IPO analysis: Route Mobile

IPO rating - Invest with limited exposure

About the issue

Route Mobile (RML), a Mumbai-based company, providing a cloud-communication platform as a service (CPaaS) to enterprises, over-the-top (OTT) players and mobile network operators (MNOs), is entering the primary capital market with its initial public offer (IPO) of equity shares of the face value of Rs 10 each. The price band has been fixed between Rs 345 and Rs 350.  

The size of IPO is Rs 600 crore at an upper price band including a fresh issue of Rs 240 crore and an offer for sale of Rs 360 crore by the exiting shareholders. At the upper price band of Rs 350, the company will issue up to 0.68 crore of equity shares, aggregating up to Rs 240 crore.  

The proceeds from the fresh issue of IPO will be used for the following purposes:

1. Repayment or pre-payment, in full or part, of certain borrowings of RML

2. Acquisitions and other strategic initiatives

3. Purchase of office premises in Mumbai, and

4. General corporate purposes 

The IPO will open for public subscription on September 9 and close on September 11.

About the company

RML was incorporated as ‘Routesms Solutions Private Limited’ on May 14, 2004, at Mumbai. The company provides cloud-communication platform as a service ('CPaaS') to enterprises, over-the-top ('OTT') players and mobile network operators ('MNOs'). According to the ROCCO Report 2020, a research firm, the company was ranked as a tier one application-to-peer ('A2P') service provider internationally. Further, the company was ranked second globally as a tier-one A2P service provider in 2017. In the three months ended June 30, 2020, through its cloud communications platform, the company processed more than 6.95 billion billable transactions. In the fiscal year 2020, the company’s platform managed more than 30.31 billion billable transactions from its clients and was used by more than 2,700 clients while it managed more than 24.74 billion billable transactions in the fiscal year 2019.

The company’s operations are internally aligned into the following business verticals: (i) enterprise (ii) mobile operator, and (iii) business process outsourcing.

Enterprise

Its enterprise vertical primarily provides a cloud-based communication platform to enterprises to enable digital communication through multiple channels including RCS, A2P / P2A messaging, 2Way Messaging, OTT business messaging, enterprise email and URL shortening; and Mail2SMS.  This segment is further divided into two primary components – the front-end that provides an interface for enterprises to integrate with, and a back-end, which is directly integrated with over 240 MNOs, and provides access to over 800 MNOs across the globe, as of June 30, 2020.

Mobile operator

Under ‘mobile operator’ business, its main service offerings include SMS analytics, firewall, filtering, monetisation, CPaaS and hubbing solutions. Its analytics-based SMS firewall solution helps MNOs identify grey route traffic terminating on their networks, block grey route traffic, identify the source of such grey route traffic, and monetise such traffic.

Business process outsourcing

Route Mobile provides a range of BPO services including client support, technical support, booking and collection services. The strategic objective is to integrate its BPO capabilities with its enterprise voice platform and deliver end to-end offerings to enterprise customers.

The revenue of the company seems to be concentrating on a few clients of late. In the fiscal year 2018, 2019 and 2020 and in the three months ended June 30, 2020, the company’s ten largest clients accounted for 36.08 per cent, 46.00 per cent, 52.50 per cent and 63.65 per cent of its revenue from operations, respectively while it’s single largest client accounted for 6.49 per cent, 19.86 per cent, 14.58 per cent and 15.45 per cent, respectively of its revenue from operations during such periods. The revenue from the top ten as well as the top client has increased considerably in the last few years, which may not be good from a business perspective.

Financials of the company

In FY20, the company generated total revenue of Rs 968.1 crore,  which grew at a CAGR of 37.8 per cent between FY18 and FY20. Operating profit or EBITDA grew at a CAGR of 14.9 per cent during the same period and was at around Rs 100 crore for FY20, excluding other income. What is worth noting is that the EBITDA has declined by almost 4.5 per cent in the same period and stood at around 10.45 per cent.

Profit after tax has shown a CAGR of 21.6 per cent over the same period. It posted a profit of Rs 69.1 crore in FY20.  Profit margin has also contracted by almost 200 bps in the same period and stood at 7.23 per cent at the end of FY20. The company reported return on net worth of 25.58 per cent, 26.42 per cent and 27.74 per cent for the period ending FY20, FY19, and FY18, respectively.

                                                                                                                                                                Figures in Rs (crore)

In terms of segregation of revenue, more than 95 per cent comes from messaging services.  

Going through the balance sheet of the RML, what is worth noting is that the company’s trade receivables and trade payables have increased at a faster pace than the company’s revenue. Going forward, it may create stress in managing working capital of the company. RML’s trade receivables for FY20 are at 21.2 per cent of sales while its trade payables are at 19 per cent of sales, which has increased from 17 per cent and 7 per cent posted in FY19.

Valuation and recommendation

At the higher price band of Rs 350 and on the expanded equity base considering the IPO, the offer is demanding market cap to sales (FY20) of 2.1 times, which looks attractive. Although there are no listed peers of the company, some companies that are operating in similar business are available at the market cap to sales of more than three times.  In terms of PE, the offer is made at around 27 times its FY20 earnings per share on a post-issue equity share capital of Rs around Rs 56.9 crore of the face value of Rs 10 each. This again looks attractive as most of the players from this space are suffering loss and hence, do not have PE. Therefore, readers can subscribe to the issue with limited exposure.