Zaggle Prepaid Ocean Services is a unique initial public offering. Should it be basketed a technology provider, payments enabler or HR solutions business? With no straightforward answer, it is best to classify it as a SaaS (software as a service) provider, embedded with a layer of payments. Such a ‘khichadi’ has its pros and cons. It ticks the box of being a one-of-its-kind listed player in India with no immediate comparable. However, despite a 12-year track record, its financials do not reflect a business that has achieved maturity. To top it, the asking price of the IPO is at over 80x FY23 price-to-earnings (PE). Adjusted for last fiscal’s ESOP costs, valuation comes to 55x FY23 PE. , The pricing does not seem to leave much on the table in the near-term.
That said, Saas has been the ruling theme among start-ups and as an early player focused on corporate clients, Zaggle is an interesting business model. However, it’s financials do not represent the strength of the business model yet. It may be prudent for investors to see how the company performs over two-three quarters post-listing to consider the stock. Even then, given that Zaggle operates in a new-age space, the stock may initially be best suited for risk-taking investors.
Also read: IPO Screener: Zaggle Prepaid IPO subscribed 19% on Day 1
Business model
Zaggle has over 2,411 corporate clients and 2.27 million active users. It operates on three main verticals – Zaggle Propel, Zaggle Save and Zaggle Zoyer. These are predominantly B2B businesses, with Zaggle having only an indirect contact with the ultimate user.
Zaggle Propel, which generates over 60 per cent of the company’s revenues, is a rewards and recognition platform, which increases employee engagements and automates employees’ financial transactions with the company, such as claiming reimbursements.
Its pre-paid instruments business, which has an overlap with Zaggle Propel and Zaggle Save, contributes round 38 per cent of revenues, Zaggle is not a custodian of cash. It acts as intermediate between the user and the banking partner; revenue is earned by way of commission and service charges. Hence, the risk that PPI players faced last year due to a change in regulations didn’t affect Zaggle. Zaggle Zoyer is a relatively new product focused on embedded finance, more like an integrated financial intermediary, without being involved in lending.
The company’s retention ratio is over 98 per cent and its ability to provide tailormade solutions, whether to employees of its clients and/ or the corporate enterprises, is Zaggle’s advantage.
Financials
The gap between revenues and net profit, especially since FY21, isn’t comforting. As against Rs 553 crore of revenue from operations, net profit for FY23 was seen at Rs 22.9 crore. Despite adjusting for Rs 14 crore of ESOP expenses, FY23’s net profit margin trails FY22’s 11.3 per cent by a significant margin. At an operating level as well, with EBIDTA margin at 8.7 per cent in FY23, down over 800 basis points year-on-year, it doesn’t paint a good picture. Zaggle extends a longer credit duration to its customers vis-à-vis what it gets from its vendors, resulting in working capital mismatch.
The fresh issue of Rs 392 crore to be raised through the IPO would be deployed towards customer retention and services, suggesting that the capital may not generate returns from day one of deployment. This is a risk that investors should be aware of while considering the IPO.
Valuations
There are two ways to assess Zaggle’s adjusted FY23 PE of 55x. With no immediate comparable, the company’s asking price, if one is to compare Zaggle’s valuations with the BSE Small Cap Index, to draw a theoretical reference, the IPO is still at a steep premium to the index. . However, when one compares it with globally listed SaaS players such as Salesforce or Freshworks, which are a lot bigger than Zaggle in revenue or valuations, the homegrown company’s asking price does not seem exaggerated. Freshworks, for instance, is yet to return profits, while Salesforce has just started making net profits.
Therefore, Zaggle would best suit investors who are willing to wait the long haul given the nascency that SaaS companies are at, in India and globally. These companies may have built a good business model, but how much of that percolates to its financials, needs to be seen in the next three–five years.