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Weak operating margin due to several operational headwinds

Our view and valuation

Overall, it reported mixed performance for the quarter. While, the revenue for the quarter was inline, EBITDA margin came sharply below estimates on several operational headwinds such as pricing pressure in few pockets, downtime due to modernization of platform and cross currency headwinds. The Q1 is a seasonally weak quarter and that led to sequential dip in revenue. The Wisely platform is shaping up nicely and would drive revenue growth for Platform segment in FY23. It remains a leader in CPaaS space in India, growing faster than the industry. The adoption of CPaaS based A2P messaging across industries continues to drive volume growth for both enterprise and platform segments. We expect EBITDA margin to improve going ahead led by improved execution. Platform segment(higher gross margin) growing faster than enterprise segment will also support margin going ahead. We estimate revenue CAGR of 21.8% over FY22?FY24E with average EBIT margin of 19.1%.  

We maintain BUY Rating on the stock with revised target price of Rs 1,218 per share, based on 22x on FY24E EPS. We have reduced target PE multiple from 30x to 22x to account for lower margin assumption and higher cost of capital(WACC) in this environment of high macroeconomic uncertainty. Trades at PE of 13.2x on FY24E EPS.

Result Highlights

* Reported revenue of Rs 8,001mn( up 27.7% YoY, down 6.2% QoQ). The YoY growth was led by increased volumes in domestic business and faster growth in OTT channels; while the sequential growth was impacted by seasonality in Q1.

* Enterprise segment grew by 28.2% YoY to Rs 7,321mn; Platform revenue grew by 22.7% YoY to Rs 680mn

* EBITDA margin decreased 530 bps QoQ( 530 bps YoY) to 16.3%. The dip in margin was due to operational headwinds such as pricing pressure in select pockets, and downtime due to platform modernization of its legacy systems. Also, cross currency headwinds impacted margin in international business.

* Enterprise business had 16% gross margin vs 23% in Q4FY22; Platform business had 96% gross margin compared 95% in Q4FY22.

* Capex was Rs 247mn vs Rs 272mn in Q4FY22 and Rs 91mn in  Q1FY22

* Cash and equivalents of Rs 9.9bn vs Rs 7.2bn as of Q1FY22. It remains debt free company.

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