Parsing EBIX's Acquisition Of ItzCash

| About: Ebix Inc (EBIX)

Summary

The Fintech market in India is poised for explosive growth after the Modi government's demonetization experiment in November 2016.

On May 24, 2017, EBIX announced that it had acquired an 80% stake in ItzCash, a digital payments startup in India.

EBIX could add up to a billion dollars in market capitalization in four years, from this acquisition.

Summary:

On May 24, 2017, Ebix (NASDAQ:EBIX) announced that it had taken a "Leadership Position in Digital Payments Market in India via Acquisition of 80% Stake in Fast-Growing ItzCash." The Fintech market in India is poised for explosive growth sparked by the current government's unprecedented move to abolish the Rs 500 and Rs 1000 notes on November 8, 2016, effectively removing 80% of the currency in circulation. This temporarily inconvenienced many people in India and made "going cashless" top of mind. However, the vast majority of daily financial transactions in India, a country of 1.3 billion people, are still done in hard currency. Therefore, the possibilities and growth opportunities for Fintech companies are endless. By becoming part of this growth story, Ebix can now be valued as a high growth company, and can, accordingly, trade at much higher multiples. This acquisition has the potential to add a billion dollars to Ebix's market capitalization in 3-5 years.

The Transaction:

Ebix will pay upfront cash of $76 million and a contingent earn out of up to $44 million payable over a period of 3 years from the closing of the deal. This is the second instance of a listed company buying a wallet license holder in India, after Calpian bought Money On Mobile, in 2014. This is the largest transaction (by dollar value) in Ebix's history. Ebix acquired an 80% stake in the company through a combination of primary and secondary share purchases. The transaction provided an exit to ItzCash's existing venture capital shareholders Matrix Partners, Intel Capital and Lightspeed Venture Partners.

Current players in India's Fintech market:

ItzCash is NOT one of the top five players in the Fintech market in India based on past funding rounds by VC firms. Paytm, a Mobile Wallet and Gateway provider, is by far the largest player and it is valued at $7 Billion based on SoftBank's (OTCPK:SFTBY) $1.4 Billion investment in May 2017. MobiKwik (Mobile Wallet), BillDesk (payment aggregator), Freecharge (Mobile Wallet and Gateway) and Policybazaar (Insurance) are some of the leading players.

However, the Fintech space in India is still in its nascent stages and there is a lot of room for growth and a lot of room for multiple players. ItzCash is definitely a strong player in this space with a Compounded Annual Growth Rate (CAGR) of 35% year over year for the past three years. ItzCash had revenues of Rs 250 Crore ($38.8M) on payments volume of Rs 14000 crore ($2,170M) in the year ended March 2017. It is a profitable company and is on track to reach Rs 400 Crore ($62M) of revenue in the current fiscal year.

Snapshot of ItzCash's product portfolio:

Cross-border remittance:

ItzCash partnered with Prabhu Money Transfer, a remittance company in Nepal, allowing Nepali migrants in India to send money back home

Third party POS terminals:

The company said in April 2017 that it will deploy 100,000 POS terminals targeting small businesses and shopkeepers in the year. It had started the POS business in early December 2016 and so far, has deployed 30,000 terminals. This is a new segment for ItzCash, and is a space that already has competition from Mswipe, Ezetap, Oxigen and PayU

Expense Management:

In February 2017, ItzCash made an undisclosed equity investment in Bangalore-based expense management company Finly which works in the corporate expense management space.

Bill Payments:

In July 2016, ItzCash got an approval from the Reserve Bank of India (RBI) to launch a Bharat Bill Payments Operating Unit (BBPOU). The National Payments Corporation of India (NPCI) set up the Bharat Bill Payment System (BBPS), a centralized interoperable bill payment system. BBPOUs are units which can create an agent network and will be responsible for on-boarding billers and aggregators.

Prepaid Cards:

ItzCash offers multi-purpose reloadable prepaid card in association with HDFC Bank (NYSE:HDB), DCB Bank & IDBI Bank and Visa (NYSE:V)/MasterCard (NYSE:MA) network partners.

Mobile Wallet:

ItzCash has a Mobile Wallet Payment App for both Android and IPhone systems. Digital payment startup ItzCash said it has entered into a strategic partnership with Visa, making it the only non-bank institution in the country to get a direct membership from the global payments technology company. ItzCash Mobile Wallet Swipe on the go is a mobile payment solution to pay your bills, transfer monies to friends and family and track monthly expenses. With the ItzCash M-Wallet you can:

  • Recharge your pre-paid mobile number of Airtel (OTCPK:BHRQY), Vodafone (NASDAQ:VOD), Reliance, Idea (OTC:ICLQY), BSNL, Tata Docomo, Aircel, Loop Mobile, Uninor, Videocon (NASDAQ:VDTH), MTS (NASDAQ:MTSC), MTNL and T24 Mobile
  • Recharge DTH of Videocon D2H, Tata Sky, Reliance Big TV, Sun Direct, Airtel DTH and DishTV
  • Pay all your utility bills like Gas, Electricity
  • Transfer money to family and friends
  • Transfer money to Bank accounts via IMPS

Insurance:

From being a pure play payments solutions provider, ItzCash is now looking to expand its scope of activities to include "delivery of credit" and distribution of insurance products, among others. To achieve this goal, ItzCash plans tie-ups/ alliances with life insurance industry players and non-banking finance companies.

Hotel bookings:

Travel & Hotel bookings account for 12 - 15 % of ItzCash business and is expected to grow at 60% year-on-year. Hotel aggregator Oyo Rooms has partnered with multi service payment solutions company ItzCash, to tap the next 500 million underserved Indian consumer segments. The tie-up will facilitate effortless payments for hotel-bookings across 5500 hotels in over 170 cities in India through ItzCash's money transfer solutions.

Revenue projections for ItzCash:

ItzCash has been growing at a CAGR of 35% for the past three years. ItzCash reported Rs. 250 Crore of revenue on Rs 14,000 crore of transactions in Financial Year (FY) 2016 that ended on March 31, 2017. I have used a conversion rate of Rs. 64.51 per USD.

ItzCash FY

2016

2017

2018

2019

2020

@30% growth in Revenues ($Million)

38.8

50.4

65.6

85.2

110.8

Ebix's 80% share

40.3

52.5

68.2

88.7

@35% growth in Revenues ($Million)

38.8

52.4

70.7

95.5

128.9

Ebix's 80% share

41.9

56.6

76.4

103.1

@40% growth in Revenues ($Million)

38.8

54.3

76.1

106.5

149.1

Ebix's 80% share

43.5

60.8

85.2

119.2

Ebix and ItzCash management announced in the press release accompanying the acquisition, that they expect to cross sell and grow the business even faster in the coming years. At 40% year-over-year growth, Ebix could add about 50% of its current revenues by 2020, just from ItzCash. Assuming current earnings and sales multiples, ItzCash has the potential to add about $1 Billion in Market Capitalization to Ebix in 4 years. Not bad for a $120 Million investment, eh?

Conclusion

It is clear to me that Ebix has solved its revenue growth problem by acquiring a fast-growing digital payment solutions company in the red hot Indian Fintech market. What is not so clear is how, Ebix's vision of being "the world's leading back-end powerhouse of insurance transactions", as stated in the company's home page, fits in with the ItzCash acquisition. I hope and expect that Robin will lay out a roadmap for the "New Ebix" as it is no longer "insurance centric". If Robin can lay out a compelling vision for the "New Ebix", I firmly believe that the share price will begin to command much higher multiples, commensurate with a growth story.

Disclosure: I am/we are long EBIX.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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