Zaggle Prepaid Ocean Services coming up with IPO to raise upto Rs 583 crore

Zaggle Prepaid Ocean Services

• Zaggle Prepaid Ocean Services is coming out with a 100% book building; initial public offering (IPO) of 3,55,78,021 shares of Rs 1 each in a price band Rs 156-164 per equity share.
• Not less than 75% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not more than 15% of the issue will be available for the non-institutional bidders and the remaining 10% for the retail investors.
• The issue will open for subscription on September 14, 2023 and will close on September 18, 2023.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 1 and is priced 156.00 times of its face value on the lower side and 164.00 times on the higher side.
• Book running lead managers to the issue are ICICI Securities, Equirus Capital, IIFL Securities and JM Financial.
• Compliance Officer for the issue is Hari Priya.

Profile of the company

Incorporated in 2011, the company operate in a segment where it interacts and interface with it Customers (i.e., businesses) and end Users (i.e., employees) and is 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 its 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. It 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. 

The company is sector-agnostic, and its network of corporate 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. It is placed at the intersection of the SaaS and fintech ecosystems, and 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 it refer to as customer engagement management system (CEMS).

The company’s core product portfolio include: ‘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 solution for business spend management facilitating digitised 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 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.

Proceed is being used for:

• Expenditure towards Customer acquisition and retention.
• Expenditure towards development of technology and products.
• Repayment or prepayment of certain borrowings, in full or part, availed by the company.
• General corporate purposes.

Industry overview

The Indian prepaid card market for transaction value has recently boomed and is predicted to grow at a CAGR of approximately 35.8% from 2022 to 2027 as the commercial sector rapidly adapts to the usage of prepaid cards. In the prepaid card industry, gift cards remain the most extensively circulating card, whether used for online purchases or in retail stores. E-gift transactions have tripled in the last 3 years. Prepaid meal cards have witnessed significant growth, and some businesses have begun to provide them to employees, to purchase snacks, meals, and groceries. The usage of credit and debit cards for payment is gaining popularity. With the rise in the contactless transaction limit and credit cards providing quick and safe access to credit, customers have additional opportunities to utilize their cards for everyday payments. This is projected to accelerate in places other than metros because of legislative measures such as PIDF and offline payments, which aim to increase the usage of digital payments in locations with poor internet access. Payment card issuances are expected to reach a 16-month high as the economy recovers. Furthermore, banking activity has increased, and banks are increasingly aggressive in contacting their target clientele. Furthermore, with increasing mobility came a rise in access card issuances, which climbed significantly in 2023.

India has the fastest-growing digital payments industry in the world, with a five-fold increase in contactless payments from 2016 to 2023. To meet expanding customer demand, the number of businesses accepting contactless payments has increased six-fold in the past three years from 2018 to 2021, the sectors driving the growth are quick service restaurants, pharmacies, food and grocery. The RBI-DPI Index continues to show a considerable increase in digital payment usage and penetration across India. In Fiscal 2022, UPI is expected to account for approximately 86% of all consumer payments, with mobile wallets accounting for only approximately 2.4%. With the significant increase in UPI traffic, it is forecasted that digital payments (debit cards + credit cards + UPI) from consumers to merchants which climbed approximately 114% in Fiscal 2019 to more than 420% in Fiscal 2021 and is on track to reach 1,575% in Fiscal 2022 from Fiscal 2018. UPI is responsible for the largest transaction volumes among all payment methods, but UPI payments are not profitable because they are free of processing charges, whereas debit/credit card merchants and POS/gateway companies charge fees for the service. 

Pros and strengths

Differentiated SaaS-based fintech platform: The company’s SaaS offerings (comprising of Propel, Save, CEMS and Zoyer) for businesses includes business and employee spend management, employee benefits management, employee incentives, channel rewards and incentives, employee rewards and recognition and employee tax benefits. It combines its unified SaaS-based platform with a comprehensive product stack that digitises business and employee spend management and rewards for businesses, along with its offering of payment instruments, such as the Zaggle Payroll Card, Kuber Gift Card (a gift card that works at both online and offline outlets where Visa cards are accepted in India) and Zinger Multi-wallet Card (a reloadable card with multiple wallets that works at both online and offline outlets where Visa cards are accepted in India). Its ecosystem allows for parties with complementary services to connect, creating a network effect for businesses, employees, channel partners, customers, merchants and banks. One of its key fintech offerings, ‘Save’, includes a physical as well as virtual prepaid card by way of its mobile application, with an ability to create multiple wallets for a single User that can be used at any online or offline terminal accepting Visa cards across India.  

In-house developed technology and strong network effect: The company is among the few uniquely positioned players offering diversified services with fintech products and services and has advantages of having one of the largest number 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 touchpoint reach. It provides a composite SaaS and fintech offering under a single application and payment instrument. It also offers CEMS, customer engagement management system that enables merchants to comprehensively manage their customer experiences including rewarding them through gift card and loyalty benefits. The API integrations with its customers’ enterprise resource planning (ERP) and other internal platforms provide its Customers and Users with ease of access and utility under a single application. The APIs are representational state transfer (REST) based which makes them configurable and are designed with the developers in mind for easy consumption and quick integration.

