Zaggle Prepaid

Managing Spendz

Created market niche by offering spend management through prepaid cards and employee management

Zaggle Prepaid Ocean Services (Zaggle) is a spend management company with a unique value proposition and a diverse user-base. The company operates in the business-to-business-to-customer (B2B2C) segment with a diverse offering of financial technology (fintech) products and services, along with prepaid cards and has built a portfolio of software as a service (SaaS), including tax and payroll software, and a broad touchpoint reach.

The company has issued more than 5 crore prepaid cards in partnership with banking partners, with more than 0.23 crore users served, as of March 2023.

The company is sectoragnostic. Its network of corporate customers covers the banking and finance, technology, healthcare, manufacturing, FMCG, infrastructure and automobile industries, among others, where the company 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.

The company is at the intersection of the SaaS and fintech ecosystems. Its 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 the company refers to as customer engagement management system.

The core product portfolio includes a) Propel- a corporate SaaS platform for channel rewards and incentives, employee rewards and recognition; b) Save- a SaaS-based platform and a mobile application to offer expense management solution for business spend management facilitating digitized employee reimbursements and tax benefits; c) CEMS- a SaaS-based platform and a mobile application to offer expense management solution for business spend management facilitating digitized employee reimbursements and tax benefits; d) Zaggle payroll Card- a prepaid payroll card that allows the company‘s 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 e) 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 2023, the company had 1,832 corporate accounts and 579 Small and medium sized business (SMB) accounts, with average user base per business was 943 users. The company had issued 1.08 crore active cards (that had not expired as of that date) to 2,411 customers across India, which used Zaggle‘s software to manage spends related to their employees, business, channel partners and customers.

The company offers an ecosystem-based approach across SaaS and fintech, with low customer acquisition and retention costs in the business-to-business (B2B) segment. Its approach revolves around cross-selling, up-selling, and offering its products and services in partnership with other players in the operating ecosystems. Through its arrangements with partner banks and fintechs, the company‘s customers can offer their employees, channel partners and consumers a suite of SaaS and fintech solutions. The company offers an integrated value proposition through its SaaS platform, providing a combination of payment instruments as well as an integrated mobile application that digitizes business and employee spends. Application programming interface (API) integrations on the platforms provided to its customers offer them enhanced convenience and an efficient user experience through a simplified dashboard, allowing an integrated access to its products, and gives the company an opportunity to promote and offer the company‘s third-party associations through the same dashboard.

The company‘s ability to offer diversified SaaS offerings to an existing customer base enables it to launch new products and cross-sell its products to a wide user-base. Accordingly, the company has partnered with, and entered arrangements with, DBS Bank, Fibe (formerly, EarlySalary) and Tata Securities to offer their products and value-added services (VAS), including insurance, investment and tax planning, to the company‘s users on its platform.

The company‘s offerings have features such as a configurable platform for each customer, allowing for partner on-boarding and automated workflows to track spends and reconciliations, which has helped maintain a consistent customer retention rate, with only 1.54%, 0.37% and 1.17% of customers terminating their contracts during Fiscals 2023, 2022 and 2021, respectively.

The company is promoted by Mr Raj P Narayanam and Mr Avinash Ramesh Godkhind.

Raj P Narayanam has a post graduate diploma in business management with specialization in finance from the Fore School of Management, New Delhi. He completed his post graduate diploma on "Computer Systems" from Advance Computer Education and a certified online course on "Scaling a Business: How to Build a USD 1 Billion+ Unicorn" from The Wharton School, University of Pennsylvania. He has experience in the technology and fintech industry.

Avinash Ramesh Godkhind holds a bachelor‘ degree in engineering from Bangalore University, Bengaluru, and a masters‘ degree in business administration from the University of Chicago, Chicago. He has been awarded the ‘Inspiring CEO‘ award by the Economic Times in 2022. Prior to this, he worked as an Assistant Vice President at Citibank N.A., India.

Object of the offer

The IPO consists of a fresh issue of Rs 392 crore and an offer-for-sale of up to 1,04,49,816 shares by its existing promoters and shareholders. The OFS comprises up to 15,29,677 shares by Raj P Narayanam, up to 15,29,677shares by Avinash Ramesh Godkhindi, up to 28,30,499 shares by VenturEast Proactive Fund LLC, up to 20,46,026 shares by GKFF Ventures, up to 5,38,557 shares by VenturEast SEDCO Proactive Fund LLC, up to 1,18,040 shares by VenturEast Trustee Company Private Limited, up to 17,65,540 shares by Zuzu Software Services Private Limited and up to 91800 shares by Koteswara Rao Meduri.

Out of the proceeds from the fresh issue, Rs 300 crore will be used on expenditure towards customer acquisition and retention, Rs 40 crore on expenditure towards the development of technology and products and Rs 17.08 crore will be used pare down, in full or in part, debt availed by the firm.

In August 2023, the company raised a total of Rs 98 crore from a clutch of investors in a pre-IPO placement, in two tranches that reduced the fresh issue size in the IPO. On August 16, the company has allotted 44,51,219 shares to Ashish RameshchandraKachola(18,29,269 equity shares), Bengal Finance & Investment Private Limited (18,29,269 shares), Himanshi Kela (5,79,268 shares), Absolute Returns Scheme (91,461 shares), Vikasa India EIF I Fund – Incube Global Opportunities (60,976 shares) and Acintyo Investment Fund PCC – Cell 1 (60,976 shares)and August 21, 2023, the company has allotted 15,24,390 shares to Valuequest Scale Fund in the pre-IPO placement.

