Even More Attractive After Price Drop Due To Short Attack –

On June 16th, Hindenburg Research published a scathing report on Ebix, Inc. (NASDAQ:EBIX) titled “Ebix: This House of ‘Cards’ seems to have a glaring fake revenue problem.” This report combines some historical concerns around Ebix with shallow research to create an ominous message for Ebix shareholders. Besides the report’s publication, Hindenburg also revealed that they had a short position on the Ebix stock.

With the report’s release, Ebix stock dropped almost 50% during the day. Later in the day, Ebix published a rebuttal of sorts indicating that they stood by their numbers. By that time, the damage was done. The stock recovered slightly towards the end of the day to around $14 to end the day down by about 37%. The short hit piece by Hindenburg achieved its goal of bringing down the stock price of Ebix. The following day, Ebix released a more detailed rebuttal in the form of clarifications. Since then, the stock price has recovered to around $18, still down about 30% from the report’s release.

The short thesis seems well-timed, as the EbixCash IPO in India was moving closer to getting SEBI approval for DRHP. Also, since Ebix is in a blackout period due to the IPO filing, it was hard for them to respond point-by-point to the short attack. However, one individual investor who goes by the name TheGribbler has researched the questions raised by the Hindenburg report and published a point-by-point rebuttal. The combination of the responses from Ebix and the research note from TheGribbler suggest that the issues raised by Hindenburg are not real issues but are presented just to create doubt in the minds of investors and bring down the price of Ebix shares so that they could benefit from the short position.

The million-dollar question is, how does this affect the pending IPO of EbixCash in India? Interestingly, the Indian media has not picked up on the short thesis story. Also, Ebix recently won a court order to block the Hindenburg story on the web in India. The fact that Ebix was willing to provide the rebuttal and the audited financial report to the court and defend itself seemed to bring back confidence among the investors.

For the last year or so, there has been a palpable change in the air in India that people outside of India do not know about or understand. Indians are brimming with a new level of confidence that has not been there before, particularly in the middle class. There is a push for “Atmanirbhar Bharat” or “Self Reliant India,” where they want to have independent thinking without too much Western influence. This mood is showing up on the stock market investment front as well. It was noticeable when Foreign Institutional Investors (FIIs) started pulling money out of Indian stock markets, the Indian institutional investors and, more importantly, the Indian retail investors stepped in and more than made up for it. Millions of new stock market investors have started investing in the stock market in India during the pandemic. As a result, the Indian stock markets have held reasonably steady compared to their Western counterparts.

Higher participation of the Indian institutional and retail investors bodes well for the EbixCash IPO. Ebix CEO Robin Raina is highly regarded in India, particularly by the media. Indian investors, in their “independent” thinking mode, will likely value EbixCash for what it is worth in the Indian context, assigning appropriate value based on the valuation of its peers. There is a good chance that EbixCash will be able to raise the ~$760m target from the IPO at a valuation they are looking for. So, it is highly likely that the EbixCash IPO will move forward with possibly some minor delays. With the recent decline in price, the current lower price of the Ebix stock makes it even more attractive.

Hindenburg Research Short Attack

Ebix is a global company with operations and entities in several countries generating revenue, making the accounting process very complex. Because of the complexity of the operations and the company’s international spread, Ebix has been an easy target for shorts. As a result, there have been many short attacks on Ebix spanning a decade or more. It was Copperfield in 2011, Gotham in 2013, and Viceroy in 2018. The shorts would dig just enough dirt to create doubt in investors’ minds, then the stock drops and the shorts make their money in the near term. However, time and again, Ebix has come out on top by proving that its finances and accounting are well in order.

The Hindenburg report, which refers to Ebix as a “House of Cards,” does not talk about the consistent and highly profitable insurance exchange and related operations of Ebix. Instead, it primarily focuses on the prepaid card business in India, which adds a lot of revenue at a very low, near 1% margin for Ebix. In 2021, RSM, who were the auditors for Ebix, resigned, complaining that they could not receive adequate information from Ebix about prepaid card operations in India. Since then, Ebix hired KG Somani, an India-based audit firm, as their auditors to complete the audit.

