Equity Research: Route Mobile

Route Mobile looks strong among its peers. Post 35% correction in share price, Route Mobile currently trades at 26x FY24 EPS. Due to its strong revenue growth (both organic & inorganic), consistent track record of profitability, and high return on equity, we expect Route to achieve 35x FY24 EPS.

Route Mobile is a Mumbai, India-based omni-channel CPaaS platform that offers communication services to both established and emerging businesses. The company's main SMS-related solutions give businesses the opportunity to contact clients by SMS for services like two-factor authentication, delivery information, bank account transactions, etc. The company’s estimates that 85% of its sales originate from the SMS sector, while new products (phone, e-mail, OTT) contribute 5%. The two remaining revenue sources, both of which were acquired inorganically by Route Mobile, are the selling of services to mobile network operators (5%), and customer support centre operations (5%). Customers of Route provide revenue on a per-transaction basis. Although they are chosen at the start of the contract, transaction rates might change at any time. Route Mobile has partnerships with more than 250 mobile network operators for SMS-based income streams, and these partners also charge Route Mobile a fixed fee on a per-transaction basis. Digital corporations like Facebook and Google use Route to conduct 2-factor authentication in India, along with banking institutions like SBI and ICICI and cutting-edge internet startups like PayTM and Policybazaar.

A rapidly expanding Communication Platform as a Service (CPaaS) business is Route Mobile (ROUTE). The SMS-based product offered by Route's clients allows them to provide services like 2-factor authentication, bank transaction updates, e-commerce delivery updates, etc. to their end-customers via SMS. This product accounts for roughly 86% of Route's revenues. Popular clients of Route's include Facebook, Google, ICICI Bank, and others. Revenues at Route have increased at a 36% CAGR over the past five years because to various acquisitions and expanding digital adoption. In the next five years, the CPaaS market is anticipated to develop at a 31% CAGR, and Route's emphasis on quickly expanding markets and acquisitions should help it outpace the market. After receiving Rs8,675mn via a QIP in September 2021, Route has spent Rs5,310mn on acquisitions over the last six months and has over Rs10,000mn in cash on hand for additional purchases. The business is also giving cash back to shareholders through dividends and share buybacks.

An emerging and fast growing industry:

Over the past two years, the global CPaaS market has grown quickly (41% CAGR), driven by increased digital usage in important markets like India (47% of Route Mobile revenues). The sector is anticipated to expand at a 31% CAGR over the following five years as new CPaaS technologies (OTT, RCS, etc.) continue to develop rapidly and continue to be adopted by consumers. Rapid industry consolidation has also been observed, with 46 acquisitions by market heavyweights since 2020. Further demonstrating the appeal of the sector are the market entries of telecom giants like Cisco and Ericsson.

Rising digital transaction imparts growth to CPaaS:

As the number of digital transactions made by the end customers of its clients rises, Route Mobile profits on a per-transaction basis. Route Mobile handled 52 billion transactions in FY22 compared to 20.8 billion in FY18 (26% CAGR). Route Mobile's revenue growth should be fueled by an increase in the volume of online transactions, rising awareness of security features like two-factor authentication, and increasing e-commerce adoption. Over the past six months, Route has acquired a number of acquisitions with the goal of expanding into more recent geographies. These purchases have enabled Route to increase its geographic reach in the Middle East, Europe, South Africa, and Latin America. Route Mobile will continue to grow as a result of its continued focus on more recent locations and acquisitions aimed at more recent technologies.

Communication Platform as a Service, or CPaaS, is a cloud-based platform that assists businesses in integrating real-time communication channels into their products. Through the use of APIs, CPaaS fundamentally enables businesses to include various systems, like audio, messaging, video, etc., into their current service delivery software and facilitates simpler customer interaction. Currently worth $8.6 billion globally, the Communication Platform as a Service (CPaaS) market is projected to expand at a CAGR of 31% year over year. The market is dominated by SMS technology, but emerging technologies like RCS and OTT are quickly overtaking it. The main market for the products is still North America. Twillio, Sinch, Route Mobile, and Tanla in India are the major companies in the market. Since 2020, there has been a substantial amount of industry consolidation, with 46 acquisitions being done.

