Tanla Platforms ~ Leading player in the fast-growing CPaaS market

I hope folks would have seen the Tanla AGM, statements, queries, and answers. I think while still short on hard details (numbers) it still gives a clearer understanding of the business. I put down my takeaways and some other points as well. One of the actions (buyback) is already triggered. Takeaways:

1. Taken at face value – Q1 is the floor, and we will be above in margin terms … Hopefully this is for enterprise margin as per question and not blended margins or total value of gross margin. If so, one of the key questions – whether it can get worse from here – is likely addressed. So, the discounting for worse case scenario should hopefully end.

2. I expect by Q3 or Q4 they will give start giving clarity on wisely numbers. There are few reasons why I think so. Nonetheless Aravind said it is in the plan and Uday also sort of alluded that in couple of quarters some numbers will start coming. Would request all readers to send emails to Tanla Investor Relation outlining what sort of disclosures you would like to see going ahead.

3. Deepak talked about expansion to MENA region in a couple of quarters. Will believe that when I see some senior level hiring. But first time they mentioned a specific place and specific time. MENA region is good from cultural affinity as large number of IT managers in MENA region are Indians and you don’t go head-to-head with better capitalized American /European companies in their home market. Yet disappointing that Southeast Asia where they acquired exclusivity rights from Kore.ai is not there.

4. Goalpost for Wisely international foray moved once again. From Consultant’s Report, to Idea case study over Q1 to now “Will roll out once we have deployed at older customers”… So essentially, there is no timeline.

5. Even more disappointing is management doesn’t want to address geographic risk by acquisitions. We have seen how one player can rock the Indian market. Organically you can develop that hedge over 2-3 years but leave yourself vulnerable in between.

6. Buy back definitely in plans. I think he will likely announce ASAP. Question is whether it will be the quick and easy 10% or more meaningful 25% (even here it will not exceed 175crores. – so, buy back will be at best 1.25-1.50% of outstanding equity). I would want 25% to happen, with management not participating. This would give investors to overall tender 2.5-3% equity at a good price and taxes paid by company on buy-back actually accrue to the tendering shareholders. Moreover, it will spark attention on the script all over again.

7. Indian market to grow to 25K Crore in 4 years per opening statement of Uday. A CAGR of ~30%. Besides this international market which is multiple times the size of this market will also be addressable. The opportunity size is huge and Tanla can aspire to grow at greater than 30% CAGR organically.

Other Views

8. I believe enterprise margins will continue to be strained compared to FY22 (would believe approx. 4%+ gross margin is lost (over and above SBI) for the balance quarters of this FY at least), but platform is going to hit big, if they need to return to 20% EBITDA. Personally, I prefer this. Enterprise GM to reach back to 20% in weaker quarters will be difficult. I rather see them hit 100 crores in platform revenue by Q4 (which they should IMO). Enterprise Loss of Margin is partially SBI. However, that can’t explain more than 2% and won’t be applicable post Q2. I suspect bigger losses in ILD space, which will continue for the next few quarters.

9. Enterprise volume growth is going to be exceptionally good for NLD (even post SBI volume loss). How much of it is neutralized by losses of Volume and margin in ILD – I don’t have a very good handle. UPI volumes are ramping up like crazy and they have direct co-relation to SMS volume. Similarly for e-commerce transactions and travel and leisure industries. In FY22, UPI facilitated over 4,600 crore transactions (Source NewIndianExpress) a run-rate of less than 400crore pm. In both July and Aug this year it is over 600Crore pm. Growth rate YOY basis would be 80%+. Even after SBI losses Tanla will likely get ~50% of this volume IMO as it is the dominant incumbent in BFSI. NLD volume growth directly feeds 1:1 into DLT volumes – so platform revenues will also be on fire.

10. A lot of platform play hinges on Data Protection Laws. Regulatory mandates such as DLT can super charge the business as enterprises have no option but to adopt. Both Consent management on Trubloq and Wisely are impacted by delay in data protection bill. If it comes through in 2023, that will be provide another boost to domestic platform revenues.

11. Forex related losses are likely to continue as Q2 is likely to see worse depreciation of Euro/GBP compared to Q1. So that won’t be a one time as expected by management.

If some of above optimistic view turns out true (enterprise margin not falling lower than q1, NLD growth and Platform growth) then hope fully prices will recover rapidly post Q2 results. We would have lost a year no doubt and given 30% CAGR return expectations – 30% of opportunity value too, besides a price de-rating of ~20x (~40%) from peak. But all is not lost and Tanla still seems to have great potential. This industry is on a take-off trajectory. Let’s hope Tanla does not again go fighting with Telco’s and do a self-goal Q1FY23 style all over again.

Disc: Invested and sitting tight, hoping for above.