Investors with a high-risk appetite can consider taking an exposure in the public offer by Tanla Solutions. The company has a good business model in place to capitalise on the burgeoning growth opportunity in the non-voice mobile market.
The price band for the offer is Rs 230-Rs 265 per share. The price-earnings multiple works out to 16-18.5 times the annualised per share earnings for 2006-07 (aided by an exceptionally strong first half of 2006-07) on an expanded equity base. Bidding at the cut-off price is recommended, as investors will remain eligible to participate in the offer even if the price gets fixed at a lower level.
The company's strength stems from its business segments straddling a wide cross-section of the mobile messaging market with strong growth potential. It provides telecom-signalling products to mobile operators; aggregation services (by acting as a single point interface between content developers and mobile network operators) and offshore services in the area of application hosting and infrastructure management. Servicing some of the established mobile operators in the UK such as 3G, Vodafone, Virgin Mobile and O{-2} for its aggregation services, also puts the company in a good position to scale-up its service offerings.
The principal risks to our recommendation are the high client concentration, margin pressures arising from intense competition in a fragmented UK market for aggregation services and slowdown in uptake of high value-added services, as 3G rollout takes place over the next few years. Besides, the risk associated with identifying the right acquisition targets to jump-start growth in the US/Asia-Pacific market will be fairly high.
Business contours
The current promoters got their entire stake through an acquisition in 2000 when the company was known as Prism Foods; this was later renamed to Tanla Solutions. The stock is now listed on the Hyderabad, Madras and Ahmedabad stock exchanges and, following this offer, on the BSE and the NSE. The offer proceeds of Rs 360-420 crore (based on the price band) are to be used to set up infrastructure facilities for the development centre at Hyderabad (Rs 77 crore), upgradation of existing R&D centre (Rs 22 crore), back-up/disaster recovery centre at Bangalore (Rs 13 crore), overseas marketing offices in the US and Asia-Pacific (Rs 5 crore) and working capital (Rs 28 crore). A chunk of the offer proceeds is also to be made available for general corporate purposes, including acquisitions and investments in strategic businesses.
The company is seeking to ride on the huge growth potential of the non-voice mobile market that is categorised into short messaging service (SMS) and multimedia messaging services. Most research and marketing outfits, such as Mobile Messaging, Strategy Analytics and Informa Telecoms and Media, have projected a substantial growth in the total messaging market over the next few years.
Of the three business segments of Telecom Signalling solutions, messaging applications and billing services (aggregator) and offshore services, Tanla Solutions derives almost two-thirds of its revenues from aggregation services, with the balance split between the other two. In the aggregation market, it has entered into agreements with several UK-based players such as 3G, Vodafone, T-Mobile and O2 among others. It plans to extend these relationships and replicate the success in the new markets that it plans to enter.
Riding on the strength of the two acquisitions, of Techserv Teleservices (now Tanla Solutions-UK) and Smartnet Communication Systems, and the agreements forged in the UK, the company has recorded a substantial improvement in its financial performance in 2005-06 and the first half of 2006-07 compared to 2004-05.
On a consolidated basis, the company has reported revenues of Rs 63 crores in 2005-06, up from Rs 22.3 crore in the previous year, with post-tax earnings also rising five-fold to Rs 30.24 crore during this period.
The first half of 2006-07 has turned out to be even better, with revenues at Rs 87 crore and post-tax earnings at Rs 35.7 crore being higher than that for the full year 2005-06. Since the company is operating on a small revenue base, sustaining a strong pace of growth may not pose a challenge. However, maintaining the operating profit margins will be a key to sustaining the growth in post-tax earnings.
Offer details: The offer opens on December 11 and closes on December 14. The lead managers to the offer are SBI Capital Markets, IL&FS Investsmart and ICICI Securities.