“With the youngest tech-savvy society, the largest middle class, a 1.3 billion population, a country committed to going digital and a growth rate of 7% plus, India is an emerging economic superpower,” the India-born Raina said at the time.
Superpower or not, Raina had sized up the market well. The start-up street has seen an explosion of unicorns, and the stock market has gone through the roof. While the public market has walloped several new-age companies that recently went public, the appetite for initial public offerings (IPO) hasn’t cooled. After its India subsidiary—now called EbixCash Ltd—reported it had doubled its revenues (revenue from operations rose to ₹4,152 crore during FY21, up from ₹2,170 crore in FY20, while profit fell from ₹243 crore to ₹230 crore), the foreign promoter is now gearing up to sell stake worth ₹6,000 crore to the public, seeking to value the domestic entity at about $4.5 billion, it said early this month in a draft prospectus ahead of a planned initial public offering (IPO). At Ebix Inc., Raina remains CEO and the biggest shareholder, owning 13% stake.
What lies beneath Ebix’s impressive numbers? What are the components of its business in India? Mint dug deep into the IPO papers of the company and government filings of its various subsidiaries, and what emerged was a curious and confounding picture. Ebix CEO Raina did not respond to emailed questions seeking comment.
Heart of the business
Over the last few years, EbixCash has acquired more than a dozen companies across fintech, travel, edtech, and others. However, about 75% of EbixCash’s revenue comes from one subsidiary—Ebix Payment Services (EPS), which was known as ITZ Cash Card Ltd before it was acquired by Ebix. Since EPS is central to EbixCash’s revenue, it calls for a closer look.
One figure leaps out of the financials of EPS. As per filings obtained from the Registrar of Companies, the company reported a dramatic 750% jump in revenues from ₹369 crore in FY20 to ₹3,166 crore in FY21. This upsurge in fortune did not just come curiously close to an IPO, it also pertains to a period when much of India was under pandemic-induced lockdowns, which shrank the Indian economy. From ₹3 crore in losses in FY20, it turned a ₹7 crore profit in FY21. Revenue for FY19 was ₹214 crore, and the loss ₹1.9 crore.
For many years now, Ebix Payment Services has earned more than 95% of its revenue from gift cards.
Fundamentally, gift cards are a prepaid voucher that can be redeemed against a good or service. Cards that can be redeemed only at a certain merchant are called closed-loop gift cards. In India, it’s a regulated business and such cards are sold by companies licensed to issue so-called prepaid payment instruments (PPI). Others in this business include Sodexo, Amazon and Zaggle, besides banks. There are also marketplaces and gift card aggregators, apart from Qwikcilver and Vouchagram, which act as intermediaries. On an average, the card issuer earns a commission of 4-5% of the gross merchandise value (GMV), or the total value of merchandise sold over a given period.
The cash cow
In FY21, EPS earned revenue of ₹3,072 crore by selling prepaid gift cards and vouchers, and ₹83 crore from processing/convenience fees and ‘other income’. In the previous financial year, the former was ₹281 crore and the latter about ₹73 crore. However, the ‘cost of goods’—or simply, what the company paid to get those vouchers and cards—was ₹3,066 crore in FY21. So, the margin between the cost of goods and sale of goods works out to be extremely thin, despite the surge in topline.
According to the standalone financial statement of EPS, revenue on sale of gift cards is recognized only to the extent the company’s performance obligation is met, which is on redemption/utilization.
A payments industry executive explained this accounting practice thus: “This means I have sold you a voucher of, let’s say, Big Bazaar. Technically, when I sell you a voucher, it is an income for them (Ebix) because now, it is Big Bazaar’s responsibility, not mine. Now, what the company (Ebix Payment) is saying is, I’m booking the revenue when the customer is going and redeeming the voucher with Big Bazaar and then, that is actually what it is taking as an income.”
The executive, who asked not to be named, said he found it difficult that in just one year, Ebix sold ₹3,000 crore worth of gift vouchers and customers redeemed those vouchers entirely. “Redemption, especially when it’s high-volume, happening in the same year is difficult. Moreover, during covid time, because physical outlets were not operating in full,” he said, adding, “someone recording 7.5X growth in just one year, without acquiring any new business, doesn’t add up.”
EPS, which reported the FY20 revenue from operations at ₹249 crore, revised the same figure to ₹369 crore in its FY21 statement. In its FY21 statement, the company explained under ‘prior year adjustments’: “During the year, the company has restated its comparative financial statements to account for the impact of revenue transactions from sale of semi-closed loop co-branded cards (Gift Cards) which have now been recorded on gross basis. The semi-closed loop co-branded gift cards business majorly picked up from January 2020 onwards.”
Anish Sarkar, CEO, Sodexo India, says there has indeed been a major shift in the gifting industry in the last five years. “Gift card has grown well as compared to physical gifting due to the pandemic. The gift card market—growing at about 20%-25% yoy—is approximately worth $4-5 billion. Sodexo India’s gift card revenue has grown at about 25% yoy since last two years,” Sarkar said.
How does Sodexo record its revenue? “We report our volume (which is GMV) and revenue separately. Volume is not my revenue, the margin and commission that I earn which is a fraction of it is my revenue. The commission is single-digit. Some companies do take the GMV and report it as a revenue. It is all about accounting.”