The CPaaS market is highly fragmented, with a number of players active both outside and in India. These players frequently play just in their narrow sphere of expertise. Twilio, Sinch, and Infobip are among the industry's top competitors, while Tanla & Route rule the local Indian market. The industry has experienced increasing consolidation over the last few years as the top players have bought smaller rivals to expand into other markets and specialised technology. With Cisco purchasing IMIMobile and Ericsson purchasing Vonage, new players are also entering the market. Twilio and Sinch, two significant international players, also made acquisitions to join the Indian market with their respective purchases of Valuefirst and ACL.

Route's business strategy is based on transaction-level pricing; as more people use digital transactions and as its clientele expands overall, revenue grows as well. In its core markets of India, Asia (ex-India), and Africa, transactions have increased as e-commerce, financial transactions, and social media usage have all developed at a rapid rate. The volume of transactions on Route Mobile has increased in step with the country's overall increase in internet usage. Route Mobile and its clients should continue to grow as a result of India's rising digital adoption rate and transaction volume. There are more chances for value creation since developing nations, like LatAm and Asia, have high internet adoption rates. Route Mobile is in a good position to acquire businesses and increase its market share in these areas. Transaction volume at Route Mobile has increased exponentially in-line with growing internet adoption globally with services such as 2-factor authentication for social networks or online e-commerce transactions gaining prominence. Transaction volume processed by Route has increased from 20.8bn transactions/year in FY18 to 52bn transactions/year in FY22. 

Like the majority of its competitors in the CPaaS sector, Route's main source of income is SMS-driven CPaaS, which now accounts for 85% of revenues and new products for 5%. Email, Whatsapp, RCS, Viber, FB Messenger, Voice, and other new products are examples. MNO customers and the call centre industry each make around 5% of the business. Route anticipates that the new product business will grow significantly in the future as businesses become more accustomed to using cutting-edge technologies. For FY23E, Route has projected a new goods business growth rate of 100%+. Over the longer term, Route anticipates that the new goods business will account for 25%+ of their total revenues.

Strong Client Base:

A variety of digitally native businesses, financial services, CPaaS partners, and retail & e-commerce efforts make up Route's clientele. Top clients of the business include leading IT, e-commerce, telecom, retail, and financial services organisations worldwide. The corporation is home to household names like Facebook and Google, as well as financial institutions like ICICI Bank and SBI and online brands like PayTM and PolicyBazaar. While also aiming to strengthen its current relationships, Route continues to have close ties with important clients, including MNOs. As it expands into more markets and regions, Route continues to recruit exclusive clients. The company has partnerships with more than 265 Mobile Network Operators (MNOs), which is essential to assuring the company's growth.

Financials:

Balance Sheet:

Profit & Loss:

Cash Flow:

Valuation:

Since FY18, Route Mobile's cash generation has been strong, with positive OCF generation and rising profitability. We anticipate that Route's asset-light business strategy will produce reliable OCF going ahead. The cash conversion cycle at Route Mobile has remained essentially consistent as the business has expanded. The company's net working capital has expanded in step with its sales growth. Acquisitions were the cause of the fall in net working capital for FY22, which is anticipated to reverse going forward. Since FY20, the company has continuously produced significant free cash flow with substantial FCF creation. Since the business strategy of the company only calls for modest capital expenditures, FCF generation is anticipated to continue. RoE for the business has often remained at 25% or higher for a number of years. The significant cash inflow following the QIP is what caused the current decline in RoE, and it should improve as the company makes further acquisitions over the next years, which will lower the cash balance and raise PAT levels going forward. Post 35% correction in share price, Route Mobile currently trades at 26x FY24 EPS. Due to its strong revenue growth (both organic & inorganic), consistent track record of profitability, and high return on equity, we estimate Route at 35x FY24 EPS.

Listed businesses in the CPaaS industry are all at different degrees of cycle maturity and trade at highly diverse valuations as a result. The biggest participant on the list is Twilio, which has had rapid revenue growth but is having trouble remaining profitable. Sinch has been damaged, along with other major international firms, by the technology stock valuation correction and heavy short selling as a result of corporate governance worries. Over the next two years, the major market participants are anticipated to grow their revenue at a CAGR of 30% or more, in line with the expansion of the entire industry. Profitability is also rising as a result of growing industry consolidation and maturity. Twilio and Vonage, which have been in the red for a while, are gradually turning a profit. While Vonage is anticipated to achieve profitability in CY22, Twilio is anticipated to do so in CY23. However, Route Mobile’s performance has been superior to most listed global players in terms of RoE, Sales growth and PAT Margins.

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