The hidden giant behind India’s digital economy holds great potential as India’s economy grows… – Stock Insights News

By Madhvendra

There’s a company that plays a role in your everyday life, even if you’ve never heard its name. From helping you get a PAN card to enabling smooth digital transactions, it works quietly behind the scenes to power India’s digital infrastructure. In this note, we dive into Protean eGov Technologies—its business model, financial performance, and growth potential—to understand why it could be a compelling addition to an investor’s watchlist.

Protean – driving digital governance through its diversified services

Founded in 1995 as a depository, Protean (erstwhile NSDL e-Governance Infrastructure) partners with the government and boasts expertise in developing digital public infrastructure and citizen-focused e-governance solutions.

Since its establishment, it has overseen around 19 projects spanning seven ministries.

These projects encompass modernising the direct tax framework, including the issuance of Permanent Account Numbers (PANs) and the Tax Information Network (TINs), enhancing the old age security system through the National Pension System (NPS), and facilitating the social security initiative via the Atal Pension Yojana (APY).

Additionally, it has supported the banking and financial services sector by offering Aadhaar-based identity verification and e-signature services. It was also designated as a registrar for Aadhaar enrollment.

Protean business structure

The company operates through three main business verticals: e-governance platforms, digital identity, and newly established units: Open Digital Ecosystems (ODE) and enterprise digitisation.

The e-governance sector includes tax services and pension systems, which handle APY and NPS. This segment is the largest, accounting for 84% of the company’s overall revenue. Within this 84%, tax services contribute 66%, while pension systems account for 34%.

84% of Revenue comes from e-Governance Platforms

Source: Ventura Securities

On the other hand, the digital identity segment accounts for 12.6% of revenue. This segment includes PAN verification, Aadhaar authentication, and e-KYC/sign services.

The remaining revenue comes from new business verticals involving ODE and enterprise digitisation.

Now, we’ll examine these verticals and their growth drivers, beginning with e-governance, which includes tax and pension services.

A leader in PAN card issuance

Protean handles applications related to new PAN card issuance, verification, modifications, corrections, and duplicates. Over the past four years, it has issued PAN cards at a compound growth rate of 19%. In addition to PAN, Protean provides a tax deduction and collection account number (TAN).

Tax Services Revenue has Grown at a CAGR of 15%

Source: Protean Q2FY25 Investor Presentation

This market operates as a duopoly, with only two companies (the other being UTI Infrastructure Technology and Services Limited) permitted to issue physical cards.

Protean holds the leading position with a 64% market share, contributing 55% (or ₹4.9 billion) of its total revenue. The Revenue from tax services rose at a 15% CAGR between FY21 and FY24.

PAN card issuance may plateau, but revenue growth remains steady

Over the past decade, India has witnessed a remarkable rise in PAN cards issued. The number has skyrocketed from 2.8 crore in 2014 to 78 crore today.

The online submission of a PAN application costs ₹86 (excluding taxes), with Protean retaining the entire amount. Conversely, an offline application costs ₹91, from which 25-30% is paid as commission to offline agents, allowing Protean to keep 65-70%.

While it’s evident that growth will slow down over time as PAN reaches all eligible entities, income from PAN-related services will grow at a healthy rate.

Nonetheless, there is a rising trend in online applications. As more PAN cards are processed online, with no commissions to pay, Protean will retain the full amount, thus increasing its revenue and profit margins.

Protean dominates India’s pension sector

Protean is the primary record-keeping agency (CRA) for NPS and APY. It was the first CRA appointed by PFRDA in 2008 and is known for establishing India’s first digital pension framework.

As the largest CRA in the country for both NPS and APY, Protean commands a 91% market share in NPS (the other being KFin Technology) and a 100% market share in APY. It has an impressive 97% combined market share (NPS+APY).

The prospects for NPS and APY adoption appear promising, with the pension market still largely untapped. Currently, pension penetration in India is only 8%, compared to 88% in China and 52% in the US, indicating substantial growth opportunity for the sector.

Dual revenue model powers growth in pension services

In this segment, Protean generates revenue through both per-transaction and annuity models. It charges ₹40 per account for account opening and ₹3.75 per transaction. Additionally, the company earns ₹69 annually per account for maintenance.

Revenue from pension services grew at a CAGR of 9%

Source: Protean Q2FY25 Investor Presentation

This segment accounts for 29% or ₹2.5 billion of its total revenue, which has grown at a healthy CAGR of 9% over the past four years.

As the number of subscribers grows, this dual revenue model is expected to drive consistent income, with the potential for significant scalability.

While Protean supports 32 state governments and union territories, the primary growth engine is the private sector, where NPS adoption is just beginning.

NPS Vatsalya, APY & private pension are growth catalysts for the sector

Currently, only 6% of private sector employees in India have pension coverage. Moreover, as of March 31, 2024, only 2.4% of India’s PAN cardholders are enrolled in the NPS, demonstrating a vast expansion opportunity.

The government is also striving to foster a more pension-focused society. It recently increased the cap on employer NPS contributions for private sector employees from 10% to 14%, making NPS a more appealing option for savings and retirement.

Furthermore, the introduction of NPS Vatsalya offers another avenue for Protean in the pension space. Aimed at minors, NPS Vatsalya is projected to benefit around 400 million children.

Additionally, only 5% of the eligible population currently participates in APY. Launched in May 2015, APY seeks to create a social security framework for Indians, particularly those in the unorganised sector.

