Buy Tanla Solutions Ltd.
Target : Rs 41
CM Price: Rs 36.70
Rebound in core business segments…
Tanla Solutions reported its Q4FY10 results, which were slightly above our expectations. The topline stood at Rs 98.6 crore against our expectation of Rs 97.3 crore. Revenues grew 6.7% QoQ while they
declined 30.8% YoY. The EBITDA improved 12.6% QoQ to Rs 32.0 crore as compared Rs 28.4 crore in Q3FY10 on the back of lower cost of sales.
The EBITDA margin at 32.4% improved 168 bps QoQ and 101 bps YoY. PAT stood at Rs 13.2 crore (I-direct estimate of Rs 14.6 crore).
- Highlights for the quarter
The post economic slowdown and regulatory changes in the UK market have affected the company’s core segments (aggregation and product services). These are key contributors to its total topline. Nevertheless, the company reported revenue growth in both aggregation and product services during Q4FY10. Revenues from aggregation and product services stood at Rs 52.1 crore and Rs 14.7 crore growing 47.7% and 10.2% QoQ, respectively. Subscription and mobile payment revenues declined to Rs 3.9 crore and Rs 28.2 crore vs. Rs 4.0 crore and Rs 31.2 crore in Q3FY10, respectively. The company reported a forex loss of Rs 7.9 crore during Q4FY10.
- New customer acquisition
The company has signed a three-year deal with Sandisk for preloaded memory cards with a suite of applications embedded with Tanla License Manager. Applications will be loaded on a minimum of 30 million cards distributed worldwide. It has also signed another deal with FCC (Largest distributor of mobile phones in the Middle East), to pre-load mobile phones in Kuwait, Saudi Arabia and Egypt, with a suite of applications embedded with Tanla License Manager.
Valuation
At the current market price of Rs 37, the stock is trading at 6.7x FY11E EPS of Rs 6.1 and 5.4x FY12E EPS of Rs 6.9. We value the stock at 6x FY12E EPS and arrive at a target price of Rs 41. We rate the stock as BUY.
Result analysis
- Deals and patent rights granted
Tanla Solutions added a number of new clients in its portfolio. The company concluded deals with four new clients that include Sandisk, FCC, Getjar and Netquin in the License Manager segment.
On the mobile aggregation and billing platform it added a couple of clients both in domestic and international markets. Tanla would provide mobile payments platform connectivity to enable premium SMS billing.
Further, it would provide mobile payments platform connectivity to enable billing and aggregation for the South African market. It has an agreement with Sony Television in the domestic market for the management of ShortCode Platform and connectivity with mobile operators for management of mobile services for popular TV programmes such as KBC, Das Ka Dum and Indian Idol.
The company has also launched voice services with a couple of telecom operators in the domestic market. It launched Karaoke services with Reliance Communications and IVR and VAS IVR in a few circles for Aircel.
The company has been granted patent rights for its “Automatic Meter Reading System and method thereof” in Singapore. The technology has been developed for efficient, accurate and cost effective sensor/meter readings. This technology enabled ad hoc wireless framework provides an easy mechanism for third-party system integrators to integrate with many kinds of meters. This includes water, gas, electricity or any other sensor networks like defence perimeter, environmental monitoring and stress monitoring.
Outlook and Valuations
Outlook
The financials still exhibit that some improvement has been seen in the UK market. However, the near term scenario for the company remains challenging. Post the economic slowdown and implementation of new regulations in the Europe region, the growth journey of the company has dampened. The revenues from the core segments (aggregation and product services are expected to grow gradually.
Tanla has adopted a cautious approach for expansion into newer territories as compared to aggressive strategies for overseas expansion adopted earlier. The company has been continuously deploying IVR services in the domestic market. It has started gaining traction in the domestic market. The company has signed with a couple of new clients in the last quarter. On the offering sides, it has put more emphasis on mobile payment solutions. The recent deal with Nokia would enable Tanla Solution to increase revenues from this stream and successfully reduce its dependence on premium SMS services. However, revenues from this are still expected to contribute to the topline. Nevertheless, UK remains the primary market for the company. The ongoing recession in the UK would impact the performance of the company and the near term future looks bleak.
The deal with Nokia and a couple of deals signed during Q4FY10 look promising but the full impact remains to be seen.
Valuation
At the current market price of Rs 37 the stock is trading at 6.7x FY11E EPS of Rs 6.1 and 5.4x FY12E EPS of Rs 6.9. We value the stock at 6x FY12E EPS and arrive at a target price of Rs 41. We rate the stock as BUY.
Report card
| Attribute | Value | Date |
|---|---|---|
| PE ratio | -25.85 | 28/05/10 |
| EPS (Rs) | -1.44 | Mar, 10 |
| Sales (Rs crore) | 6.90 | Mar, 10 |
| Face Value (Rs) | 1 | |
| Net profit margin (%) | 40.98 | Mar, 09 |
| Last dividend (%) | 50 | 03/09/09 |
| Return on average equity | 11.53 | Mar, 09 |
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