Our Shift To OTT, WhatsApp And RCS Will Create Opportunities

Key Takeaways

• Tanla's strategic shift to OTT platforms supports revenue growth, capitalizing on new clients and expanded service offerings.
  
• Expanding internationally with RCS deployment and maintaining high cash flow indicates robust potential for future revenue and earnings growth.
  
• Declining messaging volumes, weak platform revenue, and competitive pressures suggest potential revenue instability and challenges in maintaining profitability for Tanla Platforms.

Catalysts

Engages in the provision of cloud communication platforms as a service for mobile operators and enterprises in India and internationally.

• The strategic shift from ILD SMS to OTT platforms such as WhatsApp and RCS is contributing significantly to Tanla's enterprise segment revenue, now making up 29% of the overall revenue base. This growth in OTT channels is expected to continue as the company further capitalizes on new client wins and expands its service offerings, which could boost revenue.
  
• Tanla's focus on expanding its platform business internationally, with recent contracts signed for RCS platform deployment outside India, presents a growth opportunity through a revenue share subscription model. This expansion is likely to contribute positively to Tanla's future revenue and earnings.
  
• Management's strategy to mitigate pricing pressure in the SMS market by capitalizing on higher-margin OTT channels and improving operational efficiencies could help stabilize and potentially improve net margins in the coming quarters.
  
• With a strong emphasis on cash flow generation and a robust cash balance, Tanla is well-positioned to invest in its talent and technology infrastructure, which can drive future growth in revenue and earnings. The company's ability to maintain a high free cash flow conversion rate indicates financial stability and flexibility for strategic investments.
  
• The focus on enhancing cross-channel capabilities and building solutions for clients that integrate multiple communication platforms offers Tanla a competitive edge, potentially increasing customer stickiness and driving incremental topline growth as they expand their client base and solutions offerings.

Tanla Platforms Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Tanla Platforms's revenue will grow by 11.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 12.6% today to 12.2% in 3 years time.
• Analysts expect earnings to reach ₹6.8 billion (and earnings per share of ₹50.3) by about May 2028, up from ₹5.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.1x on those 2028 earnings, up from 12.6x today. This future PE is lower than the current PE for the IN Software industry at 30.0x.
• Analysts expect the number of shares outstanding to decline by 0.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.97%, as per the Simply Wall St company report.

Tanla Platforms Future Earnings Per Share Growth

Risks

• The continued decline in ILD SMS volumes is a concern, as ILD revenue is still a part of the enterprise segment, and this decline could impact overall revenue growth.
  
• The sequential weakness in platform revenue, coupled with the impact of the loss of the Vodafone contract, suggests volatility and potential instability in the top-line revenue for this segment.
  
• Pressure on gross margins in the enterprise segment, potentially due to pricing pressures and mix changes, indicates challenges in maintaining profitability levels.
  
• Long sales cycles and the need for proven success stories in platform products like Wisely ATP suggest that growth and monetization may take longer than anticipated, affecting earnings projections.
  
• The impact of Meta’s pricing decisions on WhatsApp services, along with aggressive market share strategies by competitors, could pressure Tanla's margins and revenue in the OTT space.

Valuation

• The analysts have a consensus price target of ₹607.667 for Tanla Platforms based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹680.0, and the most bearish reporting a price target of just ₹534.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹55.6 billion, earnings will come to ₹6.8 billion, and it would be trading on a PE ratio of 18.1x, assuming you use a discount rate of 15.0%.
  
• Given the current share price of ₹474.35, the analyst price target of ₹607.67 is 21.9% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.