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India’s premier play in fast-growing CPaaS space

* ROUTE is a leading player in Communications Platform as a Service (CPaaS) with strong relationship with telecom operators, particularly in the Indian subcontinent, MEA and LatAm regions. Strong industry tailwinds (~30% CAGR over 2020-25E), presence in fast growing markets and new product expansions should drive revenue/EBIT/EPS CAGRs of 25%/33%/34% over FY21-24E.

* ROUTE’s EBITM is expected to expand ~210bps over FY21-24E on the back of operating leverage with growing scale and increasing revenue share from new more profitable engagement channels and products.

* Global scale, direct reach with over 265 MNOs and access to over 800 mobile networks enable ROUTE to offer flexibility of multiple routes, swift delivery and lower cost of delivery per message, driving strong value proposition to clients and better mining.

* We initiate coverage on the stock with a Buy rating and a TP of Rs1,820 at 44x Jun’23E EPS (backed by our long-term DCF analysis), considering favorable industry tailwinds, asset light business, strong earnings profile (~34% CAGR over FY21-24E), return ratio (>25% ROE) and cash generation (~100% FCF/profit).

Industry tailwinds to support strong growth momentum:

Strong presence in fast growing markets, growing product offerings and strong industry tailwinds (~3.5x growth over 2020- 25E) should support revenue growth. With the rise of social media and growing channels of communications (like email, RCS, WhatsApp Business), communication between enterprises and consumers has become clouded, which is driving the use of CPaaS to integrate these siloed communications, to collect consumer insight and to give better customer experience. Usage-based pricing model helps ROUTE to participate and benefit from higher consumption over time even after factoring in price discounts passed on upon reaching certain volume thresholds. Strong presence in the fast-growing Indian subcontinent, MEA and LatAm markets and growing digitization in these markets provide tremendous growth opportunities.

Super network, scale and global presence give competitive edge:

ROUTE has direct relationship with over 265 MNOs and access to over 800 mobile networks. Super Network, scale and global presence enable ROUTE to offer flexibility of multiple routes, swift delivery and an ability to optimize cost of delivery per message to its enterprise clients. These factors also give ROUTE a competitive edge as large enterprises prefer to deal with vendors having a global presence, trusted partnership with MNOs to monetize traffic and their infrastructure effectively, and better rates from telecom operators with higher volume commitments.

Expect earnings to grow at 34% CAGR over FY21-24E:

Industry tailwinds, presence in fast growing markets and rising share of new products should drive a ~25% revenue CAGR over FY21-24E (lower than the industry to factor in dependency on relatively slower growing SMS messaging). Rising share of new channels like RCS, WhatsApp, email, voice, etc. (higher gross margins than SMS) and better business mix would drive gross margin expansion. Growing scale of business will drive better gross profit to EBITDA conversion. Strong revenue growth and ~210bps expansion in EBITM will drive a 34% EPS CAGR over FY21-24E.

Key Risks:

1) client concentration; 2) failure to adapt to the changing technological requirements; 3) foreign exchange.

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