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Route Mobile poised for strong growth, ICICI Securities

Route Mobile (Route) reported its Q4FY22 revenues at Rs6,261mn, up 11.2% QoQ and 72.7% YoY. While the quarter included inorganic contributions from Masivian, Intertelco and MR Messaging, organic revenues were flat QoQ and up 46% YoY. Management expects organic growth ahead to be strong on the back of new deal wins. EBITDA margins contracted 180bps QoQ to 9% due to one-offs like: 1) weak margins in Masivian business, 2) incremental employee costs (6.4% of revenues vs 4.7% in Q3FY22), and 3) participation in global conferences. Management is confident of significant margin expansion in FY23 on account of recent acquisitions and operating leverage.

For FY23, Route has guided for revenue growth of at least 40% YoY and EBITDA margin improvement of >150bps driven by gross margin expansion and significant operating leverage. Company’s focus on new geographies (Europe, South Africa and Japan), through its MR Messaging acquisition and Spanish-speaking LatAm markets through Masivian, should drive incremental revenues. Further, management intends to create use cases around block chain (DLT acquisition) and expand the company’s portfolio of services by making acquisitions in areas such as digital fraud and voice. This should position the company well for growth ahead. We build-in revenue growth of 49.6%/18.0% for FY23E/FY24E along with EBITDA margins of 12.1%/12.7%.

As communication channels of enterprises evolve from disparate A2P-based messaging system to CPaaS-based communications, we believe Route is favourably placed to benefit from industry tailwinds. Company’s key strengths include: 1) network pipe developed with MNOs, 2) firewall-based offering (aids in strengthening MNO-based relationships), 3) robust client economics with companies such as Facebook and Google providing strong client referenceability, and 4) leadership positioning in regions where Route operates. We reinitiate coverage on the stock with a BUY rating and a DCF based target price of Rs1,490 (implied multiple of ~31x on FY24E EPS).

Risks: 1) Accelerated shift to newer channels of communication (which will put pressure on SMS-based messaging volumes); 2) any potential stagnation in top-5 client spends, which contribute ~42% of revenues; and 3) Route’s pricing vis-à-vis competition can come under pressure, as larger global players (Twilio, Sinch) consolidate their operations. It may be noted that Route also works with global aggregators in terminating traffic in certain geographies, hence any adverse consolidation by these global aggregators may negatively affect Route’s revenue profile.

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