Ebix (NASDAQ:EBIX) stock is plunging lower by over 40% today after Hindenburg Research released a short report on the company. Ebix operates as a software company engaged in payments, travel, information technology and insurance. The company is headquartered in Georgia and employs over 10,000 people.
Ebix is planning a $4.5 billion IPO of its wholly owned Indian subsidiary, EbixCash. At the time of writing, Hindenburg wrote that this would imply an “imminent quadrupling of Ebix’s enterprise value.” However, the IPO has been delayed for the past three years.
From 2019 to 2021, Ebix posted revenue growth of 71%, which was driven by prepaid gift card sales. Excluding its gift card division, the company’s sales would have declined by 32% during the two-year period. Meanwhile, 82% of EbixCash’s 2021 revenue was attributable to its gift card division.
Hindenburg believes that the EbixCash IPO is a “race against the solvency clock.”
Let’s get into the details.
Hindenburg Releases Short Report on EBIX Stock
Ebix currently has $643.9 million in debt “coming due in February 2023” and only $75.9 million in cash and equivalents. It seeks to use $350 million from the EbixCash IPO to help pay its debt.
In February 2021, Ebix auditor RSM resigned because the company refused to provide evidence regarding “unusual transactions related to the Company’s gift card business in India.” The auditor was unable to obtain evidence to allow it to evaluate the business purposes behind the transactions. Hindenburg’s review of Indian corporate records shows that these “unusual transactions” have increased since RSM’s departure.
Furthermore, EbixCash’s gift card division has two customers that brought in $89 million in revenue during 2021. Hindenburg says neither company appears to be “functional” and the top customer seems to have an “undisclosed prior relationship” with EbixCash.
Hindenburg Alleges Ebix Is Faking Revenue
In its most recent financial statement, this top customer reported sales of $151,000. In fiscal 2021, the customer supposedly brought in $46 million of revenue for EbixCash. Hindenburg visited the company’s corporate address and concluded it was no longer in use. The top customer’s key product is an app that has 1,000-plus downloads and only five reviews. The last review was published in 2018.
Meanwhile, the second top customer contributed $43 million in revenue for EbixCash during fiscal 2021. Hindenburg visited the customer’s official address in Delhi and discovered the business is no longer there. The customer’s website is also nonfunctional.
Hindenburg also tested the EbixCash app and noted that most features were inaccessible. An EbixCash representative told the short seller the app was “under maintenance.”
All told, Hindenburg believes that a large part of EbixCash’s revenue is nonexistent. It also believes the IPO will “flop or fail.” The company’s upcoming debt payment in mind, Hindenburg says Ebix faces significant insolvency risk in the next 12 months.
On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.