID volumes for Commerce and Cloud services," Paytm said in a statement.

Ebixcash does not report earnings separately. Instead, they are included as part of the US-based Ebix Inc. Despite the pandemic, Ebix has been reporting growing revenue.

One important point to note is that Ebix is profitable. The US and international insurance exchange and RCS operations are highly profitable. The main driver of revenue growth is the India-based financial exchange operations of Ebixcash. However, they do not have good margins. The lower margins are primarily because Ebixcash includes gift card sales as part of the revenue, and the gift cards have very low margins of under 1%.

Ebix CEO Robin Raina, in a recent interview, indicated that Ebixcash is at a revenue run rate of around $950m for 2021, with an EBITDA profit on target to reach about $100m for the year. He expects the profit to grow to $170m by 2023. This revenue and EBITDA profit rate of Ebixcash is close to the entire revenue and EBITDA rate of the parent Ebix. It is unclear how the Ebixcash subsidiary and parent Ebix will structure the revenue split. It is possible that Ebixcash subsidiary may recognize most of the revenue that comes into Ebix. Since Ebixcash is a wholly-owned subsidiary of Ebix, it will also be reported as revenue for Ebix.

The primary reason the Paytm shares traded below the IPO listing price is the concern about the losses it has been accumulating. Indian investors are concerned that Paytm is facing increased competition in the payments space. It will take time to derive meaningful revenue from the adjacent spaces as Paytm is not a leader in any of these spaces. However, the international investors see the vast customer and vendor base as an excellent asset that Paytm could leverage and extract revenue from, particularly as the Indian economy grows and the consumption of financial services increases. It requires Paytm to maintain and extend its current share of vendors to customer payments and innovate and expand on the other services, particularly in lending and advertisements. Please refer to the excellent analysis by Prof. Aswath Damodaran on the valuation of Paytm.

Ebixcash, on the other hand, is already profitable and growing fast. It is the leader in foreign exchange and remittance spaces in India. It also has a strong presence in core financial technologies such as wealth management and lending. The current revenue of Ebixcash is possibly higher than that of Paytm. However, does it mean that the valuation of Ebixcash should be close to that of Paytm? Absolutely not. Ebixcash does not have the reach or recognition of Paytm, not even close. Also, one thing to note is that Ebixcash is intimately intertwined with its parent Ebix Inc. There are some concerns regarding Ebix, particularly related to their accounting practices listed in this article.

In recent interviews, CEO Robin Raina has talked about offering 10 to 20 percent of the company to raise about $1B in the IPO, which values Ebixcash at around $5B. Now, would Indian investors be willing to value Ebixcash at one-fourth of the listing valuation of Paytm? Maybe. At about five times the annual revenue, based on the numbers indicated by the CEO of Ebix, this valuation could be perceived as attractive by Indian investors compared to other recent IPOs in India. If the Indian investors are indeed looking for companies that are making a profit in the near term, they may be open to such a valuation. However, one of the important lessons to be learned from Paytm IPO is that the IPO stocks should be priced below the valuation that the investors are willing to assign so that the IPO will be well received. In that context, a valuation between the range of $2B to $3B for Ebixcash could make it very attractive for Indian investors. This valuation could still mean an upside of 50% to 150% for Ebix shares when the Ebixcash valuation is reflected back on the parent company.

Indian investors are open to investing in companies that are currently not making a profit. However, they do want to see a clear path to profitability, as could be seen with the poor performance of Paytm IPO. The stock prices of companies that were listed a few months before the IPO of Paytm, such as Zomato and Nykaa, have still maintained their value. This seems to indicate the Indian IPO market is still reasonably healthy. This attention to profitability in fact might be a positive for the forthcoming Ebixcash IPO as that is where Ebixcash shines. However, the critical lesson from Paytm IPO is that when listing a company for IPO, it is vitally important to keep the IPO valuation of the company lower than where the investors are valuing the company such that the IPO is received positively. Since Ebix will still own a majority of Ebixcash after the IPO, it will continue to benefit from rising share prices even after the IPO which in turn will reflect positively in the stock price of Ebix.

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Disclosure: I/we have a beneficial long position in the shares of EBIX either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.