This stock tops 2020 multibagger list among smallcaps, can the northward journey continue?

Tanla Platforms gets its revenue flow from two main sources - platforms and enterprises.

January 06, 2021 / 10:35 AM IST
 
 
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Hyderabad-based Tanla Platforms (erstwhile Tanla Solutions), the cloud communications provider, topped the gainers' list among smallcaps in the calendar year 2020 and provided a massive 867 percent return.

The actual rally in shares started off in the second half of 2020, possibly after the strong listing of its peer Route Mobile which gave a 214 percent return last year to investors.

The news of its addition to MSCI India Domestic Small Cap Index in November is expected to be another trigger which was enough reason for FIIs and institutional investors to look at the stock.

"As the stock is part of MSCI India Domestic Small Cap Index, it is getting good response from FII and institutional investors. In the last two years, the stock has delivered an excellent return on the back of strong results, improving business outlook and increase in shareholding by the promoters," Keshav Lahoti, Associate Equity Analyst at Angel Broking told Moneycontrol.

Prashanth Tapse, AVP Research at Mehta Equities also feels the same, saying cloud-based story perhaps triggered demand among the companies along with interest seen from few global funds as Tanla was included in the MSCI India Domestic Small Cap Index which opened up the path for foreign funds and institutional investors to invest in the company.

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The largest CPaaS provider Tanla Platforms had reported the highest-ever revenue, EBITDA, and EPS for the quarter ended September 2020. Profit for the quarter increased by 3.6 percent sequentially to Rs 81.47 crore on revenue at Rs 583.24 crore that rose by 28 percent.

Uday Reddy, Chairman & CEO of Tanla, after September quarter earnings, said, "Going forward our unwavering focus and investments on platforms and products, brand, customer success, and talent, will drive future growth."

The third reason behind its massive rally could be the acquisition of Karix Mobile from GSO Capital in 2019, which has changed Tanla's business profile.

Karix is the market leader in the Rs 4,000-5,000 crore Communications Platform as a Service (CPaaS) space, with an estimated 30 percent share. CPaaS players enable enterprises to send OTPs, transaction alerts, and flight status info to end-users.

"Unlike P2P messages that are declining globally due to the prevalence of OTT players like WhatsApp, application-to-person (A2P) SMS has been growing at 18-20 percent. Regulators prefer SMS due to its ubiquity and higher security. Further, WhatsApp costs ~2.5x an SMS, for enterprises in India. Though this may change over time, it would add another channel of revenue for CPaaS providers (as also seen globally). Telcos directly sell platforms to enterprises, but our interactions with enterprises and telcos themselves suggest that CPaaS providers are more agile with quicker response time," IIFL Securities explained in its research note in December 2020.

Tanla Platforms is a leading communications provider, enabling businesses to communicate with their customers and stakeholders. Its cloud-based platforms provide ease of connectivity to enterprises and aggregators, with a plug-and-play approach. Cloud communication offers enterprises omnichannel solutions that combine voice, messaging, and data over telco networks.

Tanla gets its revenue flow from two main sources - platforms and enterprises. Its platforms are deployed with major telcos in India. It serves enterprise customers across verticals such as BFSI, social media, e-commerce, government sector, and aggregators.

"Cloud-based communication platform has changed the way to do remote business under this pandemic situation like COVID-19. Interestingly, companies like Route Mobile, Tanla Platform and Affle India counters outperformed in small-cap space all have similar business models based on clouds platform but comparatively Tanla was significantly undervalued to other listed peers," said Prashanth Tapse who feels Tanla came under limelight after the world's largest blockchain solution Trubloq, deployed by Tanla for the Indian telecom industry which was launched in September 2020.

IIFL Securities expects Trubloq, Tanla's blockchain platform to add Rs 500 crore to revenue by FY23, which could be the fourth reason for the rally in stock price.

"Tanla capitalised on the TRAI regulation mandating blockchain technology, to filter unsolicited SMS from September 1, 2020. Trubloq handles 70 percent of A2P messages in India. Trubloq is the only blockchain platform deployed by Vi (erstwhile Vodafone Idea) and BSNL and is one of the two deployed by Bharti. Further upsides could come from overseas expansion," IIFL explained.

In addition to the healthy growth in legacy businesses, the blockchain platform and the impending launch of an enterprise-grade platform would drive 24 percent and 50 percent revenue and underlying EPS CAGR respectively over FY20-23, the brokerage feels.

"Tanla is a net cash company with an asset-light business model and a healthy free cash flow generation profile. A long-standing relationship with telcos and enterprises is positive. An increase in use cases, up-selling to existing clients, new client additions, and overseas expansion would drive growth. More value-added services would aid margin," said IIFL Securities.

The brokerage feels the stock trades at 27x 1YF PER, quite attractive versus listed peers in India and globally. So it advised buying the stock with a target price of Rs 859, implying a 24 percent potential upside from current levels.

The key risk pointed out by IIFL is Tanla's significant exposure to Vi. "Tanla is increasing its presence in other telcos; but if Vi collapses, there could be some short-term pain."

Prashanth Tapse of Mehta Equities believes booking profits is an art in such overwhelming performance from March 2020 till date, hence he advised investors to book the majority of the holding.

Disclaimer: The views and investment tips expressed by the investment experts on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Sunil Shankar Matkar
first published: Jan 6, 2021 10:35 am

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