Tanla Platforms ~ Leading player in the fast-growing CPaaS market

Yes. Not saying they are fraudulent but since I made the post tanla dropped 20% for 2 days. Might be more than just bad biz performance.

It has happened in the past, and all I’m saying is it could happen again(I could be wrong however). The company started out as a dairy company in 2000s. Switched in the pre 2008 bull run, and now this run up. Tons of similarities exist, imo it would be prudent to do some digging here rather than chalking it all up to market over reacting.

The global look the company is giving, forbes article are new red flags that keep cropping up.

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So, in your opinion, the turnaround in the business, the acquisitions it made so far, the association with Microsoft, big investments by FIIs, MIT, Azim premji etc. all are red flags?

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Of course not. Where did I mention that. I understand the bull thesis, Azim premji’s investment, partnership with msoft, having major banks as client, international expansion, having voda as a client, cpaas 25% growth, high ocf conversion etc etc.

All I’m saying is red flags exist, haven’t called biz a fraud at all. Cg issues exist, past record isn’t clean, political affiliations exist. Price action shows a graver story than just poor biz performance(this is however subject to change, so you may disregard this one), my impression of the promoter fell after forbes article(which I maintain seems to have been written for a reason, again I might be wrong). All I’m saying is as shareholders of Tanla, these are points to keep in mind.

Who knows I might be dead wrong and they truly have turned around and are cleaner than before. Mentioning the bank accounts where cash is held doesnt mean its all clean and rosy, CG is just a parallel narrative to keep in mind along with biz itself.

Its a bit late and I won’t attach the chart(excuse my laziness) but the chart has been painting a bleak picture since a while(when I exited breakeven at 1377 or so). 2 high volume 20% drops are usually indicative of more than just poor biz performance for a quarter(again make of technicals what you will, fundas > technicals).

Inserting excerpts of the article.

Hyderabad-based Tanla Platforms, a CPaaS (Communications Platform as a Service) company, offers wireless data services for mobile messaging. It saw its shares double during a spectacular rally on the bourses last year. In fact, since March 2014, its share price has grown a staggering 38,000 percent, which means that an investment of ₹1 lakh in the company, would have grown to ₹3.8 crore in eight years.

Last statement makes it sound like some sort of clickbait livemint article. But forget it, let’s give the benfit of doubt and say that since Tanlas rise was of such magnitude, that they felt it was worth mentioning what a 1 lk investment grew into.

“I was very clear from day one that I wanted to be in business,” says Reddy from his Hyderabad office that is lined with numerous autobiographies and self-help books. Reddy wakes up at 4 am and spends about half an hour in bed to talk to himself, find solutions to problems, and even find new challenges to solve. He’s a teetotaller, spends nearly two hours at the gym, abstains from eating non-vegetarian food and is often in bed by 8 pm. “My best friend is a clerk at a bank,” he adds. “I don’t socialise… I spend much of my time on building the business. I am here for the long haul.”

Also sounds like it is to make him look like a humble promoter. Which, as I mention time and time again might be true, but the tone made me personally uncomfortable. Up for interpretation of course, all I’m mentioning is that this should be kept in mind.

Rest of article also delves into a somewhat inspiring story of building Tanla, I personally did not make out the tonality to be sincere.

Again I might be wrong but regardless one should track this side too. Again, not saying biz is fraud our worthless, not saying what Tanla achieved is not admirable.

Excuse my ignorance if I took up too much of the thread into this side.

Disc - not invested since a while.

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What I believe is the major reason for fall in stock price is not just a weak quarter but change in perception of business , Tanla lost a chunk of revenue from a banking client which is a top 5 contributor of revenue to the competition, Majority of Tanla’s revenue comes from banks there is a fear that the competition might try to poach other large clients from tanla which can lead to severe distress , There is also a fear that there will be increasing competition in platform business .
However I believe the stock has already corrected alot , the company has good cash reserves and once the three deals on wisely start to materialize the dependence on enterprise business will be further reduced , This poaching came as a surprise for the company I believe they will now be prepared for other such events and even they lose a little margin in enterprise business it can be well compensated by platforms in the long term

Please let me know your opinion on this

Disc - Invested

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@Vileh , your note makes a lot of sense, and I totally agree with your thesis, rather than cg issues, shady past, Forbe’s article etc. Just adding to your note is a surprise big hit to their margins in Q1, which the street was not prepared for. However, management’s con call stated that Q1 was just one off kind hit and there might be a little carry over of margin hit in Q2 as well. But rest of the FY should be back to normal. I think Q2 will be a key watch out if what management says is true.

