Ebix Inc. (EBIX, Financial) looks like a classic falling knife.
Headquartered in suburban Atlanta, the company specializes in developing and deploying insurance and reinsurance exchanges through software-as-a-service solutions, focusing on customer relationship management, front-end and back-end systems and outsourced administrative and risk compliance.
Ebix also operates a financial services business in the Indian and Southeast Asian markets through a subsidiary called EbixCash, which is based out of Noida, India. Offering money remittance, foreign exchange, travel, prepaid gift cards, utility payments, lending, e-wallet and wealth management services, the subsidiary operates India's airport foreign exchange business in about 20 international airports. The company has been planning to spin off the EbixCash business for some time now, but it keeps being delayed. First it was because of the Covid-19 pandemic, which severly affected the business given its exposure to travel, and then various other reasons like getting the requisite government clearances in India as well as lawsuits. The IPO appeared to be imminent over the summer, with Ebix CEO Robin Raina doing his promotional rounds in the media, but then the news flow on the subject has tapered off.
I reviewed Ebix about two and half years ago, but decided against investing as the company, despite being cheap, had a number of red flags. The red flags I had noted related to frequent changes in auditors, the company taking out a lot of debt to fund acquisitions in Asia, declining return on invested capital and the lack of transparency in reporting.
Since then, the stock has fallen from the $30 range to the $7 range now - about an 80% decline. The stock is also heavily shorted, with 24% of the total shares outstanding currently sold short. This is certainly a battleground stock, to put it mildly, and it has been like this for years. The continuing delay in the spinoff of the EbixCash business is not helping matters with the shares at new lows.
The company also recently reported very poor second-quarter results with revenue per share down 53% from a year ago and net income crashing 98%.
Ebix's profit margins have been declining over the years. Part of the problem is the company's investment in its Asian businesses (currency exchange and travel), which have low margins, though its U.S.-based IT business does not look bad. However, the company does not break down the various business segments (which I continue to find strange), so the results are muddled with high-profit businesses mixed together with low-profit ones as well as new ventures.
Despite these concerns, however, the company continues to generate decent free cash flow.
The following table shows Ebix's operating income over the last five years. Growth has been erratic and seems to have fallen off a cliff in the last year.
Growth per share | 10-Year | 5-Year | 1-Year |
| Revenue | 23.30% | 24.60% | -12.40% |
| EPS without NRI | 4.40% | -8.10% | -52.00% |
| EBIT | 9.70% | -1.10% | -1.20% |
| EBITDA | 10.20% | 1.20% | -2.20% |
| Free Cash Flow | 4.70% | -1.50% | 2.30% |
| Dividends | 7.40% | - | -50.00% |
| Book Value | 8.30% | 6.80% | -0.50% |
Further, the price-earnings ratio is 6.73.
Debt
A look at the latest quarterly balance sheet shows most of the debt is short term and in the form of a line of credit ($620 million). This means the bankers have Ebix on a short leash.
Quarterly interest payments and related credit fees have been ramping up quickly, which is pressuring the income statement. GuruFocus estimates that the effective interest rate on debt is now 15.6%.
Ebix has been counting on the EbixCash IPO in India to raise cash so it can pay back the debt. Raina declared as recently as Aug. 9:
“Our operating results in Q2 2023 are in line with our expectations. We are fully aware that non-operating costs like the cost of debt and the associated advisory costs associated with it, continue to hamper our overall financial results. We are accordingly still committed to the aspirational goal of a debt-free Ebix in the year 2023 itself."
Over the summer, various brokerages were projecting the EbixCash IPO would raise 80 billion Indian rupees ($962 million). This would have been enough to cover the company's debt, but recent developments make this look doubtful.
Recent developments
On Oct. 2, Ebix announced it has extended its credit facility repayment date to Nov. 15 as it explores strategic options. By Oct. 31, it will decide on an amendment of credit terms or alternative transaction for repayment. The company plans to sell specific U.S. assets or combine them through an outbound process (whatever that is). Additionally, the company has added two independent directors to its board, Elizabeth LaPuma and Jill Krueger. These two are likely representatives of the creditors, who are getting anxious to get their money back or extract better terms.
To me it looks like Ebix is approaching crunch time vis a vis its creditors. Its appears the EbixCash IPO may not happen in time to pay down the line of credit and the bankers are holding the company's feet to the fire. This means Ebix will have to sell its cash flow positive (but declining) U.S. businesses or raise equity (thus dilute existing shareholders) via sale of shares or issuance of convertible debt. As such, common shareholders could be in for a painful time. Its shares have fallen over 50% in the last month as the market waits for the other shoe to drop.
