The IPO of Protean eGov Technologies (Protean) is possible from November 6th to 8th. The ₹489 crore issue is purely an offer for sale by existing investors. The company is managed diversely and has no circle of supporters. The largest shareholder is NSE Investments with a stake of 24.77 percent, while financial institutions such as SBI, HDFC Bank, Axis Bank, Bank of Baroda, Deutsche Bank AG, HSBC, PNB, BOB and SUUTI own low to mid-single digit stakes in the company.
Originally incorporated in 1995 as National Securities Depository Limited, the company was renamed NSDL eGov Technologies (NSDL eGT) following the spin-off of its depository business into a separate independent entity (NSDL Depository Limited). NSDL eGT was later renamed Protean eGov Technologies in 2021. In its current form, the company is no longer associated or affiliated with NSDL.
His current activities are an engagement with growing e-governance projects and digitalization trends in India. At ₹792 per share, the IPO values the company at 30x FY23 P/E. However, it is important to note that the total profit includes a significant other income component. Adjusting for this (see below) gives a FY23 P/E ratio of around 33x. This may not be cheap considering the FY21-23 revenue/profit CAGR of 11/8 percent. Still, the company still has a long way to go given the growth potential in its core business (it performed well in the first quarter of fiscal 2024) as well as new initiatives that hold potential. We recommend subscribing to investors with a high risk tolerance.
Business and prospects
Protean is an IT-based solutions company engaged in the design, development and execution of nationally important and large-scale greenfield technology solutions. Due to its long-term collaboration with governments (central and state), the company has extensive experience in creating digital public infrastructure and developing citizen-centric e-governance solutions. Since its inception, it has implemented and managed 19 projects spread across seven ministries and autonomous bodies, enabling a transformation in public service delivery. Currently, three segments have grown well, accounting for almost all of the company’s sales and representing its core business.
PAN Issuance and TIN Systems: The company has been an active partner of the government in modernizing the direct tax infrastructure in India through projects such as PAN issuance and setting up of the Tax Information Network and its technology infrastructure for Aadhaar authentication and e-KYC Services. It has a market share of 45 per cent in the PAN issuance segment and 58 per cent in filing TDS returns through TIN systems (FY23). This is largely a B2C business where customers pay the company to use its service to obtain a PAN or file TDS through TIN systems.
Based on the details in the RHP, it is estimated that a total of 657 million PAN cards have been issued in India by FY23 and is expected to reach 890 million by FY27. This implies a potential for 8 percent volume growth in this business (assuming the company maintains its market share). Sales growth will depend on price developments. Although an exact revenue contribution is not available for each of these sub-segments, it appears that PAN (one-time deal) issuance is the largest contributor in this segment. There is scope for higher growth in recurring businesses such as filing through TIN systems and online PAN authentication for transactions.
Central Record Keeping Agency for NPS: CRA acts as an operational interface between PFRDA and other NPS intermediaries. CRA is responsible for building the IT infrastructure and handling administrative and customer service functions for all NPS subscribers. It maintains centralized records of all relevant details and provides reports to all NPS stakeholders. Although this segment is open to competition, Protean has a virtual monopoly share in this segment, with 98 percent share in NPS subscribers (99 percent in terms of AUM) and 100 percent share in Atal Pension Yojana (APY ).
Management believes there is a long growth ahead for this segment as there were only around 1.5 crore NPS subscribers as of June 2023, compared to around 28 crore EPFO accounts. As per CRISIL estimates in RHP, NPS and APY subscribers are expected to grow at a strong CAGR of 17 per cent in FY22-27. This segment includes revenue from B2G (government NPS accounts), B2B (private NPS managers) and B2C (NPS subscribers).
E-authentication: The company’s IT infrastructure network and multi-stakeholder relationships make it a key player in e-authentication of transactions to enable digital transactions. For example, if a KYC process needs to be completed using Aadhaar to open a bank account, this will be made possible through the services provided by the Company and in this case the Company will be paid by the Bank per transaction. As financial inclusion increases and digital transactions continue to increase, this segment’s contribution to the company’s overall revenue may increase. Although detailed information about the segments is not available, the revenue of this segment is currently significantly lower than that of the above two.
New initiatives
Due to its established relationships, software expertise and IT hardware infrastructure, the company has invested in expanding its offerings. One of the key initiatives here is engaging and collaborating with various stakeholders in the widely used ONDC or Open Network Digital Commerce. ONDC is the government’s digital project to develop a holistic, nationwide standardized e-commerce marketplace at the scale of UPI for online payments. Protean is a key and early contributor to the open source community and protocols that power ONDC. It appears well-positioned to capitalize on this opportunity as it gains traction.
Another opportunity the company appears to be interested in is the potential of an account aggregator or AA ecosystem to expand financial inclusion in the country. Under the AA ecosystem, Protean (with the consent of NPS subscribers) will be a financial information provider for banks/NBFCs to use for their loan processing or other business decisions. Another business line the company is considering is managing and providing enterprise cloud infrastructure services, based on the expertise the company has gained from owning and operating data centers for its own business.
These new initiatives are options that are not currently quantifiable but have potential given the company’s previous track record, expertise and digitalization trends.
Finance and valuation
During FY21-23, the company’s revenue grew at a CAGR of 11 percent, while EBITDA and net profit grew at a CAGR of 18 and 8 percent, respectively. However, the company witnessed an acceleration in growth in the June quarter of FY2024, with revenue growing 41 percent year-on-year, while EBITDA and PAT increased 57 percent and 52 percent, respectively. According to management, this was due to accelerated development in its core business areas, such as PAN issuance.
Protean has an immaculate balance sheet with net cash of around ₹700 crore, which is about 22 percent of its market cap at the higher end of the price range. This also enables the company to invest aggressively when necessary to capitalize on the opportunities of its new initiatives.
The company’s core business (reducing net cash from market capitalization and reducing other after-tax income from net profit) is valued approximately 33 times. To justify this assessment, the successful expansion of new initiatives is essential. In the meantime, a strong balance sheet, a stable core business and a good track record can support implementation.
While there are different competitors for different divisions of the company, many of which are unlisted, among listed companies, companies such as KFin Technologies and Computer Age Management Services, which provide recordkeeping and related services to the mutual fund industry, have a P/E ratio of 40 and 43 in fiscal year 2020, respectively.
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