Protean EGov Technologies Ltd – A Play on the ONDC, Digital Policies

A Pioneer in Digital Public Infrastructure and Digital India

Brief Introduction

Protean E-Gov is the only company in India offering all facets of digital identity and leading the way in the development of Open Digital Ecosystems, data stacks, cloud, and InfoSec services. It maintains dominant leadership across the domains of Tax, Pension and Identity services. Within that, in the Pension Services, this is the most accretive in terms of the gross margin.

Company largely serves the BFSI sector, capital market participants in enabling these transactions, be it for account opening, be it for supporting capital market transactions above a certain value, be it for supporting any property purchase, wherever the PAN card is required for validation. So, this aspect of digital identity is run on a database that the company manages for the nation.

Currently, Protean is involved in five specific digital infrastructure sectors. They are contributing and powering ONDC, which is supporting e-commerce and mobility. Also, likewise involved in providing foundational digital infrastructure interventions as a technology service provider in the space of agriculture, health, education and skilling (Huge Opportunity in Future)

Another important aspect for the Company under ODEs (Open Digital Ecosystems) is the data exchange foundational layer, which is in the form of the account aggregator. That is where the company has an operational account aggregator license and they are building a business on top of their digital identity business to provide data analytics and data exchange services. Last but not the least, looking at these three verticals, the fourth one is clearly about Powering Enterprise Digitization.

Company has a diversified customer base of over 1,500 corporates.

FY24 Revenue

• 80% of our revenues are transactional, while the remaining around 20% is annuity based.
• More than 65% of our revenues come from B2C segments,
  around 20% from B2B segments with corporates as clients and
  Only 12% of the revenues are dependent on government billings.

Current Business and New Verticals

Top line is largely contributed by three large businesses, two of them being on the e-governance platform front, which is taxation and Pension.

• Taxation
• Being the central record-keeping agency for pension services. (Higher Gross Margins)
• Provisioning of Digital Identity.
• New Verticals – Open Digital Ecosystems, second is on Data Stack (GOI Big Focus) and third is on the entire Cloud and Infosec services (RBI Big Focus) and Fourth being Going International.

For ONDC – Company is the only technology service provider which powers the entire network. the entire search runs on our gateway,

• Company is also providing enterprise tech providing capability to buyer and seller applications to integrate into the gateway, providing adapter services, and also at the same time building applications, seller applications, buyer applications, which is basically a model in which the company designs, builds the technology, has a design and implementation cost, and then it runs like a SaaS model. (Holds 5.56% in ONDC)
• The network uses interoperability, common rules of engagement at the network-level and dynamic, digital contracts to allow Network Participants to coordinate their actions to successfully complete orders on the Network and fulfil them.
• This is a digital infrastructure play and it will be very similar and akin to what NPCI does with UPI.

Taxation Services

The company’s primary work in this segment is the issuance of fresh PAN cards, re-issuances, updating of PAN CARD and running of the TIN Facilitation Centres and PAN Centres across India. The finance minister Nirmala Sitharaman said that PAN will be made as a single business identifier for each company making it a document acceptable to all departments or ministries at the Central & State level.

PAN: 3-player market – Leading cumulative market share of 63%. Today, the company manages over 74.7 crore PAN records

Growth Drivers

• Growing use cases leading to high usage of PAN.
• PAN being the single identifier for businesses and any financial transaction.
• More than 1.2 cr youth enters the workforce every year.

• 50crs Indian population doesn’t have a PAN Card yet.

• Financial Aid schemes including Pradhan Mantri Vidya Lakshmi Karyakram require PAN to avail.

Pension Services

The company-built India’s first Digital Pension Infrastructure and is currently India’s largest CRA for NPS and APY. As a CRA, Protean established IT infra, handles administration & customer service functions for all subscribers.

Pension penetration in the country continues to be in single digits. Company continues to maintain a 100% market share in the Atal Pension Yojana (APY) and an aggregate market share of 97% across both the schemes i.e. NPS and APY. This is a 3-player market with Protean having a leading market share of 97%

Till date company has issued 480mn+ PAN Cards – the first digitally verifiable ID, 11.9bn+ Online PAN verifications.
New Thrust and other Drivers – Company has received a major thrust during the recent budget announcement with the widening of the National Pension Scheme (NPS) coverage to approximately 40 crore minors. This makes NPS a more inclusive lifecycle instrument promoting savings from an early stage.

• Private Sector Opening Up to Pension as an Investment Option – Only 6% of private sector employees in India have pension coverage in India currently, compared to nearly 70% in the U.S., the opportunity for expansion is significant.
• There are only around 7.6 crore pension accounts (NPS & APY combined) as compared to around 54 crore Jan Dhan accounts.
• The Budget 2024, increased the threshold for NPS contribution by employer for private sector employees from 10% to 14% making NPS a more lucrative instrument for saving.
• The nascent stage of the pension industry in India and the strong support provided by the government, company remains very optimistic about the future growth in this line of business.

Identity Services

Adoption of digital payments, digital lending and increased penetration of digital processing of documents across governments and private organisations have created multiple use cases and fostered demand for E-KYC, E-Sign, Online Pan verification and Aadhaar Authentication services. The identity services business saw exceptional growth of 62% in FY24.

