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We recently interacted with Route Mobile Limited (Route) senior management for an update on key business developments. Route is confident of exceeding its FY23 revenue guidance and delivering ~60% YoY growth (vs guidance of 50% YoY stated in Q1FY23 earnings call) led by: 1) strong volume growth driven by recent deal wins and ramp-up across multiple enterprise clients, 2) increase in ILD (international longdistance) prices (with effect from Q2FY23), 3) possibility of increase in NLD (national long-distance) prices, and 4) strong seasonality of acquired business (Masivian, based in LATAM) in overseas markets.

Management mentioned that aggressive pricing offered by a telco for a large PSU banking client in Q1FY23 was a ‘one-off’ event. Moreover, subsequent RFPs have seen rational pricing. Management acknowledged that competitive intensity has increased from large telcos though Route is able to maintain its margins as well as gain market share, especially from global competitors with leveraged balance sheet.

With pricing pressure from telcos not persisting, we expect margins to improve for Route going forward. Growth leverage and shift in revenue mix towards high-margin portfolio (higher share of developed markets and new channels) are key margin levers ahead. Margins will also likely benefit from ILD price increase in Q2FY23 (on 5 th Aug’22, network operators increased prices for all international messages terminating in India from 3 US cents currently to 4 US cents). We expect EBITDA margins to be at 11.5% for FY23E.

Considering management’s commentary of potential to outperform its earlier guidance of 50% YoY revenue growth, we now model 65%/17% YoY revenue growth for FY23E/FY24E leading to increase in our revenue estimates by 10%/11.5%. Given earlier perceived pricing pressure no longer likely, we increase our EBITDA margin estimate by 89bps to 11.5% for FY23. We also adjust no. of shares (62.1mn shares post buyback) to account for buyback of Rs1.2bn (Rs1,700 buyback price per share) completed on 29th Aug 22. Above changes lead to increase in EPS estimates by 22%/8.5% for FY23E/FY24E and we arrive at revised DCF-based TP of Rs1,520 (implied multiple of ~32x on FY24E EPS).

We upgrade Route to ADD (earlier: Hold) given: 1) accelerated growth in FY23E, 2) earlier expected pricing pressure due to telcos in CPaaS market no longer likely, 3) potential market share gains, and 4) improving margin profile.

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