Featured image source: https://www.zagglesave.com/
Zaggle is one of the uniquely positioned Fintech companies in the country, offering a diverse range of products and services around the nucleus of spend management. It offers SaaS solutions to its customers like expenses, payments, and rewards management software.
Comparing Zaagle to a cotton candy stall in a children’s fair wouldn’t be an overstatement considering its customer acquisition in the last year or so, bagging almost 2 contracts/day.
To give you a brief overview, Zaggle majorly operates via three segments:
Propel, which is a rewards and recognition platform for both channel partners as well as employees.
- Save is a platform for employee expense management, reimbursement, and benefits.
- And Zoyer, is a data-driven business spend management platform.
- It has also introduced Zatix, which is a spend analytics platform and a Fleet Management service as well for fleet owners and Oil Marketing/CNG companies.
Before we get into further nifty-gritty of the business, let us have a broad industry overview of spend management, the overall cards markets, and prepaid cards in particular.
Burgeoning Spend Management Market in India
In the last decade, India has witnessed a notable uptick in terms of the sheer number of new businesses and the working-age population, making efficient business spend management more important than ever.
Why? You may think.
Imagine being a professional who has frequent business trips, having to tirelessly take care of your flight bookings, hotel reservations, and transportation receipts in order to apply for reimbursements once you come back. This created two problems, first, you have to spend on office expenses out of your own pocket. Second, it’s hectic.
This is where spend management services like Zaggle comes in, helping businesses, as well as employees, manage their expenses on a single platform.
*Source: Zaggle FY24 Annual Report.
As per another report from Frost & Sullivan, India’s outsourced spend management software market is estimated to grow from Rs 35 Bn in 2020 to Rs 72 Bn by 2027.
Now, let us also have a peek at the Cards Market in India.
Over the past decade, the usage of credit and debit cards has seen a significant rise. New features, such as contactless payments and the convenience of credit cards, have made it easier for customers to access credit, creating a wider range of use cases than ever before.
*Source: Zaggle FY24 Annual Report.
The credit card issuance is expected to grow at ~21% CAGR in the next 5 years. In contrast, debit cards are expected to have a stagnant growth of 3% CAGR. This is largely due to the rapid adoption of UPI, which is now a front-runner in all senses in the digital payment ecosystem of the country.
While UPI has captured the markets significantly, credit and debit cards still have distinct use cases.
Prepaid Cards Market in India
By Prepaid cards here, we mean corporate prepaid cards. These are commonly used as gift cards, meal cards, travel cards, and payday cards.
With business travel returning to pre-pandemic levels, the use of prepaid cards for spend management has seen a notable increase, as discussed earlier.
*Source: Zaggle FY24 Annual Report.
Gift cards continue to be the most widely used prepaid card, whether for online shopping or retail purchases. Meal cards have also seen significant growth, allowing employees to purchase snacks, meals, and groceries.
In addition, travel cards have gained popularity. These cards enable companies to load a specific amount and currency for employees traveling on business, offering greater control and convenience.
Now, let’s dive deeper into Zaggle.
As we briefly touched on earlier, Zaggle has various products, and its approach centers around cross-selling, up-selling, and collaborating with other players in the ecosystem to offer a wide range of products and services while it also leverages API integration, to provide customers with a convenient and efficient user experience.
The company focuses on the B2B2C segment, positioning itself to serve both corporates and their employees, which helps to create a diversified user base. This strategy also allows Zaggle to maintain low customer acquisition and retention costs by leveraging its existing customers and offering value-added services.
*Source: Zaggle FY24 Annual Report.
The most important question is, how does Zaggle make money? Let us now talk about its revenue streams and major costs.
The revenue stream for Zaggle includes:
- SaaS Fees: The software fees charged monthly/annually per user to corporates for using the platform. This is made across products and is reported on a net basis.
- Program Fees: Their banking partners share a proportion of interchange earned on spending using the Zaggle cards. This is also made across products and reported on a net basis.
- Propel Platform Fees: This is recognized on redemption of Propel reward points allocated to employees/distributors/channel partners. This is only made in Propel and is reported on a gross basis.
Referring to the table above, Zaggle’s revenue has seen impressive growth, increasing from 240 Cr in FY21 to 776 Cr in FY24, reflecting a strong ~48% CAGR.
A key driver of this growth is its Propel platform, which has seen exponential growth, rising from just 32 Cr in FY21 to 433 Cr in FY24, at ~136% CAGR. Program fees have also grown steadily at an 18% CAGR, reaching 322 Cr. Meanwhile, SaaS fees remain a small portion of its overall revenue.
Now that we have discussed the different streams of revenues, let us also talk about some of the expenses specific to the business, Zaggle’s in.
Cost of Point Redemption/Gift Cards: This refers to the expenses Zaggle incurs when customers redeem Propel points or gift cards through its platform. As per our understanding, these costs should be deducted from the gross revenues recognized from the Propel platform.
Consumption of Cards: These are the expenses related to the issuance, processing, or maintenance of prepaid, corporate, or other types of payment cards.
