EBIX - Ebix: Deteriorating Margins And ROIC Leave Me Worried

Summary

• Given the poor performance of its stock price, as seen in the first chart of this article, one might expect that its financial performance has been similarly poor.
• And well, one might be right in presuming that.
• While revenues have nearly tripled over the last 5 years (an impressive feat) earnings have not followed suit.
• ROIC has been cut to just a third of what it was a decade ago, now yielding just less than 6%. I believe such performance is subpar.

Ebix ( EBIX ) is a medium-sized technology firm that provides software development and SaaS services to several industries including the insurance, financial, and healthcare industries. EbixCash and its insurance exchanges are Ebix's largest revenue channels, when combined, they account for 92% of Q3 2022 revenues.

Ebix is unique among tech companies, having listed more than 3 decades ago, they are one of the oldest listed tech stocks. But their story has not been nearly as successful compared to some of the more well-known older tech companies like Alphabet ( GOOG ), Apple ( AAPL ), and Microsoft ( MSFT ).

Within this article I'll discuss:

• Ebix's operations
• Ebix's financial performance
• Ebix's valuation versus its peers

Operational Profile

One of the most important innovations of Ebix is their EbixCash system which employs, what they call, a "Phygital" strategy meaning a combination of physical distribution outlets in Southeast Asian nations with an online platform.

EbixCash's Forex operations are a leader in India's airport foreign exchange business, conducting over $4.8 billion in transactions per year. The company is also a leading provider of travel services in Southeast Asia, with over 500,000 agents and $2.5 billion in gross merchandise value pre-COVID-19. EbixCash's technology services division is a leader in lending, asset and wealth management, and travel technology in India and has expanded internationally to Europe, the Middle East, Africa, and ASEAN countries.

EbixCash continues to grow, on November 30th, 2022, they announced they were awarded a long-term contract by the Maharashtra State Road Transport Corporation (MSRTC) to implement an electronic ticketing system for the state of Maharashtra. Ebix will deploy 36,000 electronic ticketing machines on all MSRTC buses and will handle an estimated 6 billion passenger tickets over the first five-year term. The contract also includes advertising rights for printing on the back of each ticket. EbixCash's Bus Exchange Division handles $1.7 billion in annual transactions all over India.

Due to the rapid growth at EbixCash, they are looking at launching an IPO to separate it from the rest of the business. I believe this is wise and may allow the Indian-centric business to trade at a premium to the rest of the global business. Management mentioned in their latest earnings call that the goal is to rapidly decrease their debt load.

As you can see in the chart above, Ebix's debt load has ballooned over the past few years, this is concerning given the uncertain macro outlook. An IPO may free up much-needed cash to pay down their growing debt load.

One concern will be to see how Ebix can navigate the IPO market given the notoriously weak IPO market in 2022 (though some analysts expect a rebound in 2023).

Financial Performance

Given the poor performance of its stock price, as seen in the first char of this article, one might expect that its financial performance has been similarly poor.

Revenue, Operating Income, EPS

And well... one might be right in presuming that. While revenues have nearly tripled over the last 5 years (an impressive feat) earnings have not followed suit. Operating income is relatively flat over the past 5 years and EPS has dropped by over 25%. This is somewhat head-scratching.

Given the strong revenue growth, it seems that they may have been acquiring incremental sales but suffering from margin deterioration.

Margins

As you can see in the chart above, this does appear to be the case, Ebix's margins have suffered over the past 5 years, once standing at over 60% margins they now lie closer to 30% and the operating margin hovers close to 10% after previously being closer to 30%. Financials like these indicate to me that management may be more focused on growth than profits.

Return on Invested Capital

The chart above further supports my suggestion that management seems to be more concerned with growth over profits as their returns on invested capital, a metric I pay close attention to, have continued to deteriorate.

ROIC has been cut to just a third of what it was a decade ago, now yielding just less than 6%. I believe such performance is subpar. Given the US stock market has returned 10% on average, I am less than optimistic about Ebix.

Valuation

Looking at Ebix's enterprise value to sales of roughly 1x you might be forgiven to assume that Ebix trades at discount compared to the past. Because based on that one metric, it is cheaper than it once was. But then again, looking at EV to EBITDA we can see that Ebix, at 7.7x trades similarly to where it did a decade ago. In fact, it was only 2015-2020 when that trend was broken and they traded for more than 15x EV to Ebitda, so perhaps that was just an outlier period?

Conclusion

Should EbixCash fail to IPO I would start to become concerned about its long-term viability as an investment for long-term holders. ROIC and Margins are both following a dangerous trajectory downward suggesting that operation performance is weakening over time, and in the case of margins, weakening at a rapid pace.

Some positive catalysts that could send Ebix upwards are the potential of a refinancing of its debt, which it is looking at with Jefferies, and the prospect of an IPO of EbixCash.

Until I have a better grasp of what this company will look like over the next few years I cannot consider making an investment. I may reassess once we have more clarity regarding the debt load and IPO. But until then, I must stay away.

Debt worries, declining margins, and declining returns on capital don't excite me, actually, they scare me. Because of those factors, I rate Ebix a Sell .

Thank You, Reader

If you took the time to read my article and make it to this point (even if you disagree with it) thank you! I value all of my readers, if you'd like to discuss anything written above, please feel free to chime off in the comments below and I will get back to you.

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