About the company
Route Mobile is one of the leading providers of cloud-communication platform as a service (CPaaS) to enterprises, over-the-top (OTT) players and mobile network operators (MNOs). It provides voice, email, and omni-channel communication, SMS analytics, firewall, filtering and monetization, SMS hubbing and Instant Virtual Number solutions. It is ranked as a tier one application-to-peer (A2P) service provider internationally and garners nearly 80.1 per cent of its revenue from exports and 19.9 per cent from India.
Over FY18-20, Route Mobile’s topline grew at 38 per cent CAGR to Rs 956.3 crore in FY20 while profit after tax (PAT) increased at a CAGR of 22 per cent to Rs 69.1 crore. The company's earnings before interest, tax, depreciation, and ammortisation (Ebitda) rose at 15 per cent CAGR. Average Return on Equity (RoE) for the period stood at 29 per cent and Return on Capital Employed (RoCE) at 24 per cent.
According to Motial Oswal, "RML’s Working Capital (WC) is negligible as it has a large pre-paid client base that pays upfront. Further, revenue is directly linked to usage based on each communication sent by clients and RML follows flexible pricing policy based on prevailing market rates."
Strengths and risks
The CPaaS platform providers have witnessed traction over the recent years as mobile channels have become increasingly important for brands and enterprises to connect with customers. Analysts expect the trend to continue on the back of rising mobile subscribers globally and growing preference of digitalisation of businesses as well as communication. They expect Route Mobile to be a key beneficiary of this trend.
On the other hand, adverse currency movements (80 per cent of revenue from exports) can impact the company’s financial performance. Moreover, it's a highly evolving market and any inability to adapt to such changing conditions could adversely affect its business. And, since nearly 64 per cent of the company's revenue comes from top 10 clients, therefore any loss of a large client can impact business meaningfully
Should you invest? Here's what the brokerages say
The financial track record has been encouraging for the company. Going forward, we believe the growth prospects look promising for the company led by positive industry trends coupled with the company's constant focus on innovation, enhancing offerings and widening geographical reach. Further, it would continue to focus on in-organic opportunities which would aid growth momentum and widen its service offerings. On the valuation front, the company is valued at a P/E of 18.5x (post-issue) FY21 annualized EPS. One can invest in the company for the long term.
Motilal Oswal Retail Research
At the higher end of the price band, the issue is valued at 29x FY20 P/E (fully diluted), which is comparable to mid-sized IT firms. We recommend 'Subscribe' to the IPO given RML’s strong presence in the niche CPaaS market with high entry barriers and healthy financials. Further, given the small offer size and presence in niche IT space, one may get listing gains too.
Route Mobile's management has till now infused only Rs 6 lakhs capital in the company, and it will command a market cap of Rs 1,990 crores at the higher price band. This shows that it is a scalable business model, which can grow without capital infusion. Unlike many other businesses, Covid-19 has led to better growth prospects for the Company given increased adoption of digital technologies.
At the upper end of the price band, the company demands PE multiple of 25.3x on F.Y.20 EPS, which we believe is quite reasonable considering the future prospects of the company. As we are positive on the future outlook for the industry as well as the company, we would recommend to “Subscribe” to the issue for long term as well as for listing gains.
Route Mobile has seen plausible growth in revenues and profits over the last two years. However, there are some factors which might hurt the company’s long-term growth prospects. Firstly, its core business being communication services, it faces stiff competition from peers which devoids it of any significant competitive advantage or strong moat. The company also reports high current liabilities on its books comprising around 55 per cent of its balance sheet. This, along with a low current ratio of 1.17 compared to the peer average of around 2, puts it in a weak spot. All these factors lead us to believe that long term investors should avoid this IPO for the moment.