Onmobile Global

Investors with a two-year horizon can retain the shares of Onmobile Global Services, a mobile value-added services provider, given the strong revenue growth in lucrative overseas markets that are likely to kick in over the next 12-18 months. Its model of driving international growth by targeting multi-year, multi-country implementations for large operators such as Vodafone and Telefonica provides long-term revenue visibility. Onmobile is looking at targeting a few more deals of this kind.

At Rs 382, the stock trades at 24 times its likely FY11 per share earnings. Though there are no strictly comparable listed peers, the valuation is at a premium to the broader markets. But given that Onmobile is set to expand its international footprint, through large executions for top mobile operators to nearly 50 per cent over the next 2-3 years, nearly double that of current levels, its revenues and margins are set to expand significantly. There is thus scope for capital appreciation over the next few years. Investors may also choose to accumulate the stock in declines linked to the broader market.

This apart, its strong presence in India continues with deals with most of large incumbent operators, though, due to the ongoing tariff war, there could be some hitches in driving ARPU (average revenue per user) for operators.

In FY09, OnMobile's 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 FY08.

In the recent December quarter, the company saw its revenues grow by 6.3 per cent sequentially to Rs 115.5 crore, while net margin increased from 8.6 per cent to 10.9 per cent.

International footprint

OnMobile's deal with Telefonica for deployment of value-added services to the latter in Latin America provides further thrust to its expanding global footprint. The company will be deploying value-added services covering 130 million of Telefonica's subscribers across 13 countries.

The company expects this deal to contribute a third to 40 per cent of revenues in the next 3-4 years.

Latin America has a mobile penetration of over 83 per cent, which creates a larger market for selling VAS products. The deal with Telefonica envisages delivery of services such as ring-back tone, music search and soccer portal for its subscribers.

Soccer is a highly popular sport there and is expected to generate rich interest in related mobile value-added services .

Telefonica's subscribers in countries such as Brazil, Mexico, Chile, Argentina, and Venezuela, its key markets, generate high ARPU of $10-30, which is substantially higher than the $5-6 that the Indian market generates .

The revenue share with operators such as Telefonica would thus be more lucrative for OnMobile.

The company had earlier won a contract with Vodafone to deploy its VAS products in many emerging markets such as Eastern Europe, Africa and Latin America. The deal, over a three-year period, is expected to contribute 25-30 per cent of OnMobile's overall revenues. The revenues from these deals are set to flow in from late 2010-2011.

These projects would ensure that OnMobile will be able to develop high-level implementation expertise. The company is negotiating 3-4 of such large deals currently and hopes to convert some of them.

Domestically, the company caters to most of the top operators in the country. Though the current tariff war may strain the potential of deriving value-added services revenues, the arrival of newer operators may result in prospective new clients and drive volumes for the company. These apart, the company is also looking at increasing its footprint by delivering value-added services to social networking sites, which is another rapidly expanding space.

Risks

The company recently got the approval to raise Rs 1,000 crore for funding the capex of any large deals that it may enter into or for any large acquisition. A part of this (around Rs 300 crore) could be through equity, which means significant equity dilution for Onmobile.