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Weak quarter due to multiple one-offs

JM Financial Institutional Securities Limited JM Financial Research is also available on: Bloomberg - JMFR , Thomson Publisher & Reuters, S&P Capital IQ, FactSet and Visible Alpha Please see Appendix I at the end of this report for Important Disclosures and Disclaimers and Research Analyst Certification. Route reported muted topline growth of 0.8% YoY (-0.7% QoQ) vs. our expectation of c.9% in 4Q. Localised issues for the company’s international subsidiaries, MR Messaging (Europe) and Masivian (LATAM) and devaluation of Nigerian currency Naira, together had an adverse impact on growth. On the other hand, domestic messaging volumes in India grew double digits YoY, as per the management. While there was also one month of revenue contribution from VI firewall deal, meaningful ramp up is only expected in the forthcoming quarters. Despite gross margin expansion by 50bps YoY, EBITDA margin was under pressure in 4Q, down c.90bps YoY (below JMFe by c.60bps) due to revenue weakness, especially in MRM business (drag of c.60bps in FY24). We expect revenue growth trends to improve starting 1QFY25, as we factor in a ramp-up in VI deal (full year incremental revenue potential of INR 5-6bn), deal wins announced earlier (a large eCommerce company) and revenue synergies with Telesign (post completion of takeover of control by Proximus Opal).

Operating performance was subdued in 4Q: Route’s 4Q revenue grew only 0.8% YoY (- 0.7% QoQ) to INR 10.17bn, below JMFe/Cons. by 7.3%/3.6%. Billable transactions grew 24.2% YoY (+9% QoQ) to 34bn, driven by NLD volumes while realisation was affected by lower ILD volumes. Gross margin improved 53bps/61bps YoY/QoQ to 21.8%, a beat on JMFe of 21.2%. EBITDA margin stood at 12.0% (-87bps YoY, -24bps QoQ), below JMFe/Cons. by c.60/30bps. The miss on profitability was mainly due to lower-thanexpected operating leverage. As a result, EBITDA declined by 6% YoY (-2.7% QoQ) to INR 1.22bn, a miss on JMFe/Cons. by 11.5%/6.1% respectively. Consequently, despite lower than expected ETR of 13% (vs. JMFe of 19%), Adj. PAT declined 17.7% YoY (-9% QoQ) to INR 825mn.

 Proximus takeover likely to be concluded by May’24: The management noted that all regulatory approvals have been secured for the takeover of Route by Proximus Opal. With mandatory takeover offer tendering period also completed, the M&A is likely to be completed by 1QFY25. The deal is likely to unlock combined synergies of at least USD 100mn for Telesign and Route Mobile over the next 3-4 years, as per the management. It also re-iterated that the deal will accelerate Route’s path to achieve USD 1bn revenue over the next 2-3 years.

 Maintain ‘BUY’ with revised TP of INR 1,820: We see several tailwinds for Route’s revenue growth in FY25 such as 1) incremental revenue accrual from the VI firewall deal, 2) recently announced deal wins, and 3) synergies between Telesign and Route Mobile. However, in the absence of a concrete guidance from the management and multiple oneoffs in recent quarters, we only partially bake-in these developments in our model, while noting that actual delivery could lead to sharp upgrades in our estimates. We maintain ‘BUY’ rating with a 10-year DCF (WACC of 13% and Tg of 5%) based Jun’25 TP of INR 1,820 (implied target FY26E PER of ~21x versus ~17x at CMP).

Key Risks

 Key upside risks to our price target are: (1) strong industry tailwinds drive better-thanexpected growth; (2) Growing share of new product sales leads to faster-than-expected gross margin expansion; and (3) Any substantial value-accretive acquisitions.

 Key downside risks are: (1) Substantial increase in competitive intensity; (2) Failure to enter into or maintain long-term relationships with MNOs and/or OTT players; (3) Inability or failure to acquire/upgrade new technologies, clients or expand geographic reach organically or through strategic M&As. (4) Technology failures and data breaches. (5) Client concentration risk.

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