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Revenue beats estimate, margins miss

* ROUTE’s Q3FY22 revenue was ahead of our expectations, whereas margins missed our estimates. Revenue grew by 29.2% QoQ/46.2% YoY to Rs5.6bn (organic 22.1%). EBITDAM declined 160bps to 10.8% on account of ESOP costs, increase in S&M costs and hiring of developers for the Rapid initiative.

* Billable transactions stood at 16.3bn in Q3 (highest ever in a quarter) vs. 10.9bn/8.5bn QoQ/YoY. Acquisitions (Masivian and Interteleco) contributed 3.31bn billable transactions in Q3. ROUTE recorded 13% YoY growth in organic volume in 9MFY22.

* Revenue from new products rose 156% YoY/67% QoQ to Rs277mn in Q3, accounting for 4.9% of total revenue. ROUTE is on track to achieve its target of USD10mn revenue from new products in FY22. Email business contributed Rs52.3mn in 9MFY22.

* We cut FY22-24 estimates by 2.9-8.6%, considering the Q3 margin miss and ESOP charges. We retain Buy with a TP of Rs2,330 at 50x Dec’23E EPS, given favorable industry tailwinds, a strong balance sheet and robust earnings (~34% CAGR over FY21-24E).

What we liked? Strong revenue beat on the back of market share gain, billable transaction up almost 50% QoQ to 16.3bn (highest in a quarter), traction in new products

What we did not like? Q3 margins miss

Revenue beat; growth momentum to sustain in Q4: Revenue grew by 46.2% YoY/29.2% QoQ to Rs5.6bn. Q3 revenue included inorganic contribution from Masivian (consolidated for ~50 days) and Interteleco (consolidated for about a month) acquisitions; organic revenue growth in Q3 stood at 38% YoY/22% QoQ. Q3 gross margin was flat at 21.1%. While Q3 was the best quarter seasonally for ROUTE, the company believes that it will sustain revenue growth momentum in Q4. Billable transactions stood at 16.3bn in Q3 (highest ever in a quarter) vs. 10.9bn/8.5bn QoQ/YoY. ROUTE continues to see strong momentum in the nonSMS business (up 156% YoY to Rs277mn) as next generation messaging channels (IP-based messaging, email, enterprise voice solutions, and unified communication solutions) continue to witness increasing adoption by enterprises. EBITDAM contracted 200bps QoQ to 10.8% due to ESOP costs, increase in sales and marketing costs and hiring of developers for the Rapid initiative. Improvements across client buckets lead to better client diversification, and the company sees immense revenue growth potential with these clients. ROUTE’s deep customer engagement continues to drive high recurring revenues (90% on LTM basis).

Expanded presence in Latin America and Middle East through M&A: ROUTE has acquired Masivian S.A.S. for USD50mn (63.16% upfront and additional 12.28% each after 12, 18 and 24 months) to expand into new markets – particularly Colombia and Peru, and further expand across the Latin American market over the medium term. The acquisition will also unlock cross-sell opportunities to Masivian S.A.S.’s existing client base. It has also acquired 49% shareholding of Interteleco, along with an additional 41% of economic & beneficial interest (including profits, dividends, voting and distributions), for USD2.2mn. The acquisition will help ROUTE establish a direct presence in Kuwait. It has recently raised ~Rs8.7bn through QIP to invest in organic or inorganic growth opportunities to further accelerate revenue growth. M&A will help ROUTE augment capabilities, and it remains an integral part of ROUTE’s growth strategy.

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