IPO-bound SaaS Company RateGain expects global acquisitions to lift profits as travel picks up

#Bhanu Chopra, #Business, #interview, #IPO, #IT, #RateGain, #Technology

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RateGain Travel Technologies is set to become the first software as a service company (SaaS) company to list on the Indian stock markets. It has received approval from the market regulator, Securities and Exchange Board of India (SEBI), for an initial public offering (IPO) likely in December. People familiar with the development suggest the IPO could raise around Rs 1,200 crore. RateGain is selling a fresh issue of up to Rs 400 crore with an offer for sale (OFS) of up to 22.6 million shares.

Moneycontrol’s Nisha Poddar caught up with Bhanu Chopra, chairman and managing director of RateGain, to understand the profit focus and key metrics for SaaS companies. Edited excerpts:

SaaS commands a lot of interest in the Indian market. What’s your unique selling proposition (USP)? 

If I would want to draw a comparison with traditional information technology (IT) service companies, they usually work on projects that do back-office work, dealing with the IT managers at large Fortune 500 companies, building through a particular speck. Whereas at RateGain, we actually own the intellectual property (IP) and solve an end-to-end business problem for a business user in the travel and hospital sectors; thus you know this model is a lot more scalable.

IT services are usually more reliant on human capital and we are non-linear and thus experience high unit economics, so every dollar of revenue leads to almost 80 percent of gross margin of go through. And you know in IT services largely, it is project-based and non-recurring whereas in SaaS, (it is a) highly predictable revenue stream, very recurring, highly automated….

Compared to Freshworks, which listed and created a lot of interest, you are dedicated to only one space, which is hospitality and travel. So how do you really pitch your future growth prospects to investors? 

If I were to ask you, what is that one thing that you’d like to do as you come out of the pandemic, what would you say?  

Definitely, I know what you are saying. Everyone is dying to travel, but it is also temporary in nature. So I asked you about the sustainability of these valuations. 

So, look like you said there’s a huge pent-up demand. Everybody’s yearning to get out there and I feel at least next four to five years, travel’s going to be the next big sectoral theme. You know if you look at Phocuswright, which is a premier research firm, they predict almost 26 percent CAGR (compound annual growth rate) within travel for the next four to five years.

And you know, if you think about it, travel’s actually become a necessity. We at RateGain feel we are very well positioned to capture this opportunity because we havve really doubled out on innovation and how I think about growth from here. I mean it’s a large opportunity right, it’s north of $90 billion and from a RateGain perspective the way we look to capitalise on it is continuing to penetrate.

Key metrics? What are the KPIs based on which you should be ranked in terms of performance and where you stand? 

Yeah sure, so one of the key metrics in SaaS that you look at is net retention ratio. You know we are at a very healthy 118 percent. Our net promoter score is at 45 percent against our SaaS peers at 32 percent, which measures customer satisfaction. Our lifetime value to customer acquisition cost which the measure sales efficiency is at 8.9 percent versus our SaaS peers at 3 percent. So you know we enjoy a lot healthier metrics if compared to our SaaS peers.

RateGain’s gross margin is 80 percent but it boils down to an EBITDA (earnings before interest, tax, depreciation and amortization) margin of only 10 percent due to dilution from some acquisitions. How are you going to maintain profitability versus growth prospects and there is a metric in the industry of Rule of 40 between growth as well as profitability. Where do you stand on Rule of 40 (that a software company’s combined growth rate and profit margin should be greater than 40 percent)?  

On Rule of 40 this fiscal year, we are experiencing significant growth and also given that we’ve always maintained margins, you know we should exceed the rule of 40 by a huge margin. But I will also comment you know currently if you look at our EBITDA margins it’s a low double digit but we will continue to see expansions because we’ve really invested on growth through launching traditional products you know really focusing on R&D (research and development) and also we’ve acquired companies that see a little bit pressure on EBITDA for now but we believe that as we continue reap benefits of all these new innovations and we’ve demonstrated success and integrating companies, we would see expansion on EBITDA as well.

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