Hindenburg has effectively used the resignation of RSM to create doubt about the whole company and its operations. The Hindenburg short thesis raises three critical points, which are discussed below. Ebix has addressed these in detail in a press release. In addition, as mentioned earlier, the report by TheGribbler, apparently an individual investor, provides more insight and clarifies many issues brought up by Hindenburg’s seemingly intentionally shallow research.

Fake Revenue Claim

• Hindenburg claims that two prepaid card customers, Paytekk and ePocket, accounting for almost 10% of EbixCash’s 2021 revenue, are unknown entities that do not even have a proper office. Also, these entities show only a small fraction of that revenue in their annual filing. In addition, calls to the EbixCash distribution network show that most are not actively selling Ebix prepaid cards. This means, according to the report, that Ebix must be faking the revenue.

Ebix has responded that while Ebix could treat the entire proceeds from the card sales as revenue since they are the manufacturers, their customers may show only the small income from the cards as revenue. This explains the potential discrepancy between the revenue pointed out by the Hindenburg report. Also, the report by TheGribbler gives a detailed account of how these two customers – Paytekk and ePocket – are indeed active entities and very much involved in prepaid card sales.

Also, as per RBI regulations and EbixCash’s contract with issuing Banks, Gift cards cannot be sold through just any EbixCash franchisee or retail outlet, which explains why many of the retail outlets were not selling the prepaid cards.

Fake Store Fronts Claim:

• The next allegation is that, in their corporate presentations, many of the EbixCash storefronts in Mumbai and Bangalore are just photoshopped locations and are likely nonexistent.

EbixCash has pointed out that during covid-19, some branches were closed or merged with other branches with approval from RBI. They have also provided photos of the two closed offices and their replacement locations along with mapping images.

Fake Downloads Claim:

• The next charge is that EbixCash claims 1.5m downloads, while the EbixCash app has only 100,000 downloads with just a 1.5star rating

The Hindenburg report has looked only at the EbixCash app and claims that the download numbers are small, and the reviews are awful for the app. EbixCash has provided the list of apps that they are offering to customers showing that many have good ratings, and the total download actually exceeds 3.5m

In addition to these three claims, there are other claims, including old case studies that the customers cannot corroborate, etc., which are addressed in detail by the report from TheGribbler.

Auditors and Compliance

It has to be pointed out that creating fake revenue is considered criminal conduct by the SEC, and it is likely treated similarly by SEBI. Moreover, EbixCash is audited by two audit firms independently, KG Somani, the auditors for Ebix, and Grant Thornton’s Indian audit affiliate, Walker Chandlok & Co LLP. It is to be noted that whatever information Hindenburg’s research found, the auditors have full and complete access to it. If the auditors are signing off on the books of Ebix and EbixCash, it implies that they are placing their reputation on the line with SEC and SEBI. They likely will not do that unless and until they are convinced that the books are in order.

One accounting issue we mentioned in an earlier article is that Ebix auditor RSM resigned in 2021, pointing to not getting adequate information from Ebix on the sale of prepaid cards. This was a black mark for Ebix, dropping the stock by almost 50%. After that debacle, Ebix management engaged the forensic accounting specialists Alixpartners to conduct a thorough review of the prepaid card business. Ebix Board reviewed the study results and concluded they were in full compliance. Maybe expecting such short attacks in the future, the management decided to do a dual audit with two independent audit firms doing the audit and signing off on it.

Highly Regarded Board of Directors

In the past, there have been complaints that the directors on the board of Ebix were not very effective and had no authority to oversee CEO Robin Raina. However, when Robin Raina formed the board of EbixCash, he made sure to bring in people of high reputation within India and internationally along with solid financial industry backgrounds.

For example, Mr. Kothari was a Professor of Accounting and Finance at MIT’s Sloan School of Management. From 2019 to 2021, he served as Chief Economist and Director of the Economic and Risk Analysis Division at the U.S. Securities and Exchange Commission. In addition, he was recently awarded Padma Shree by the President of India, one of the highest honors in India.

Having people of such high caliber on the board gives confidence to the investment community as they will not be a party to any deviations from the norms regarding the company’s financial conduct.

CEO with a Mission and the Vision

The Hindenburg report carries a couple of shirtless images of the CEO of Ebix, Robin Raina, with one on his expensive motorcycle, implying that the flamboyant CEO must be making loads of money for himself and not caring about the company or its shareholders. However, the history of Ebix since Robin Raina took over as the CEO paints a very different picture. Robin Raina turned around a loss-making Ebix into one of the most profitable companies in the U.S. Furthermore, it has been consistently profitable for over two decades since he took over as the CEO.

