Route Mobile - Scale begets scale - ICICI Securities

As communication channels of enterprises evolve from disparate A2P-based messaging system to CPaaS-based communication (TAM to grow ~30% in medium term), we believe Route Mobile ('RML') is favourably placed to benefit from industry tailwinds. Key strengths of RML include: 1) Network pipe developed with MNOs (240 direct relationships), 2) firewall-based offering (aids in strengthening MNOs-based relationship), 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 believe growth in revenue should manifest into operating leverage as GM/EBITDA improves and we estimate revenue, EBITDA and EPS to grow at FY21-F23E CAGR of 22.1%, 26.2% and 27.9%, respectively. Key risk include stagnation in top-5 client spend and failure to augment non-SMS business. We initiate coverage on the stock with an ADD rating and a target price of Rs1,710.

- Network pipe developed with MNOs, a key strength. The company offers a wide variety of solutions based on its broad portfolio of APIs. Route Mobile has also strongly developed the underlying SMS/voice network that allows it to provide unique capabilities in service delivery and has been instrumental in establishing the company as a strategic partner to its customers. To support these high-volume use-cases, it has spent more than a decade expanding and improving its MNO network and has direct tie-up/partnered with 240/800 MNOs. Further, to strengthen these relationships, the company provides MNO-based firewall solution which aids in better rates and payment terms for the company.

- Route participates in fast and growing markets. Route Mobile is a A2P/CPaaS based company with a TAM of ~US$7bn, in 2020 which is expected to grow at ~30% till 2025 (Source: Juniper). Further, we believe, the addressable market is much larger as vendors and customers continuously innovate with technology, creating new use-cases and applications that become new markets in themselves (For e.g. CCaaS and UCaaS have a TAM of ~US$50bn).

- Strong client referenceability and robust client addition: Route Mobile client list includes technology giants (Google, Facebook & Samsung) and leading Indian banks. This provides strong client referenceability and aids in top-tier client addition in our view. Client addition/mining has been healthy with customers providing US$1m/US$5mn increasing from 11/0 in FY18 to 30/11 in FY21E.

- Development of non-SMS based revenue to be key: Currently, Route is pre-dominantly SMS-based A2P service player. To mitigate disruption from newer/next gen channel of communication in near term, we believe, Route Mobile will need to invest in white spaces such as video API and contact centre-based solution in addition to augmenting OTT/RCS based revenue streams. The company has already done key hiring and alluded to acquiring companies in the above mentioned areas. We believe development of these revenue channels will be the key monitorable, which will also help sustain the leadership of Route Mobile in markets which it operates in medium-long term.

- Expect strong near-term execution to continue; initiate at ADD. We expect revenue to grow at 22.1% over FY21-23E with EBITDA growing by 26.2% as we expect operating leverage to aid margin accretion by 80bps over similar term. Competitive intensity has increased in the recent past as global companies such as Twilio and Sinch have ramped up their investment intensity in markets where Route operates. We initiate coverage on the stock with ADD rating implying a P/E of ~40x FY23E EPS.

Key risks

From a structural standpoint, we would be watchful on the following key risks:

- An accelerated shift to newer channels of communication (which will put pressure on SMS-based messaging volumes)

- Any potential stagnation in top-5 client spends which contribute ~50% of revenues

- Route Mobile's pricing vis-à-vis competition can come under pressure, as larger global players (Twilio, Sinch) consolidate their business operations. It may also be noted that Route also works with global aggregators in terminating traffic in certain geos, and therefore, any adverse consolidation by these global aggregators may negatively affect the revenue profile.

Source : Equity Bulls

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