Ebix Inc: A Hidden Jewel In The Payment Solutions Industry

Summary

• For the fiscal year 2020, their Payment Solutions business had year-over-year growth of ~590%.
• Management is targeting the EbixCash IPO for first quarter of 2022.
• Management believes there are significant growth opportunities for EbixCash in the Indian foreign exchange, bus travel, and eLearning markets.

The company reported a strong Q4 with revenues up 52% YOY despite the pandemic. We are impressed by management’s ability to navigate through the ongoing pandemic. Management reaffirmed its positive outlook for 2021. We increase our target price to $40.50 per share (earlier $34.50) and maintain our BUY rating.

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Q4:20 Summary

• Total revenues were $222.1 million in Q4:20 vs. $146.1 million in Q4:19. The increase was due to growth in the company's EbixCash and insurance channels. EbixCash registered growth of 98% YOY to $160.4 million.
• India-led revenues accounted for 72% of Ebix's total revenue during Q4:20.
• The company's foreign exchange, travel, remittance, and e-learning businesses experienced more than a 70% decline in YOY revenues during Q4:20.
• Gross margin was ~32.1% in Q4:20 versus 44.3% in Q4:19. The margin compression was primarily due to increase in revenue from the lower margin Payment Solutions business.
• Adjusted EBITDA was $38.8 million or 17.4% of net revenues in Q4:20, flat YOY.
• Non-GAAP net income at $28.6 million or $0.94 per share, compared with $31.8 million or $1.04 per share in the same quarter last year.
• We maintain our BUY rating and increase our target price to $40.50 with an implied capital appreciation potential of 33%.

PRIMARY RISKS

• A U.S. and/or India recession from a Covid-19 outbreak could result in lower demand for its products and services and could adversely impact revenues.
• Any further shutdowns or shelter-in-place restriction due to COVID-19 could impact operations.

QUARTERLY SUMMARY – Q4:20

• Revenues up ~52% vs. prior year. Total revenues were $222.1 vs. $146.1 million in Q4:19. The increase was due to growth in the company's EbixCash and insurance channels. EbixCash registered a growth of 98% YOY to $160.4 million. International revenues accounted for 81% of total revenues in Q4:20. India-led revenues accounted for 72% of Ebix's total revenue during the same period.
• Payment solutions business increased 96% sequentially in Q4 versus Q3:20. For the fiscal year 2020, the business experienced year-over-year growth of ~590%. However, the business has materially lower margins compared to other EBIX solutions and services. We expect elevated levels of demand for Payment Solutions products in India as consumers and businesses change their payment habits.
• COVID-19 impact. The company's foreign exchange, travel, remittance, and e-learning businesses experienced more than a 70% decline in YOY revenues during Q4:20, which is consistent with the third quarter of 2020 and an improvement from a ~90% decline YOY in the second quarter of 2020.
• Gross margin was ~32.1% in Q4:20 versus 44.3% in Q4:19. The margin compression was primarily due to an increase in revenue from the lower margin Payment Solutions business (primarily gift card revenue).
• Non-GAAP Operating income down ~8% YOY to ~$38.2 million in Q4:20 compared to $41.6 million in Q4:19. Non-GAAP operating margins decline to 17.2% of sales in Q4:20 compared to 28.4% of sales in the prior year period.
• Adjusted EBITDA was $38.8 million or 15.7% of net revenues in Q4:20, flat YOY.
• Non-GAAP net income at $28.6 million or $0.94 per share compared with $31.8 million or $1.04 per share in the same quarter last year.
• Significant opportunities for EbixCash once the pandemic subsides. Management noted that EbixCash has significant growth opportunities in Indian foreign exchange, bus travel, and eLearning markets. Ebix noted that one state contract for deploying end-to-end bus exchange solutions could provide revenue of ~$40 million.
• EbixCash IPO. Management is targeting the EbixCash IPO for the first quarter of 2022 and is in the process of filing required documents with the regulatory authority in India.
• Margins to improve. Management expects margins to improve from new revenue sources as the pandemic subsides. Present margins are adversely impacted by the payment solutions business. Excluding that business, non-GAAP adjusted EBITDA margins were ~41% in Q4:20 which is fairly high.

VALUATION AND RECOMMENDATION

We value EBIX using a P/E multiple of industry peer companies blended with our Discounted Cash Flow (DCF) valuation to derive a fair value target price for the company.

While the prospects for the company are expected to improve going forward, we remain conservative in our assessment, thus valuing EBIX at a discount to the lower end of our peer group multiple. We value EBIX at 10x our 2021 EPS estimate of $4.30. We weight this discounted multiple target to equal 50% of our price target. The multiple based target price is $43.04 which discounts back to the present value of $40.98.

We weight the other 50% of our target using our Discounted Cash Flow target. Our DCF model uses our forecasted free cash flow to the firm over the next year and then grows EBIT at an 8.25% rate over years 2-8. We apply a weighted average cost of capital of 10.29%. Thus, our DCF produces a value of $40.24.

The combination of $40.98 at 50% and $40.24 at 50% results in a weighted average price target of $40.61, which we round down to $40.50. The exhibit below summarizes our peer group multiples.

Exhibit 1: Ebix Inc. Group Peer Group Multiples and Price Targets

Source: Ebix Inc. and Singular Research