Aggregating profits Tanla Solutions

Tanla Solutions is poised for strong growth on Openbit acquisition, foray into new geographies and improved penetration in existing markets.

Even as the number of mobile users globally continue to rise at a rapid rate, the mobile service operators are feeling the heat in the voice-based segment with their average revenue per user (ARPU) heading southward.

The trend points towards operators needing to constantly launch greater number of value added services (VAS) to drive aggregate ARPUs. This augurs well for aggregators like Hyderabad-based Tanla Solutions (Tanla), specialising in developing mobile applications and platforms, primarily for the mobile telecom industry.

Business
Over the last eight years, Tanla has evolved from a mere telecom product licensing company to providing integrated telecom products and services on a revenue / pay for use revenue model.

The company offers aggregation services (by acting as a single point interface between content developers like ESPN, Disney and mobile network operators like Airtel, Idea), telecom-signalling products to mobile operators and offshore services in the area of application hosting and infrastructure management.

With its focus on the sophisticated mobile VAS markets of UK and Ireland (estimated size $1.5 billion) that generate more than 95 per cent of the company’s revenues, the company has cornered a market share of about 5 per cent in these markets.

The company intends to increase its market share to about 8 per cent in FY09 by bundling solutions in billing and applications, and increasing its presence in the rich content arena.

In the aggregation business, relationships with global telecom operators are crucial and Tanla scores favourably on this front. The company has strong business ties with Vodafone, O2, T-Mobile, Virgin, Orange and 3 (Hutchison); encompassing relationships with all the mobile operators in UK, which gives it a strong lever to gain market share.

Growth strategies
Tanla recently acquired 85 per cent of Finland-based Openbit, a provider of global on-device payments for mobile applications for $18.6 million. Openbit is used as a payment gateway, which facilitates payment through mobile phones with support from credit card companies. Openbit’s clients include Nokia and some of the largest independent software vendors like Symantec, F-Secure and Quickoffice, and gaming companies like 3D Arts and Gamelion.

Openbit was installed in 1.4 million handsets during June 2008, which is typically a lean period for the company. This enabled Openbit to register revenues of Rs 7.4 crore and PAT of Rs 1.6 crore (revenue recognised for the month of June 2008 only).

The company plans to scale up the number of installations to 50 million by end-2008 and 190 million by 2009. The Openbit acquisition will help Tanla move higher up the value chain and provide rich media and business applications.

Tanla not only gets access to Openbit's proprietary technology and applications, but also its customer-base of 90 operator networks across 30 countries. The acquisition is expected to be 10-11 per cent EPS accretive in the first year of operations.

Tanla entered India in Q4FY08 and signed billing and messaging agreements with service providers such as Airtel, BSNL, Idea, Reliance, and Vodafone.

Apart from this, Tanla also entered into tie-ups with operators like Airtel and BSNL for FM radio service on the move and setting up voice portals across India, respectively.

The company is already live with all major operators for premium SMS, which would be further aided by its tie up with five TV channels for Interactive TV (ITV) services. As the name suggests, ITV helps media channels to run interactive services with their viewers.

Connectivity agreements were also signed with operators in South Africa, Dubai, Spain and Singapore.

Notably, revenues for all these engagements are expected to accrue from Q2 FY09 onwards. Tanla has an ambitious plan to expand geographically by expanding it footprints from nine countries currently to 40 countries with direct connectivity in 28 countries in FY09.

Financials
Tanla has consistently reported robust performance, with CAGR of 170 per cent in revenues and 132 per cent in net profit over FY06-08.

The company’s growth continues to be driven by both increased penetration into existing markets as well as expansion into newer markets, with the aggregator business remaining the key growth driver and focus area.

All the three businesses have high margins, upwards of 35 per cent.

ROBUST GROWTH
Rs crore FY08 FY09E FY10E
Net sales 459.8 689.0 938.0
Net profit 163.1 229.3 281.0
OPM (%) 46.8 46.0 45.6
NPM (%) 35.5 33.3 30.0
P/E (x) 13.1 9.3 7.6
E: Analysts estimates

The company is a debt-free company and a total cash on books stands at about Rs 200 crore, which gives the company fuel for further acquisitions.

Investment rationale
As per industry estimates, the global market for VAS stands at $25 billion in FY08, and is growing at 25-30 per cent annually.

With its suite of end-to-end solutions, Tanla appears well-poised to tap the opportunity going forward. Its key competitive advantages are its lower costs vis-à-vis competition in the overseas markets, wide product and service offerings and long experience.

One of Tanla’s key strategies to drive revenue growth going ahead is geographic expansion, which will not only provide momentum to its growth but also de-risk its business model.

Visibility for Tanla’s aggregator business appears strong with its entry into newer markets like Singapore, Dubai, Spain, South Africa and the US.

Going forward, Tanla’s revenues and profits are expected to grow at a CAGR of 42 per cent and 31 per cent over FY08-10, respectively. The lower profit growth is a result of contribution from the low margin business of Openbit, change in the revenue mix with increasing share of aggregation business and higher costs due to international expansion.

However, EBITDA margins above 45 per cent and net profit margins of 30 per cent still characterise the strong business model of Tanla. With the recent fall in the equity market, at Rs 213.45, the stock is attractive and can deliver over 30 per cent in a year.
Source : The Business Standard dt. 28 7 2008