Route Mobile - Focus on Quality vs Quantity - ICICI Securities

With the objective of pivoting towards higher-end offerings and profitability, Route Mobile has indicated several measures such as pruning of low margin accounts, gradual shift towards OTT/RCS based communication and cross-selling more experience-based offerings to its end clients. Further, to expand in DMs such as America and Europe with a platform/solutioning focus (rather than purely SMS-based A2P), RML has appointed Mr John Owen (previously CEO at Mastek) as CEO, of Europe and Americas. We believe these measures are necessary to achieve revenue longevity as A2P SMS business will likely face pressure in medium to long term. We estimate RML to deliver healthy growth of 25% in FY22 (vs guidance of 20%). This should be driven by 1) healthy net-revenue retention (120%) as the company focusses on mining and cross selling (e.g. RCS, CCaaS) and 2) geographic expansion into US and Europe. Maintain ADD.

- Revenues weaker than expected. Revenues declined 6% sequentially in Q4FY21. This was due to (1) lower billing days / seasonality, (2) low margin business rationalisation and (3) certain LATAM / African geographies getting impacted by the pandemic. However, gross margin (22%) was strong primarily due to (1) company passing through DLT-based charges to end client, (2) price increase within OTT channels and (3) exiting lower margin business.

- Recent leadership addition augurs well for growth in developed geographies. RML recently appointed Mr John Owen as CEO of America and Europe. John provides a rich mix of experience and has previously worked as CEO at Mastek. SAAS-based positioning / scaling up of revenues will be key as this geography offers higher margins.

- Near-term outlook robust, pivoting from A2P SMS business key for long-term stable growth. We believe as the enterprise increasingly adopts UCaaS based, SMS based volumes (co indicated a growth of 10-15%), on an organic basis, it will continue to face pressure. By taking measures such as 1) upselling OTT/RCS based volumes, 2) pruning of lower margin accounts and 3) strengthening investments in SAAS-based offerings by acquiring companies such as TeleDNA and Phonon, management's focus is on incrementally getting a stable revenue profile with higher margins. Execution of the same remains the key. We maintain ADD with a target price of Rs1,775. Key risks to our rating include: 1) Stagnation in top-10 client spend, 2) lower than expected margin improvement and 3) slower than expected uptake from next-gen business.

Source : Equity Bulls

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