IGI Logo

Strong operating performance 

Route Mobile delivered better-than-expected operating performance in Q2FY23. Revenue grew by 16% QoQ/94.1% YoY to Rs8.5bn on account of continued traction in billable transactions (27bn in Q2 vs. 25bn QoQ/11bn YoY), uptick in ILD rates in India, and market share gains. Route expects the strong momentum to continue in FY23 and has raised its FY23 revenue growth guidance to 60%, considering strong H1FY23 performance, healthy new client wins, market share gains, currency depreciation, and benefits accruing from increased ILD message charges. Management remains watchful of global macro headwinds such as rising inflation, energy prices, and geopolitical uncertainties; however, management suggested that the bulk of its revenue comes from traffic terminated in emerging markets, and impact in these markets remains limited so far. We have raised our EPS estimates by 0.2-4.6% for FY23E-25E, factoring in the Q2 beat. We remain positive on medium-term growth prospects of CPaaS industry and Route Mobile; however, valuations leave limited upside. We maintain our Hold rating with a TP of Rs1,500 at 26x Sep-24E EPS.

Result summary: Route reported revenue growth of 94.1% YoY/16% QoQ to Rs8.5bn in Q2FY23, ~3% ahead of our estimates. Billable transactions grew by 10% QoQ to 27bn in Q2FY23 due to continued strong traction in India business. Gross profit margin declined ~10bps QoQ to 22.3% but was 70bps above our expectations. EBITDAM (non-GAAP) expanded ~110bps QoQ to 12.9%. Reported EBITDAM expanded by ~60bps QoQ to 12.2%, ~160bps above our expectations. Net profit grew by 6% QoQ to Rs736mn, beating our expectations due to better operating performance and lower ETR. Route continues to see strong momentum in India business, particularly in the financial services segment, driven by new client additions and market share gains. The company continues to see strong momentum in the non-SMS business (up 12%/116% QoQ/YoY to Rs358mn), as nextgeneration messaging channels (IP-based messaging, email, enterprise voice solutions, and unified communication solutions) continue to witness increased adoption by enterprises. Route’s deep customer engagement continues to drive high recurring revenue (88% in Q2). The company has guided 50-60% revenue growth in FY23 and 150bps expansion in EBITDAM (non-GAAP) in FY23 from Q4FY22 level of 11.1%. What we liked: Strong operating performance, healthy FY23 revenue guidance, and margin beat. What we did not like: Weak OCF conversion (~13% in H1).

Earnings call KTAs: 1) Management is now focused on integrating all the acquisitions smoothly and deriving synergies from them in the coming quarters. 2) India constitutes ~47% of revenue by termination; Management is confident of surpassing USD175mn revenue from India by steady market share gain. 3) Masivian reported revenue of ~Rs0.6bn in Q2. Management highlighted that Masivian is performing well based on the investments done over the past three quarters and is entering into its seasonally strong quarter. 4) Mr. Messaging reported revenue of Rs1.7bn in Q2. 5) M&A remains a critical part of Route’s growth strategy. The company suggested that earlier-mentioned tuck-in acquisitions in Voice/UCaaS and Mobile Identity solutions are going through a due diligence process. 6) ETR for Q2 was lower at 11.7% due to the deferred tax credit. 7) OCF was weak for the quarter due to a large PSU bank mandating the integration of GeM portal to bill the company, which took some time; management indicated this has now been integrated and expects an improvement in OCF going ahead. 8) The company intends to distribute dividend pay-out of up to 40% of FCF generated over FY23-25. 9) The company expects cash conversion to improve in H2 and 50- 75% OCF/EBITDA conversion in FY23.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer