7 days to go for Q3 results … What are your expectations / predictions? What would you like to hear from the management this quarter ?
This is in buyback offer they submitted
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Thanks Mitesh, that is a big relief.
18 Cr and 33 Cr
Its not massive i think.
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Tanla - Looking forward to FY24, after a regressive FY23.
Assumptions Made:
NLD + OTT channels (Whatsapp/Truecaller) - Volume growth 15%.
ILD Volume flat or de-growing
Tanla Enterprise - value wise - 2/3rd NLD+OTT, 1/3rd ILD - Hence, 9% minimum growth needs to be delivered to maintain marketshare at present levels.
Trubloq around 50% of Platform revenues (40cr+ / quarter), Wisely network around 30% (~25 crore/qtr), balance Wisely and older platforms 20%
Seeking ballpark/order of magnitude understanding at component level, rather than a very precise modelling.
A. Platforms business (comparing against Q3FY23 and not on full financial year basis - YoY it will yeild higher):
- Trubloq (with current use case)- follows NLD growth of 15% - adjusted to 10% effectively for Tanla, to account for Vi continued market share loss.
- Wisely Network - follows ILD - flat or de-growth.
- Thus 30% of platform revenue will be stagnant, 50% will grow 10%, giving effective growth of (4/65) ~6% over 80% of current revenues.
- Others
4a. Trubloq - new use cases - Voice scrubbing, consent management - totally regulatory dependent. No point trying to put a number.
4b. Wisely OTT (Truecaller) - this can scale very rapidly given lower base effect. However, how revenue accounting is done between Enterprise and Platform is not known - so difficult to model. However, let us assume 2 paise as platform revenue per message (rest going to enterprise) and assuming 2.5bn per quarter weighted avg over FY24 - per quarter gives 5Crore revenue - which is a 6% over current platform revenues.
4c. Wisely connect (Kore.ai) - let us keep 0 for FY 24. They are still in trial phase.
4d. Wisely Communicate - possibly they get 1 paise per message. Let’s say in absense of regulatory mandating - they are able to push it up by 2.5bn quarterly volume (from 1bn+ presently)- This is a 2.5Crore / quarter. - another 3% over current platform.
4e. Wisely “Protect” - using this word till they actually give a name - going to be launched Feb end. - let us keep revenues at 0 for FY24, given earlier experiences.
Adding this all up (4+5+2.5) = ~12crore weighted avg bump up per quarter from present ~80. Totalling to ~365 for FY24 vs approx 300 for FY23 - a growth of 20%+. Now this is with a rather conservative/realistic view not accounting for regulatory changes that can give serious tailwind to one or the other platforms.
B. Enterprise business
- If we assume they are able to arrest market share slide and just about grow with market volume for FY24 - it translates to a 9% value growth. A slightly higher value growth due to increasing share of whatsapp - may take it to 10-12% topline growth (basis Q3FY23 nos).
- Margin improvement continues and is able to reach 19%+ wght average over the year (aided by slightly better realization in NLD, increasing volumes from new customers and improving product mix with OTT growing faster than NLD & ILD).
- both these put together (and low base effect of Q1 Fy23) can give an approx 20% gross profit boost to Enterprise business in FY24 over FY23.
C.Overall
seems like a 20% YOY growth in Gross profits for FY24, not accounting for any external event which can have +ve/-ve impact on a conservative to realistic basis. If it all happens Tanla will reach EPS of FY22 in FY24. Effectively Two years wasted.
D.Other Potential impacts areas:
-ve : Macro conditions deteroriate further, leading to lower spends and cooling down of the transaction vol increase, besides lower promotional - Enterprise growth may not be realized.
-ve : Vi goes under - this could seriously drag down some of Tanla’s Platform revenues.
-ve : Tanla Enterprise losses further market share - chances are low, but can still happen. Might mute Enterprise growth numbers.
+ve : Trubloq Voice gets regulatory boost - boost to Platform revenues
+ve : Trubloq Consent Management gets regulatory boost - boost to Platform revenues
+ve : Data protection bill is interpreted by banks to require encryption - tremendous boost to wisely communicate.
+ve : Tanla Finally gets some international stuff going.
+ve : Tanla is able to claw back some of lost market share (40% has come down to ~30% over last 4 quarters) - tremendous boost to Enterprise growth numbers.
