Onmobile Global IPO Review

Investments can be considered in the initial public offering of OnMobile Global, a telecom value-added services (VAS) provider, in the light of its track record in the Indian market and good growth prospects. The offer price, though, appears to be stiff given current market conditions and the valuation accorded to frontline telecom service and software players.

At the upper end of the price band (Rs 450) the stock would be valued at 44 times its estimated current year earnings, on the post-offer equity base. But the niche nature of OnMobile’s business, sustainable growth prospects, strong operating margins (45 per cent) and the absence of peers in the listed space make a strong case for investment. Value-added services (such as music downloads and gaming) augment the voice revenues of telecom players. The market for value-added services has strong growth potential in India where telecom players are grappling with falling realisations (ARPUs) and looking to generate higher revenues from subscribers.

OnMobile Global offers content aggregation and application development, which is software-packaged, to telecom service providers. The company retains the intellectual property rights to the platform and applications. OnMobile, with its established relationships with most of the dominant players — Bharti Airtel, Reliance Communications, and BSNL — appears well-placed to capitalise on this potential.

An expanding client profile to include media companies and handset manufacturers and an expanding South-East Asian footprint are positives for the company.
Integrated VAS Play

Among value-added services, short messaging service (SMS) continues to be the top non-voice revenue generator for telecom companies. But increasingly, services such as ringtone downloads, voice SMS, gaming and information services are also catching up and providing alternative revenue streams to operators. Other VAS include MMS (multimedia messaging service), USSD (unstructured supplementary service data) and WAP (wireless application protocol). OnMobile, with its positioning and experience, appears well placed to establish its presence in this space. Mobile Commerce, service that facilitates payment for movie tickets, utility bills, pre-paid recharge and shopping, is an area where OnMobile is expanding its offerings.

With players such as Reliance Communications and Bharti Airtel already having launched this service, the company could benefit from increased spending in this segment. Together, these give OnMobile a healthy service base.
Broadening client profile

Moving beyond telecom clients, OnMobile is broadbasing its customer base by offering interactive services to newspapers, magazines, television and radio broadcasters. Clients in this segment include ESPN, Star, AOL and Buena Vista. With mobile contests, polling, voting, song downloads and other interactive services on the increase from media companies, OnMobile may see this segment contribute significantly to revenues. The revenue sharing arrangement is three-way between OnMobile, media clients and the telecom company. The company also works with handset manufacturers such as Nokia to market its products, creating a holistic business model.
Expanding Geographical footprint

In addition to domestic presence, OnMobile has expanded its offerings to clients in the fast-growing South East Asian markets. The relationship here is with strong telecom players in this region such as Maxis, Optus, Bakrie Telecom and Banglalink. Some of these countries have higher ARPUs than India and also a high propensity to use value-added services. OnMobile stands to gain with any increased spend on VAS by these players.

In addition, OnMobile has acquired two companies — Vox mobili in France and ITFINITY in India — both VAS players. While the former is said to have 21 customers worldwide, the latter has good software products. These moves help in widening OnMobile’s offerings and client base.
Technology independence and 3G policy:

OnMobile’s applications are claimed to be network-neutral. This means that services can be delivered to a 2, 2.5 or 3G phone or network.

In the Indian context, this becomes relevant as a vast number of users still have low-end phones. As operators upgrade the technology of their network, OnMobile’s products may not require substantial reworking to be commissioned in the network. The imminent announcement of the 3G policy, with many operators betting on increased offtake of high-end voice, data and video services, could provide a trigger to this business. OnMobile, with its offerings and operator relationships, may be able to tap into this high-margin market.
Risks

Most of the revenues that OnMobile generates is outcome-based — a revenue share arrangement with the operator, based on offtake of services by mobile subscribers. The success or failure of an offering thus directly affects realisations.

This apart, a substantial number of new subscribers may have come in because of offers such as ‘life-time recharge’, ‘chota recharge’ and so on. These are typically low ARPU subscribers and may not use value-added services in a significant way. This has adverse implications for OnMobile. Competition from other (unlisted) players in the same segment such as Bharti Telesoft, IMI Mobile and Servion Global may create pricing pressures on OnMobile. Vendor rationalisation from players such as BSNL may force OnMobile to work with a smaller pie.

Issue details

The company proposes to issue 1.09 crore shares at a price band of Rs 425-450, for purchase of office equipment, repayment of loans and working capital requirements. The offer is open during January 24-29. Deutsche Bank and ICICI Securities are book running lead managers to the issue.