Route Mobile (BAAP Story) – Curious case of a Platform Business

Updated: Dec 2, 2021


Company Name – Route Mobile Limited (Route Mobile)


Current Share Price – INR 1,928 (November 17, 2021)


Market Cap – INR 12,069 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”). 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 – 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 centre (“SMSC”) and multimedia messaging service centre (“MMSC”) solutions and Digital Ledger Technology (“DLT”) solutions.


Company offers a scalable and flexible omni-channel Communication Platform as a Service (“CPaaS”) to enterprises globally and across industry verticals, OTT players and MNOs.


In FY19, FY20 and FY21, Route Mobile managed 25 billion, 30 billion and 32 billion billable transactions, respectively, while in H1FY22, the Company has processed c. 18 billion billable transactions. As of September 30, 2021, Company’s platform was used by more than 2,000 clients. Company generated 13% and 40% revenue from top client and top 5 client respectively in H1 FY22. Based on messages terminated, Company generates 47% revenue from India and 22% from rest of Asia in H1FY22.


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

Significant risk faced by the Company is owing to potential technology changes – similar to reduction of SMS usage after the arrival of WhatsApp. In the future, a lot of enterprises can start verification or delivery of messages, with higher penetration of smartphones, using WhatsApp or Apps reducing the usage of SMS.

The Company is on an acquisition spree with most of the 2020 IPO proceeds being spent on acquisitions in 2021 and has raised c. INR 870 cr from QIP in November 2021 for further acquisitions.


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 following characteristics:

  • any business which provides service using technology platform

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

Route Mobile generates c. 98% of its revenue from selling messaging services and the cost associated with purchasing such messaging services is c. 82% of its messaging services revenue. Hence, the gross margin on the main business line (messaging services) is c. 18% which has been stable in FY19, FY20 and FY21. Company revenue jumped c. 45% in FY21 vs FY20 but the gross margin on the messaging services was slightly lower in FY21 vs FY20 which is not a sign of platform business. So, in calling company a platform business - lot of creative liberty has been taken.


Working Capital in H1FY22


Company had negative cash flow in H1FY22 even after EBITDA of c. INR 100 cr. Negative cash flow was driven by significant increase in trade receivables and other current assets. This is highly unusual for a Company which has negative working capital and stable debtor days (55 in FY21 and 55 in H1FY22 as per QIP document). Management mentions in the QIP document – “Our cash flow from operations to EBITDA ratio was 96.16% and 130.62% in Fiscal 2020 and 2021” but they are silent on H1FY22 CFO/EBITDA ratio even when QIP document discusses all other aspects of H1FY22 results.


2. Key Historical Financials



3. What is my view on company valuation?


Route Mobile currently trades at P/E (TTM) ratio of c. 77x – quite rich!


I have used market leader IT companies to arrive at fair value of the Company.


Average PE (TTM) ratio of Infosys and TCS over last 5 years is 16-20x. Company is expected to grow c. 15% (organic) vs Infosys/TCS of 7-8%. Factoring Route Mobile growth at 2x of Infosys/TCS in perpetuity, we get PE (TTM) multiple of c. 36x. We need to adjust the multiple for:

  • Discount for corporate governance standards or growth through acquisitions (typically risky) – 30% [Infosys and TCS come with very high corporate governance standards]

  • Margin of safety discount – 20%

We arrive at an adjusted multiple of c. 20x or fair value of c. INR 3,000 cr (26% of current market valuation). Btw, this is close to the IPO price – no promoter will want to dilute significantly below their own perceived market value.. this was before FOMO or BAAP crowd caught on to the “Platform Story”.


4. What are the risks to the investment analysis?


Risks to the analysis are:


  1. 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 short/medium term

  2. Development of cutting edge technological product


About the Author


I have over 15 years of experience in venture capital, private equity and investment banking in India and Middle East across a wide variety of sectors. I was last working with Majid Al Futtaim Holding (MAF), a leading conglomerate in 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 since 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.


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