With nearly 10 months having passed since its IPO, the stock of Protean eGov Technologies (Protean), has had a good run, with the stock up by 175 per cent from its IPO price of ₹792. At bl.portfolio we had recommended that investors subscribe to the issue. Now, with stock up significantly, we recommend that investors book profits for the reasons explained below.
At the time of IPO, Protean was priced at PE of around 30 times. After the recent upside, and factoring FY24 earnings, the stock is now trading at a very pricey PE of 91 times. Our earlier positive view on Protean last year was predicated on its reasonable IPO valuation when factoring for growth prospects in core businesses, and potential for new emerging initiatives.
The company’s strong foothold in many Digital India initiatives laid a case for good long-term potential. However, when you factor core businesses’ revenue and reported EBITDA grew at 19 and 11 per cent respectively in FY24 and also that emerging initiatives constitute less than 4 per cent of revenue with uncertainty on which will scale up when, it’s hard to find comfort in current valuations. While business case remains good, risk-reward in stock is unfavourable now with no margin of safety.
Business
Protean is an IT-enabled solutions company engaged in conceptualising, developing and executing nationally critical and large-scale greenfield technology solutions. By virtue of its long-term collaborations with governments (Central and State), the company has extensive experience in creating digital public infrastructure and developing citizen centric e-governance solutions. The company has three main operating segments that make up its core business and they are as follows:
Tax services: Protean has been an active partner with the government in modernising the direct tax infrastructure in India through projects such as PAN issuance and setting up Tax Information Network and its technology infrastructure for Aadhaar authentication and e-KYC services. As of end Q1FY25, Protean had a 54 per cent market share in the PAN issuance segment where in gets a fee based on number of PANs issued in a period for services rendered from time of application to issuance.
In this segment it also makes revenue for services provided such as filing of TDS returns through TIN systems. This segment is largely a B2C business where customers pay the company for using its service to get a PAN or filing TDS through TIN systems. This segment accounted for 55 per cent of FY24 revenue, and delivered Y-o-Y growth of 12 per cent.
Pension services/CRA: Central record keeping agency or CRA is responsible for establishing the IT infrastructure, handling administration and customer service functions for all NPS subscribers. It maintains centralised records of all relevant details and provides reports to all NPS stakeholders. Although this segment is open to competition, Protean virtually has monopolistic share in this segment, with more than 97 per cent share of pension subscribers across NPS and Atal Pension Yojana. This segment accounted for 29 per cent of FY24 revenue and grew 14 per cent Y-o-Y.
Identity services: Protean’s IT infrastructure network and relationships with multiple stakeholders enable it to be a key player in e-authentication of transactions for enabling digital transactions. For example, when a KYC process needs to be completed using Aadhaar for opening a bank account, this is enabled by services provided by the company, and the company, in this case, will be paid by the bank per transaction. Authentication services provided under this segment encompass Aadhaar eKYC, Aadhaar Authentication, E-sign and Online PAN verification. This segment accounted for 12.5 per cent of FY24 revenue and was the fastest growing segment among core businesses with revenue growing 62 per cent.
Emerging businesses: Protean also has made investments in many other tech services, such as cloud/cybersecurity and emerging Digital India initiatives such as ONDC and AA or account aggregator system for financial inclusion. However, at present, these are very small and account for less than 4 per cent of consolidated revenues.
Recent performance and outlook
In Q1FY25, Protean reported revenue of ₹197 crore, down by 11 per cent Y-o-Y. According to management, the major segment – Tax Services, was impacted by de-growth in issuances of PAN cards across the country due to election activity. This is expected to recover, going ahead. While this segment de-grew 28 per cent Y-o-Y, Pension Services and Identity Services performed well, and grew by 13 and 27 per cent respectively. EBITDA was at ₹45 crore and PAT was at 21 crore, down by 5 and 35 per cent respectively. Higher PAT decline was partially due to exceptional items.
While the impact in Q1 to revenue and PAT is not much to be worried about, what merits attention is the lack of traction in EBITDA/EBITDA margins over the last year. While the company reported EBITDA growth of 11 per cent in FY24, this is including other income. Removing that, core operational EBITDA in FY24 was flat at around ₹126 crore (margin at 14 per cent) as against ₹124 crore (18 per cent) in FY23.
When it comes to new businesses, the monetisation potential is still not clear. For example, in the case of ONDC, management has noted that it provides gateway services (enabling buy/sell transactions) and registry services. At present it only gets re-imbursements for the cost it incurs for infrastructure and tech developments. As per management, the business model has to evolve into a self-sustaining model from where company can charge on per transaction basis and also make revenue from providing value-added services in the ecosystem. There is potential in this and a few other initiatives from long-term perspective. Nevertheless, at current hefty valuation, it does appear even the best case prospects from new initiatives, which are hardly generating meaningful revenue, are well-captured.
