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00:00 Hello and welcome to Earnings Edge.
00:08 We have with us a very special guest talking to us about a very exciting company that's
00:13 been in the news for more than one reasons.
00:15 Zagil is the company I'm talking about and we've got with us Avinash Kothkani, MD and
00:20 CEO of Zagil.
00:21 Avinash, good morning.
00:22 Thank you for joining us today on the show.
00:24 Your stock has been quite the talking point since you listed.
00:29 I believe you've been in business for over 11-12 years and now you're bearing the fruit
00:34 of it.
00:35 Stupendous growth on top line, bottom line, margins.
00:39 Is this sort of growth sustainable going ahead?
00:41 Thank you, thank you for having me on the show, Samina.
00:45 I think it's a pleasure and look, we've given our guidance on growth.
00:50 This year we're going to grow 40-50%, next year 40% plus.
00:55 If you think of it holistically, Samina, the spend management space is very nascent in
01:01 India and every company needs to digitize.
01:04 There's a huge push from the overall ecosystem to be more compliant, to reduce leakage, to
01:11 have information on a fingertips, out of fingertips.
01:17 That's the benefit that we provide.
01:18 We increase your compliance, we reduce your leakage, we help you with your ESG goals because
01:23 we reduce paper usage, it's greater transparency and we are extremely competitive when it comes
01:30 to price because we earn through our software fees and we earn through our transaction income.
01:36 So it's a very reasonably priced platform for our corporate customers.
01:41 Okay, so subscription and transaction income.
01:44 How much does subscription contribute to your top line and how much does transaction?
01:48 And also more importantly, the transaction income earned is from the same clients or
01:53 customers that subscribe to your platform?
01:56 Great questions, Samina.
01:58 The beauty of the model is that the transaction income comes through our partner banks and
02:04 networks like Visa, Rope, Mastercard.
02:07 We work with 11 banks, some of the best banks in the country, banks like Kotak, Access,
02:13 ICICI, SPI, Bank of Baroda, ES Bank, IndusInd Bank, IDFC First.
02:19 So we invoice the transaction revenue to these partner banks and the networks.
02:25 So from a corporate customer perspective or a user perspective, an employee of a company
02:29 perspective, they don't bear the transaction income.
02:33 This is largely interchange and other components, incentives that we get from the networks.
02:39 And that's why this model is so powerful because from a corporate perspective, they're paying
02:44 a SaaS fee, which is heavily subsidized.
02:48 We are very open about the fact that we earn through transactions and we're able to offer
02:52 the software platform at a deeply discounted price.
02:58 The value that we bring is easily tenfold plus of the software cost that we provide
03:04 to our customers.
03:06 Avinash, so in terms of transaction fee, which you earn from Mastercard, Access Bank, HSBC,
03:14 like you mentioned, the quantum of deal is across the board, right?
03:18 Can you help me understand, is this on actuals that you're earning, which means that the
03:24 projection could be revised upward or downward depending on the amount of usage that's taking
03:29 place or underway?
03:32 So it's linked to the spends.
03:34 You spend on your card, whether it's a prepaid card, whether it's a corporate credit card,
03:38 you spend on your card, we earn a lion's share of the interchange income there from partner
03:44 banks.
03:45 Partner banks earn other lines of revenue that get generated from these programs.
03:50 So you're right, these are lines which go up and down because of seasonality.
03:56 For example, our Q3, Q4 has always been our strongest quarters.
04:01 And Q1, Q2 have been typically about 30 to 40% of our revenues.
04:08 And that's simply because the spend patterns in India at least changed this way.
04:13 Q3 is festive season and Q4 is the time when every employee is submitting her claims, using
04:20 all the money that they have on their cards because there's a tax season and their take-homes
04:28 may have gotten reduced a little because of the investments that they need to make, etc.
04:33 So that's been the pattern that we've seen and that's how we look at it.
04:40 Talk about margins, Avinash.
04:41 You stand close to 10, just around 10%.
04:46 That's your blended margin.
04:47 Now you did say that the subscription model is subsidized, but you're making money on
04:52 transactions, transaction fee in that sense.
04:55 What is the margins across both?
04:57 The blended of course is 10.2.
05:01 But if you break those two down for me, what does margins for each vertical stand at?
