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Growth could continue to surprise

Route Mobile (akin to CPaaS industry) has seen strong growth tailwinds aided by increased digital adoption in recent years which resulted in 45% revenue CAGR over FY20-22. Growth momentum is sustaining through FY23 as well with increased confidence in a likely beat on company’s revised ‘growth outlook of 50% YoY’(note that company started the year with a 40% growth outlook) aided by strong messaging volumes, improvement in pricing on ILD (and potentially even in NLD at the industry level) and upcoming strong seasonality in International geographies. Route sees the recent aggressive pricing at a large PSU bank by a Telco as a ‘one- off’ suggesting that subsequent RFP’s have not seen any aggressive pricing competition. We raise our FY22-25E EPS by 5-8% led by increase in revenue growth assumptions (we raise FY23 growth to 60%+ YoY). Maintain BUY with a revised TP of INR 1,730(V/s INR 1,660 earlier) as we roll forward to Sep’23.

* Confident of sustaining growth momentum: Route Mobile akin to CPaaS industry peers has seen 45% revenue CAGR over FY20-22 aided by increased digital adoption and increasing use cases. The company expects strong growth momentum to sustain as was reflected in the raise in the revenue growth guidance post 1QFY23 results (company started the year with a 40% growth outlook which was subsequently raised to 50% growth). Our discussions suggest likelihood of growth outperformance aided by strong volume growth trends (with ramp ups across multiple Enterprise clients), increase in pricing for ILD business (came into effect in 2QFY23) and potential possibility of increase in NLD pricing alongside the strong seasonality of the acquired businesses in international geographies.

* Acquisitions remain core to growth strategy: Route Mobile has made several acquisitions in recent times for market access as well as to close the service portfolio gaps with the bigger acquisitions till date focused on expanding geographically(Mr Messaging for Europe and Masivian for Latin America). Route is pursuing small tug in acquisitions to further expand the omni channnel stack suggesting that it gives them the ability to cross sell aided by existing client relationships. Importantly, Route suggests that aggressive pricing at a large PSU RFP as ‘one-off’ suggesting that subsequent RFP’s have seen normal competition

* Raise FY22-25E EPS by 5-8%; maintain BUY, TP INR 1,730: We raise our FY22-25E by 5- 8% aided by increase in our revenue growth assumptions as we now build in 60% revenue growth for FY23(V/s 51% earlier) even as we factor in slight margin dilution. We roll forward to Sep’23 and increase our TP to INR 1,730(V/s INR 1,660 earlier). Our target price implies~ 2.6x FY24 EV/Sales and ~35x FY24 PER.

Key takeaways from the investor meetings organised by us earlier this week

Equally focused on India opportunity as well as Global Opportunity Route Management highlighted that they are focused on both the Indian CPaaS opportunity as well as global markets( as evidenced by the acquisitions made in Latin America and Europe over the past 12 months). The company has gained several enterprise clients in India in recent year which has aided market share gains in the geo. Company expects the Indian CPaaS market to be a ~USD 2 bn market over the next 18 months aided by increased digital adoption and further increase in pricing for both ILD and NLD business. Company suggests that it will go after the start ups and the new age companies more aggressively with local presence in Bangalore now and expects this to drive increased traction in the Indian market.

Confident of outperforming the revenue outlook for FY23 Route Mobile guided for 40% YoY growth at the start of FY23 (note that this included significant contribution of full year consolidation of acquisitions made during the year). After a solid 1QFY23 performance, the company suggested of possibility of achieving ~50% YoY growth in FY23. The company is confident of meeting and possibly outperforming the revised outlook in FY23.

Sees a long run way to growth beyond FY23 as well Route Mobile has seen solid growth through FY20-23E however sees a long run way to growth beyond FY23 as well citing underlying industry tailwinds (increased digital adoption, multiple use cases) and further market share gains as seen in recent past in the Indian market for the company. The company suggested that it is chasing a few RFP opportunities which could drive strong growth visibility beyond FY23. Company suggested that pricing for ILD volumes still remains below other markets and may continue to see further increase as has been seen through the last couple of years.

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