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Navigating privacy and technology challenges will be the key

Privacy being a more central value proposition, than ever, to some big-tech companies (Apple, Microsoft etc.), regulators and governments, internet industry will likely undergo a paradigm shift - from largely an ad-driven to subscriptiondriven one. Apple’s forthcoming app tracking transparency measures can catalyse this change.

Eventual catch up by Android (e.g. like in case of third party browser cookies) should impact data quality and CPCUs for Affle. In addition, (1) insourcing by end clients and (2) ad agencies sprucing up digital capabilities can potentially deflate Affle’s volumes. Churn / disruptive innovation inherent to the business model and M&A integration are the other key risks to a sustainable high growth expectation over medium to long term.

Current valuations (120x FY22E EPS) are led by the ‘high growth staple’ perception and do not provide the margin of safety for above risks. It should be noted that global ad-tech giants (Facebook and Alphabet) trade at significantly lower multiples (20-26x, 1yr forward P/E). Deployment of funds from the proposed fund raise (Rs 10.8bn) will be the key near term monitorable. We initiate coverage with HOLD rating and TP of Rs 5,610.

* Apple vs Affle. Global ad-tech industry is replete with examples of policy change by a dominant player (e.g. Apple) materially disrupting ecosystem partners (e.g. Criteo). Buckled under political / regulatory pressure and limited by the incremental scope for technology upgrades, privacy is becoming a more central value proposition, than ever, to some big tech firms (e.g. Apple, Microsoft). Apple’s forthcoming app tracking transparency is a step in this direction. Even as global ad-tech (e.g. Facebook) raised alarm about its impact on ad-based internet, it is discounted by Indian markets so far. We believe, this has the long-term potential of altering internet business paradigm – from largely ad-driven to subscription-driven one. iPhone usage in core geographies of Affle is limited to ~10-20%. However, in the likelihood of Android eventually catching up (e.g. in case of 3 rd party cookie policy), data quality and CPCU of Affle are at risk.

* ‘High growth staple’ perception needs to be revisited. As the converted user base rises, inherent churn in the business (viz. matrimony) will make incremental growth (> 25% CAGR) / scalability more challenging. Relatively, this also weakens the investment case vs staples / annuity kind of businesses. Historical precedence and Affle’s own evolution suggests ad-tech industry is more vulnerable to the risk of disruptive innovation / obsolescence vs staples where incremental innovation is more prevalent. Industry structure is currently agency led. However, we see likelihood of both end clients / agencies becoming more aggressive (through insourcing / capability acquisitions – e.g. Dentsu Aegis / IPG / Publicis buying Merkle / Axiom / Epsilon) potentially eating into Affle’s volumes over medium term. Back ended risks emanating from M&A integration cannot be ruled out. Meaningful synergies / optionality benefits from acquired platforms are yet to be seen

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