Despite its global scale, the company’s cloud-based architecture entails low capital requirement, driving high return ratios; this has spurred cash flow generation–a trend we expect to sustain.
By Edelweiss Securities
Route Mobile (Route) is one of the largest players in the Application to Person (A2P) messaging business and a formidable emerging player in the high-growth (33% CAGR over FY19-24E) CPaaS segment. Despite its global scale, the company’s cloud-based architecture entails low capital requirement, driving high return ratios; this has spurred cash flow generation–a trend we expect to sustain.
We estimate 30%/44% revenue/EPS CAGR over FY20-23 as consolidation favours big players and its ability to mine large accounts. However, at 41x FY22E P/E, the market is already factoring in strong growth; hence, initiate with ‘hold’ with TP of Rs 1,280. Technological obsolescence and inefficient capital allocation are key risks.
Various industry reports estimate the CPaaS industry to clock 33-40% CAGR over FY19-24 led by a confluence of several factors–digital transformation of companies, consumers’ smartphone adoption and emergence of API-based digital communication architecture. The Covid pandemic has further accelerated the pace of digital communication adoption by enterprises. While emergence of new channels offers an opportunity to participate in enterprises’ digital communication transformation journey, it’s imperative for Route to develop the right products and processes in order to tap the same in the ever evolving competitive landscape.
We estimate Route to clock healthy 30% revenue CAGR, leading to 44% earnings CAGR over FY20-23 riding industry growth tailwinds and the company’s strong positioning. Moreover, leveraging cloud-based infrastructure will minimise capital requirements, which will drive strong 29% ROCE.
At CMP, the stock is trading at 41x FY22E EPS, implying the market is already factoring in high growth rate. While global peers trade at much higher valuations, they do clock superior gross profit margins and have much broader product portfolios. Considering Route’s lower gross margin, we peg our target multiple at 45x FY22E EPS to arrive at `1,280 target price. We initiate coverage with ‘hold’ recommendation and ‘sector neutral’ rating. Faster-than-anticipated digital adoption driving faster revenue growth will be the key risk to our call.
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