Route Mobile offers a play in digital communications space

ET Intelligence Group: Route Mobile plans to raise up to Rs 240 crore by issuing fresh equity and up to Rs 360 crore through an offer for sale by promoters.

After the IPO, the promoter group stake will fall to around 66% from 96%. A portion of the IPO proceeds will be used to reduce debt, to buy office premises, and for strategic acquisitions. While the company has shown rapid growth in financials over the past three years, the future performance will depend on its ability to stay ahead in an ever-changing technological landscape amid tough competition. This and a high client concentration makes the IPO more suitable for investors with higher risk appetite who want exposure to the fast-growing digital communications sector.

Business
Founded in 2004, Mumbai-based Route Mobile offers communication solutions such as firewalls, filtering, and analytics for messing services; voice, email and business process outsourcing (BPO) to enterprises, mobile operators and over-the-top (OTT) content providers across 18 countries. The company grew its services portfolio through various acquisitions in the past. The rising adoption of digital communication tools by companies amid the push for work-from-home initiative offers ample growth opportunities. Client concentration is a major concern with the proportion of the top 10 clients to the company’s revenue increasing to 63.7% in the June 2020 quarter from 36.1% in FY18. Also, the top client contributed 15.5% to the revenue during the quarter.

Financials
The company’s operating revenue grew by 37.6% annually between FY18 and FY20 to ₹956.3 crore. Net profit rose by 21.6% to ₹69.1 crore. The operating margin (EBIT margin) dropped to 10.4% from 15% during the period following bouts of acquisitions and high competition. In the June 2020 quarter, revenue was ₹309.6 crore of which 86% was from exports. A higher proportion of overseas revenue exposes the company to currency fluctuations. Net profit stood at ₹26.9 crore during the quarter.

Valuation
On the post-IPO equity and after considering June-quarter annualised net profit, the company demands a price-earnings (P/E) multiple of 18.5. There are no direct domestic listed peers for comparison. The rising importance of technologies that enable remote operations due to the pandemic augurs well for future growth. Investors, however, need to see whether the company can maintain the pace of past financial growth.