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

My views post Q2 results. There is lot of estimation involved in absense of clear data. If anyone sees any mistake, or something that doesnt make sense, pl do call out. No recommendation either way, DYOR.

1. Tanla reported flat revenues on YoY basis in Enterprise business. This is despite a ~30% hike in ILD A2P SMS rates effective from July (lets say July end). What this basically means is that they have lost business of approx 500-600 crore on annualized basis to competitors/price erosion. This should translate into a fall of 5-6% value market share (or even more). Thus, if they had 40% market share in enterprise business at FY22 exit, it would be below 35% now. I believe, they could possibly claw some of it back over next 2 quarters – however, they will still end FY23 with lower market share. I also suspect some industry slowdown happening with the global crisis raging and India’s growth rate being reduced. Industry wide growth is likely to be somewhat lesser than earlier years.

2. To me this was the bottoming out of the loss in real gross margins (not accounting for one timers, which happened in Q1). So that is in some way a positive thing on looking forward basis. There will still be some more loss on account of Euro – but lesser than Q2 due to (a) shifting of billing to USD from Euro and (b) hope of lesser slide in Euro, relatively speaking, in Q3 over Q2. This impact is likely to be minimal by Q4. Further, increasing volumes of WhatsApp and Truecaller messaging would help give a minor boost to margins (minor because base is very low). I think it is unlikely that Tanla will revert to 20%+ EBITDA levels as promised by management in Q1 concall (and no mention in Q2 concall – further solidifies this). A 18% is more realistic number given facts in front of us.

3. They have possibly lost DLT market share too (and no one has talked about it yet) over last 2 qtr. March exit was at 1.06bn messages on daily basis. Q2 they are below 1bn on daily basis (85bn for the qtr), whereas assuming even 10% growth it should have been more like 1.15bn daily basis. To me, it indicates at least a 15% erosion. That possibly explains a rather modest 20% YoY increase in platform revenues despite revenues from Wisely picking up. What could be the reasons or whether the slide is over or not, I have no basis to judge, besides the fact that Vi is losing market share continuously and some slide was likely. However, the magnitude is far more than what can be explained by Vi market share losses. This is a huge -ve. How they claim 64% share in Q2FY23 vs 63% in Q4FY22, beats me (maybe blockchain has different arithmetic rules).

4. Truecaller volume callout at 700mn is good show (if it is not a typo). This effectively could mean a likely exit run rate of 2bn messages by Q4 (quarterly) – which is more than 1% of the total messaging volume in the industry. This however, means much lesser in value terms as ILD possibly accounts for a third of the value market share with less than 5% of the volume market share. Assuming they have a 50% higher gross margin in Truecaller messaging over SMS, this would add to margins. Moreover, if they can use it to penetrate new accounts (40-50% accounts where they are not present) it will be more beneficial than mere minor margin additions.

5. Wisely communicate (Which was the actual exposition of wisely platform – Omni channel, encryption, real time settlements etc) hasn’t clearly taken off. In absense of Data protection bill, it is actually a very hard sell and that reflects in lukewarm performance. As an when data protection bill comes up and becomes an Act, only then I expect it to rapidly accelerate. Hence, this is a regulatory dependent item and in absence of regulation I don’t think there will be significant ramp-up to make a meaningful difference to overall numbers (topline/bottomline). Don’t count anything substantial for FY23 from this.

6. Kore.ai – is some time away from getting revenues. Don’t count anything in FY23. What can materialize in FY24, is to be seen as management gives further commentary on wins and expected volumes.

7. WhatsApp is taking off. They have SBI WhatsApp account. If that takes off well, it can bring decent amount of revenues and margins. SBI has reportedly ~50mn customers using mobile banking and overall ~100mn customers using internet banking. Difficult to quantity topline/bottomline impact as usage patterns and adoption ratios are not known to me.

8. International Rollout – they don’t seem to have any real concrete plans or aggression on this. Goal posts are continuously being shifted. I won’t count on anything in FY23 definitely. As of now even FY24 seems dicey. I wonder why they took 5 market exclusivity for Kore.ai and definitely all the GTM post Vi case study talks have vanished (Which were earlier promised on consultant’s GTM recommendation sometime in Q4FY22, before goal post was shifted to Vi case study and then to focus on domestic deployment before going international).

9. Literally, all Indian/Domestic institutional investors are now out of Tanla. They have been the real investors in face of sustained FII selling in 2022 at a macro level. Their money is not being put in Tanla. FII has also reduced, as have corporates and large holders. Retail is the sole new investor – some 90K shareholders added with average holding of 70 odd shares. This explains the freefall in July and doesn’t help the PE ratio at all.

In summary:

a. FY23 is a year lost for Tanla in many ways (it doesn’t mean there is no acheivement though). Bottomline wise, we have gone back 5-6 quarters and topline wise – 4 quarters. Worse, management credibility has eroded significantly. Ditto for share price.

b. 2022 was promised as year of Wisely. I think we should add 2-3 quarters to any dates given by Tanla (they have tended to over-promise and under deliver on this in the near past). Wisely Communicate has value if Data protection mandating encryption comes thru, else it is a hard sell. Whether Vi kind of deals is replicable elsewhere in the world, is an open question at this point of time. No Trubloq (DLT) kind of deals have materialized in the last 4 quarters. Huge regulatory dependency.

c. On positive side, worst may be over. Key is how quickly then can claw back to regain some credibility. Truecalller volumes are a good show and Kore.ai integration and trials can bring some positivity in FY24. Notwithstanding likely slow down in short term, growth in this industry is exciting.

d. Strategically, the absolute ham-headedness not to address geographical risk on Enterprise business is crazy. Right now is a good time to do acquisitions (with VC funding dried up and low valuations). They have enough cash in hand and despite poor show are still generating 100Crore on quarterly basis. The board needs to deliberate this better.

e. Tanla Investor Relation needs to woo the DII’s like their life depends upon it. At least their jobs should.