While the IT index has been flattish over the last month, one stock has been on a roll — the stock of SaaS company RateGain Travel Technologies is up 32 per cent in the same time. The stock, which had its IPO in December 2021, priced at ₹425, is still down 12 per cent from the issue price (in our IPO note, we had recommended that long-term investors avoid the issue). A year post listing, is the recent rebound justified and are the valuations reasonable?

Fundamental analysis indicates the stock remains expensive and long-term investors can continue to avoid it for now, although the company is in a niche space within the Indian IT sector. Post the recent rebound, RateGain now trades at one-year forward EV/revenue (Bloomberg consensus) of 4.7x and an EV/EBITDA of 30.6x. Compare this to best in class and global pure play leader in SaaS – Salesforce (NYSE listed),  trading at one-year forward EV/revenue of 4.5x and EV/EBITDA of 14.4 x.

Not only is Salesforce more profitable at the EBITDA level with FY23 margins estimated at 33 per cent, versus RateGain’s 13 per cent, its four-year revenue CAGR (FY19-23) at 24 per cent also is superior to RateGain’s 19 per cent. Home-grown company Freshworks (Nasdaq listed) trades at one-year forward EV/revenue of 5.3x. While unprofitable at EBITDA level, Freshworks is expected to deliver better FY19-23 revenue growth with four-year CAGR at 36 per cent.     

Acquired businesses

However these differences in valuations apart, we had referred to an interesting dichotomy. What is that? This is the value at which RateGain is able to acquire other high-growth SaaS and related businesses. RateGain has good track record of growth via successful acquisitions. But the dichotomy lies in valuation multiples (EV/revenue) that public investors are willing to assign to RateGain for its business prospects as against the multiples at which RateGain is able to scoop and integrate smaller companies into its fold.

One of the reasons RateGain stock has been buzzing in the last month is on news of it acquiring Adara. As per RateGain’s filings, Adara is one of the world’s largest travel data exchange platforms and has a SaaS revenue stream.  RateGain is acquiring Adara at a very cheap multiple of 0.6x its FY22 revenue. This is when Adara reported revenue growth of 29 per cent in FY22, although growth appears to have slowed down in FY23. Adara is no small company either, with FY22 revenue a little more than 50 per cent of RateGain’s revenue. Now, contrast this with RateGain being valued at a pricey 11x its FY22 revenue, with  revenue growth at 45 per cent for the year. Sure, there are other factors to consider, like margins and synergies from integration. However, the acquired businesses are given higher multiples by public investors as soon as they are acquired and folded into RateGain. It’s like the value of the same asset triples or quadruples as soon as it is acquired by RateGain! We had mentioned in our IPO note in December 2021 that acquisitions prior to the IPO were also done at much lower multiples compared to the asking rate in the IPO.

This raises the question, who is getting it right. Is the valuation at which RateGain is acquiring these businesses the right one, or the value the public investors are assigning to RateGain (and its acquired businesses) correct? Time will tell, but for now, based on listed comparables, RateGain appears to be trading on the expensive side.

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