Protean Tech: Should investors consider the stock after muted Q3 performance?
Its business moats and huge growth opportunities in the digital public infrastructure space outweighs the dull performance in Q3 FY24.
Highlights
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- Protean’s stock has fallen over 20 percent post Q3 earnings
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- Q3 FY24 performance was subdued
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- Revenue growth was healthy but employee expenses soared
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- At present, three verticals generate revenue – tax services, NPS, and identity services
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- Working on four more segments fo diversification
- Valuation premium justified
The stock of
Protean eGov Technologies (CMP: Rs 1,244; Mcap: Rs 5,032 crore; Rating: Overweight)
corrected over 20 percent after the tepid earnings performance in Q3 FY24. Protean’s net profit declined 46 percent YoY (year on year) to Rs 15 crore in Q3 FY24 mainly due to higher employee expenses.
The key question is why should investors consider the stock despite lacklustre earnings.
Protean, being a pioneer in e-governance solutions and building digital public infrastructure (DPI), is a unique play on the rising digital adoption in India.
Moreover, Protean’s business model is asset-light with some proportion of revenue, which is annuity-type, enjoying high operating leverage and has a track record of healthy profitability and cash generation.
Protean’s business moats and humungous growth opportunity in the digital public infrastructure space outweighs the muted performance in Q3 FY24. Hence, investors should keep the stock on the radar.
Subdued Q3 FY24
The company’s revenue has seen consistent growth even as expenses jumped in Q3. Revenues from operations in Q3 increased to Rs 204 crore, a growth of 16 percent YoY. The increase in revenue was led by robust growth in identity services, partially off-set by a decline in tax services due to seasonality.
The employee expenses jumped 49 percent YoY in Q3 FY24 as the company has been investing in people and technology for future projects. Consequently, the EBITDA declined 28 percent.
The company recorded a credit loss of Rs 7 crore in line with conservative accounting policies on receivables from the government. It is worth noting that while Protean collaborates with the government in establishing DPI, only 12 percent of total revenue comes from the government.
A significant portion (around 80 percent in Q3 FY24) of Protean’s revenue is generated from offerings that are based on a per-transaction basis and the remaining 20 percent of revenue is annuity like.
The encouraging aspect is that the underlying drivers for Protean’s business (online PAN verification, e-KYC Transactions, Aadhaar Authentication, etc) have shown healthy growth in 9M FY24.
For instance, pension penetration is hardly under 14 percent in India compared to other developed countries in Asia, which is somewhere around 70 percent. There are around 6.8 crore pension accounts. This is a very small number compared to even EPFO numbers. So, the headroom for growth in NPS is humungous.
New verticals to drive future growth
Protean’s current top line is contributed mainly by three business lines – tax services, NPS, and identity services. It is diversifying into four more, three of which are open digital ecosystem (ONDC), data (account aggregator), and cloud and infosec services.
Protean is the only technology service provider which powers the entire network on which the ONDC ecosystem is sitting. Likewise, it is involved in providing foundational digital infrastructure interventions as a technology service provider in the space of agriculture, health, education, mobility, and e-commerce.
Another growth lever for the company will be taking the entire stack of 6-7 lines of business into international markets, especially in developing countries.
Such multi-term population scale projects offer revenue visibility.
Valuation rich but justified
Protean is trading at 34 times FY25 estimated earnings. Valuation is rich but justified by Protean’s dominant market position in e-governance space, unique business moats, and tailwinds from growing digital penetrations.
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