Calling last two weeks’ price action in Tanla a rollercoaster is also stating it mildly. Its been brutal. Tanla was my largest allocation and although I had reduced my position a little when initially price broke down to 1200-1250 levels, I still had a large allocation. The only good thing that can be said is that probably the worst is behind us. Whatever reasons the stock could have been punished for, it has already taken the punishment. From here on, Tanla can re-rate from this extremely low base if the business recovers.
Although I had correctly identified the price break down, I never thought it would break the strong support levels of 1000 odd. Based on 27th July volumes of 2.9Cr, its fairly certain that a large FII/DII exited. Lesson learnt : Moderate your position size because sometimes even the promoter doesn’t know what could go wrong in the short term.
Will talk specifically about a few aspects:
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4.5% YOY EBITDA de-growth - Management seemed to split this into 3 impacts
i. EUR devaluation against USD causing a 1% impact (~8 Cr) : This is reasonable enough to accept as EUR has depreciated about 10% against USD on a y-o-y basis.
ii. 1% EBITDA loss due to Enterprise stack upgradation : As someone has already pointed out, this reason is quite upsetting for an investor. The least you would expect a 10kCr MCap company is to stay ahead of its infra requirements. I hope this isn’t repeated again by Tanla. Anyway, going past the slip-up, the explanation seems understandable as they lost revenues while the systems were being upgraded.
iii. Loss of SBI causing 2.5% impact - @anna had already predicted a 3% EBITDA loss from this customer and he was quite accurate. It seems like Airtel was L1, Route L2 and Tanla L3 and Airtel will serve 60% of SMS traffic for SBI, Route 30% and Tanla 10%. Both Tanla and Route (In response to @anna question in concall) have confirmed in their concalls that the price quoted by L1 is untenable and is unlikely to be repeated for other enterprise clients. However, we have to keep our eyes open for any repetition of this undercutting in other large accounts. -
Enterprise business gross margin de-growth of 5% YOY: @anna YOY GP comparison is the right comparison. I don’t think comparing Q4 GP with Q1 GP is fair as seasonality is involved. 1% out of this 5% is due to EUR devaluation. The remaining 4% impact seems to be a result of the SBI account. They mentioned in the concall that they were forced to service the SBI account at the new L1 prices for a period of time in Q1 (I am not sure why, maybe a handover period?), so this could explain part of the reason. However this remains a key monitorable. Uday’s suggestion that EBITDA will come back closer to 20% over Q2-Q3 should hopefully mean that Enterprise GMs also inch back upwards.
3. Nature of Enterprise SMS business - is it a specialty business or is it a commodity business? This is the real million $ question. Its a fact that for a large enterprise like SBI, qualifying an SMSC/CPaaS vendor is a very time taking activity (Route mentioned they worked for 8 months on the a/c to synchronize everything), so there is definitely a barrier of entry there. But the barrier won’t prevent the established CPaaS players (Indian arms of Sinch, TWLO) from getting qualified. And within these 4-5 players there is unlikely to be too much of a quality difference. So the Enterprise SMS business for me seems like it will face increasing margin pressure from both telcos and CPaaS players. Tanla is already trying to pivot to a Platform strategy to mitigate this (not very successfully so far, one might add).
4. Wisely - The big question - All of which brings us to the mystery element called Wisely. After announcing Vodafone deal more than 6 months ago and publicly stating that there will be 2 months of VIL Wisely revenues in Q1 and then IR team personally answering my query re-affirming that there will be 2 months of Wisely revenues in Q1, finally the company declared no revenues from Wisely in Q1. As can be understood from the call, they underestimated the complexity of integrating Wisely with the entire VIL network. I am worried about the delay but not enough to press any panic buttons yet. I hope we will get to see 2 months of Wisely VIL and Truecaller revenues this quarter (As per Uday, integration with VIL in finishing stages). Will be interesting to see what that does to Q2 revenues and more importantly gross margins. Will Kore.ai partnership deliver any revenues in Q2? Difficult to assess unless they announce explicitly that XYZ clients on Wisely have started using Kore.ai powered chatbots.
5. Corporate Governance - @GrowingAlpha has been cautioning on the thread regarding past CG issues in Tanla. Would like to thank him for the same as being aware of and re-assessing anti-thesis pointers are very important. However, on going through the fraud thread on VP, I was quite disappointed by the quality of investigation done on Tanla. Barely 5-6 posts with no meat on them. @GrowingAlpha Would be great if you could point us towards a post/article/video which details the proven CG issues in Tanla. I know there was a large foreign asset write-off in 2020, but somebody who is not negatively biased might accept Management’s view that the write off was necessitated due to the obsolescence of pre TCCCPR legacy assets as these assets were rendered useless post Trubloq. There is no conclusive evidence here, just allegations which can go either way.
Secondly, about the Forbes article. I actually quite liked the article because it showed the founder’s ambition. India is riddled with stories of such common people with uncommon heart and drive who went on to become very successful and respected promoters. The fact that Tanla started with a dairy operations is a negative why? Do you know that for the first 25 years of its existence, Wipro was a vegetable oil company? In fact Wipro stands for Western India Vegetable Products Limited.
As an investor who has been actively trying to get his hands on quality writeups/videos on Tanla and its CG issues, I must say I am quite disappointed. I keep hearing about these issues but when I seek some analytical evidence in any form, there is usually none. I would once again request Boarders here to point us towards any good quality forensic analysis done on Tanla which can help us understand the extent of CG issues in Tanla, if any.
6. Investor Communication and future outlook- Having said that, I have some serious grouse with Tanla on its quality of investor communication. While they have improved the quality of their quarterly results and presentation, the Annual Report until last year was completely sub-par. As the Market leader in CPaaS in India, one would expect that the Tanla AR would serve as the bible for anybody wanting to understand the CPaaS space in India. Far from it, the Management Discussion & Analysis section is only 3 paragraphs long with absolutely no useful information about industry or trends in CPaaS etc. In addition, for a new investor to understand Tanla’s sources of revenue (SMS/Whatsapp/Other channels split of revenue; Nature of Platforms; NLD/ILD split in SMS revenues) and product details (Detailed explanation of the present CPaaS architecture is missing; How does Wisely enhance the present architecture?) is almost impossible. The company has a few videos and articles on its website but I at least haven’t felt confident about understanding their products and sources of revenue in great depth after going through them. In all fairness I am yet to read their blogs, maybe there is something there.
The IR team is also not doing a great job IMO. Its clear that Tanla’s communication style with investors is not working. This I believe is one of the key reasons for poor DII/FII participation in the story and the recent II selloff (This is an assumption based on the volumes of 27th July, may be wrong). If Tanla can get its investor communication act together, it will be re-rated a few notches only by virtue of that as more FII/DII will come in for sure. The declaration of a formal dividend policy is a step in the right direction. Would like to see more such steps taken.
For now I am fully invested (No sales after some at 1200 levels), but will be watching Q2 and Q3 results like a hawk especially Wisely roll-out and Enterprise margins and revenues. Any persistent weakness in either of these 2 aspects without mitigating reasons will be interpreted by me as signals to reduce allocation.