+ve : Possible NLD price increase in Q2 (Last 2 years ILD was increased by telco’s, would they touch NLD this year?) - can boost NLD revenues/margins.
E. Looking Beyond
If Tanla can breach FY22 EPS in FY24, it will be a positive given the situation we are in. There are few levers to do much better, but they require regulatory tailwinds.
International foray, could have added growth opportunity beyond India, but kept on hold, perhaps “wisely”, till Wisely gets traction in India. There is simply no adoption of Wisely at present - network has 1 customer, Communicate has 4 in trial/commercial and number has been constant since last few quarters.
Given large cash reserves, acquisitions to bolster market presence and gain valuable realtionships ahead of wisely international launch should have been done - no better time than this when valuations are at nadir. But management wants to do organic growth only. Surprising, but it is what it is.
New Inflection point for Tanla will come when the platform business starts contributing 40%+ gross margin (without Enterprise taking a hit) and crosses 100Crore quarterly margins. When this happens, Enterprise related margin disruptions can be easily absorbed, so overall risk comes down significantly. I believe Truecaller (Wisely OTT) is likely the one which can help move this needle fast, without regulatory changes.
It requires one of the platforms to take off (in next 2-3 quarters) to provide a new source of energy to the stock and its valuations. But beyond FY24, FY25 could be the real moment in sunshine once again for Tanla as 2-3 of its platforms could be scaling up revenue and the present economic slowdown should be over - driving the enterprise business rapidly. But, meanwhile, risks remain at the top of mind for investors. How many existing shareholders will survive FY23 and 24 is to be seen?
Disc: Invested
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Thanks for a thorough and dense analysis piece. It is getting quite hard to hold on to the shares given the voluminous bleeding. Institutional holding is down. Concall full of individual investors screams of investment Winter!
Disclosure - in e Ted,
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Govt to convert the Vi outstanding to Equity. One overhang gone - hopefully for some time at least.
Truecaller Q4 results call, mentions the follwoing on Truecaller Messaging;
- Millions of business messages per day, towards end of Q4.
- Have barely scratched the surface
- Further innovation to support more engaging content thru rich media messages, attachments etc - bascically playing catch-up to some level of whatsapp capabilities.
No hard numbers in terms of guidance or acheivement. Are they going to be able to scale to 1bn messages a day in 6 months time or 5bn a quarter by end of FY24 (~3% of sms volumes)? These would be meaningful numbers. Another important question is (though it may be too early) - as and when Truecaller takes messaging to any other market would Wisely tag along?
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Will Wisely ATP be the game changer for Tanla in FY24? Will it do for Tanla what Trubloq did for it earlier ?
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Do we have any idea about the demand for this in the CPaaS market? To me this looks more as a regulatory feature than a revenue making one.
Regulatory features can potentially make more money than anything else, in general, as customers don’t have a choice of not buying. Hope it gets mandated by regulator(s). If it does, it will earn good revenues.
As for demand, anything which can reduce smishing on proven basis, will have excellent demand. Banks spend crazy amount of money on security products.
Apart from this general gyan, I don’t have specifics in terms of size or timelines.
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Seems headed for a Trubloq repeat (in terms of approach and deployment).
But if I were to take a guess - I would say, it seems like Trubloq repeat in more ways than one. Telco’s will likely deploy this solution and use it as an excuse to put a large price increase due to it/in its name on NLD sms. Scrubbing (DLT) - they charge nearly 2.5 paise per sms. It was effectively a 50% hike on the interconnect charges of 5 paise. The tech provider possibly makes 20% of that (0.5paise per sms). I would put a 50% chance on something like that getting replicated all over again and NLD price hike (in name of security) and anti-smishing technologies getting rolled out by July.
Disc : still invested …
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Tanla Q4 - expectation
Business
- Gross Margin improvement in Enterprise business.
- No more than 3% QoQ fall in enterprise revenues
- Wisely OTT (Truecaller) scale up to run rate of bn messages a month.
- Wisely Communicate scale up to revenue run rate of 10+ crore a quarter
- Clarity on sms price increase (ILD)
Commentary on
- Wisely ATP business model and time to revenue.
