ICICI Securities Upgraded This Small Cap Service Sector Stock From Hold To Add, Shares Can Surge 10%

Stock Outlook & Returns

The current market price (CMP) of the stock stood at Rs 1,392.30 apiece on NSE. Its 52 week low is Rs 1,052 and the 52 week high is Rs 2,389, respectively.
 
 In the past 1 week, the stock has given 5.25% positive return, whereas, in the past 1 month it gave 3.1% negative return. It gave 9.8% positive return in 3 months, and 12.11% negative return in 6 months, respectively. Over the past 1 year, it gave a 32.14% negative return. It was listed on the stock exchange in September 2020 and since then it has delivered a multibagger return of 113.77%. 

Growth likely to accelerate in FY23E

Route Mobile Limited (Route) revenue grew at 45% CAGR from FY20-FY22 led by covid-induced surge in digital adoption and increasing use cases. Company started the year FY23 with 40% YoY growth guidance which was subsequently increased to 50%. As per our discussion with management, Route can potentially exceed its current revenue guidance moving closer to 60% YoY growth on the back of: 1) strong volume growth due to recent deal wins and ramp-up across multiple enterprise clients, 2) increase in ILD (international long-distance) prices (with effect from Q2FY23), 3) possibility of increase in NLD (national long-distance) prices, and 4) strong seasonality of acquired business (Masivian, based in LATAM) in overseas markets.

Not witnessing demand slowdown; transaction volume expected to double

Accelerated digitisation in India and emerging markets has given a boost to Route. Volume of transactions has increased multifold, even though size of transactions has decreased. Management mentioned that since Route is largely present in emerging markets, they are not experiencing slowdown in demand. Transaction volume was 52bn in FY22 and is expected to cross 100bn in FY23 as per management. Management mentioned that Q2FY23 is likely to clock highest quarterly revenue. Q3 is also expected to be strong aided by festive seasonality. Q4 will benefit from the strong seasonality experienced by the recently-acquired Masivian, Latam-based company.

Acquisitions remain a key growth strategy

Acquisitions is a key component of Route's growth strategy either for gaining access to newer geographies (acquired Mr Messaging for expansion in Europe, SA and Japan, Masivian to expand in Latam, Interleco to expand in GCC market), or for enhancing portfolio capabilities (acquired SendClean to transmit transactional and promotional emails on behalf of enterprises). 

Route is now focussing on small tuck-in acquisitions to improve portfolio capabilities. This is expected to improve cross-sell opportunities to its existing strong client base. It also aims to invest in future technologies. Omni-channel product portfolio and voice is a significant focus area for the company. Route expects contribution from new channels to increase to 15% of revenue vs current 5% over next ~2 years. Two acquisitions are expected to close in FY23.

Aggressive pricing by telco is ‘one-off'; rational pricing prevails

Route management mentioned that aggressive pricing offered by a telco for a large PSU banking client was 'one-off' event. Moreover, subsequent RFPs have seen rational pricing. Management acknowledged that competitive intensity has increased from large telcos though Route is able to maintain its margins. Plus, the company is gaining market share from global competitors with leveraged balance sheet. Europe- and US-based competitors with leveraged balance sheets are not as aggressive in pricing as they were earlier due to impending slowdown in developed markets. 

Minimal currency exposure to GBP

Management mentioned that it derives ~70% of its revenue in US$ currency and has negligible exposure to GBP currency. Therefore, GBP depreciation against rupee is not likely to adversely impact Route. In fact, it is likely to benefit Route as the company has significant amount of debt commitments in GBP pertaining to acquisitions and deferred considerations, and depreciation of GBP augurs well for Route. Company is also looking at hedging debt exposure at current rates.

Growth to persist over long term

Management mentioned that there is a long runway for growth beyond FY23 led by: 1) increasing digital adoption and use cases, 2) potential market share gains, 3) strong pipeline that could drive visibility beyond FY23, 4) scope for improvement in ILD volumes.

Margins expected to improve going forward

In FY22, EBITDA margins declined by 146bps YoY due to investments in market coverage, ESOP/RSU costs charges, etc. Growth leverage and shift in revenue mix towards the high-margin portfolio (higher share of developed markets and new channels) are key margin levers ahead. Margins are also likely to benefit from ILD price increase in Q2FY23E. Network operators increased prices for all international messages terminating in India from current 3 US cents to 4 US cents. Route benefits from 60% of this price increase. We expect margins to be at 11.5% for FY23E. 

Add with a target price of Rs 1,520

ICICI Securities said, "Considering management's commentary of potential to outperform its earlier guidance of 50% YoY revenue growth, we now model 65%/17% YoY revenue growth for FY23E/FY24E leading to increase in our revenue estimates by 10%/11.5%. Given earlier perceived pricing pressure no longer likely, we increase our EBITDA margin estimate by 89bps to 11.5% for FY23. We also adjust no. of shares (62.1mn shares post buyback) to account for buyback of Rs1.2bn (Rs1,700 buyback price per share) completed on 29th Aug 22. Above changes lead to increase in EPS estimates by 22%/8.5% for FY23E/FY24E and we arrive at revised DCF-based TP of Rs1,520 (implied multiple of ~32x on FY24E EPS).

It added, "We upgrade Route to ADD (earlier: Hold) given:1) accelerated growth in FY23E, 2) earlier expected pricing pressure due to telcos in CPaaS market no longer likely, 3) potential market share gains, and 4) improving margin profile."

Key downside risks to the estimates

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 account for ~42% of revenues; and 3) Route's pricing vis-à-vis competition can come under pressure, as larger global players (Twilio, Sinch) consolidate 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.

Disclaimer

The stock has been picked from the brokerage report of ICICI Securities. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.