Zaggle Prepaid Ocean Services IPO (Avoid)

Highlights

Zaggle Prepaid Oceans Services Limited (ZPOSL) incorporated on 2011, operates in a segment where it interacts and interfaces with their Customers (i.e., businesses) and end Users (i.e., employees) and is one of a small number of uniquely positioned players with a diverse offering of fintech products and services, having one of the largest number of issued prepaid cards in India in partnership with certain of  banking partners (approx. 16.0 pct of India’s total prepaid transaction volume, as of March 31, 2023), a diversified portfolio of SaaS, including tax and payroll software, and a wide touchpoint reach.

As of March 31, 2023, ZPOSL is a market leader in spend management, with more than 50 mn prepaid cards issued in collaboration with banking partners and more than 2.27 mn users served. 

The Company network of corporate customers includes the banking and finance, technology, healthcare, manufacturing, FMCG, infrastructure, and automobile industries, among others, and includes brands such as TATA Steel, Persistent Systems, Vitech, Inox, Pitney Bowes, Wockhardt, MAZDA, PCBL (RP – Sanjiv Goenka Group), Hiranandani group, Cotiviti, and Greenply Industries.

The Company’s Saas platform is designed for :- (i) business spend management (including expense management and vendor management); (ii) rewards and incentives management for employees and channel partners; and (iii) gift card management for merchants, which we refer to as customer engagement management system (CEMS).

ZPOSL core product portfolio includes (i) Propel (ii) Save (iii) CEMS (iv) Zaggle payroll card (v) Zoyer.

It will use Rs. 3,000 mn of the net proceeds of the new equity issuance for customer acquisition and retention, Rs. 400 mn for technology and product development, Rs. 170 mn  for repayment/prepayment of certain borrowings, and the remainder for general corporate purposes.

Key Highlights

• India’s fintech market revenue is expected to grow at a CAGR of 21 pct nearly Rs. 8,341 bn in FY27 from Rs. 3,123 bn in FY22 as a result of supportive government policies, rising investments, and a fintech adoption rate of approximately 87 pct, the highest compared to other countries. The company believes this allows much room for growth.
• As of FY23 Company has 16 pct market share in the prepaid card, 12.7 pct market share in total prepaid card transaction volume and 6 pct market share in Expense management, Procurement management, Payroll Management as of fiscal 2022.
• As part of company offering, it has partnered with key banking players, including IndusInd Bank Limited, Yes Bank Limited and NSDL Payments Bank Limited (together, the Preferred Banking Partners), and have issued more than 50 mn co-branded prepaid cards since inception of their business.
• As of March 31, 2023, company had more than 2.27 mn active users with 579 SMB accounts and 1,832 corporate accounts. Company Customer base as of March 31, 2023 was 151.37 pct higher than their customer base of 904,713 active customers as of March 31, 2021.
• Zaggle Prepaid Ocean Services has a good client retention capabilities, with churn rates for customers terminating contracts with us consistently low at 1.54 pct, 0.37 pct, and 1.17 pct in fiscal years 2023, 2022, and 2021, respectively.
• In FY23, the business capitalized R&D costs of Rs. 151.04 mn to develop Save, Propel, and Zoyer. Company sales increased at a CAGR of 51.87 pct during fiscal years 2021 and 2023, reflecting market acceptance of their products. To accomplish growth, the company established in-house product development and technology teams focused on generating new and creative goods.
• Despite increasing sales of the company the EBITDA margin declined in FY23 and it stood at 8.69 pct in FY23, 16.12 pct in FY22, 11.51 pct in FY21. During FY23 profit of the company declined by 54 pct due to increase in their employee benefit expense towards ESOPS, increase in R&D expense, increase in finance cost.

Key Risk

• Zaggle Prepaid Ocean Services experienced negative operating cash flows in FY023 and negative net worth as of March 31, 2022 and March 31, 2021, which may make it difficult or expensive for company to obtain future financing or meet liquidity needs. 
• The RBI regulates the businesses of company banking partners, and any changes in the RBI’s policies, decisions, and regulatory framework could adversely affect the company’s business, cash flows, results of operations, and financial condition.

Valuation

At the upper end of the price band, the company prices the issue at a PE ratio of 87.2x its FY23E fully diluted earnings. The IPO is aggressively priced. Zaggle Prepaid Ocean Services does not have any listed peers. One can Avoid this issue.

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Disclaimer: The views expressed in the blog are purely based on our research and personal opinion. Although we do not condone misinformation, we do not intend to be regarded as a source of advice or guarantee. Kindly consult an expert before making any decision based on the insights we have provided.