- Kore.ai commercial deployment and time to revenues
- Wisely OTT - how much revenue accrues to The platform part
- International rollout
- Enterprise business outlook for FY24.
- Trubloq additional revenue streams likely in FY24 (consent management , Voice DLT etc)
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A few things bothered me about the result:
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In the cash flow statement, there is a 60cr block of Movement in Bank Balances. Any idea what this is?
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An investment of 60cr in leased office, 23cr (too high??) on furniture and a whopping 72cr on computers (this is surprising without the addition of any new employees and a relatively low increase in deprecation)
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Tanla Q4 - expectation Vs Actual
Business
- Gross Margin improvement in Enterprise business -
continues to reach 20%.Good show.
- No more than 3% QoQ fall in enterprise revenues
Overall down 4.15% - not so great, but not a disaster either. Basically, tells me Tanla is still losing market share, albeit at lower pace in the Enterprise segment (down 5% QoQ). On the other hand platform is up 4%+ QoQ. This is a mixed bag as it basically tells us that there is no significant progress (Revenue wise) on any other platform. At this low base, any platform taking off, should lead to significanly higher growth rates.
- Wisely OTT (Truecaller) scale up to run rate of bn messages a month.
Bang on - Extract from the shareholder letter - WiselyOTT has started to scale substantially over the last three months to reach a monthly volume of over 1 billion digital interactions with over 50+ marquee enterprises.
- Wisely Communicate scale up to revenue run rate of 10+ crore a quarter
Did not happen. Actually seems like no further progress. This was the original Wisely. Its proved to be a dud so far. Also no signs of anything changing significantly, in the near future. Management gave a guidance of 0-50Crore. I mean, who gives such a range?
- Clarity on sms price increase (ILD)
Not clarified to the best of my knowledge. ILD per managemet is 30-33% of Enterprise business. A 20% increase on that, without loss of any further market share or fall in volumes, basically translates into a growth of ~6% in FY23-34 purely from that. However, the last two price increase does not seem to have gone well for Tanla as it kept losing share. Let’s see how this round shapes up.
Commentary on other stuff.
The only confident commentary and answers seemed to be for Wisely ATP. But no details on timelines and opportunity size except saying - it’s the biggest innovation from Tanla.
- Nothing on Further use case deployment for Trubloq (consent management, voice DLT)
- Kore.ai may get commercialzed next quarter.
- Wisely ATP may start commercial operation next quarter.
- Wisely communicate - only god knows.
- Wisely OTT will conitnue scale up IMO. we can see it hit a runrate of 2bn a month sometime by Diwali, IMO.
Conclusion and looking forward
What do we exect in FY24 and beyond? Firstly what is Tanla today - Presently Tanla is still largely an Enterprise Play + Trubloq, with almost entire revenues in India. Wisely (communicate) is a flop show so far and doesn’t seem to be doing much even for next few quarters… Truecaller is just an enterprise channel like whatsapp or sms (though margin may be highest). Kore.ai still doesn’t have a customer. FY2223 is a washout.
For FY2324 partial views - refer to this : Tanla Platforms ~ Leading player in the fast-growing CPaaS market - #256 by anna
Gross Margins
Gross Margin improvement in Enterprise does not appear to come from market condition improvement in my opinion. To me it seems more of a financial thing. My bet is they have traded some discount from Vi by paying them upfront. Last quarter they had an outgo. The discount possibly has kicked in this quarter. This is my view, and I could be wrong. For FY2324 - I think gross margin will be within 20-22 range as whatsapp and Truecaller scale up, and they provide healthier margins and promotional business too has higher margin. On the other hand, PSU banks contract renewals/tenders will continuosly keep pushing the margin down thanks to reverse auctions.
Platform scale up
Truecaller (Wisely OTT) will definitely scale up further. How much of revenue is booked in platforms from that is not known. But it will add. Wisely Network (Vi firewall) will not add anything. Trubloq will at best grow with organic growth in market. So where is the Wow? Wisely ATP could be the Wow for Tanla and be a Trubloq repeat. Unless that happens, there is no wow. If that happens and they can say drive a monthly revenue run rate of around 15Crore+ - the entire perception of the stock and its earning multiple will change overnight. My money is on this happening by Q2.
