Widely read:
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
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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 | FY22 | FY21 |
|---|---|---|---|---|
| Revenue (Rs cr) | 51.9 | 553 | 371 | 240 |
| EBIT (Rs cr) | 28 | 42 | 58 | 26 |
| PAT (Rs cr) | 8.8 | 23 | 42 | 19 |
| Net worth (Rs cr) | 49 | -4 | -46 | |
| Total debt (Rs cr) | 141 | 70 | 73 | |
|
EBIT is earnings before interest and taxes
PAT is profit after tax |
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Key ratios
| Ratios | 3Y average (%) | FY23 | FY22 | FY21 |
|---|---|---|---|---|
| ROE (%) | - | - | - | - |
| ROCE (%) | - | - | - | - |
| EBIT margin (%) | 11.3 | 7.6 | 15.6 | 10.7 |
| Debt-to-equity | 2.9 | -19.8 | -1.6 | |
|
ROE is return on equity ROCE is return on capital employed EBIT is earnings before interest and taxes |
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Risk report
Company and business
-
Are Zaggle's earnings before tax more than Rs 50 crore in the last 12 months?
No, the company's profit before tax for FY23 was Rs 32 crore. -
Will Zaggle be able to scale up its business?
Yes, the fast adoption of digital payments and need for digital cost management systems will help the company scale its business. -
Does Zaggle have recognisable brands with client stickiness?
Yes, the company has a very low customer churn rate, and has been able to maintain long-term relationships with its customers. -
Does the company have a credible moat?
No, the company faces high competition in the industry.
Management
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Do any of Zaggle's founders still hold at least a 5 per cent stake in the company? Or do promoters hold more than a 25 per cent stake in the company?
Yes. Post-IPO, the promoter's stake will be 44.1 per cent. -
Do the top three managers have more than 15 years of combined leadership at Zaggle?
Yes, the Executive Chairman and Managing Director have a combined experience of over 20 years with the company. -
Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
Yes, no information to suggest otherwise. -
Is the company's accounting policy stable?
Yes, no information to suggest otherwise. -
Is Zaggle free of promoter pledging of its shares?
Yes, there is no pledging from the promoters.
Financials
-
Did the company generate a current and three-year average return on equity of more than 15 per cent and a return on capital employed of more than 18 per cent?
No, the company reported negative net worth in FY21 and FY22. -
Was the company's operating cash flow positive during the last three years?
No, the cash flow from operations was negative in FY23. -
Is the company's net debt-to-equity ratio less than one?
No, the net debt-to-equity ratio was 2.4 times in FY23. -
Is Zaggle free from reliance on huge working capital for day-to-day affairs?
No, the company has high working capital requirements which are often financed through debt. -
Can the company run its business without relying on external funding in the next three years?
No, the company has a net debt-to-equity ratio greater than two and it has frequently borrowed money for short and long-term capital. Moreover, the value of equity was negative prior to the end of FY23. -
Is Zaggle free from meaningful contingent liabilities?
Yes, contingent liabilities as a percentage of equity is 5.1 per cent.
Valuations
-
Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
No, the stock will offer an operating earnings yield of 2 per cent. -
Is the stock's price-to-earnings less than its peers' median level?
Not applicable. The stock will trade at a price-to-earnings ratio of 87.4 times. There are no listed peers. -
Is the stock's price-to-book value less than its peers' average level?
Not applicable. The stock will trade at a price-to-book value of 4.5 times. There are no listed peers.
Disclaimer: This is not a stock recommendation. Do your due diligence before investing.
Suggested read: Learning from IPOs
Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.
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