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Kedia Buys Zaggle: Value Bet or Risky Play?
21 Aug
Summary
- Vijay Kedia's firm bought a 1.48% stake for Rs 33 cr.
- Zaggle's software fees are only 3% of revenue, not SaaS.
- Company reported Rs 294 cr profit but Rs 368 cr cash burn.
Kedia Securities recently purchased 20 lakh shares of Zaggle, equivalent to 1.48% of the company, for approximately Rs 33 crore. This acquisition by Vijay Kedia's firm was interpreted by the market as smart money seeing value in the company. However, a closer examination of Zaggle's business model reveals that software platform fees account for a mere 3% of its total revenue. The majority of its income stems from program fees and rewards points, which operate with significantly lower margins.
Despite a reported consolidated net profit of Rs 294 crore between FY23 and FY26, Zaggle experienced a cash flow deficit. Operating cash flow was negative Rs 130 crore, and free cash flow showed a cumulative outflow of Rs 368 crore over the same period. This indicates a struggle to convert reported profits into actual cash, with debtor and working capital days tying up significant funds. This situation raises concerns for investors buying at current prices, as they are purchasing a claim on future cash that has historically diverged from profits.
The company's recent quarterly performance also showed a decline, with operating profit rising only 1.3% and net profit dropping 32.9%. Management attributes this to acquisition costs and operational changes. Foreign and domestic institutions have significantly reduced their holdings in Zaggle over the past three years, while public shareholding has increased substantially, contributing to the stock's volatility.
Zaggle's stock is currently trading at a discount to its historical highs and the industry median. The company's valuation has shifted from a premium software multiple to a more ordinary services multiple. The upcoming September quarter is crucial, as it is expected to bring in revenue from a recent acquisition and potentially normalize margins and cash flow generation. Investors are closely watching to see if Zaggle can convert its impressive revenue growth and reported profits into positive cash flow, a key challenge it has faced for years.