Strengths

The company offers a differentiated SaaS-based fintech platform, offering a combination of payment instruments, mobile application, and API integrations. Zagglehas created a market niche in the country by offering a combined solution for spend management through prepaid cards and employee management (through SaaS).

The company is among the few uniquely positioned players offering diversified services with fintech products and services and have advantages of having one of the largest numbers of issued prepaid cards in partnership with certain of its banking partners and high profitability along with a diversified portfolio of SaaS services (including for tax and payroll) and a wide touch point reach. The company provides a composite SaaS and fintech offering under a single application and payment instrument.

The company has a diverse revenue stream. The company charges its customers platform fee, SaaS fee and service fee for implementing its product offerings. The company earns fees from periodic subscriptions from its customers; generate revenue by monetizing ‘Propel Points‘. In addition to the revenue stream from subscription fees, the company has also begun to earn merchant commissions and commission on VAS sales. The company also works with lending and wealth management partners such as DBS Bank, Fibe (formerly EarlySalary) and Tata Securities to offer their loan and wealth management products to the company‘s users and earns referral fees. The company‘s ability to offer customers subscription-based services helps provide a recurring revenue stream for the company.

Healthy growth in scale of operations of the company primarily attributable to an increase in its user base from 904,713 users as of March 31, 2021, to 2,274,138 users as of March 31, 2023, along with a corresponding increase in spending by its users that facilitated an increase in the interchange fees received due to an overall increase in the scale of its business, commensurate with the growth in the digital payments industry.

The company benefits from an ecosystem-based approach across SaaS and fintech which enables them to cross-sell products and services in partnership with other players in the operating ecosystems. This integrated product offering along with the experience of the management has helped the company to onboard reputed clientele engaged in sectors such as banking and finance, technology, healthcare, manufacturing, FMCG, infrastructure and automobile industries among others. Some of the reputed clients include names such as Tata Steel, Microsoft India,Infosys, Kohler India, AT&T Communications India, United Spirits, and Greenply Industries. As of March 2023, the company had 0.23 crore active users with 579 SMB accounts and 1,832 corporate accounts.

The company has a strong customer retention capability with the churn rate for customers terminating their contracts with the company being consistently low at 1.54%, 0.37%, 1.17% in Fiscals 2023, 2022 and 2021, respectively. With the integrated offerings, the company has been successful in reducing the negative impact of low switching costs associated with a SaaS business.

Weaknesses

The global IT services industry is dominated by several large players and small niche technology players. Zaggle is susceptible to competition from domestic as well as international IT service companies which can have margin pressure.

The industry is highly technology oriented, which keeps changing, time-to-time. Thus, the company needs to keep upgrading the services it offers according to the needs of the clients and changes in the industry.

The company might not be able to retain existing customers, attract new customers, convert customers using its beta or trial versions into paying customers, or expand usage of its products within or across customer organizations which will have an adverse impact on the business of the organization.

Failure on the company‘s part to effectively develop and expand its direct sales capabilities could affect its ability to expand usage of its products within its customer and user base and achieve broader market acceptance of its products.

Any termination of, or failure to maintain, its relationships with its banking partners, including its preferred banking partners, or any changes to its interchange fees due to a variety of factors, could adversely affect the company‘s business.

The company is dependent on third-party payment networks, channel partners and third-party providers for various aspects of its business and its growth, and any failure to maintain these relationships could adversely affect the operations of the company.

The company may encounter challenges with adoption and usage of its products if they are not able to successfully integrate with other software applications, which could adversely affect the company‘s business.

The company is exposed to counterparty credit risk in the usual course of its business due to the nature of, and the inherent risks involved in, dealings, agreements and arrangements with its counterparties who may delay or fail to make payments or perform their other contractual obligations. The company experienced negative operating cash flows of Rs 15.62 crore in FY 2023 primarily due to an increase in its trade receivables of Rs 58.09 crore.

Valuation

In FY2023, consolidated sales were up by 49.1% to Rs 553.46 crore compared to FY2022. OPM declined by 743 bps to 8.69%, which led to a 19.6% decline in operating profit to Rs 48.10 crore. Decline in operating margin was due to increase expenditure towards development of Zoyer; increase in employee benefits expense on account of expense towards employee stock option Plan (ESOP); and a decrease in the company’s program fees on account of a reduction in the interchange rates. Other income increased 172.6% to Rs 1.12 crore, while interest cost increased 62.8% to Rs 11.38 crore and depreciation increased 195.6% to Rs 6.20 crore. PBT decreased by 38.2% to Rs 31.64 crore. Tax expenses for FY2023 were Rs 8.73 crore compared to tax expense of Rs 9.26 crore in FY2022. Net profit declined 45.4% to Rs 22.90 crore.

FY2023 EPS on post-issue equity works out to Rs 1.88. The company has issued 59,75,609 equity shares in August 2023 on a pre-IPO placement to a clutch of investors at a price of Rs 164 per equity share. At the upper price band of Rs 164, P/E works out to 87.23X.

The company does not have any listed peers.