Zaggle Prepaid IPO review (May apply)

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Review By Dilip Davda on September 12, 2023

•    ZPOSL is in the diversified offerings of fintech products and related services.
•    It has B2B and B2C models with many renowned clients globally.
•    It is spending Rs. 300 cr. for the acquisition of clients and expanding its infra to match the needs.
•    The lower bottom line for FY23 is attributed to its ESOP plans and other one-time adjustments.
•    Based on its FY23 earnings, the issue appears aggressively priced. 
•    Well-informed investors may park funds for the medium to long term.

PREFACE:
The company has done a pre-IPO placement in the month of August 2023 for 5975609 shares of Re. 1 each at a price of Rs. 164 per share and garnered Rs. 98 cr. and has reduced the final IPO fresh issue size by the said quantum. The list of pre-IPO investors includes Ashish Kacholia, Bengal Finance & Investment Pvt. Ltd., Himanshi Kela, Valuequest S Cale Fund, etc. Perhaps it may attract first mover fancy post listing. It appears that the company is trying to greedy pricing on its unique business model. The offer document has not covered Q1 of FY24 and that has surprised all.

ABOUT COMPANY:
Zaggle Prepaid Ocean Services Ltd. (ZPOSL) is in a segment where we interact and interface with its Customers (i.e., businesses) and end Users (i.e., employees) and are among a small number of uniquely positioned players with a diversified 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 (which constituted approximately 16.0% 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 (Source: Frost & Sullivan Report). 

ZPOSL is a leading player in spend management, with more than 50 million prepaid cards issued in partnership with banking partners and more than 2.27 million users served, as of March 31, 2023. It offers a differentiated value proposition and diversified user base (Source: Frost & Sullivan Report).

The company is sector-agnostic, and its network of corporate customers ("Customers") covers the banking and finance, technology, healthcare, manufacturing, FMCG, infrastructure and automobile industries, among others, where it has relationships with brands such as TATA Steel, Persistent Systems, Vitech, Inox, Pitney Bowes, Wockhardt, MAZDA, PCBL (RP - Sanjiv Goenka Group), Hiranandani group, Cotiviti and Greenply Industries. 

ZPOSL is placed at the intersection of the SaaS and fintech ecosystems, and our 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 it refers to as customer engagement management system ("CEMS").

ZPOSL's product portfolio includes:
• 'Propel', a corporate SaaS platform for channel rewards and incentives, employee rewards and recognition;
• 'Save', a SaaS-based platform and a mobile application to offer expense management solutions for business spend management facilitating digitized employee reimbursements and tax benefits;
• 'CEMS', a customer engagement management system that enables merchants to comprehensively manage their customer experiences including rewarding merchants through gift card and loyalty benefits;
• 'Zaggle Payroll Card', a prepaid payroll card that allows our Customers to pay contractors, consultants, seasonal and temporary employees, and unbanked wage workers as an alternative to direct deposits to bank accounts or cash payments; and
• 'Zoyer', an integrated data-driven, SaaS-based business spend management platform with embedded automated finance capabilities in core invoice-to-pay workflows.

As of March 31, 2023, it had 1,832 corporate accounts and 579 SMB accounts. As of March 31, 2023, the company has issued 10.83 million active cards (i.e., cards that had not expired as of that date) to 2,411 Customers across India. These Customers used ZPOSL's software to manage spending related to their employees, business, channel partners and customers. According to the Frost & Sullivan Report, as of March 31, 2023, the company has served more than 2.27 million Users. As of March 31, 2023, it had 273 employees.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a combo book-building route maiden IPO of fresh equity shares issue worth Rs. 392.00 cr. (Approx. 23902470 shares at the upper cap) and an Offer for Sale (OFS) of 10449816 shares (worth Rs. 171.38 cr. at the upper cap). Resultantly the overall size of the IPO will be for 34352286 shares worth Rs. 563.38 cr. (at the upper cap). The company has announced a price band of Rs. 156 - Rs. 164 per share having a face value of Re. 1 per share. The issue opens for subscription on September 14, 2023, and will close on September 18, 2023. The minimum application to be made is for 90 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 28.14% of the post-IPO paid-up capital of the company. The company has allocated not less than 75% for QIBs, not more than 15% for HNIs, and not more than 10% for Retail investors. 

From the net proceeds of the fresh equity issue, it will utilize Rs. 300.00 cr. for customer acquisition and retention, Rs. 40.00 cr. for development of technology and products, Rs.  17.08 cr. for repayment/prepayment of certain borrowings, and the rest for general corporate purposes. 

ICICI Securities Ltd., Equirus Capital Pvt. Ltd., IIFL Securities Ltd., and JM Financial Ltd. are the joint Book Running Lead Managers (BRLMs) for the issue and KFin Technologies Ltd. is the registrar of the issue. 

Having issued initial equity shares at par value, the company issued further equity shares in the price range of Rs. 22.50 - Rs. 18222.20 per share between March 2013 and August 2023. It has also issued bonus shares in the ratio of 50 for 1 in July 2022. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 0.00, Rs. 0.02, Rs. 1.72, Rs. 2.17, and Rs. 3.78 per share.  

Post-IPO, ZPOSL's current paid-up equity capital of Rs. 9.82 cr. will stand enhanced to Rs. 12.21 cr. Based on the upper cap of the IPO price band, the company is looking for a market cap of Rs. 2002.39 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last two fiscals, ZPOSL has (on a standalone basis) posted a total income/net profit of Rs. 240.29 cr. / Rs. 19.33 cr. (FY21), and Rs.371.66 cr. / Rs. 41.92 cr. (FY22). On a consolidated basis, for FY, the company earned a net profit of Rs. 22.90 cr. on a total income of Rs. 554.58 cr. It has surprised on higher top line with a lower bottom line for FY23 (on a consolidated basis). According to the management, this is attributed to its ESOP plans and other one-time adjustments. 

For the last three fiscals, ZPOSL has reported an average EPS of Rs. 3.11 (diluted) and an average RoNW of - (376.32) %. The issue is priced at a P/BV of 31 based on its NAV of Rs. 5.29 as of March 31, 2023, and at a P/BV of 3.72 based on its post-IPO NAV of Rs. 44.12 per share (at the upper cap). 

If we attribute FY23 earnings to the post-IPO fully diluted paid-up equity capital of the company, then the asking price is at a P/E of 87.23. And based on FY22 earnings, the P/E stands at 47.81. Thus the IPO is priced aggressively. 

For the last three fiscals, the company has posted PAT margins of 8.06% (FY21), 11.29% (FY22), and 4.14% (FY23), and its RoE margins were (42.44) %, (1178.22) %, and 46.98% for the corresponding periods respectively. 

DIVIDEND POLICY:
The company has not declared any dividends for the reported periods of the offer document. It has already adopted a dividend policy based on its financial performance and future prospects in December 2022. 

COMPARISON WITH LISTED PEERS:
As per the offer documents, the company has shown listed peers to compare with. 

MERCHANT BANKER'S TRACK RECORD:
The four BRLMs associated with the offer have handled 99 public issues in the past three years, out of which 32 issues closed below the offer price on the listing date. 

Zaggle Prepaid Ocean Services IPO FAQs