Incentives and Cash Back: These expenses are incurred by Zaggle to encourage employees to use Zaggle Cards. These costs can be directly tied to Program fees, as they correspond to the revenues Zaggle generates from the use of its cards.
The cost of point redemption/gift cards has grown significantly, increasing to ~49% of Zaggle’s total revenues in FY24, which aligns with the substantial growth in its Propel platform fees. On the other hand, the consumption of cards as an expense remains negligible, as it is a very small proportion of overall costs.
Regarding incentives and cash back, an interesting trend has emerged. The expense has almost halved, dropping from around 57% of revenues in FY21 to about 28% in FY24. This reduction, however, seems to have impacted revenues from program fees as well.
Notably, as seen in the chart above, when incentives and cash back decreased from FY21 to FY23, program fees also declined. In FY24, both incentives/cash back, along with program fees, saw a proportional increase.
This shift could be attributed to employees opting to use their personal cards if the cashback offers are better and then reimbursing the amount later. We believe that the increase in cash back in FY24 was one of the key reasons for the ~90% YoY growth in program fees.
Zoyer: Powering Future Growth
Zoyer as briefly touched on previously, is an accounts payable and procurement platform bundled with Zaggle’s business credit cards.
Some of its key features include:
- Streamlining vendor payments.
- Automating invoice handling, reducing manual errors and delays.
- Reconciliation of expenses across various departments.
- Supports multiple payment methods.
- Utility payment bills via the Bharat Bill Payment System (BBPS).
- ERP Integration
The product was launched in FY23 and has contributed significantly since the last year. According to the management’s recent conference call, Zoyer has gained strong market acceptance, with its primary use case being petty cash expense management. They expect Zoyer to contribute around 40-50% of Zaggle’s overall topline by FY26-27.
The product appears particularly well-suited for sectors with distributed operations, such as Quick Service Restaurants (QSRs), Healthcare, Retail Chains, FMCG, and more. Its contracts have predominantly come from these sectors, further cementing its relevance in the market.
In a recent interview, the management also mentioned that they are taking Zoyer to educational institutes for managing petty cash and fee-paying operations. The product has received a positive response from these institutions, which opens up an interesting growth avenue. It will be interesting to see how this new application fares out.
On An Acquisition Spree?
Zaggle has recently acquired a controlling stake in Span Across IT Solutions (TaxSpanner) for ~32 Cr and another ~16 Cr was invested to acquire a 26% stake in Mobileware technologies.
The company has also raised another 595 Cr in December via the QIP route. This fundraiser, according to its management is to fund at least 2 other acquisitions.
The company also mentioned that it is in talks with 5-6 potential targets, out of which 2 are in advanced stages. FASTag is another space that really interests them and could add another 150-200 Cr to its topline.
Other areas of interest are the Merchant Card System and Payment Systems Space.
Valuation and Way Forward
Zaggle had robust results for the Q3 FY25:
- Revenues grew by 69% YoY to 336 Cr.
- EBITDA is up by 44% YoY to 29 Cr.
- PAT increased by 33% YoY to 20 Cr, while Cash PAT grew by 34% YoY to 26.2 Cr.
The upped its guidance to ~60% topline growth for FY25. The management also in an interview mentioned 45-50% growth for FY27, with the potential to reach 80% through acquisitions. As the business scales, they also anticipate a 1% annual margin expansion, which could drive EBITDA margins to around 11-12% by FY27.
Some of the major deals for the quarters were partnerships with Blinkit and Zepto for expense management of its dark stores. While Zepto has also tied up for its employee benefit programs. It has also got into a strategic alliance with Mastercard for 7 years to recommend Zaggle on a referral basis to its corporate customers.
Margin accreditation for Propel while higher revenue growth in program fees is the mantra for margin improvement going forward, which looks very likely the management stated with conglomerates getting onboard on program fees while It expects propel margins to improve with the acquisition of a merchant card system.
Zaggle is currently trading at an Enterprise Value (EV) of ₹ 5574 Cr (Market Cap: ₹5694 Cr + Debt: ₹55 Cr – Cash: ₹175 Cr). Annualizing its 9M FY25 EBITDA, the estimated FY25 EBITDA stands at ₹105 Cr, implying an FY25E EV/EBITDA of 53x.
However, based on management’s growth guidance, FY27 topline is expected to reach ~₹2,100 Cr, with EBITDA margins improving to 12%. This would translate to an EBITDA of ₹252 Cr, bringing its FY27E EV/EBITDA down to 22x. Given the company’s growth potential and strategic moves, these valuations appear reasonable.
Disclosure: I, Sidhanth Paul, Research Analyst, author, and the name subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific view(s) in this report.
Research Analyst or his/her relative or Capitalmind Research LLP does not have any financial interest in the subject company. Also, the Research Analyst, his relative, Capitalmind Research LLP, or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or his relative or Capitalmind Research LLP or its associate does not have any material conflict of interest at the time of publication of this research report.
Also, Zaggle is a part of our Capitalmind Premium Portfolios. This article is intended solely for informational purposes and should not be considered as an investment recommendation.
Capitalmind Research LLP is a SEBI Registered Research Analyst having registration no. INH000014003.
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