Operating leverage
With fall in revenue, -ve operating leverage is at play (Gross Margin to EBITDA conversion ratio has fallen significantly). Without large jump in revenues there is no operating leverage (-ve), salaries are flat as % of revenue and SGA has increased. So they need to get to 15%+ growth in enterprise business to get some operating leverage back. It is a distinct possiblity.
Enterprise Market share
Can Tanla claw back some market share in the Enterprise business. Possible, if promotion business picks up, One large ILD customer swings back and Truecaller is able to be strategically used. Else the stress will continue.
Image and credibility
The biggest knock Tanla has taken has been on its image and credibility (directly coupled to Uday Reddy’s image) in FY23. A blockbuster performance from Wisely ATP can restore it partially. My touchstone to determine this would be the DII particaption in this stock. If their shareholding goes up from literally zero to 3%+ (which was there at end of FY22) then I would say this is largely restored. However, I don’t have much hopes on this. I think FII will actually rampup their holding further. Maybe then the DII might step in
Price Increase in NLD A2P
I continue to believe it is around the corner. Last two changes were in 2018 and 2020/21. Its about time now. This at 20% increase hypothetically, will give a straight 12-14% topline increase on annual basis.
Industry
Presently this industry in India is around Rs 10k crore. Uday reddy in his remarks says that by 2028 it could be 5-6bn USD, which is in Rs 40-50K Crore range. Seems diffiicult but not impossible. Even at 30k, it will be a CAGR of 25%. Who can argue against that for long? My money on the industry is on this basis.
FY24 Bottomline
Despite a lot of -ve being listed, can FY24 deliver a 30%+ YoY topline growth and a EPS of ~Rs50? Sounds far-fetched? Can a Rs15 EPS be possible in Q4 FY24? Maybe not. Maybe a 20% probability. But this is exactly what the bet has to be on.
Disc : still invested
15 Likes
Anna,
what is your take on value first acquisition. I know this has been a major gripe of your about reluctance on inorganic expansion. Now they also got a toe hold in middle east and fast growing Indonesia.
Is the acquisition cost justified?
Disclosure-invested since 1050.
My take on the VF acquisition by Tanla - https://www.bseindia.com/xml-data/corpfiling/AttachLive/b798b65f-031f-48af-80c8-2cc1762e341d.pdf
They’ve acquired the VF India and Middle East entities at 7x EVEBITDA. I am not a fan of the kind of margins VF has (5% EBITDA) but considering revenue growth CAGR of 18% for the entities and potential synergies, the valuation seems in the ok zone to me. Its not great but it may be good if they execute well.
A 52Cr EBITDA on 366Cr acquisition value translates to around 8-9% ROCE (Assuming 1.5% depreciation on VF revenues). As a comparison, Tanla ROCE in FY23 was 38%. So there is a lot of work to be done to bring VF ROCEs to a decent level.
Uday Reddy has done a lot of u-turns on his earlier stances in doing this acquisition - he used to be insistent that Tanla won’t do margin dilutive acquisitions and they will grow internationally organically. I am sort of happy he has come around and acted on the piles of cash accumulating in the b/s. If CpaaS is such a huge growth industry then why pay dividends with cash rather than growing organically or inorganically? Never made sense to me.
Potentially benefits could be:
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Finally a foothold in key Asian geos of Saudi, UAE and Indonesia - This was much needed. Route has shown Tanla how depending on only one geography may be counter-productive
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Cross selling Karix and Wisely solutions to the 40% revenue subset of VF that has net new customers to Tanla.
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Ability to improve VF margins via backward integration and economies of scale
Potential pitfall: Tanla now has 3 organizations within itself - Tanla, Karix and VF. Neither Karix nor VF seem up for a merger with Tanla. This can get tricky and artificial boundaries can prevent synergies from truly accruing. I hope Tanla management will steer this organizational structure in the right direction in the future. ESOP plan for immediate retention of VF employees is a good step, but longer term amalgamation may be needed.
Overall, some action on cash, happy about that. But jury will be out on the quality of this acquisition until VF sees significant uptick in its margins. Good thing is, the acquisition should be EPS accretive from Day 1 (3-5% EPS addition on Tanla FY23 base depending on how much interest VF pays).
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Well, well, well … Mr Reddy doing an acquisition after repeated vows not to do it … so what happened? Is it a good thing?