Protean continues to be uniquely placed as the only company offering all four facets of digital identity, thus providing corporations a single stop for enabling various digital journeys.
Vertical Integration – As a part of their strategy to enable vertical integration of services, Protean has created significant assets in the application space powering end-to-end enterprise digitization. They have launched a host of innovative products like multi-sectoral API marketplace, digital documentation suite, AI-based Reg-tech and analytics solutions to enhance efficiency, improve accuracy, reduce risks and provide a seamless digital experience

Under digital identity, Company operates as a licensed service agency for UIDAI, offering e-KYC and e-authentication services. And lastly, they are a certified authority for e-Sign, which is today used to sign any document digitally using Aadhaar as a validating or authenticating ID (PAN verification, e-KYC, e-Auth and e-Sign)

Growth Drivers

• Many government schemes require an active PAN card, so verification and authentication becomes important.
• Large Volume of Transactions: While the per transaction revenue might be nominal, these verifications occur on a very large base, allowing for high volume growth.
• Growth of Fintech Industry: The expanding fintech sector, driven by new entrants and significant investments, is expected to increase the demand for digital verification services as more diverse offerings emerge.
• Large Unaddressed Headroom: With only 2% of the population as regular digital transactors, the growing e-commerce ecosystem is likely to encourage broader adoption of digital payments, boosting the need for digital verification.

New Business and Products

India’s visionary DPI framework is built on open standards and protocols, Protean continues to expand its multi-sectoral reach towards ecommerce and transport, coming under the vertical of ONDC; Education and Skilling coming under ONEST, which is Online Network for Education, Skill, and Transformation; Agriculture; and Health.
Over the last few years, the Company has accelerated investments in people, products and technology, and built centres of excellence in open source and open standards tech stacks, contributing to multi-sectors ODEs at an infrastructure and innovation level.

Agristack – It establishes a robust framework for seamless data exchange between farmers, government bodies and private entities. This stack is being created as a DPI, a Digital Public Infrastructure, which is designed to revolutionize the data management and information sharing within the Agri sector, leading to enablement of multiple use cases starting from agri-lending to agri-marketplaces to insurance and advisory. This is already under pilot with more than 10 State governments engaged in enabling multiple use-cases.

• ProteanX – Company has launched ProteanX, which is supporting digitally verifiable credentials. This is a future-ready solution, enabling individuals and organizations to create, verify and store credentials using blockchain-based technology. The Use cases, whether it is with regard to sharing your information in the form of certificates, sharing your information in terms of your land records in the Agristack. As long as you have verifiable data, you are able to secure and consume services using the digital public infrastructure.
• eSign Pro – It Supports Digital Signature and Stamping. It will be helpful for sectors like BFSI, Real Estate, Healthcare, Education, and enables you to digitize documents like customer onboarding, legal agreements, student certificates, and records, at a fraction of the cost. It will enable creation of paperless journeys, and company anticipates a widespread adoption of eSign Pro.

Multi-Opportunities

• There has been a concerted focus to take India Stack global, leveraging core multi-sectoral DPI competence in the Indian context. The Company has focused on creating competence in open-source technologies and becoming a certified partner. The company aims to extend its expertise in implementing large-scale, data intensive projects across international markets, with a focus on sectors such as taxation, digital identity, social security, and open digital ecosystems.

• There was equally strong focus on creation of DPI apps and enablement of various MSME services, including credit, leveraging the data DPI. With regard to agriculture, there were call outs on land record digitization, creation of crop registries and issuance of Bhu-Aadhaar, identity linked to land holding. All these initiatives therefore become very convergent with the thrust that the Company has in the area of building, providing and contributing for digital public infrastructure.

• The central bank has asked payments facilitators such as Visa, MasterCard, Google or WhatsApp to ensure that data related to payment systems operated by them are stored only inside the country which gives a boost to the Protean’s business of Digital Cloud and Infosec Services (Article Link).
  Since Protean already has tie-ups with many other banks for their other services like E-KYC, they can leverage their new line of business and can gain further momentum in the line of DPI.

• A New type of Service – IaaS – Infrastructure as a Service and has Multiple use cases not only limited to Financial Inclusion or Social Security but now expanding to different sectors like Real-estate, Agriculture, land records, Healthcare, Education etc. So, the room for growth is very high.

Business MOAT as per my Understanding

• Any sector which mandates digital onboarding of customers, Naturally, it means a strong business case over there because any e-KYC and e-authentication is a line of business which company provides to the market to enable any of these entities
• Infrastructure – There is significant entry barriers for any new participant to suddenly come in and build their entire infrastructure. (Till date done almost 7 billion online PAN validations. And at times in a single day, supported more than 10 billion transactions in a day) Company runs a PAN India network of 166,000 points of service for PAN.
• With extensive experience in collaborating with the government, Protean has played a crucial role in creating digital public infrastructure and has been a trusted partner. Company also has the largest subscriber base across B2C, B2B, B2G.
• End Customer being majority revenues from non-government allows for negative working capital prepayment of services directly from consumers
• GOI has now enlisted Protean under its Development Partnership framework, this will help the company to go international. This becomes natural Strength for the company.

Current Valuations

As of FY24 the company has EPS of 24 Rs and trades at a PE of around 80.
Though given the past growth the stock looks expensive, the increasing use case of their existing products, launch of new innovative products, low penetration of different products like PAN, Pension etc, opening of new business verticals (NPS Minor) and launch of new business like Data Security etc will drive the growth ahead.

What we should look at here is that with the increase in the number of new pensions, pan cards – volume growth will drive the business and margins can also expand (from ET Now Interview).

I personally feel that given the Market capitalisation of around 7000cr and the opportunity size of expanding the services to global and even at homel is lucrative. Currently in talks with around 14-15 countries, the company is having specific focus in Africa and SouthEast Asia and are constantly engaged in early advocacy with key stakeholders to enable them on their path to digital transformation.

Source – AR, Concall, ET Now, NDTV Profit, Economic Times, Management Interviews.