Vakrangee's strong play on rural growth

Growing network of Kendras and tie-ups with Amazon, Aramex to fuel growth

Over the past few years Vakrangee has evolved, from a sub-contractor and information technology (IT)-enabler for e-governance projects, to a company taking on projects on its own.

Rising revenue contribution from its retail network, Vakrangee Kendras, has enabled it to move away from capital-intensive and low return ratios e-governance projects to an asset-light business model, with high return ratios. The share of these Kendras (all on a franchisee basis) in revenue has surged to 60 per cent, from 34 per cent in FY13, with the rest from e-governance.

The management believes the Kendras will contribute all their revenues by 2020. Vakrangee provides all its services through these Kendras, which are small (around 200 sq ft) outlets in under-served rural areas. In addition to e-governance and Aadhaar card services, it sells insurance, opens banking accounts, makes payment of bills and provides mobile phone recharge through these outlets. Recent tie-ups with Amazon and Aramex will be other strong growth drivers for these Kendras.

“Amazon’s tie up with Vakrangee is helping it to penetrate the rural hinterland and urban slums, wherein it is otherwise difficult for e-com companies. As of June, Amazon was already active in more than 1,000 outlets, with plans to increase to 75,000 outlets by 2020,” wrote analysts at Bank of America Merrill Lynch, in a recent report.

For Aramex as well, these Kendras will provide parcel booking and collect payments. Vakrangee plans to expand these from 21,820 outlets currently to 35,000 by March 2017 and 75,000 by March 2020. The management has forecast FY17 revenue at Rs 3,800- 4,000 crore, growth of 19-25 per cent over FY16.

As these Kendras are a franchisee model, Vakrangee’s operating earnings margin could come down from about 26 per cent currently to 20 per cent. However, the management remains confident of good growth in net profit.

Vakrangee has been appointed as a business correspondent by various banks for opening of accounts and other banking services in rural areas. It also has a Reserve Bank of India’s licence to set up and manage 15,000 ATMs. The company, thus, is an important part of the government’s financial inclusion plan.

The scrip has outperformed the BSE Sensex consistently over the past year, up 75 per cent to Rs 234. Despite the rise, the scrip trades at 26 times the FY17 estimated earnings, close to its historical average. Given the strong revenue visibility, a near zero-debt balance sheet and healthy return ratios, the stock could continue to give attractive returns.