EBIX - Ebix: An Uncertain Path To Future Growth

2023-09-19 11:31:00 ET

Summary

• Ebix is a highly shorted stock, prompting caution in evaluating its prospects.
• Ebix faces challenges with its financial stability, including a substantial debt load and reliance on a successful IPO to address its credit facility.
• Ebix's declining operating margins and potential disconnect between reported profits and cash flows further contribute to the uncertainty surrounding its future.

Investment Thesis

Ebix (EBIX) is a highly shorted stock. And while the easy option is to dismiss short sellers as only looking for a quick return, with a fresh pair of eyes and no preconceived biases, I analyze and describe Ebix's prospects.

As I often say to my followers, pick out businesses that are not battlegrounds. Investing is challenging enough at the best of times. But we should always seek to deploy capital into businesses where the business in two years' time will be stronger than it is today.

And while Ebix could be better positioned in two years' time, its path to that point is far from certain. And further compounding matters, Ebix really needs its EbixCash IPO to be a success.

Accordingly, I'm staying neutral on this stock.

Ebix's Near-Term Prospects

Ebix is a supplier of on-demand infrastructure exchanges primarily for the insurance, financial services, travel, and healthcare industries.

In the insurance sector, Ebix focuses on developing and deploying various insurance and reinsurance exchanges using SaaS enterprise solutions, streamlining functions like customer relationship management, front-end and back-end systems, and administrative and risk compliance tasks.

Ebix also operates in the financial sector with its EbixCash Financial exchange portfolio, offering services such as money remittance, foreign exchange, travel booking, pre-paid gift cards, and wealth management in India and other ASEAN markets.

The company aims to facilitate insurance and financial transactions globally, for customers in over 70 countries. Ebix's value proposition lies in its comprehensive suite of software and services designed to enhance efficiency and convenience in these industries, from insurance exchanges to financial solutions, all supported by a strong global presence.

With this context in mind, let's now discuss Ebix's financials.

Revenue Growth Rates Are Highly Volatile

As we look through Ebix's results, it's difficult to get a clear sense of the business's stable revenue growth rates.

Indeed, the business is just as likely to report negative y/y growth rates as it is to grow its revenues. But even this facet isn't really the reason why I'm avoiding Ebix. Here's why I can't get comfortable with Ebix.

Standing on a Weak Financial Footing

Ebix has a cash position of $76 million. But against that cash, Ebix has a substantial amount of debt outstanding. Here's a quote from the SEC filing that describes what investors need to know,

At June 30, 2023 the outstanding balance of the Credit Facility, $616.8 million, was classified as a current liability. The Company expects to address the Credit Facility maturity prior to the Credit Facility Maturity Date ["30 September 2023"], and intends to do so in conjunction with the resolution of the anticipated IPO of EbixCash

So Ebix needs its IPO of EbixCash to be a success for it to be able to cut back on its current debt. Then, on top of that Ebix goes on to note that,

The refinancing of the Credit Facility will require the Company to successfully access the debt and/or equity capital markets in the U.S. or internationally.

So, it's not even the case that the IPO will solve all of Ebix's issues. Rather, the IPO will be selling out a good part of its business, and what will be left behind will either need a debt raise or a shareholder dilution. That's not a good position for the typical investor to position itself in.

And next, think about Ebix's underlying profitability profile.

Q2 2023, saw its operating margins at 25%, down 100 basis points from the prior year at 26%. That's understandable, many businesses have seen their profitability contract in 2023. But then consider its overall trajectory.

The graphic from Ebix's corporate investor presentation on its website. And as you can see, the graphic has the years pointing in the wrong direction. This isn't immediately obvious. But once we understand this, it appears that with the passage of time, Ebix's underlying profit margins are compressing.

And finally, Ebix's operating profits in Q2 2023 reached $29 million, while its cash flows from operations stood at $1 million. And for this figure, I haven't subtracted its capex nor its capitalization of intangibles. When factoring in these two uses of cash, Ebix's free cash flow would have been negative and quite different from its reported operating profits.

The Bottom Line

I approach Ebix with a cautious perspective given its status as a highly shorted stock. While it may be tempting to dismiss short sellers, I prefer to evaluate Ebix's potential without preconceived biases.

The company's near-term prospects appear uncertain, with volatile revenue growth rates and a significant debt burden that requires resolution, potentially through a planned IPO of EbixCash.

Moreover, its operating margins have been declining, and its reported operating profits are not accurately reflected in its cash flows. Considering these factors, I find it challenging to confidently get bullish on Ebix's future, and I maintain a neutral stance on this stock.

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