Robin Raina’s personal and management styles and how he approaches an acquisition are very different from other CEOs. However, the proof is in the pudding. Ebix has grown organically and through acquisitions into one of the largest insurance software companies in the world, with a client set that includes some of the top financial companies in the world. For example, software from Ebix enabled Lloyds of London to conduct insurance business digitally, particularly during the painful period of the pandemic.

In India, Robin Raina is a well-respected businessman who is almost treated as a celebrity. His ability to grow the EbixCash business from nothing to one of the top fintech companies in India is well admired. He is seen as a man with a mission and a vision – a mission to create a Multi-National Company (MNC) out of India and with a vision that grows the company profitably, organically, and through acquisitions within and outside India. What is seen as a flamboyant and flashy style in the U.S. is seen as modern and youthful in India. What is seen as rash and risky decisionmaking is considered bold and maverick in India.

In India, where many money-losing startups carry multi-billion valuations, the profitable EbixCash is considered to be almost a model startup. Indian press and TV media are full of praise for Robin Raina and EbixCash. He is routinely interviewed to comment on national business topics and issues, including the Indian budget. Many leading business magazines in India have done cover story articles on EbixCash and Robin Raina that reference his American as well as an Indian success story. Robin Raina was awarded the top 20 Business Leaders of Asia award by the economic times of India recently.

Self-Reliant India with a resurgent economy

There is a sense of optimism and confidence in the air in India, which has not been very visible or noticed outside India. There is a strong move in India to become self-reliant. Indian Prime Minister Narendra Modi’s government has termed this “Atmanirbhar Bharat,” or self-reliant India.

Atmanirbhar Bharat is taken seriously, and there have been many national discussions with economists and business leaders at the national level. Recently, Robin Raina was interviewed at one such conference.

India will be the fastest-growing large economy in the world in 2022. Demonetization, introduced in 2017, was painful, and though it did not achieve its original goal of reducing black money, it did help accelerate the adoption of digital transactions. Moreover, the introduction of UPI, one of the most used payment platforms in the world, along with the most extensive biometric identification system called Aadhaar, has ushered in a revolution in the fintech space.

The second wave of Covid-19 was devastating in India. However, immunity from the initial wave followed by a very successful vaccination drive has effectively controlled and limited the spread of the pandemic. Even though there are still some cases, they are minimal compared to, for example, the U.S. and the hospitalization rates are very low.

Travel surge has increased, and all other economic activities are cranking up. As a result, corporate and consumer travel is expected to be back to almost 90% of the pre-pandemic level. This should help with the travel and foreign exchange-related revenue for EbixCash in Q2’22.

India stock market and recent IPOs

While the U.S. and European stock markets have dropped considerably in the last few months, India’s stock market has held up comparatively well. Year to date, Dow Jones and Nasdaq indices are down 24% and 14%, respectively, while BSE and NSE indices in India are down only by about 8% each. This is despite the fact that Foreign Institutional Investors have been pulling large amounts of money from the Indian stock market for the past nine months. Instead, the domestic institutional investors and the large and growing retail investor base have stepped in and held it up.

After a short pause at the beginning of the Ukraine war, the IPO market has started picking up. In fact, the IPO market in India in 2022 is considered a standout compared to the rest of the world. The largest IPO in India’s history, Life Insurance Corporation of India, was successfully launched in May 2022. Though it went down below the listing price, it has stabilized now. Another IPO of a logistics company, Delhivery, is performing much better than the listing price.

Some companies that went IPO towards the end of 2021, such as Paytm and Zomato, are trading below their price. However, these are loss-making companies with no clear visibility into when they’ll be profitable. On the other hand, profitable companies are doing very well. For example, the stock price of Easy Trip Planners, an OTA in India which went IPO in the early part of 2021, has increased by more than 400% since the IPO because they are a profitable company. Investors, in fact, are hungry for profitable companies in the high technology space.

