Zaggle_A platform to address pain points for enterprises

[piyush_narang]

What made me look at this company at first sight?

Recent B2B SAAS Fintech Platform IPO

• Innovative fintech platform which has identified white spaces in Vendor assessment and payments and Employee reimbursements.

First-Generation Professional Entrepreneurs

• Promoters with proven track records in building and exiting businesses.

Primary Raise Proportion in IPO

• 70% of the issue size for primary raise, indicating growth-focused funding.

Market Opportunity and Share

• Management highlighting a significant market opportunity and strategy to gain market share.

Capital Efficient Business Model

• Pre-IPO placement, they have diluted ~40% to GKFF ventures and Veantureast. Both the investors are early-stage VCs implying that the company haven’t raised significant money in the past.

• They raised Venture Debt of ~50 Cr. from Vivriti (Source: Crunchbase) which was paid Pre IPO.

Historical & Projected Growth Rates

• The company doubled revenue in the last 2 years to reach INR 775 Cr.

• Management is guiding for stable margins and organically doubling revenue in the next 2 years.

• Inorganic growth on the cards in H2 FY24 with acquisition size of ~500 Cr topline

Venture Capital Backing

• Raised money from reputable VC funds and grown profitably, showing strong product-market fit.

Customer Success Stories

• Demonstrated positive impact on businesses through real-life success stories.

• Big enterprise clients incl. IT services companies

Strategic Partnerships

• Formation of key alliances with Banks to issue prepaid and credit cards.

Primary Raise Proportion in IPO

• 70% of the issue size for primary raise, indicating growth-focused funding.

Market Opportunity and Share

• Management highlighting a significant market opportunity and strategy to gain market share.

Capital Efficient BusinList itemess Model

Video Links: Video Link - Management interview
(https://www.youtube.com/watch?v=wFKgigIF3LM)

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I might have avoided the IPO but surely keep track of the company given other business aspects were strong enough.Pre- IPO_ Management interview

[piyush_narang]

Recent Management Commentary and Con-call Highlights (4 Con-calls since IPO)

Raj Narayanam, Executive Chairman, Earnings Conference Call:

“FinTech’s are at an inflection point where there is a perfect concoction brewing between increasing digital adoption, ever-improving digital infrastructure, and proactive regulations to create a lasting and sustainable ecosystem. This trend will further drive growth and value for the fintech sector.”

“There is a remarkable jump in terms of the fees what we can charge the corporates now per user, per platform basis than what it was before. We intend to capitalize on this opportunity and capture a significant market share in the coming two years. "

“Zaggle has always partnered with and worked with very large banks to make sure that we maintain the highest level of regulatory and compliance standards”

Avinash Godkhindi, Managing Director, and CEO, Earnings Conference Call:

“Innovation remains at the core of our strategy. We continuously invest in research and development to introduce new products and use cases that meet the ever-changing demand of our customers. Innovation is a driving force behind our competitiveness.”

“Consistent demand for digitization, transparency, tracking and budgeting of spends gave birth to most of Zaggle’ s products”

“We are set to drive growth by both acquiring new customers and cross-selling to the existing ones. This year, we are putting a special emphasis on cross-selling of our products as well as of our partners in the space of insurance, loans, taxation, investments, etcetera.”
Strategic Investment in Span Across IT Solutions & Inorganic Expansion Opportunities:

“We have made a strategic investment in a company called Span Across IT Solutions Private Limited. Span Across offers digital products for online tax filing and financial wellness solutions. This is a strategic investment, it’s a product decorative investment and access to Span’s product, which would be integrated with our offerings. Thus, increasing the value proposition for our customers.”

“We are actively looking at opportunities for inorganic expansion. We are looking at companies which are EBITDA accretive or product accretive or the ones who will give us access to new geographies. We are in active discussions with a few players across different, but synergistic domains like API banking platform, payments and possibly NBFCs. The revenues from these acquisitions would be in addition to our organic revenue growth which we have already mentioned that we would like to grow so that we double our revenues in the next 2 years.”