05:06 So when I say, Srimina, that we subsidize on the software, what I mean to say is that
05:12 what potentially is the value that we bring to the corporate customer versus what we charge,
05:18 there's a huge difference.
05:20 And some of our global competitors who operate in India are, for example, multi-fold times
05:25 more expensive than we are on a software fee basis.
05:31 And that's what I mean.
05:32 Our software income, the SaaS income, from a gross margin perspective is near 100% because
05:40 we've already invested in the platform and we've expensed out a large part of it.
05:46 So that's from a gross margin perspective.
05:49 On the transaction side, we have two components.
05:51 We've got a points platform and we've got the interchange income, the program fees.
05:57 The program fees, again, the gross margins are very, very high.
06:01 And even net margins are fairly high.
06:04 And the propelled points, of course, is a gross number.
06:07 Aminash, your top line currently is at about 199 crores.
06:15 You have a deal with Visa, which is to the tune of $20 million, so close to 165 crores
06:20 over the next five years.
06:22 Is this going to be equally spread out over five years in terms of cash flow?
06:26 No, our top line for the last quarter was about 390 crores.
06:32 Yeah.
06:33 Yeah.
06:34 So this year, yeah, for the nine months, we've crossed 500 crores.
06:40 And last year we did about 550 crores and we're going to go about 40 to 50% on that
06:45 550 crores.
06:47 So we should land somewhere in the range of 750 to 800 crores.
06:52 And the Visa deal is not spread equally.
06:54 It is again linked to spends.
06:57 All these network contracts, typically, Samina, are linked to the amount of spends that you
07:01 drive.
07:02 And the contracting question that you're talking about is a contract that we have with Visa
07:05 for our Forex programs, Forex cards.
07:10 And those programs will get launched in the next financial year and you'll start seeing
07:14 revenues flowing from those incentives.
07:17 Right.
07:18 Also, your recent deal announcement with EasyTrip planners.
07:23 How big is this as an opportunity?
07:25 What is Zagil offering?
07:28 Can you break that down for us as well so we can understand the impact this is going
07:31 to have?
07:32 Absolutely.
07:33 So EasyMyTrip, one of the leading providers of travel in the country.
07:41 And when you look at an expense management platform, which is what our Save platform
07:46 is along with employee benefits, a very large part of expenses that employees incur on behalf
07:52 of their companies is to do with T&E, travel and entertainment.
07:57 And EasyMyTrip allows us to be able to offer seamless bookings to all these employees of
08:04 these companies through a self-booking tool that we have.
08:08 And it also allows us to earn commissions for every ticket that's booked by a corporate
08:13 or an employee through the platform.
08:17 So there's an additional revenue that we get from the tickets that get booked through the
08:22 platform.
08:23 And as an employer and as an employee, you get a very seamless, comprehensive experience.
08:29 So it's an integral part of our offering.
08:31 We've had other travel partners with whom we've worked, and we will continue to work
08:37 with multiple partners.
08:38 Vish, how does the logistics of this deal work out?
08:42 I mean, then understanding the size of the deal, the potential quantum that you stand
08:47 to earn from this, and over what sort of a period, a time horizon?
08:52 So this is generally, Simina, these contracts are while this contract I think is for three
08:58 years to begin with.
08:59 Our view is that this is a long-term partnership, which can potentially get extended through
09:06 the years.
09:07 And if you look at what this means is there are millions of users on the platform who
09:14 book hundreds of thousands of tickets.
09:17 For each ticket that gets booked, we would now start to earn LD commissions.
09:23 So the recurring nature of this and the accretive revenue that we would earn through this can
09:29 be significant.
09:30 Possible to quantify, Avinash?
09:33 That would be too premature on my end, Simina.
09:36 Okay.
09:37 You've also had an interesting deal that we caught on your website with Torrent Gas.
09:41 You said you're very excited about this opportunity.
09:43 What is this one?
09:44 It's still such different industries.
09:45 So you keep up with everything that's happening at your company.
09:49 Actually, it's different and it's similar, Simina.
09:52 At the end of the day, we are working with corporate customers to manage their spends.
09:59 It's all about spend management and companies have such a wide variety of spends in their
10:05 P&L that they...
10:08 We cater to literally every type of spend that a company incurs except for biotech capex.
10:15 In Torrent Gas case, this is a platform that we have created for Torrent Gas for fleet
10:19 owners whose drivers would fill gas at Torrent Gas outlets.
