OnMobile Global - Sluggish revenues but cost structure well managed - PhillipCapital

OnMobile Global Q2FY13 numbers disappointed our estimated on account of sharper than expected decline in domestic revenues and slower-than-expected growth in international revenues. We continue to maintain our Buy recommendation on the stock on account of relatively cheap valuation and growth potential from the international operations. The key takeaways of the results and the conference call are as follows:

International operations contributed 59% of the total revenue in Q2FY13: International business registered tepid revenue growth of 1% QoQ but grew by 61% YoY. The QoQ growth was slower on account of seasonality in developed markets. Revenue from developed markets declined by 16% QoQ. The management indicated that international revenues are likely to pick up in Q3FY13. Revenue from emerging markets grew by 11% QoQ as the company continues to gain traction in the Latam operations. We believe international revenues will continue to grow at robust pace on account of new client additions and roll out of new products with the existing clients.

Domestic revenues decline sharper than expected: Domestic revenues declined by 17% YoY and 8% QoQ which was significantly higher than expectations. The management indicated that the decline in revenue is on account of re-negotiation of the commercial contracts. We believe the domestic revenues may continue to decline further in the forthcoming quarters on account of regulatory changes and contract renegotiations.

EBIDTA margins remain stable: Q2FY13 EBIDTA margins remained stable QoQ notwithstanding the forex impact of Rs 68mn in the quarter and sluggish revenue growth. The management has been able to manage content costs better than expectations. We note that revenue growth from current levels will translate into significant EBIDTA growth as the company has managed to stabilize its cost structure.

Earnings below estimates on account of higher tax rate: Tax rate for the quarter was at 54% and the company is working on implementing the transfer price mechanism which will result in significant tax savings in the future.

Estimates revision and Maintain Rating: We have largely maintained our earnings estimates for FY13E and FY14E notwithstanding the sluggish revenue growth on account of better than expected cost structure management. We maintain our price target at Rs 62 which implies an upside of 55% from the current levels. We maintain our Buy recommendation on stock.

Source : Equity Bulls

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