Business model with diverse sources of revenue and low customer acquisition and retention costs: The company charges its Customers a platform fee, SaaS fee and service fee for implementing its product offerings. It earns fees from periodic subscriptions from its Customers for the usage of its software that has represented 4.38%, 4.48% and 5.39% of its revenue from operations in Fiscals 2023, 2022 and 2021, respectively. It also generates revenue by monetizing ‘Propel Points’ which are reward points that are calculated, issued and redeemed on its platform. Program Fees is one of the largest components of its total revenue from operations, which in turn primarily consists of its portion of interchange fees which are spend-based fees that its banking partners earn for the transactions carried out by the Users of prepaid cards at offline and/or online merchant points of sale and which it receive from its banking partners.

Diversified customer relationships across sectors along with preferred banking and merchant partnerships: The company has a diversified Customer base covering leading brands across multiple industry verticals. It has been successful in developing relationships with some of the well-known names. It has been serving some of these Customers since 2013. As of March 31, 2023, it had more than 2.27 million Active Users with 579 SMB accounts and 1,832 corporate accounts. Its Customer base as of March 31, 2023 was 151.37% higher than its Customer base of 904,713 Active Customers as of March 31, 2021. It has a strong customer retention capability with the churn rate for Customers terminating their contracts with it being consistently low at 1.54%, 0.37%, 1.17% in Fiscals 2023, 2022 and 2021, respectively. With its integrated offerings, it has been successful in reducing the negative impact of low switching costs associated with a SaaS business. Its ability to offer Customers subscription-based services helps provide a recurring revenue stream.

Risks and concerns

Dependent on third-party Payment Networks, channel partners and third-party providers: The company and its banking partners are dependent on Payment Networks to process payments made using its prepaid cards. Its banking partners earn spend-based fees for the transactions carried out by the Users of prepaid cards at offline and/or online outlets. Based on the contractual agreements entered into with its banking partners, it receives a portion of such fees (which are largely earned as a percentage of the spending levels on a prepaid card) earned by them. Furthermore, it also earns business development incentives from its arrangements with Payment Networks. It cannot assure that arrangements involving the Payment Networks will be renewed on terms commercially favourable to it, or at all. A change in applicable regulatory landscape could prompt the Payment Networks to impose additional requirements on its banking partners and/or it, or may adversely affect their ability to continue to offer their full suite of services to it.

Operate in highly competitive industry: The company competes with a number of companies that range in size from large and diversified enterprises with significant financial resources to smaller companies. The market for its products is rapidly evolving and highly competitive and in the future there may likely be an increasing number of similar products offered by additional competitors. Its competitors (including its existing partners) may develop or implement similar or better technology. With a constantly changing market environment, its future business strategies, practices and results may not meet expectations or respond quickly enough to customer demand, and it may face operational difficulties in adjusting to any changes. Some of its current and potential competitors may have longer operating histories, higher brand recognition, stronger and more extensive partner relationships, significantly greater financial, technical, marketing, and other resources, lower labour and development costs, and larger customer bases than it does.

Business subject to seasonality: The company is impacted by seasonal variations in sales volumes which may cause its revenues to vary between different quarters in a financial year. Typically, it see higher transaction volumes associated with the festive sale period in the third quarter of each financial year, which encompasses holidays in India such as Diwali, Christmas and annual sales events such as the end of season sales. Furthermore, it also experience an increase in transaction volumes in the fourth quarter of each financial year, with Users transacting to exhaust any pending balance on their cards before the end of a financial year. As a result, its results of operations and cash flows across quarters in a financial year may not be comparable and any such comparisons may not be meaningful or may not be indicative of its annual financial results or its results in any future quarters or periods. 

Rely on providers of software system: The company relies on the providers of software systems to allow it access to their APIs to enable integration of its products with a variety of hardware and software platforms and SaaS products and technologies, and it need to continuously modify and enhance its products to adapt to changes in hardware, software, and browser technologies. It is typically subject to standard terms and conditions of such providers, which govern the distribution, operation, and fees of such software systems, and which are subject to change by such providers from time to time. It depend on the interoperability of its products with third-party services, mobile devices, software applications, mobile operating systems and servers, which predominantly use third-party cloud-enabled hardware, software, networking, browsers, database technologies and protocols that it does not control. It may not be able to modify its products and offerings to assure their compatibility with that of other software products and services, which may continue to evolve from time to time. 

Outlook

Incorporated in 2011, Zaggle Prepaid Ocean Services provides financial technology (fintech) products and services to manage corporate business expenses through automated and innovative workflows. 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, its Customers are able to offer their employees, channel partners and consumers a suite of SaaS and fintech solutions. It offers an integrated value proposition through its SaaS platform, providing a combination of payment instruments as well as an integrated mobile application that digitises 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. This enables a clear, distinct and integrated access to its products, and gives it an opportunity to promote and offer its third-party associations through the same dashboard. On the concern side, 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 issue has been offered in a price band of Rs 156-164 per equity share. The aggregate size of the offer is Rs 555.01 crore to Rs 583.48 crore based on lower and upper price band respectively. On the financial front, the company’s revenue from operations increased by 49.08% to Rs 5,534.60 million in Fiscal 2023 from Rs 3,712.55 million in Fiscal 2022. The company’s restated profit for the year decreased to Rs 229.01 million in Fiscal 2023 from a net profit of Rs 419.21 million in Fiscal 2022. Going forward, the company intends to enable its Preferred Banking Partners to penetrate into large and small businesses, attracting a wider Customer base that provides an opportunity to cross-sell their offerings. While it intends to enhance its penetration in existing markets as they continue to grow, it is also working towards expanding its footprint globally. It also intends to collaborate with various vendors to expand its portfolio of offerings, increasing its acceptability with Customers.