OnMobile sees no issues in delivering 15-20% growth YoY

Here is the edited transcript of the interview. Also watch the accompanying video.

Q: How is the international market panning out in this juncture? In Q1, there was bit of pressure your sales were flat QoQ and profit had its own impact for other reasons. How is Q2 panning out in terms of both sales as well as pricing?

A: On international business front, our overall international business as per expectations is tracking ahead of expectations. The Latin American project is the largest project and it is absolutely on track. In the month of August, we will cross Rs 4 crore of revenues to OnMobile from that single project.

It is growing rapidly at almost 50-60% QoQ. This large project will become cash breakeven in the next quarter. We will see huge amount of cash flow coming of that project over period of remaining five years of the contract.

In Q1, one customer contract got cancelled that was largely in Pakistan. Due of security reason, we were informed that a Pakistani operator had to cancel operations with Indian companies.

Hence, it was more of a forced measure effect, which impacted our Q1 results. Our results would have been at or above street expectations if we would have acquired that contract. There is nothing wrong with our core business both on the domestic and international front.

Q: On the TRAI directive on value added services subscription front, pressure has started showing in terms of subscribers renewals. What sort of pressure are you factoring-in in FY12?

A: We have seen this coming for the last two years. This is a consideration of what TRAI issued almost two years ago staring with DND. TRAI is fairly rational and do what is in interest of the consumer.

At the same time, they don’t want to kill or severely impede the VAS industry which is a golden goose for the telecom sector. We were in discussion with TRAI today and there is a problem which is like a needle in the haystack.

When you are dealing with 300-400 million consumers in a month, there are bound to be some situations where the wrong content is served to the wrong person or a person gets activated without them knowing it.

If that it’s intentional, it needs to be controlled through tighter management control systems. If it happens inadvertently, then it is something that needs to be tolerated.

We have given TRAI our strong recommendations and have seen this being controlled in the overseas markets. Companies like Vodafone or Telefonica in Europe, North America and Africa have controlled this problem.

There isn’t a single reason why Indian operators cannot follow the same principal and use technology to control the problem. We have recommended a centralised campaign management system to TRAI and they might look at it very favourably. We will be able to solve the problem if they allow us to do it.

Q: How are you expecting revenues to pan out in FY12 and more importantly in FY13? You are in the structural growth business, in a situation where the world is talking of double-dip what kind of revenue projections can you stand by ?

A: Our operations are realted to mobiles and mobile applications. In reality the concerns related to double dip, inflation and debt will have no effect on us. On the other hand, we are seeing latent demand for cell phone usage growing with no correlation to these macro economic factors.

We are seeing 60-70% growth on our international deployments. In India we are seeing growth in the range of 10-20%. It is lower than before because of two reasons, one is the telecom industry is going through transition from 2G to 3G, so the networks are still not ready.

Handsets are being upgraded and consumers need to be educated on how to use 3G services. All this is going to take time. A sector that was growing at rate of 30-40% is going to slowdown for a couple of years and then pick up again. But overall, I don't see any issues for us in terms of delivering 15-20% growth year on year into the indefinite future.

Q: Your margins dipped to 19% versus 23%. Apparently you have guided that you could scale back to 30%, can you just take us through what you are expecting on the margin front? How do you expect to scale up to 30% if that is the case?

A: It is not so much of guidance. We are giving conservative or low estimates, given the uncertainty in the markets. I said, we will be able to meet or exceed the margins that we went into the fiscal year with.

We were roughly at 22-23% EBITDA, I am maintaining that we are going to do that at least that if not more. That 30% will happen over a period of time whether it's one or two years I don't know. We are eminently capable of that but we are just coming out of a very deep investment cycle.

On telefonica in Latin America we invested Rs 250 crore in the last two years. Now all that money has gone in and it is beginning to show results. That contract alone over the life time of five years is going to generate Rs 1,200 to 1,500 crores of revenue at EBITDA margin north of 50%.

It is a good profitable long-term contract but it requires and investment. The stock market needs to understand that. Our margins should only improve as we come out of this deep investment phase.

Coming back to the Q1 issue, we lost one large contract in Pakistan for no fault of ours, it was a force measure. It was a very profitable account for us because all the hardware had already been depreciated. A big chunk of that revenue dropped straight to the bottom line. A significant part of the margin impact came out of that single deployment as well.

Q: How would you have done on your international business if it hadn't ex- the Pakistan contract?

A: We would have met or exceeded Street expectations.