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Route Mobile has steadily gained market share, particularly in India, over the last few quarters and growth momentum will be further aided by benefits accruing from: i) exclusive partnership with Vodafone Idea for International A2P SMS Services, ii) capturing higher share of message termination in India and other emerging markets from Telesign, and iii) ILD and NLD enterprise message price hikes wef 22-Apr and 1-Aug, respectively. We believe there could be some upside to the company’s current at least 20% revenue growth guidance for FY24, while it is on track to deliver EBITDAM within the guided range of 12.5-13%. Cash conversion remained weak over the last few quarters (OCF/EBITDA: 16.5% in FY23) and the few recently-signed large firewall contracts are expected to weigh on cash conversion in FY24. We revise our EPS by 1.7-2.3% for FY24-26E, factoring-in the better revenue growth and weaker cash conversion. We roll forward our TP to Sep-25E and retain HOLD with revised TP of Rs1,720/share, while reducing our multiple to 22x Sep-25E EPS (from 23x), given the poor cash conversion and slower scaling of the non-SMS business.

Revenue momentum supported by market-share gain and price hike

Route Mobile has steadily gained market share, particularly in India, over the last few quarters. It has recently entered into an exclusive partnership with Vodafone Idea to deploy its firewall solution and SMS hub for international A2P SMS services. As per media interviews and social media updates by Management, it has the potential to contribute USD100mnpa incremental revenue. The company should benefit from the ILD and NLD price hikes that have been implemented from 22-April and 1-August, respectively. While ILD price should fully reflect from Q2, NLD price-hike benefits should entirely reflect from Q3. Some initial volume dip is likely due to the hike; however, the net impact is still expected to be positive. Telesign has sizable traffic termination in India and other emerging markets, and Route Mobile is likely to benefit from this terminating portion of traffic as it is the beneficiary of the common parentage. Based on these factors, coupled with a healthy pipeline, we believe that the 20% guidance for revenue growth can have upside risks. Progress on scaling the new-products revenue stream remains slow so far, though Management has rolled out incentive schemes on driving growth here.

Cash conversion is expected to stay weak

Route Mobile is seeing strong traction in the Firewall business, which requires upfront investments in terms of security deposits. Growing revenue contribution from Firewall deals has led to deterioration in cash generation over the last few quarters. Working Capital is also likely to be impacted, as the enterprise segment continues to distend. Some of the enterprise business in India and the Middle East has higher working capital requirements. Consequently, reported OCF-to-EBITDA declined to 16.5% in FY23 (vs >90% over FY20-22) and is likely to remain weak in FY24E. Management indicated that normalized OCF/EBITDA (adj. for security deposits given to telcos) was ~45% in FY23, and has guided for normalized OCF/EBITDA conversion of >50% in FY24.

Focus on Proximus Opal deal timelines and synergy benefits

Route expects to receive regulatory approvals for transaction with Proximus Opal by the end of Nov-2023. Proximus Opal will come out with an open offer post receiving such approvals and expects the overall process to be completed within a couple of months thereafter. Proximus Opal’s Management guided for EBITDA synergies of at least EUR90mn, to be realized in 3 years post closure of the deal, and also suggested that 1/4th of the synergy benefits would accrue from revenue synergies via footprint expansion and cross-sell opportunities, while the balance would be realized from opex savings with consolidation of the CPaaS platform, purchase efficiencies from scale, and cost efficiencies. We believe that some synergy benefits should also accrue to Route Mobile, though the quantum remains unclear for now. Route can also take advantage of synergies via collaboration with TruSense and Telesign products.

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