Route Mobile – Curious Case Of A Platform Business

Company Name – Route Mobile Limited (Route Mobile)

Current Share Price – INR 1,452 (May 24, 2023)

Market Cap – INR 9,068 cr

---

1. What is interesting about the stock?

Route Mobile is a leading cloud communication platform provider, catering to enterprises, OTT players, and mobile network operators (“MNO”). The Company product portfolio is:

• Enterprises and OTT players - smart solutions in digital communication including Application-to-Person (“A2P”) SMS, Rich Communication Services (“RCS”), and OTT business messaging, voice, and email.

• MNOs – The company has created a full stack of Software-as-a-Solution (“SaaS”) solutions for MNOs, including Artificial Intelligence (“AI”) and Machine Learning (“ML”) driven SMS filtering, analytics, and monetization, short messaging service center (“SMSC”) and multimedia messaging service center (“MMSC”) solutions and Digital Ledger Technology (“DLT”) solutions.

The Company offers a scalable and flexible omnichannel Communication Platform as a Service (“CPaaS”) to enterprises globally and across industry verticals, OTT players, and MNOs. Recently expanded portfolio:

In FY21, FY22, and FY23, Route Mobile managed 32 billion, 52 billion, and 107 billion billable transactions. As of March 31, 2023, Company’s platform was used by more than 2,000 clients. Based on messages terminated, the Company generates 46% revenue from India and 15% from the rest of Asia in FY23.

Key competitive advantages of the Company are:

• Tailwind in the industry – increased usage of SMS for OTP or any other kind of verification

• Relationship with MNOs and diversified geographical business

One major risk for the Company is the possibility of technology changes, such as the decrease in SMS usage following the introduction of WhatsApp. As more businesses begin using WhatsApp or other apps for message verification and delivery, SMS usage may decline with the growing prevalence of smartphones.

Furthermore, the Company has been actively acquiring other businesses with the majority of their 2020 IPO funds being allocated towards acquisitions in 2021 and 2022.

Is it a platform business – SaaS, CPaaS, etc?

Let’s start with the question: what is a platform business (in today’s context)?

A platform business has the following characteristics:

• any business which provides service using a technology platform

• increase in revenue (scale up) comes with a marginal increase in expenses or the platform has high gross margin/high operating leverage

It appears that Route Mobile earns around 98% of its revenue from selling messaging services, and the cost of acquiring these services accounts for approximately 80% of its messaging services revenue. As a result, the gross margin for their primary business line (messaging services) is approximately 20%, a figure that has remained relatively stable between FY19 and FY23. Although the company experienced a significant revenue increase of approximately 78% during FY23 compared to FY22, the gross margin only increased from 21% to 22%. This suggests that there is very little operating leverage, which is not indicative of a platform business model. Therefore, it seems that some creative liberty has been taken in labeling Route Mobile as a platform business.

Cash flow conversion is poor

The Company generated a CFO of INR 73 cr in FY23 on an EBITDA of INR 444 cr implying a ratio of 16%. Even after a few adjustments by the management, the ratio could not go above 45%.

The Company took a loan of INR 100 cr in FY23 when the cash balance is ~ INR 900 cr: quite strange!

2. Key Historical Financials

3. What is my view on company valuation?

In September 2020, the Company conducted an IPO which garnered a subscription of 73x. Route Mobile was listed at a premium of over 100% to its IPO price of INR 350. The price of its shares soared to about INR 2,200 in October 2021 but has since plummeted by about 34%.

Presently, Route Mobile has a P/E (TTM) ratio of approximately 28x, which is a significant reduction from the 130x it had in February 2021. However, the lack of clarity on the company's cash flow generation makes it challenging to determine its fair value.

4. What are the risks to the investment analysis?

Risks to the analysis are:

• High liquidity in the stock market, controlled ownership of the stock, and perception of being a BAAP or platform stock – can push the price higher in the short/medium term

• Development of cutting-edge technological product

About the Author

I have over 17 years of experience in venture capital, private equity, and investment banking in India and the Middle East across a wide variety of sectors. I was last working with Majid Al Futtaim Holding (MAF), a leading conglomerate in the Middle East, to look after investments, M&A, and venture capital. I have prior experience in India with Tata Capital (Private Equity), Merrill Lynch (Investment Banking or IB), and Ambit Corporate Finance (IB). I bring the long-term ownership mindset to the analysis.

I graduated from the MBA program of the Indian Institute of Management Lucknow (2005) after completing the Bachelor of Technology program at the Indian Institute of Technology, Kharagpur (2002).

I am an Insignificant Investor in the public market and co-founder of SocInvest.

Disclosure

I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.