Strategic Role of Zoyer Platform:

“Zoyer, our accounts payable platform, which is bundled with our business credit cards, played a pivotal role in this year’s performance. Launched just over a year ago, Zoyer is strategically positioned to help us garner a significant market share in the account payable platform space. Our strategy is to onboard corporate clients and their network of employees, channel partners and vendors who become the ultimate users of our solutions. This helps us to keep our CAC to a minimum.”

Strategic Roadmap

“Client-wise revenue concentration is limited with the top 20 customers contributing less than 20% of the revenues”

“Additionally, only 20% of the corporates currently use both Propel and Save while Zoyer is a newly launched product. This abodes us a huge opportunity to cross-sell our products to our existing customers”

“We are augmenting our current expense management platform to offer much more flexibility for corporates to do self-booking on our platform. What this means is that a lot more spends would flow through our platform.”

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Con-call Highlights

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Investment Thesis

Company addressing pain point in Spend Management, Rewards & other white spaces–

Given the company is successfully identifying the white space in enterprise tools and building platform to fill those gaps is a major win for the company.**

Company has been innovating and adding products to make enterprise clients life easier is the biggest strength of the company

Negligible CAC
• Zaggle goes through B2B2C route to reduce the CAC with an innovative business model which gives it an edge vs competitor
•
With discounted monthly SaaS fees, Company is more focused on earning money by getting commission on spends through branded cards

Flexible Product / Deployment
• Zaggle can deploy its platform in any enterprise grade HRMS/ERP tool starting from Tally to SAP. This makes it easier to onboard customer and reduced the onboarding time to minimal
•
There is no limitation for the corporate to use Zaggle co-branded corporate cards, Client can keep using only the platform

Win-win proposition for all stakeholders
• Banks –

• Banks get an entry into a large pool of corporate salary relationships.
• Also, they can deploy their co-branded cards at 0 CAC
• There is no tech cost for banks as all the API/ integration is done by Zaggle

Corporate -

• get the card, which is a system of transactions,
• to tightly couple with Zaggle system, which is a system of engagement
• with their system of records which is their ERP

Zaggle –

• Earns commission on propel points and card spends
• Earns SaaS fees platform deployment

Unique business model

• Given it is a Fintech, Zaggle earns at the point of payment by building the processes (which are given to client at minimal cost)

• Lower SaaS fees entice corporates of all sizes to opt for Zaggle platform

Growth Levers

There are 4 levers of growth for Zaggle

1. More number of corporates,
2. Users within that corporate,
3. Greater number of solutions i.e. cross sell and upsell opportunities,
4. The amount of spending which the users do on the cards

Deeper penetration in existing customer groups; currently, only there is only a ~20% overlap in Propel and Save customers

Wide addressable market
• Opportunity size for spends management software pegged at Rs 139bn by FY27**
• Credit card & Prepaid card issued and spent are increasing at rapid pace**
• ARR Payments amounting to ~Rs 8,000 cr. is being done using Zoyer platform**
• Increase in formal workforce is another growth trigger for Zaggle**

High customer retention rates
• Zaggle has strong customer retention capabilities with the churn rate for customers terminating contracts being consistently low (annualized sub-2%)
• With its integrated offerings, the company has been successful in reducing the negative impact of low-switching costs associated with a SaaS business

Experienced promoters with deep domain knowledge
• The senior management team is ably supported by a professionally qualified workforce with extensive knowledge, understanding and experience in the fintech, banking, technology, infrastructure, and healthcare industries. (Refer- Board of Directors & Management Team section)

[piyush_narang]

What is Zaggle?

• Company X has 5,000 sales executives. These executives spend money on travel, customer entertainment, hotel stays, etc.

• These sales executives get variable incentives as and when deals get closed. This includes vouchers, Meal cards, Diwali gift cards, etc.

• A sales executive spends ~8-10 hours/month to put all the reimbursements. He feels it’s a cumbersome process. Lot of to and from happens with Finance personnel also. Company also employees additional finance executives to validate these expenses

• All this led to time wastage for Sales executives, additional cost for company and cost leakages due to irregularities in reimbursements

• Company X has ERP integrations with most major ERP providers like SAP.

Solution

• Using Zaggle, Company X can go ahead and say that for this project, I want to limit my overall travel cost to say, INR5 crores. Irrespective of whether the individual cards that have been given to employees, the total limit may be INR30 crores on those cards, across say 1,000 cards or 3,000 cards, but the travel cost should be limited to INR5 crores.

