EBIX - Ebix: Upcoming EbixCash IPO Is Still Under-Appreciated

2023-07-20 13:41:34 ET

Summary

• EbixCash's IPO is set to be listed in the Indian stock market after years of delay.
• All indications point to the imminent IPO of EbixCash in the next few weeks.
• Improved market conditions and peer valuation comparisons suggest a well-received IPO.
• Successful EbixCash IPO could have a huge positive impact on Ebix share price.

The wait for EbixCash's IPO has been a test of patience for its investors. Many years after announcing and more than a year after filing to go IPO, it looks like EbixCash will finally be listed on the Indian stock market sometime in July or August 2023. With so many uncertainties, the market is still not ready to believe in EbixCash's IPO. While Ebix's stock price has more than doubled from the lows, it is still nowhere near the valuation potential from the IPO. We believe the patient investors will be rewarded as their patience is about to bear fruit in the next few weeks.

Tortuous Path to EbixCash IPO Approval

We wrote our first article in September 2021 about the potential uplift from the EbixCash IPO. By the end of 2021, the IPO market in India was booming. Fintech companies, even those generating huge losses, went IPO at sky-high valuations and were over-subscribed many times.

Just as Ebix was readying to file DRHP for EbixCash IPO in early 2022, Russia invaded Ukraine. The confluence of many factors, including the oil price rise forced the Fed to increase the interest rates. As the markets became risk averse, the high-riding freshly IPO'd Indian tech stocks fell to the ground. Many companies about to file for IPO postponed their plans, and companies with IPO approval postponed their listing. However, Ebix moved forward with its IPO filing and, on March 11th, filed the DRHP with SEBI for taking EbixCash's IPO. Ebix's stock price shot up briefly to around $42, only to fall back as the IPO filing enthusiasm faded.

As the initial shock of the Ukraine war wore off and the markets around the world reluctantly accepted Fed tightening, the Indian stock market started recovering even though the newly IPO'd tech companies were still down. Interestingly, not all newly IPO'd companies, but only the stock prices of those that could show no path to profits in the near term were suffering. At that point, EbixCash was showing growing revenues along with profit. The IPO approval and listing looked ever so close.

On June 16th, Hindenburg Research wrote a scathing short thesis alleging that a large part of the EbixCash gift card revenue was nonexistent. Ebix stock plunged by 40%. It is unclear if it is the short thesis or just the complexity of EbixCash operations; SEBI referred EbixCash to get clearance from another government agency, which is thought to be the Reserve Bank of India. This pushed out the EbixCash IPO time horizon much further.

Ebix acquired more than 25 companies from 2017 through 2019 to form EbixCash. Banks funded these acquisitions. Ebix was planning to pay back a large part of the debt using the proceeds from the IPO. As the IPO got pushed out, Ebix was forced to renegotiate the debt in Feb '23, buying time till May '23. With uncertainty around the IPO approval and increasing interest payments, Ebix was losing investor confidence, and the stock dropped below $12 in early April.

After a year-long wait, on April 10th, 2023, Ebix finally got approval from SEBI to list its subsidiary EbixCash on the Indian stock markets. Ebix's stock has more than doubled from the lows at that point. However, the stock price still does not reflect the full potential of a successful IPO of its EbixCash subsidiary.

Gift Card Sales are No Longer Recorded as Revenue

Recognizing proceeds from EbixCash gift cards sale as revenue has been a monkey on the back for Ebix. This issue has haunted Ebix for the last few years. In Feb '21, Ebix's auditor, RSM, resigned , stating that they do not have visibility into significant and unusual transactions related to gift card sales in India. The crucial part of the Hindenburg article was also targeted toward gift card sales. In all of the above instances, Ebix's stock price dropped precipitously.

It is unclear why Ebix CEO Robin Raina treated gift card sales as revenue. It is possibly a carryover from Itzcash, the company Ebix acquired, which brought in the gift card sales to EbixCash. It is more likely that Robin Raina wanted to show high and growing revenue from the gift cards to boost the valuation of EbixCash in preparation for the India IPO. However, this strategy seems to have backfired in many ways. Apart from all the issues mentioned above, the gift card revenue was also very uneven, making it difficult to show a growing revenue pattern, which is crucial for any company going into an IPO. Many of these headaches could have been avoided had Ebix not included gift card sales as revenue.

The final straw seems to be the letter of displeasure from the RBI (Reserve Bank of India) to EbixCash, which in turn made SEBI instruct EbixCash to refile the financials to record gift card revenue on a net basis. EbixCash has complied by filing an addendum.

Though the updated revenues for EbixCash (provided in the addendum) are significantly lower than before, the updated revenue numbers for EbixCash look good compared to its peers and also, interestingly, show excellent growth along with much higher operating margins.

Comparative Peer Valuation

India's overall stock market conditions have improved in the last few months and continue to improve. The beaten-up fintech company stocks that IPO'd towards the end of last year are recovering. These companies are showing high revenue growth and are reducing their losses. This has increased investor confidence.

The stock price of Paytm, one of the largest digital payments companies, has increased by more than 60%, and that of Policy Bazaar, an insuretech player, by 80% in the last six months. The following table provides the revenue, earnings, and growth rate for the EbixCash peers in the fintech space that went IPO in the previous two years.

*as of 18th July

EbixCash is also in the fintech space. However, EbixCash has a much broader focus than the peers mentioned above. The following are the revenue, earnings, and growth rate for EbixCash for the past few years.

