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

Well, well, well … Mr Reddy doing an acquisition after repeated vows not to do it … so what happened? Is it a good thing?

1. Tanla has enough cash and is generating 100 crore per quarter. so this won’t be a large strain from the funding perspective. It will help improve ROCE from moving funds from 6% FD’s to a 15% yeild (EBITDA/acquisition price). Gets cash off the Balance Sheet. Not bad at this level.

2. This will close one line of questioning by analyst, about competition from Twilio etc. Mr. Reddy will be gloating that he not only competed but bought their company. This is good for bluster value.

3. This reduces competitive intensity somewhat in the industry and leads to more consolidation, though the main source of competitive intensity at present is Route Mobile rather than any other company. This is perhaps a small positive.

4. This is not a very good quality business. Mostly the same Enterprise play at similar lower margins and higher servicing cost leading to lower EBITDA’s. Doesn’t change Tanla’s business significantly in India except a more bolstered play in the mid market segment. This sounds not so good.

5. Helps get very minor additional footprint in Saudi and Indonesia. If this is leveraged to drive up businesses in those territorities, then it may be good news going forward. I will count it a small positive till we hear the real intensions (if we get the real intensions … )

6. Synergies … not much – Valuefirst is still going to be run independently. So no real cost saving. On about 200 Crore of its purchase it might volume savings through Tanla. A bit of cross sell maybe. But nothing that can add up to say the combined entity EBITDA will get to be higher than Q4 exit EBITDA of Tanla. Esssentailly incremental improvement, nothing substantial.

So why did Tanla do this acquisition, when there are some small good points and nothing great at all?

I believe this is a defensive play from Tanla, to save their skin. Twilio wanted to sell Valuefirst and get cash. Now nearly 10% of Tanla business (280 Crore+) seem to be aggregator play selling sms to Valuefirst (280 crore topline going out on consolidation) !! If Valuefirst had gone say to Route, this business would have disappeared overnight and Tanla stock valuations would have followed suit … Other than buying out Valuefirst, there could be no way to ring fence 10% of your business. What do you do? I guess Mr Reddy did the right thing to break his vow and acquire. He saved the business and got few additional plus. To me this shows flexiblity and maturity which was missing for last 5-6 quarters (I may be being a big harsh … but this is my view).

Now if they can use this to further the international business and bring down share of India revenues to 75% over a period of couple of years through more acquisitions … it will be a very positive step indeed from both risk management and growth perspective. Let’s hear out what Mr Reddy has to say today evening.

I believe this is a positive for Tanla from a longer term perspective, altough the market may not be very kind right away.

Disc:Invested