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In-line performance; likely to outperform initial FY23 outlook

Route’s 1QFY23 operating performance was broadly in-line (even after adjusting for capitalised R&D expenses of INR 59 mn). Company reported revenues of INR 7.3 bn (+16.4% QoQ, +93.1% YoY) which were inline aided by full quarter consolidation of MRM. EBITDA margins improved by 120 bps sequentially to 10.8% aided by flow through of higher gross margins (+130 bps QoQ) reflecting the consolidation of higher margin acquisitions. Route’s 1QFY23 performance is a welcome relief given the sharp hit on margins seen through 2HFY22. Company remains confident of outperforming its FY23 revenue growth outlook of 40% YoY growth, hinting at ~50% YoY growth for the year and remains confident of delivering 11.5-12% Reported EBITDA margins. Route does not cite any significant increase in competitive intensity/pricing pressure as was suggested by peer results and sees that as a client specific situation. We tweak EPS estimates by (0.4%)-4.6% driven by 1Q beat (aided primarily by higher other income and tax write-backs) and also incorporate lower share count to reflect on-going share buyback. BUY stays with revised TP of INR 1,660.

* Strong revenue growth; margin improvement is a relief: Route reported in-line revenues at INR 7.3 bn (+16.4% QoQ, +93.1% YoY) boosted by full quarter consolidation of Mr Messaging acquisition even as organic revenue performance was weak on sequential basis given the usual seasonality. Gross margins improved by 130 bps sequentially to 22.4% reflecting the positive impact of higher margin acquisitions and some price increases taken in the ILD messaging business This reflected in a 120 bps QoQ increase in EBITDA margins to 10.8% (note that we have included INR 58.8 mn of capitalized employee expenses in our operating costs for a like-to-like comparison). Margin improvement is a significant relief given the margin misses through 2HFY22. Net profits however beat expectations aided by higher other income and tax reversals.

* Likely to outperform initial revenue growth outlook; maintains margin outlook: Route had guided for ~40% YoY revenue growth post 4QFY22 results which appeared conservative given that the company will see significant contribution from full year acquisitions made during the course of FY22. The company did indicate the likelihood of outperforming the initial revenue growth outlook and possibly do ~50% YoY revenue growth (similar to our expectations). On margins, the company reaffirmed the margin expansion target for FY23. In addition, Route also suggested a formal dividend payout policy of up to 40% of FCF over FY23-25. Route also downplayed concerns on increasing competitive intensity and pricing pressure as outlined by another peer commentary, suggesting that it saw it as a unique client situation and remains confident of 23% GM for FY23 (and improvement ahead aided by revenue mix).

* Tweak estimates for lower share count; retain BUY: We tweak our FY23-25E by (0.4%)- 4.6% for 1QFY23 performance, lower share count (to factor in ongoing INR 1.2 bn buyback). We maintain BUY with a revised DCF based TP of INR 1,660 as we roll forward to June’23 (vs. Mar’23 earlier). 1QFY23 is a welcome relief after the disappointment seen through 2HFY22 albeit Route needs to carry on the show to build investor confidence.

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