Will attempt to put my understanding of the nature of Tanla’s business here. The understanding has been gradually built over the last few months via discussions with industry experts (@anna being one of them).
1. Enterprise business - Primarily SMS driven revenues with enterprises like banks/retailers/travel companies as clients and telecom companies as key stakeholders. The CPaaS company facilitates cloud based API/SDK access to various communication channels for an enterprise - SMS, Whatsapp, email - and in various forms - text, voice, video etc. Enterprises don’t have to set up communication infra on premise, instead leveraging these APIs. In India, right now most of the use case is for SMS - promotional, OTP, government outreach, transactions. SMS revenues are of 2 types - NLD and ILD - NLD SMS originate in India and ILD originate outside India (All Amazon India SMS come under ILD). ILD prices are several times that of NLD and even though ILD volumes are < 5% of total, they contribute around 40% to telco and CPaaS revenues. New mediums like Whatsapp are starting to see traction but are at a very nascent stage. Also, Whatsapp sessions are presently costlier than SMS (Between 2-3x) but allow for more communication per session than an SMS. So as enterprises figure out richer and longer communication to their customers, Whatsapp adoption is expected to increase. Enterprises deal directly with the CPaaS company and there is no direct interface with the telco (Unless Telco has a CPaaS arm like Airtel does). CPaaS companies purchase bulk SMS quantities from telcos and sell them to enterprises after adding their margins. As per my discussions with industry experts, a CPaaS integration with an enterprise takes substantial time and effort. Thus CPaaS partners tend to be sticky for enterprises - unless prices are disrupted majorly by a player, an enterprise may not want to go through the head ache of re-integrating with a new CPaaS company. This high switching cost and existing relationships and trust are the only moats for a CPaaS company in the enterprise business as far as I can see. The industry in India is dominated by Tanla and Route which are the biggest players followed by the likes of Airtel, ValueFirst (Twilio company) and several others. There will always be steep price competition in this space between the existing players as its essentially an oligopolistic commodity business. However, the market in India is growing aggressively and the pie is large enough for everyone to thrive unless somebody goes rogue like Airtel. Why Airtel needs to take such an aggressive bite at a small revenue stream such as CPaaS (When compared to Airtel’s other businesses) is not clear to me. Hence I am unable to convincingly comment on whether the price undercutting was one time or will continue, but I am leaning towards believing that this is not a sustainable practice and Airtel has little to gain due to the size of the pie.
A company which thrives in the enterprise segment is essentially in a semi-moated commodity business and I would hesitate to value such companies at a multiple of more than 20-25 PEx. Where things get interesting for Tanla is the Platform business.
2. Platform business - Tanla has 2 streams of platform revenue as of now -
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Trubloq, which is a DLT (Distributed Ledger Tech, a blockchain) platform responsible for scrubbing A2P SMS whose existence came into being by virtue of TRAI regulations in 2018 (TCCPR, full text here - https://trai.gov.in/sites/default/files/RegulationUcc19072018.pdf). A DLT system aims at allowing only registered participants to send A2P SMS while blocking all other kinds of spam SMS and facilitating scrubbing, which means checking SMS contents against pre-registered content templates and rejecting messages if templates are violated and also enforcing DND i.e. not allowing SMS transmission if a certain enterprise a/c has been blocked via DND by a customer. Essentially its a blockchain based SMS spam filtering platform. Tanla took the lead here and developed Trubloq which currently handles a large section of SMS traffic on DLT in India. Other companies involved in providing DLT services are Tech Mahindra and IBM, with Route also entering this space in May via an acquisition of Teledgers. Thus Tanla revenue share here may decrease but overall revenues should keep going up as the volume of SMS traffic increases. The 2018 regulation also has a provision for voice DLT which would curb spam calls but TRAI is yet to implement this. Even DND is not strictly implemented by TRAI it appears, so there is good potential for additional use cases and therefore growth.
2. Wisely - TBH, I don’t understand Wisely 100% yet and I don’t think Tanla has done a good job of explaining it. But as far as I can understand, Wisely is end to end encrypted cloud based platform which can ensure better delivery, tracking, leakage prevention of communication (SMS/Whatsapp) for enterprises while allowing 3rd party suppliers (Such as Kore.ai) to provide plug and play CPaaS services such as Chatbots which Enterprises can leverage for a one-stop CPaaS solution. It appears that once Wisely is integrated with an enterprise, Tanla gets gatekeeping rights i.e. all traffic originating from the enterprise will deliver a small revenue component to Tanla irrespective of the telco which is carrying the message. I may be wrong but it seems to me that Tanla probably over-estimated the ease of integration of Wisely and also over-estimated the potential value delivery to Enterprises due to Wisely. I come to this conclusion because of the slow pace of integration with Vodafone and lack of reporting of any deal specific Wisely revenues even after 7 months of the announcement. I am eagerly looking forward to commentary on Wisely and Vodafone Idea integration this quarter and hope they publicly release the case study they have spoken. It will help investors and potential clients understand the USPs of Wisely.
Why is the platform business a game changer? Because its a 90% gross margin business as opposed to 20% gross margins for the enterprise business. Thus, even though platform revenues are less than 10% for Tanla, the platform business already contributes 35% gross margin to Tanla. This is a quantum change and if Wisely clicks and platform revenues can sustainably grow, then Tanla can hope to get re-rated to 35-40x PE, the kinds afforded to product or ER&D companies.
For the immediate next Qtr, the key monitorable however is how well Enterprise gross margins recover as mentioned by @anna in one of the posts above. If Enterprise GMs recover and are closer to 18%, the stock will bounce strongly I believe. If, on the other hand, Enterprise gross margins are below 16% and QoQ revenue growth is less than 15-20%, it can signal that the disruptions that happened last Q will have a more lasting impact. In that case, I won’t even be surprised if the market de-rates Tanla further due to uncertainty. Tanla’s investor communication is quite poor, so I don’t really trust Management to save the sentiments if results are not up to the mark.
I have reduced my position size to around 7.5% because the original thesis (Stable enterprise business clients, revenue and margins and fast traction in Wisely) has been disrupted and as things stand I don’t see the potential for 25-30% stock price CAGR over the next 2-3 years. Things can change if Wisely clicks, however, over the next 3-4 Qs. Nevertheless I don’t want to have an aggressive position in a stock which has been beaten down as badly as Tanla has. Clearly market sentiments around Tanla are at multi-year lows, so I would respect that and hence have de-risked myself to an extent by reducing the allocation. Hope for better Qs ahead and really hope Q1 was the trough. Because if it wasn’t there is more pain ahead.
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