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OnMobile Global: Hold

Caller ringback tones and IVR-based solutions, where OnMobile’s key presence lies, are set to dominate non-voice revenues, hitherto dominated by messaging alone.



Benefitting from ringtone downloads.

K.Venkatasubramanian

Investors can continue to hold the shares of OnMobile Global, primarily a mobile value-added services (VAS) player, given the growth prospects for such services in India and other emerging markets. At Rs 325, the stock trades at 19 times its likely 2009-10 per share earnings, a premium to the broad market. In the absence of listed peers and increasingly successful relationships in the form of strong deal wins with most Indian mobile operators and select international ones, there may yet be scope for capital appreciation in the stock.

The company has won a large multi-country, multi-year deal with Vodafone to deploy its VAS products in many emerging markets such as Eastern Europe, Africa and Latin America. OnMobile’s ability to mine existing client base and synergies from overseas acquisitions (such as Telsima and Vox Mobili) that it made over the last couple of years may support earnings growth over the medium term.

In FY-09, OnMobile revenues grew by 55.2 per cent to Rs 406.3 crore, while net profits grew by 41.3 per cent to Rs 85.2 crore over FY-08.

OnMobile works with mobile operators for providing services such as caller ring-back tones, ringtone downloads and IVR-based services. Top Indian mobile operators such as Vodafone Essar, BSNL, Bharti Airtel, Reliance Communications and Idea Cellular feature among its clients. The revenue share for any VAS product ranges between 20 per cent and 25 per cent of the revenues that an operator normally generates from delivering such services to customers. Most of these operators are witnessing rapid subscriber additions and looking to augment non-voice revenues. OnMobile appears well-placed to benefit from the opportunity. Caller ringback tones and IVR-based solutions, where the company’s key presence lies, are set to dominate non-voice revenues, hitherto dominated by messaging alone.

In fact, Bharti Airtel and Reliance Communications have seen SMS revenues (till recently a major portion of VAS revenues) as a percentage of non-voice revenues fall, indicating subscriber interest in other services. A study by IMRB shows that VAS revenues for Indian operators are expected to grow at 70 per cent yearly to Rs 16,520 crore by 2010, with the proportion of SMS revenues coming down and other VAS products enhancing contributions. The IVR-based solutions cater to a rural audience (where a bulk of subscriber additions are happening), wherein cumbersome dialling of codes may be overcome by the local language voice-based prompts for their VAS requirements.
Vodafone deal rings revenue visibility

Vodafone India had been working with OnMobile for the past eight years. According to the company, Vodafone generates Rs 1,000 crore per year from delivering VAS services powered by OnMobile. Vodafone has now awarded its emerging markets VAS delivery responsibility to OnMobile. This deal is significant on several counts. Over the next three years, revenues from this deal are expected to contribute 25-30 per cent of OnMobile’s overall revenues.

It is important to note that Vodafone in Eastern Europe and African countries generates ARPUs in the range of $7.5-13.3, much higher than the $6 that the Indian subscribers generate. This means that the scope of generating VAS revenues is that much higher.

The other key aspect is that the software development expenses for delivering these services from a platform have already been incurred. This means that this deal will be a margin enhancing one for OnMobile.
Improving International performance

OnMobile, through a series of acquisitions, has managed to upsell and cross-sell services to operators in Europe. International revenues account for 23 per cent of the company’s revenues, up from 15 per cent in 2007-08. It has managed to win customers in Asia-Pacific and Latin America as well. This creates a healthy geographic mix for the company, which after the Vodafone deal is set to become even more enhanced.

Client concentration, with top five clients contributing 70 per cent of revenues, though still high has come down substantially from 77 per cent in FY-08.

One critical aspect that gives OnMobile the edge in winning deals is that it is technology-agnostic and has the capability to delivers all its services from a single platform. This becomes relevant as rollouts can happen quickly in overseas geographies and integration can happen seamlessly.
Risks

A recent TRAI order that requires prior subscriber permission through SMS, email or fax, may delay offtake for VAS services. Competition from other VAS players such as Bharti Telesoft, IMI Mobile and One 97 may pose pricing pressure.