• Now Zaggle will ensure and enable through spend analytics platform on each card spent, link it to the limits and controls that we have set on platform.

• A standalone card platform would not be able to understand what the project code is itself, because the standalone card platform doesn’t have an API integration with the ERP. Because Zaggle’s platform sits in the middle of the card management system, which is the system of transactions, and the system of records, which is the ERP.

• In addition, Company X can see through pie charts, bar graphs, etc. a breakup of where the spends are happening across different spend categories, like saying where is the money being spent for T&E, client entertainment, how does it break up for different geographies, how do employees in Jaipur spend, how do employees in Bombay spend.

• Given Zaggle is integrated with Network partners, it automatically recognizes the vendor category and reduces employee limit from that category when any expense is made.

[piyush_narang]

Timeline

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**** Pre-requisite - How to read financials of Zaggle***

• SaaS fees and program fees are reported both on a net basis with almost no direct expenses involved which give us a gross margin of about 94%, 95%.

• In contrast, propel point revenues are recognized on a gross basis and the gross margin for this varies between 7% to 10%.

• Program fees (revenue side) encompass various revenue streams including interchange income and incentives from networks like Visa and Rupay.

1. • Program fees (expense side) have 3 components –
2. • cashback for prepaid cards,
3. • cashback for business credit cards
4. • cost of funds.
     FY’23 - had one component which was cashback against on prepaid cards.

• What are Intangible assets under development?

• One is Zoyer, which is yet to go completely live.
• ZatiX is the analytical platform, will capitalize once it gets completely done.

• ESOP guidance for FY’25

• With the existing set of costs, without any new issuance of ESOPs, FY25 will be around INR8 crores & INR3 crores is FY’26.

• Will the take rates remain constant

• It is evolving as more and more expenses are being incurred on recharges. Gas, fuel, electricity, etc. which have lower take rates but overall take rates should remain constant at 1.8%.

• Seasonality:

Business does anywhere between 35% to 40% of revenue in the H1, and 60% to 65% of the business in H2

• Working capital will be in three categories -

• SaaS fee - 50-60 days,
• Program fee, which Zaggle largely charge towards the banks - 50 - 60 days
• Propel point redemption - sometimes Zaggle must give them redemption upfront – 30 days

[piyush_narang]

[piyush_narang]

Key risks

Agreement/regulatory changes adversely impacting interchange revenues

• Company’s revenues are largely dependent upon Banks sharing a part of interchange on the co-branded cards. Banks currently share a significant part of the interchange with ZAGGLE as they get float on the card balances,

• they get to bundle value added products along with bank’s own core products which creates differentiation viz competition

• Any change in the agreement/Regulatory environment can adversely impact the interchange revenues.

Slowdown in new customer acquisition

• If any of the above 4 growth levers stops working for Zaggle, business could see lower growth rates

Change in Tax laws

• The risk isn’t that significant but might impact Zaggle to an extent

Incentives and cashbacks as a proportion of program fees do not decrease across products

• A key thesis for EBITDA margin expansion is that incentives and cashbacks will moderate over time across each product as these incentives and cashbacks are largely linked towards onboarding and activation of new customers to drive usage of ZAGGLE’s products.

• With Zoyer having a higher incentive payout currently (at above 80%), we expect overall incentives and cashbacks as a proportion of program fees will increase over the next couple of years. However, if the proportion of Incentives and Cashback’s doesn’t decline that the operating leverage may not play out but earning growth can be in line with the revenue growth.

Increase in competitive landscape

• There are many start-ups as well as incumbent entities globally that are offering spends management solutions. As the spends management ecosystem matures, there could be an increase in competitive intensity thereby impacting growth for ZAGGLE. Given the customer low churn rate in this business, it is essential that the company focuses on onboarding clients at an accelerated pace.

[piyush_narang]

[piyush_narang]

[manish962]

You need to merge all the posts in one.

[piyush_narang]

Numbers are inline with guidance. This year PAT should be 80-90 cr.

Q1 is seasonally weak. A decent start to Fy25…

Management is looking for a smaller acquisition in next 30 days and a much bigger acquisition by Q4FY25…