Subscribe to Tanla Solutions IPO: Angel Broking

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Tanla Solutions, a provider of integrated telecom solutions and products, is open for subscription with a public issue of 1,58,85,000 equity shares of Rs 2 each in the price band of Rs 230 to Rs 265. The issue closes on December 14, 2006.

The existing equity shares of the company listed on the Hyderabad, Ahmedabad and Madras Stock Exchanges. The equities offered now are proposed to be listed on these exchanges as well as on the BSE and NSE.

SBI Capital Markets, IL & FS Investsmart and ICICI Securities are the BRLMs for the issue and Karvy Computershare is the registrar.

The Angel Broking report on Tanla Solutions IPO:

Company Background

Tanla Solutions is a provider of integrated telecom infrastructure solutions and products. The company specialises in providing SS7-based (Signalling System 7) messaging infrastructure software products, messaging applications and billing services (aggregator services), and offshore services.

The company carries out international marketing through its subsidiary, Tanla Solutions (UK). Another company, Tanla Mobile, a subsidiary of Tanla UK, provides aggregator services to major mobile network operators in the UK. Tanla earned revenues to the tune of Rs 63 crore in FY2006, while net profits stood at Rs 30.3 crore. For H1FY2007, revenues stood at Rs 87.1 crore, while net profits stood at Rs 35.7 crore. The company has shown growth in its revenues and net profits at astounding compounded rates (CAGRs) of 231.6% and 215.4% respectively over the period FY2004 to FY2006.

Investment rationale

A scalable business model

Tanla's business model is quite scalable, as is clearly reflected by its major operating metrics. The company's operating margins soared from 34.9% in FY2005 to as much as 55.7% in FY2006, and in H1FY2007, stood at over 51%. The net profit margins, on the other hand, stood at an outstanding 47.9% in FY2006, and at 41% in H1FY2007. The company's telecom signalling solution business, which includes products such as SMS Centre, High Density Media Servers and Caller Back Ring Tone Servers, is undoubtedly a very scalable business, and the management has said that this segment earns operating margins of as much as 90%. This is due to the fact that Tanla, implements these products remotely through broadband, which results in very low incremental costs.

The aggregator business, on the other hand, is also scalable, serving as a platform to connect content providers and telecom operators, and work on a revenue-sharing model. The company is the newest entrant in the UK market in this business and commands a market share of just 2%, with the largest players, such as Mblox and WIN Plc having market shares of around 14% to 16%. Clearly, the major business segments of the company show strengths in terms of strong operating leverage, which is undoubtedly borne out by the strong margins that it makes.

Evolution in the revenue model from licensing to revenue-share

Tanla's business model initially worked on a licensing basis, wherein the company used to sell telecom products to its customers. However, over a period of time, Tanla has shifted to a revenue-share/pay-per-use model. The advantage of this type of business model is that the incremental investment required is minimal, while the ever-increasing use of value-added services will result in a significantly enhanced volume of transactions. This leads to ever-increasing revenue for Tanla flowing straight to the profit before tax, PBT.

It is also important to note that for each transaction (SMS, for example), Tanla gets around 24% of the total cost to the subscriber. Thus, if each SMS hypothetically costs £ 1.5, then Tanla gets 36 pence out of this.

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Investment Rationale

Concerns

Valuations