EbixCash IPO

It is clear that the Indian investors and the investors in the USA are not on the same page when valuing India-based companies. One good example is Yatra Online (YTRA), a well-known OTA player in India. In the Nasdaq, where Yatra is listed, it is valued at around $140m. On the other hand, its peer in India, EasyTripPlanners, a less well-known brand compared to Yatra, with similar revenue as Yatra but with higher profit (which Yatra will likely catch up in the next few quarters), has a valuation of around $1B!

EbixCash is in the desirable fintech space, it has sizeable growing revenue, and it is profitable, and it is likely to grow further with recovery from the pandemic. Moreover, the impact of the short attack on Indian investors will be minimal, given that the exposure to the short article will be very limited since it is blocked on google and Twitter, and also the Indian media has not picked it up. Based on past coverage, the Indian media will likely review the EbixCash IPO very positively. In this context, the IPO of EbixCash is expected to be well received in India.

Ebix Valuation

The insurance exchange part of Ebix has stabilized and is starting to grow. In the last earnings call, Ebix announced the addition of a super broker account Aon to their health exchange. Ebix also talked about another super broker account win which they’ll be announcing soon. The underwriting business, which has been struggling, seems to be stabilizing and recovering. The annuity exchange, life exchange, and consulting services are growing and doing well. The recovery in the core exchanges and in travel and foreign exchange after the pandemic positions Ebix and EbixCash for growth in revenue and profits in Q2 and beyond.

The short attack on Ebix has lowered its valuation from around $1B to about half of that. However, as discussed earlier, there is a good chance for EbixCash IPO to go through around the valuation they have been looking for. In fact, now there is a perfect explanation for why the valuation of the parent Ebix is only around $500m while it is trying to raise money for the subsidiary EbixCash in the Indian market at around 8 to 10 times that valuation – Short Attacks.

A successful IPO, which seems increasingly likely, could bring in more money than the current valuation of the company as a whole. The immediate impact will be that the debt will be cut to less than half making it very easily manageable. The valuation of EbixCash will be reflected in the valuation of the parent Ebix which could be many multiples of the currently battered share price of Ebix. The increase in the stock price of Ebix will likely happen in several stages as the impact of the short attack eases and the events towards the IPO start unfolding. The key events as EbixCash moves towards IPO:

DRHP Approval by SEBI: After taking a couple of weeks of pause after the short attack, EbixCash LM seems to have started responding to SEBI queries. As SEBI has started approving DRHPs that was filed at around the same time as EbixCash, there is a good chance that the SEBI approval could come within the next week or two.

Q2’22 results: Ebix typically reports the Q2 results in early Aug. With the pandemic fading, Q2 results are to be very good because of the travel and foreign exchange recovery from the pandemic and improving prospects in the parent Ebix’s insurance exchange business. It is likely that the results will be announced just around the roadshow phase of the IPO and are expected to make it easier to sell the EbixCash growth and profit story.

Price Band Determination: EbixCash lead managers will go through the book-building process and decide on the price band based on the demand. This price band will determine the listing valuation.

IPO subscription and listing: once the price band is decided, the IPO will be opened for subscription. It takes about a week after the close of the subscription for the stocks to begin trading on the Indian stock exchanges.

The steps mentioned above are critical as EbixCash moves towards the IPO, and each step is an affirmation that the IPO will indeed happen. So the parent Ebix shares may rise as EbixCash IPO progresses through these steps.

Based on the trend, the Indian media will likely cover EbixCash IPO positively; hence, there is a good chance that the IPO will be oversubscribed. Also, after the shares are listed on the stock exchange, the share price in the Indian stock exchange may rise, which in turn could positively impact the share price of the parent Ebix.

Conclusion

The bull case for Ebix remains unchanged despite the publication of the Hindenburg short thesis. Ebix successfully moved to the court to block access to the article through Google (GOOG, GOOGL) and Twitter (TWTR) in India by presenting the results and the rebuttal as evidence. This shows the confidence Ebix has in its numbers and increases the trust level among the investors. In fact, the bull case gets stronger with the accounting issues brought up and responded to in public, suggesting that Ebix does not have anything to hide. With the accounting questions addressed, the chances for a successful IPO improve.

A successful EbixCash IPO in India will drastically cut down the outstanding loan and could potentially increase the valuation of the parent Ebix by many folds. In this context, the stock price drop due to the short attack makes Ebix even more attractive.