This is the restated revenue after adjusting for the gift card sales from revenue. Even with that change, EbixCash's revenue is high and comparable to that of, for example, its peer Policy Bazaar. While its revenue growth rate is lower than its peers, EbixCash is highly profitable, with a fantastic operating margin above 30%.

Good Chance that EbixCash IPO Will be Well Received

After getting bitten by huge loss-making technology startups, reluctant Indian investors are slowly returning to the IPOs. They now seem to gravitate toward profit-making companies. Also, they are cautious about promotors and early investors using IPO as an exit strategy. This has caused substantial stock drops after the end of these investors' mandatory holding period when they start indiscriminately dumping shares.

In his interviews, Robin Raina stresses some key points which address these investor concerns:

- EbixCash IPO is 100% primary, meaning no investors are exiting the stock by selling large chunks.

- EbixCash is highly profitable, with operating margins above 30%

- It has an excellent 50+ percent CAGR revenue growth, which is expected to continue in the near future.

- It has no debt other than the loan from the parent Ebix, which will be paid back from the IPO proceeds.

These points will likely be well received by Indian investors. Compared to its peers, EbixCash stands out in terms of profitability combined with excellent growth in revenue and a diverse customer base. Will EbixCash be able to make a case that 20 to 25% of their company is worth $730M, valuing the company at $3B to $3.5B? We believe so.

A good example is Policy Bazaar, an insuretech company that went IPO in November 2022. It has a comparable revenue to EbixCash, valued at around $4B. Policy Bazaar has a high revenue growth rate of 80%. However, it is still not profitable. EbixCash has a lower growth rate than Policy Bazaar but is highly profitable and has a more diversified business model. So, EbixCash could make a case that they should be valued at a comparable level to Policy Bazaars.

IPO Highly Likely in the Next Few Weeks

Ebix CEO Robin Raina has often said that EbixCash's IPO will move forward as soon as SEBI approves it, irrespective of the market conditions. Interestingly, the IPO market in India, which looked gloomy even a few months back, has brightened up recently. More companies are lining up to go IPO.

Not just the CEO's statements or market conditions seem to point to the IPO. As part of the debt extension signed on May 23rd with its bankers, Ebix is legally mandated to go for IPO before the end of July. While it is possible that there might be some wiggle room in the exact timing of the IPO, there is a lot of pressure from the lenders for EbixCash to go IPO soon.

The signs of the imminent IPO are already there. Businessworld India carried a cover story on EbixCash IPO along with improving IPO conditions in India. Ebix chairman and CEO Robin Raina sat down for an interview with ETnow about EbixCash's IPO. Anil Singhvi of Zee TV interviewed the entire top management team of EbixCash for an hour-long program talking about the Rs6000cr ($730M) EbixCash IPO. Business Today TV interviewed Robin Raina at the EbixCash headquarters in New Delhi , focusing on the profitability of the EbixCash operations.

All this activity seems to point to an active roadshow engagement, which in turn suggests an imminent filing of the RHP, which is a precursor to the IPO.

A Successful IPO Could Catapult Ebix's Stock Higher.

EbixCash's CEO, Robin Raina, says he wants to leave money on the table in pricing the IPO to benefit the EbixCash IPO investors. He also has been hinting that EbixCash would offer the public anywhere from 20% to 25% of its outstanding shares to raise $730M from the IPO. It would be a massive deal if EbixCash could pull off such an IPO. What that would mean is :

- The Indian subsidiary EbixCash, entirely owned by Ebix, will be worth many times the current valuation of the parent Ebix.

- About half of the money from the IPO would go towards repaying the parent Ebix debt. This will have a significant impact on the interest payments, which are eating up a large part of the earnings of the company

- At this point, Ebix is one of the most shorted companies. A sudden increase in the stock price could put a squeeze on the shorts, resulting in abnormal movement upwards.

All this is dependent on Ebix pulling off a successful IPO. There is a good chance that Ebix might be able to pull this off. However, this is not a given, and the market does not believe that Ebix could pull this off. In the last few years, Ebix management has lost a lot of credibility, and it has to be earned back, starting with the successful execution of the EbixCash IPO and debt repayment.

Risks

One of the risks is that the IPO is postponed or does not happen. While that is possible, at this point, it looks highly likely that EbixCash's IPO will move forward and will occur by the July-Aug 2023 timeframe. As discussed earlier, Ebix is under pressure to move forward as they need to meet their debt mandate.

Another concern is that there could be short attacks similar to the ones that have happened before. Removing gift card sales as revenue has reduced the potential accounting concerns and questions around those practices. This has removed the critical target for the previous short attacks.

One of the most significant risks is that the IPO demand is low, and EbixCash cannot get the valuation they are looking for, thus forcing Ebix to give up a more significant percentage of the company to raise the funds they are targeting.

Even if Ebix has to give up 50% of EbixCash shares to get these funds, it could still be considered a success. In that case, Ebix would still own 50% of the shares in the subsidiary valued at double the current valuation of the parent Ebix. In addition, the parent Ebix will be able to cut its outstanding debt by more than half.

Conclusion

Ebix is pushing forward with the IPO of EbixCash in India to list its share on the Indian stock markets in the next few weeks. Looking at the valuation of the fintech peers of EbixCash in India, it seems possible that Ebix might be able to raise $730M by offering some fraction of its wholly owned subsidiary EbixCash. This could have a significant impact on the valuation of the parent Ebix.

With a successful IPO of EbixCash, not only will parent Ebix own a majority of a subsidiary, which likely could be valued many times its current valuation, but also the proceeds from the IPO will reduce its debt burden significantly. The combination of these factors could positively impact the share price of Ebix.

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