IPO: Zaggle Prepaid Ocean Services

In a nutshell Quality : The company had negative net worth in FY21 and FY22. Thus, ROE will not be calculable. Growth : Its revenue and net profit grew 51.9 and 8.8 per cent per annum, respectively between FY21 and FY23. Valuation : The stock will trade at a P/E and P/B of 87.4 and 4.5 times, respectively. Overview : An increase in the adoption of digital payments and cost management to improve efficiency will benefit Zaggle and lead to its growth. However, a relatively new business model, the highly volatile nature of the fintech space, and the highly competitive nature of the industry are things to watch out for. About Zaggle Prepaid Ocean Services Zaggle Prepaid Ocean Services, incorporated in 2011, is a fintech company which follows a B2B2C business model. The company operates under the spend-management segment, which includes software solutions for payables, payroll, and tax processing, along with issuing prepaid cards through its banking partners. As of FY23, the employee's reward and cost management platform, 'Propel', is the highest revenue contributor (65 per cent) followed by program fee (30.6 per cent) received from issuance and usage of prepaid cards. Strengths of Zaggle Prepaid Ocean Services The digital payment adoption in the economy has resulted in an active user base of over 20 lakh, recording an annualised growth of 58.5 per cent over the last two years. The company has managed to reflect client stickiness, as 70.5 per cent of revenue was generated from existing customers in the last financial year. Moreover, only 1.5 per cent of customers terminated their contracts in FY23. Weaknesses of Zaggle Prepaid Ocean Services The program fee, which constitutes 30.6 per cent of the total revenue, depends on agreement with preferred banking partners. Termination of a contract or modification in the agreement can have a major impact on the revenue. Despite strong revenue growth, the profitability of the company has remained low because of higher expenses (in the form of reward points) in order to entice customers. Debt-to-equity ratio stood at nearly three times in FY23. Furthermore, the company reported negative net worth in FY21 and FY22. IPO details Total IPO size (Rs cr) 563 Offer for sale (Rs cr) 171 Fresh issue (Rs cr) 392 Price band (Rs) 156-164 Subscription dates September 14, 15 and 18, 2023 Purpose of issue To fund customer acquisition, tech development and repay debt Post-IPO M-cap (Rs cr) 2002 Net worth (Rs cr) 441 Promoter holding (%) 44.1 Price/earnings ratio (P/E) 87.4 Price/book ratio (P/B) 4.5 Financial history Key financials 2Y growth (% pa) FY23