Tanla Solutions

The crisis in the global financial markets has taken a toll on several of the key banking, financial services and insurance clients of Indian IT majors. The top-tier companies may yet pull through, thanks to the breadth and depth of their service offerings and broad geographical diversity.

For most mid-tier companies, though, these are challenging times. Valuations for mid-tier IT players has plummeted, with most of them trading at single-digit price-earnings multiples on a forward basis. Even at these levels, the business risks associated with many of them are high.

In this scenario, players with niche offerings and catering to limited verticals or segments may chug along and deliver strong earnings over the medium to long term. Tanla Solutions, predominantly a network aggregator in the mobile value added services (MVAS) space, might be one such player. Investors with a two-year perspective may consider buying the shares of Tanla Solutions. At Rs 173, the stock trades at eight times its likely 2008-09 earnings. Tanla has no strict peers in the listed space.

An integrated play in the mobile billing and value added services catering largely to top mobile operators in the UK and Ireland, synergies from the acquisition of Openbit and an expanding domestic presence are key business drivers for Tanla. Content aggregators typically enable content from music companies, websites and entertainment companies to be made available in a downloadable format on mobile phones.

The company’s revenues have grown at a compounded annual rate of 173 per cent over the last three years to Rs 459.8 crore, while net profits have jumped 189 per cent to Rs 166.5 crore. The company has over the last several years been enjoying an EBITDA margin of over 50 per cent.
Integrated play

Tanla has end-to-end offerings in the mobile value added services segment, with network aggregation, product offerings and professional services. The company derives 78 per cent of its revenues from the network aggregation services. Its top clients are leading European mobile operators such as O2, Orange and Vodafone, all pan-European players, thus enabling Tanla to expand its footprint. These operators also have an average revenue per user (ARPU) of $35-45, of which non-voice revenues are $10-14.

In addition, the company also has its own products, such as content management systems, WAP Builder and Interactive TV. Although this segment contributes only 11 per cent of revenues, it enjoys 86.9 per cent of the EBITDA margins. Professional services are also delivered offshore by Tanla. Interestingly, most products are offered on a SaaS model, making the implementation cycle shorter and cheaper for clients and allowing for higher margins.
Openbit acquisition

Tanla Solutions’ acquisition of Openbit gives it a clear edge in terms of enhancing its offering in the on-device mobile payment segment. It could also help Tanla expand operations in new regions and create a sustainable revenue stream.

The company acquired an 85 per cent stake in Openbit in June, to be hiked to 100 per cent in two years, for $15.8 million. For June alone, the company declared Rs 7.4 crore in revenues, with an EBITDA of Rs 1.66 crore.

The acquisition holds several positives for Tanla. Openbit has strong tie-ups with players such Nokia and has its software products installed in 20 million Nokia phones. This deal can help Openbit extend its relationship with Nokia in countries such as China and India, where mobile subscribers are being added at 8 million a month.

This apart, on-device payment is a concept fast catching up in India, with several operators such as Reliance Communications and Bharti Airtel betting big on mobile commerce. Tanla is set to serve Indian operators and agreements with several players are on the anvil.

Openbit’s products may augment Tanla’s mobile applications offering in this regard. Openbit derives 60 per cent of its revenues from clients in Europe and 35 per cent from those in Asia-Pacific, both of which are high-growth regions for mobile payments.

While a bulk of the revenues will continue to flow in on a usage basis for features such as gaming and other entertainment-related downloads, Tanla could create a more sustainable revenue stream over the next couple of years, comprising set-up, upgrade and support revenues.
India Foray

Tanla has also started its India foray, with tie-ups with BSNL for a voice portal in all the circles. It also has agreements with Bharti Airtel for launching a voice product-M-Raga in two circles. Reliance Communication is also in a deal with Tanla for premium SMS delivery.

There are also agreements with content developing companies to deliver integrated offerings to domestic operators. But all these are at a nascent stage and it may be over the next two to three years that India will contribute substantially to revenues. With established players such as OnMobile, IMI Mobile and Bharti Telesoft to contend with, breaking into this market may be difficult.
Risks

In India the company may have to contend with tighter margin on VAS products as offtake is much lower than in the US and Europe. The company does not offer ringtone downloads or caller ringback tones, which may be a negative. Tanla may find competition from players such as IMI Mobile, which has just entered the UK, and Onmobile Global which has made acquisitions in France.