Will Expand OTT Offerings And Invest In R&D To Boost Competitive Edge

Key Takeaways

• Strategic asset acquisition and platform expansion could enhance revenue and efficiency, improving net margins and sustainable growth beyond legacy services.
  
• Focus on innovation, talent, and shareholder returns may boost competitive edge, shareholder confidence, and long-term earnings.
  
• Increasing OTT competition and dependency on regulatory approvals may hinder revenue growth, while potential overstatement of profits raises financial transparency concerns.

Catalysts

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

• The OTT business is experiencing significant growth, with contributions increasing from 15% to 23% of overall revenue. This is driven by particular growth in RCS and WhatsApp, which could potentially improve revenue and indicate market expansion.
  
• Investment in innovation and talent is prioritized, with significant free cash flow (180% of PAT) being allocated towards organic growth and R&D. This focus on innovation can potentially elevate the company's competitive edge and increase earnings in the long term.
  
• Tanla Platforms is exploring opportunities for strategic asset acquisition, both organic and inorganic. These potential acquisitions could enhance revenue streams or introduce synergetic efficiencies, which may consequently improve net margins.
  
• The company's ongoing capital allocation plan involves returning 30% to shareholders, which includes dividends. This consistent return policy can improve shareholder confidence and potentially uplift the EPS if effectively managed.
  
• There is a noted increase in the development of new platforms, such as MaaP, which has already achieved substantial volume growth. Continued platform expansion can lead to sustainable revenue increases, particularly from diversified channels beyond legacy SMS services.

Tanla Platforms Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Tanla Platforms's revenue will grow by 12.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 13.0% today to 12.8% in 3 years time.
• Analysts expect earnings to reach ₹7.2 billion (and earnings per share of ₹53.87) by about January 2028, up from ₹5.2 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.3x on those 2028 earnings, up from 14.2x today. This future PE is lower than the current PE for the IN Software industry at 35.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.89%, as per the Simply Wall St company report.

Tanla Platforms Future Earnings Per Share Growth

Risks

• The telecommunications industry remains highly price-sensitive, with pricing dynamics not yet stabilizing, which could negatively affect Tanla's revenues.
  
• The increase in OTT competition, including price cuts by major players like WhatsApp, poses a challenge to maintaining healthy gross margins.
  
• The company's financials could be artificially inflated through capitalization of development costs, potentially overstating its profits.
  
• Significant dependency on approval processes, such as for VF International, adds regulatory risk, potentially delaying growth plans and impacting revenue.
  
• Concerns about a stagnant top line and the loss of the Vodafone firewall deal hint at possible difficulties in retaining or acquiring significant clients, which could hinder long-term revenue growth.

Valuation

• The analysts have a consensus price target of ₹816.0 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 ₹950.0, and the most bearish reporting a price target of just ₹724.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹56.7 billion, earnings will come to ₹7.2 billion, and it would be trading on a PE ratio of 22.3x, assuming you use a discount rate of 13.9%.
• Given the current share price of ₹549.0, the analyst's price target of ₹816.0 is 32.7% 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.