The number of pension subscribers has grown at a CAGR of strong 26%

Source: Protean Q2FY25 Investor Presentation

With its dominant market position, Protean is expected to benefit from this growth trend, driven by India’s rising per capita income, a young population entering the workforce, and increasing awareness about pensions among individuals.

According to the Protean RHP, the subscriber base for NPS and APY is anticipated to increase at a CAGR of 16-17% through FY27, while total assets under management are projected to rise at a CAGR of 23-24%.

The number of subscribers and AUM expected to grow at 17% and 24% till FY27

Source: Protean Red Herring Prospectus

Digital identity services: another vertical with growing opportunity

Protean is uniquely positioned as India’s sole provider, offering authentication services across all four sectors: Aadhaar authentication, PAN verification, e-KYC, and e-Sign. It earns revenue on a per-transaction basis under this segment.

This sector has grown strongly in recent years, driven by increased digital penetration, notably through governmental initiatives. Numerous schemes now require active PAN cards, underscoring the importance of verification and authentication.

Revenue from identity services has grown at a 37% CAGR

Source: Protean Q2FY25 Investor Presentation

According to Protean’s Annual Report, India has around 750 million internet users, but fewer than 200 million are actively involved in e-retail. The increasing awareness of digital platforms is expected to spur the uptake of e-commerce, digital payments, and digital lending.

These services heavily rely on verification through digital identity, positioning it as a key enabler of India’s digital transformation. As connectivity improves and digital services proliferate, this trend is predicted to experience robust growth in the coming years.

Open digital ecosystem and enterprise digitization

In addition to its two primary business verticals, Protean has ventured into two additional areas: open digital ecosystems and enterprise digitisation. Although this currently accounts for only 3.5% of its revenue, substantial potential exists.

Protean is a leader in developing technology for Open Digital Ecosystems (ODE). This initiative includes several sectors, such as e-commerce (ONDC), education, and skilling.

Business verticals under Protean’s ODE

Source: Ventura Securities

Under ODE, ONDC is Protean’s sole vertical driving revenue, having seen transaction numbers increase fourfold over the past year. Given that digital e-commerce accounts for just 7% of India’s retail market, ample growth opportunities remain.

Number of transactions quadruples in the past year

Source: Protean Q2FY25 Investor Presentation

Protean levies a 0.5% to 3% transaction fee on orders processed through its backend platform via ONDC. The surging transaction volume on the ONDC platform could substantially enhance Protean’s revenue growth in the upcoming years.

In contrast, other sectors are still developing and presently generate little revenue for the company. The cloud and cybersecurity under the enterprise digitisation vertical also possess substantial potential.

What about Financials?

Protean derives 20% of its revenue from annuities, while the remaining 80% comes from transactional sales. This holds substantial growth potential owing to favourable macro trends, such as digitisation and enhanced internet infrastructure.

Despite a revenue increase at a CAGR of 10% over the past four years—from ₹6 billion in FY21 to ₹8.8 billion in FY24—profits have stagnated.

Over this period, profits have remained flat, ranging from ₹92 to ₹107 crore, with a 10% decrease to ₹97 crore in FY24. This is due to Protean’s investment in newer verticals and upgrading its digital infrastructure.

These investments have led to higher capital expenditure, increasing depreciation and amortisation charges, thereby affecting its net profit despite healthy EBITDA growth.

The company’s adjusted EBITDA has seen significant growth, rising at a CAGR of 23% from ₹0.8 billion to ₹1.9 billion, with the margin increasing from 14% to 20%.

What about Valuations?

Given its short trading history, it is difficult to estimate its valuation. However, it trades at a price-to-earnings (P/E) ratio of around 83, a very high premium to its average P/E of 51.

Relatively, we have compared its valuation with Computer Age Management Services (CAMS) and KFin Technology.

Here, too, it is trading at a very high premium to CAMS’ P/E of 54 and KFin’s P/E of 69. This makes Proteans’ valuation relatively unfavourable at this level; however, Protean is worth keeping on the watchlist.

Looking forward, Protean aims to deepen its proficiency in India Stack, open digital ecosystems, and cloud services, which is projected to boost its financial performance significantly.

Additionally, Protean remains net debt-free and consistently generates high free cash flow. The company benefits from significant operating leverage and stands to gain immensely from the network effect.

Disclaimer

Note: We have relied on data from throughout this article. Only in cases where the data was not available, have we used an alternate, but widely used and accepted source of information.

The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educative purposes only. 

Madhvendra has been deeply immersed in the equity markets for over seven years, combining his passion for investing with his expertise in financial writing. With a knack for simplifying complex concepts, he enjoys sharing his honest perspectives on startups, listed Indian companies, and macroeconomic trends.

A dedicated reader and storyteller, Madhvendra thrives on uncovering insights that inspire his audience to deepen their understanding of the financial world. You can connect with Madhvendra on LinkedIn to explore more of his insights and engage in meaningful discussions.

Disclosure: The writer and his dependents do not hold the stocks discussed in this article. The website managers, its employee(s), and contributors/writers/authors of articles have or may have an outstanding buy or sell position or holding in the securities, options on securities or other related investments of issuers and/or companies discussed therein.  The content of the articles and the interpretation of data are solely the personal views of the contributors/ writers/authors.  Investors must make their own investment decisions based on their specific objectives, resources and only after consulting such independent advisors as may be necessary.

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