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So finally the dividend policy. Its an year too late but hopefully they giveaway a good chunk of it. Don’t want a low ball dividend to please the shareholders. I don’t really see any CG issues since the management started getting good people on board, but 35% cash in hand has been my biggest Red flag.

Disc - Invested, 3% of PF

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The only red flag I see in Tanla is the drop in Gross Margins in the Enterprise business. Don’t have a satisfactory answer for the 630 basis point decline. Whatever is impact due to platform migration is clearly one time. Large bank related business impact will finish by Q2. Question is how much of the 630 basis points these 2 items account for and what about the balance? Is balance going to be lost for the foreseeable future? Management did not give an answer on the call. They tried to explain with respect to 4.5% EBITDA variation, which is not fair. Part of EBITDA are already made up by increase in enterprise margins and possible reduction in salary/other expenses. They need to explain clearly the variance for this gross margin of enterprise business and for us to understand what part of loss of gross margin is permanent and what is one off.

Anyone who can communicate with company should raise this question. Rest is all noise.

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Please check out Forbes article on Route Mobile as well. It almost like a class to entrepreneurs on how to make sacrifices to achieve success!!! Maybe the Forbes style of reporting which needs to be red flagged :grinning:

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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:

  1. 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.

  2. 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.

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Hey @nirvana_laha! Yep when I was an investor I too was mostly unable to find much info regarding issues with management. Many investors I respected seemed to hold a negative view of it, and I didn’t know why.

  1. Political association. Tanla mentioned in the article, please go through. In fact, My hometown(in Andhra) is a locations where some investments were kept.
    Jagan Mohan Reddy is worth Rs 16,97,335 crore: TDP | News Archive News,The Indian Express

  2. I’m not very good at forensic accounting but the fraud thread at VP pointed me in the direction of purchasing assets(with the help of foreign subsidiaries) and writing them off(essentially insinuating a siphoning of funds). This is not from 2020, this is from previous bull run. Again I’m not very good at this. If someone who was good at this could interpret the statements from 2007-2012 it would be great!


    2007

    2008

    2009

    2012 where the ARs mentioned the write offs. Next image shows the writing off of fixed assets on BS. Also they did mention that assets were depreciated differently for Tanla UK and Singapore(I don’t shine at this accounting but a better informed and practised individual feel free to correct me on whether I’ve interpreted this wrongly)

  1. I remember reading a particular concall where a participant asked about this and IIRC Dasari Uday Kumar Sir was irate at the questioner and changed the topic to business performance and mentioned something along the lines of it not being a point of significance and that the investors should not be worried about it.(he might be right about it being insignificant/things of the past etc but still).

Now to your second point. Yes what Tanla has done is remarkable no doubt, but I didnt say the tonality of inspiration in the article was off to me, what I found rather weird were the lines I highlighted. The rest of the article goes into the inspiring story. We can interpret this differently of course, but for me personally not a big fan.

Tanla might not be comparable to WIPRO imo, it hasnt proved itself where it can comfortably escape scrutiny in shifting business multiple times. Many companies which pivot multiple times/change names have a distrust among investors. Few like Azim Premji sir do it well.

Finally, I have not financial interest here. Hopefully I’m wrong and Tanla shareholders do well. If someone with more experience could read the statements and give a clearer picture than I did, it would be great! If nothing fishy is going on here(too much cash held up in foreign subsidiaries) then great! All I’m saying is that the shady side of tanla’s poor CG of the past should be kept in mind.

P.S mentioning as a side point. Tanla’s price action is one thing to keep in mind. Companies usually dont underperform agaisnt a broad market index as badly as Tanla has without a reason(usually). 2000 all the way to 700 is significant and I don’t think it is all becuase of de-rating and bad biz performance. But price action isnt always perfect which is why I kept it in the end. You can choose to disregard this.

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New dividend policy and insider trading policies announced - https://www.bseindia.com/xml-data/corpfiling/AttachLive/05e8a194-0ea5-44fa-8aa6-abd10ee36c18.pdf

Dividend policy - https://www.tanla.com/media/images/Policies/DividendDistributionPolicy.pdf

Around 30% of consolidated net profit to be distributed each year as dividend. This is a good move, there was a concern regarding cash accumulating on the b/s without any acquisition plans. Returning the cash to shareholders according to this policy is a progressive move.

Insider Trading - https://www.tanla.com/media/images/Policies/Code_for_Insider_Trading_and_Fair_Disclosure.pdf

If any one has figured out the bridge for Tanla enterprise gross margin drop, will be interested in seeing that.

It seems the company hasn’t talked to media / channels and seem to be lying low.

Was Q1 the worst or Q2 will be worse still, before things move up as postulated by Uday Reddy (in Q3)?

Look forward to some data/industry insight based answer.

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