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Tanla has enough cash and is generating 100 crore per quarter. so this won’t be a large strain from the funding perspective. It will help improve ROCE from moving funds from 6% FD’s to a 15% yeild (EBITDA/acquisition price). Gets cash off the Balance Sheet. Not bad at this level.
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This will close one line of questioning by analyst, about competition from Twilio etc. Mr. Reddy will be gloating that he not only competed but bought their company. This is good for bluster value.
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This reduces competitive intensity somewhat in the industry and leads to more consolidation, though the main source of competitive intensity at present is Route Mobile rather than any other company. This is perhaps a small positive.
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This is not a very good quality business. Mostly the same Enterprise play at similar lower margins and higher servicing cost leading to lower EBITDA’s. Doesn’t change Tanla’s business significantly in India except a more bolstered play in the mid market segment. This sounds not so good.
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Helps get very minor additional footprint in Saudi and Indonesia. If this is leveraged to drive up businesses in those territorities, then it may be good news going forward. I will count it a small positive till we hear the real intensions (if we get the real intensions … )
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Synergies … not much - Valuefirst is still going to be run independently. So no real cost saving. On about 200 Crore of its purchase it might volume savings through Tanla. A bit of cross sell maybe. But nothing that can add up to say the combined entity EBITDA will get to be higher than Q4 exit EBITDA of Tanla. Esssentailly incremental improvement, nothing substantial.
So why did Tanla do this acquisition, when there are some small good points and nothing great at all?
I believe this is a defensive play from Tanla, to save their skin. Twilio wanted to sell Valuefirst and get cash. Now nearly 10% of Tanla business (280 Crore+) seem to be aggregator play selling sms to Valuefirst (280 crore topline going out on consolidation) !! If Valuefirst had gone say to Route, this business would have disappeared overnight and Tanla stock valuations would have followed suit … Other than buying out Valuefirst, there could be no way to ring fence 10% of your business. What do you do? I guess Mr Reddy did the right thing to break his vow and acquire. He saved the business and got few additional plus. To me this shows flexiblity and maturity which was missing for last 5-6 quarters (I may be being a big harsh … but this is my view).
Now if they can use this to further the international business and bring down share of India revenues to 75% over a period of couple of years through more acquisitions … it will be a very positive step indeed from both risk management and growth perspective. Let’s hear out what Mr Reddy has to say today evening.
I believe this is a positive for Tanla from a longer term perspective, altough the market may not be very kind right away.
Disc:Invested
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Some more updates on the acquisition based on Uday Reddy’s CNBC interview:
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Incremental revenue addition to Tanla upon consolidation will be 650Cr out of the 950Cr as VF was an existing customer of Tanla
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This also means that the VF biz quality was better than it seemed at first glance. They were doing a 52Cr EBITDA on a value addition of 650Cr at 8% EBITDAM with 300Cr being pass through revenues via Tanla
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Plans to improve VF EBITDAM from 5% to double digits in 2-3 quarters via sourcing consolidation and higher bargaining power - This effectively means improving VF margins from 8% to double digits, that doesn’t sound outlandish or unachievable in the given timelines. If they do manage 10% EBITDA for VF and a 15% growth, VF may contribute 75Cr EBITDA in the first full year pre-ESOP costs. Post ESOP EBITDA should be around 50Cr.
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VF India to be consolidated from Q2 onwards, VF Middle East may be consolidated Q3 onwards
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Anna, Nirvana
. Many thanks for your illuminating thoughts. After hearing the Concall and studying the ppt, and hearing your thoughts, here are my thoughts.
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Uday reddy is an extremely risk averse and conservative. I don’t see VF ad a bold move, same tuck -in gingerly step. Should have tried europe or some US companies which have bled out and on the verge of death. Something in NLP and conversational ai, Perhaps. Something on the high margin platform side would have been great.
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With their experience, they are likely to improve the profitably noticeably. Although enterprise remains a low margin biz. It appears they have bought cheap at 7x ebidta (fire sale by twilio?. I also. am a twilio shareholder). Team seemed confident to boost returns. There was hardly any mention of deep synergy.
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Indonesia is buzzing while middle east is stable. I don’t see significance even with VF addition. Route is doing a better job at geo expansion IMHO.
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