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

My take on the VF acquisition by Tanla – https://www.bseindia.com/xml-data/corpfiling/AttachLive/b798b65f-031f-48af-80c8-2cc1762e341d.pdf

They’ve acquired the VF India and Middle East entities at 7x EVEBITDA. I am not a fan of the kind of margins VF has (5% EBITDA) but considering revenue growth CAGR of 18% for the entities and potential synergies, the valuation seems in the ok zone to me. Its not great but it may be good if they execute well.

A 52Cr EBITDA on 366Cr acquisition value translates to around 8-9% ROCE (Assuming 1.5% depreciation on VF revenues). As a comparison, Tanla ROCE in FY23 was 38%. So there is a lot of work to be done to bring VF ROCEs to a decent level.

Uday Reddy has done a lot of u-turns on his earlier stances in doing this acquisition – he used to be insistent that Tanla won’t do margin dilutive acquisitions and they will grow internationally organically. I am sort of happy he has come around and acted on the piles of cash accumulating in the b/s. If CpaaS is such a huge growth industry then why pay dividends with cash rather than growing organically or inorganically? Never made sense to me.

Potentially benefits could be:

1. Finally a foothold in key Asian geos of Saudi, UAE and Indonesia – This was much needed. Route has shown Tanla how depending on only one geography may be counter-productive

2. Cross selling Karix and Wisely solutions to the 40% revenue subset of VF that has net new customers to Tanla.

3. Ability to improve VF margins via backward integration and economies of scale

Potential pitfall: Tanla now has 3 organizations within itself – Tanla, Karix and VF. Neither Karix nor VF seem up for a merger with Tanla. This can get tricky and artificial boundaries can prevent synergies from truly accruing. I hope Tanla management will steer this organizational structure in the right direction in the future. ESOP plan for immediate retention of VF employees is a good step, but longer term amalgamation may be needed.

Overall, some action on cash, happy about that. But jury will be out on the quality of this acquisition until VF sees significant uptick in its margins. Good thing is, the acquisition should be EPS accretive from Day 1 (3-5% EPS addition on Tanla FY23 base depending on how much interest VF pays).