10:28 The whole idea is to be able to create an ecosystem where the fleet owners' working
10:33 capital is saved.
10:34 Today, if you think of a trip from, say, New Delhi to Chennai, it's probably a 20, 30-day
10:40 truck trip.
10:43 In absence of an ecosystem like this, the fleet owner pays the truck driver the entire
10:49 fuel cost upfront.
10:50 Through this ecosystem, a fleet owner is able to load the car on a daily basis, track where
10:58 the money is being spent, if a driver has gone missing, then he can block the car.
11:06 It gives a tremendous amount of control to a fleet owner.
11:09 To Torrent Gas, they get captive spends.
11:12 They are able to derive loyalty from their fleet owners and the truck drivers.
11:17 And of course, we earn revenue through this arrangement.
11:23 Has it already turned revenue-occurritive?
11:26 Is it visible in this quarter earnings or we'll see it from next quarter, Avinash?
11:31 So we've done the very initial pilot successfully, Samina, and we will see revenues come in in
11:37 the next quarter and beyond.
11:39 So typically in these technology programs, you would want to do a basic pilot, see if
11:44 it's working.
11:46 And we did that successfully along with Torrent Gas just last week.
11:51 And we should start seeing revenues flowing from subsequent quarters.
11:56 Right.
11:57 Also, Avinash, you've added 105 customers, I believe, in the third quarter, bringing
12:02 up the total to 2,837 customer base.
12:08 In the next quarter, how many more additions can we expect?
12:12 So typically we add about 600 corporates in a year, if you look at our historic trends.
12:20 And our focus now is to go after the larger contracts.
12:27 We also are focusing a lot on cross-sells.
12:29 It's not just about the number of corporates, but it's also about the quality of the corporates.
12:35 And you can see that there are a couple of announcements that we make in the next 24
12:40 to 48 hours, which are very large corporate customers, again, who we have signed up.
12:46 And this flow will hopefully continue for the coming weeks and months.
12:53 Right.
12:54 I think one thing a lot of investors talked about is that while Zagil is doing well, they
13:01 haven't started paying out dividends yet.
13:03 Can we expect that in the next couple of quarters as the money getting reinvested in the business?
13:07 There's too much growth for us, Samina, that we would like to, while this is a decision
13:14 of the board, and we'd be guided by the board's direction.
13:19 But if you ask me, I believe there's way too much of growth in the business.
13:25 And what I understand from my training in business is that if there is a lot of growth,
13:32 the real value that we bring to our shareholders is not necessarily through dividends, but
13:37 by reinvesting that money judiciously in the business, and bringing outsized performance
13:46 and helping the stock increase in price through performance.
13:51 Just one quick one, Avinash, and this is more operational that I want to understand from
13:55 you.
13:56 Your debtor days have actually gone up from 48 to 68, and your working capital days have
14:01 also increased from 34 that it used to be to nearly now 71, 72.
14:07 Any reason for this?
14:08 I mean, any particular concerns here, or this is nature of costs, I mean, just the way it's
14:13 supposed to be in your business?
14:15 So, I mean, I think anybody who's done a B2B business would realize, and that too with
14:22 large banks and large enterprises, that there is a certain amount of time that takes, because
14:29 look, whenever people go ahead and spend on the cards, they'd spend through the month,
14:36 and then we would invoice our partner banks at the beginning of the next month, right?
14:41 And the banks would take anywhere between 45 to 60 days to clear those invoices.
14:46 So while we're working with our partner banks and corporate customers to reduce this, as
14:52 you add newer banks, each bank has its own cycle, and it takes a little while for these
14:57 things to settle.
14:58 But we are confident that this is going to get addressed in the coming years and quarters.
15:07 I look forward to the big announcement from the company over the next 48 hours, as indicated.
15:16 But exciting times, good times, good luck.
15:18 We'll hopefully chat with you soon as well.
15:20 Thank you so much for having me, Sharmila.
15:23 Thank you.
15:24 With that, we're completely out of time.
15:25 That was the management of Zagil talking about the outlook.
15:28 The stock does look expensive, but the earnings have been phenomenal quarter on quarter, and
15:32 the company is guiding for a 40 to 45% growth in the next financial year.
15:38 With that, completely out of time.
15:39 Thanks for watching.
15:39 [MUSIC]