The CEO of a fintech firm, which also issues gift cards, who spoke on the condition of anonymity, said: “I’m not sure what the rule is in India when it comes to reporting GMV as your revenue, but in the US, you are not allowed. This raises points on the quality of the revenues if the sales of gift cards are similar to the cost of goods.”
The big customers
At EPS, the ‘major customers’ stand out. Apart from sale of gift cards to group companies, EPS’ major customers—from whom it derived 10% or more of its revenues—were Delhi-based Prepay Payment Services Pvt. Ltd, which purchased ₹332 crore worth of gift cards, and Nashik-based EPocket Online Payments Pvt. Ltd, which bought ₹356 worth of gift cards.
Big customers, by themselves, are normal; all companies, big and small, have them. However, Prepay Payment seems to be different. Its latest RoC filing has an entry of ‘goods purchased’, which shows ₹237 crore worth of gift cards purchased in FY21. (It doesn’t identify the seller). This means while EPS says it received ₹332 crore from PrePay, the latter’s Prepay’s own RoC filing shows it purchased no more than ₹237 crore, leaving a gap of about ₹100 crore.
Separately, Prepay Payment’s latest RoC filing shows its revenue rose from ₹237 crore in FY20 to ₹1,315 crore in FY21, while profit nearly doubled from ₹79 lakh to ₹1.5 crore. The company has listed employee benefits of about ₹27 lakh for FY21, of which ₹11.4 lakh was ‘salaries and wages’ and ₹15.9 lakh was director remuneration. It’s a remarkably low wage bill for a company with more than one thousand crore in revenue.
The company did not respond to email queries sent by Mint.
EPocket has not filed any RoC documents after 2019, and Mint could not trace the company or its employees on LinkedIn. The company, like the previous one, did not respond to email queries.
Auditors of Ebix Inc. did not seem to like the goings-on at its Indian subsidiary. According to the DRHP, Ebix Inc.’s auditor RSM US LLP resigned in February 2021, stating the parent’s “internal control over financial reporting was not effective as of December 31, 2020, due to the identification of a material weakness.”
The draft red herring prospectus the company has filed in India identifies the source of discomfort of the auditors as being the prepaid cards business in India. “The issues raised in the resignation letter related to the prepaid cards business which we carry out in India,” the DRHP stated. The US auditor’s exit sparked a crash in Ebix Inc.’s shares listed in the US, triggering a class action lawsuit.
By then, the Indian unit had already seen its auditor exit. T.R. Chadha & Co. LLP, which was appointed for five years as statutory auditor of EPS in July 2017 (right after ItzCash was acquired by Ebix Inc.), resigned in late 2020, expressing “unmodified opinion on those financial statements vide their audit report dated 29 October 2020.” The financial statements of EPS for the year ended 31 March 2020 were audited by TR Chadha.
Litany of litigation
The DRHP lists more than 20 outstanding litigation proceedings involving Ebix, its subsidiaries, directors and promoters. Two cases involve companies it acquired, of which the biggest in terms of value involves EPS. Out of ₹796 crore that it has quantified as claims in various lawsuits, ₹651 crore is linked with the arbitration proceedings initiated by Vyoman Tradelink and others—the original promoters who sold ITZCash to Ebix.
According to the DRHP, the original owners of ItzCash, who still hold 20% in Ebix Cash, have alleged various violations by the current management, including “(i) deliberately adversely impacting revenue of Ebix Payments to evade the payment of first earn-out and second earn-outs, (ii) submission of delayed and inaccurate financial statements, and (iii) acquisition/ incorporation of entities engaged in competing activities.”
Some of Ebix’s acquisitions have an earn-out clause, where the seller gets a chunk of the payment linked to revenue growth. As part of the acquisition, some ₹250-300 crore was linked to the revenue growth that was supposed to be paid in three years since acquisition. However, in those three years, the company’s revenue actually flatlined and fell, and the company went into losses.
In FY17, the year of acquisition, ITZCash had about ₹250 crore revenue and about ₹3 crore profit. In FY18, revenue of the company (then renamed Ebix Payment) remained flat at ₹256 crore, and it posted a profit of ₹28 crore. Revenue fell in FY19 and grew marginally in FY20. In both years, the company posted losses.
However, in FY21—at the end of the three-year earn-out period—Ebix Payment’s revenue shot up 7.5X, and the company, which had made losses for two years, was back in profit. While expenses should have normally gone up due to acquisitions, employee benefit expenses at EPS halved to ₹4.9 crore from ₹11 crore and the company’s contribution to provident fund also halved.
“Revenue growing 7.5X in one year and arbitration with original stakeholders are red flags for me and makes this an IPO to avoid. The integrity of the management quality is very suspicious. I will wait and watch it for five years and then take a call,” says R. Balakrishnan, an independent financial consultant and market expert.
Investors do not know much about new companies, Balakrishnan observed. “And institutional investors are part of the game, despite knowing some red flags. For retail investors, if the build-up is nice and profit is shown, they are not bothered about business strategy, cultural issues and regulatory loopholes available.”
Ebix has been eyeing India’s insurance sector for a while, but there has been little progress on this front. BSE Investment Ltd and Ebix Fincorp Exchange Pte Ltd set up a joint venture called BSE-Ebix Insurance Broking Pvt. Ltd in 2018. The venture is waiting for the insurance regulator’s approval.