Prabhudas Lilladher has come out with a report on OnMobile Global IPO. It has recommended subscribing to the issue.

OnMobile Global, a leading provider of telecommunications value added software products and services in India with an expanding international presence, has opened for subscription with an initial public offering of 10,900,545 equity shares of Rs 10 each for cash at a price to determined through a book building process.

The issue will close for subscription on January 29, 2008. The price band has been fixed between Rs 425 and Rs 450 per equity share

Prabhudas Lilladher report on OnMobile Global IPO

Company Background

Incorporated in 2000, OnMobile provides value added products and services in the Indian mobile market. It works as an aggregator and its product list includes ringback tones, ringtone
downloads, mobile radio, TV contests, missed call alerts, various kinds of subscriptions, corporate marketing, etc.

The company works on a revenue sharing model with telecom operators, and on an average earns around 22-25% of the amount charged to the subscribers for the content or product. Its customers include all leading telecom operators in India and some international telecom operators spread across eight countries. Recently, it has spread its operations in Australia, Bangladesh, Malaysia and Indonesia.

Investment Rationale

Blooming industry

Wireless subscriber base in India has been growing rapidly (12% CQGR for the past four quarters) and is expected to grow further, albeit at a slower rate.

ARPUs of all major wireless operator in India and worldwide is decreasing, but the incremental subscriber base will set-off the impact of declining ARPUs.

Also, even if ARPUs are decreasing, revenue from VAS for all wireless operators in India is increasing.

Strong customer relationships

We believe that an aggregator must have strong relationships with all telecom operators in the region it is present. Relationship with all operators ensures that content owners are not reluctant to partner with the aggregator, since they want their content to be delivered to all the subscribers irrespective of the service provider.

Also, it takes a long time to win the telecom operator’s confidence (which OnMobile has done successfully), since their selection process for aggregation platform is very stringent.

Impressive financials

OnMobile’s topline has grown at a three-year CAGR of 82.7% to Rs 1.4 billion in FY07. The company’s EBITDA margin at 45.9% is also very healthy, although it is declining year by year due to high manpower and content costs. We expect its EBITDA margin to fall further to around 39.0% by FY10.

Its net profit margin at 25.0% is also healthy considering the fact that it pays taxes at the maximum marginal rate of 33%. The company’s RoCE and RoNW for FY07 were very impressive at 30.7% and 33.5% respectively, considering that 65% of its balance sheet was cash & liquid investments.

Investment Concerns

Slowdown in mobile penetration could affect VAS

The Indian telecommunication market is expected to grow at a CAGR of around 30-35% over the next five years. As a result of which VAS market is expected to grow at a CAGR of 50% over the same period. OnMobile’s business could be seriously impacted by any slowdown in mobile subscriber growth or any slowdown in the VAS market.

Execution risks in its international foray

We believe one of the key risks for the company could be the execution risks in its international foray. It could prove to be a difficult proposition to repeat its domestic success story abroad. Establishing relationship with telecom operators abroad could also prove to be an uphill task.

Price reduction by telecom operators

Price reduction by telecom operators is also one of the key concerns for OnMobile. Pricing for content depends on telecom operators and due to cut throat competition to garner volumes, they might resort to price reduction.

Financials & Valuation

The company has sound fundamentals with three-year revenue CAGR (annualising 6MFY08) of 82.8%, net profit CAGR of 65.4% and EBITDA margin of around 45%. Our preliminary estimate of net profit is Rs 607 million for FY08E and Rs 926 million for FY09E.

At the offer price of Rs 425-450, the stock is available at 28.7x FY09E earnings of Rs15.7 at the higher price band, and 27.1x at the lower price band. Considering its impressive financials and robust growth prospects, we recommend subscribe to the issue.