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Industry tailwinds plus land and grab to drive strong growth

Route Mobile has continued to pursue the inorganic route in-line with the strategic objective of diversifying into newer markets as well as expanding the product suite in-line with the objective of creating an omni-channel communication suite. Larger acquisitions like Masivian (Latin America) and Mr Messaging (Europe and Africa) have been aimed at geographical expansion. We note that Route’s YoY revenue growth trajectory improved significantly on both an organic as well as reported basis in 3QFY22 and will see further bump up aided by the consolidation of the acquired businesses in the next few quarters. While 3QFY22 results brought about some disappointment on margins , we highlight that Gross margins have improved through the course of FY22 (21% in 9MFY22 V/s <20% in FY21) with EBITDA margins remaining largely flat due to the hit from the recently instituted ESOP plan and other business investments as Route expands globally. We incorporate the details provided for the Mr Messaging acquisition as per the recent exchange filing driving an increase in our revenue/EPS estimates for FY23/24. Indian CPaaS players have not been immune to the global contagion in the SaaS universe, albeit have held up much better than global peers due to underlying growth and profitable characteristics. Retain BUY on Route with a slight revision in TP to INR 2,210 (V/s 2,180 earlier) as we incorporate Mr Messaging acquisition and roll forward to Mar’23 (V/s Dec’22 earlier).

Route Mobile continues to flex acquisitions to expand into newer markets as well as build new product capabilities: Larger acquisitions of Masivian (announced in late CY21) and Mr Messaging (announced in Feb’22) are aimed at expanding in newer markets and using them as beachhead for Omni channel communication play. These acquisitions are aiding revenue growth as was evident in the step up in the YoY growth trajectory seen in 3QFY22 (YoY reported revenue growth improved to 46.2% YoY in 3QFY22, even organically growth improved to 38% V/s <25% YoY growth in 1HFY22). These acquisitions are likely to provide further fillip to revenue growth through FY22-24. Taking note of the recent disclosures on the financial performance of Mr Messaging, we raise our revenue growth assumptions for FY23. We continue to build in a 30%+ revenue CAGR for Route Mobile over FY22E-24E. Increasing contribution of new product channels and geographical mix will aid margin improvement at the portfolio level. While the 3QFY22 margin performance was marred by the newly implemented ESOP Plan, the company has made reasonable progress on margins through FY22. To cite, the company’s gross margins have improved to ~21% in 9MFY22 (V/s 19.7% in FY21) aided by revenue mix. EBITDA margin improvement however has been restricted on account of the ESOP plan led charge in 3QFY22 (1.7% of revenues in 3QFY22 and ~70 bps on a 9MFY22 basis) with EBITDA margins at 13% in 9MFY22 (V/s 12.9% in FY21). We reckon the benefits of improving portfolio mix to reflect in terms of margin improvement and hence bake in ~290 bps improvement in gross margins over FY22-24E.

Global weakness in CPaaS has driven some collateral damage but Indian players have held up much better: The CPaaS players went through a round of significant re-rating starting CY20 as the crisis accelerated the need for digital communication. The sector has also seen significant correction in the past 3M/6M with global peers like Twilio (down 50- 60% over the past 3/6 months) and Sinch (down 30-60% over the past 3M/6M) as global SaaS universe has seen a hit due to concerns around Fed tightening and growth/profitability concerns for some. Indian Techs have not been immune to the contagion with both Route and Tanla (Unrated) also correcting in recent past. That said, Indian techs have still held much better than global peers due to the underlying growth momentum and profitable characteristics. As detailed in Exhibits below, Indian CPaaS players like Route and Tanla (Unrated) trade at similar EV/Revenue Multiples as the group unlike the past when they were quoting at a discount to global peers.

Retain BUY, TP revised to INR 2,210: We expect Route to be a key beneficiary of the continuing industry tailwinds and on-going consolidation of the fringe competition. We upgrade our FY23E-24E revenues by 3-7% and EPS estimates by 1-5%. Our DCF (WACC of 12% and Terminal Growth of 5%) based TP changes to INR 2,210 (from INR 2,180 earlier), implying ~41x Mar’24 EPS and ~3.5x Mar’24 EV/Sales

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