Route Mobile IPO Review|Should I Subscribe?

Route Mobile IPO Review – 5 Points Analysis

Introduction

Route Mobile is a cloud communications service provider has issued an IPO open from 9^th September ’20 to 11^th September ’20. In this blog, let us analyse this IPO on various fronts like company overview, sector analysis, financial and valuation analysis, corporate governance of the company and ultimately whether or not one should subscribe to this IPO.

Route Mobile IPO Review

IPO Details

• Route Mobile is a cloud communication service provider which has come up with an IPO to raise INR 600 crore from the equity markets.
• The price band is fixed from Rs 345-350 per share and minimum lot size is 40 shares.
• The book running lead managers are ICICI Securities, Axis Capital, Edelweiss Financial Services and IDBI Capital Markets & Securities.

Applications of funds raised through IPO

• Out of the total INR 600 crore, there is a fresh issue of equity capital of INR 240 crore, which will be utilized by the company for repayment of debt, acquisitions and strategic investments, purchase of fixed assets, etc.
• Equity shares worth INR 360 crore will be offer for sale i.e sale of shares held by promoters.

Company Overview

• Company started its operations in May 2004, and has its headquarters in Mumbai.
• It is a cloud-communication platform provider to enterprises and Mobile network operators. It enables enterprises to engage with their stakeholders namely customers, vendors and employees using various modes of digital communication.
• Services offered by Route Mobile are as follows:

• Company has three main verticals namely – Enterprise, Mobile Operator and Business Process Outsourcing (BPO).
• Company operates in a very niche segment and since it has a elite clientele, it is evident that company does not have much bargaining power. This is because, these major players can easily access these services in-house . However since the costs of out sourcing seem to be lower, these companies opt to outsource these services.

Corporate Governance

Shareholding Pattern pre and post IPO

• After the IPO, stake of promoter and promoter group will fall from 96% to 66%.

Promoter

• Both main promoters Sandip Kumar Gupta and Rajdipkumar Gupta have strong corporate background.
  • Rajdipkumar Gupta has 18+ years of experience  in software design and development.
  • Sandipkumar Gupta is a qualified CA and SAP certified solution consultant. He has worked with big MNCs namely – Covansys (India) and PwC and has 15+ years of experience in accounts and business analysis.
• Company has following group companies – Zon Hotels Private Limited, 29 Three Holidays Private Limited and  Cobx Gaming Private Limited. These are not subsidiaries of the main company – Route Mobile.
• Promoters of the company have significant personal stake in these companies. The proceeds from offer for sale can be used in some of these businesses.
• This seems to be a red flag to us as these three business are not related to the core business of the company.

Sector Analysis

• Cloud communication services is quite a niche industry and basically helps to streamline back-end operations.
• The Application to Person (A2P) market is expected to grow at a modest CAGR of 4.4% from 2017-2022.
• Competitive Landscape
  • There are no listed companies having similar business portfolio in India.
  • Globally, Syniverse and Mblox in USA , SAP in Germany and CLX of Sweden are company’s competitors.
  • As nearly 80-85% of revenues comes from offshore services, the company faces direct competition with these players.

Financials

• Company’s revenues have has more than doubled in 2020 from 2017 levels. However EBITDA margins have declined to 11.5% in FY20 from 18.9% in FY17 mainly as company has lower bargaining power.
• Revenue earned by the company in FY19, INR 105 crore was one-time revenue. If we exclude this revenue , the growth from FY18-FY19 looks moderate.
• ~80% of the company’s revenue is from exports.

Valuation

• Current (FY 20 ) PE of the company is 28 x. Profit of the company in FY20 was ~INR 70 crore.
• Currently, stock is trading at 30-40% premium in grey markets.
• Company earned ~ INR 27 crore in Q1FY21. If we annualise these earnings , FY21E PE comes to ~19 x.
• As company has good clientele, there is good earnings visibility. However, since lack of bargaining power, growth potential seems to be bleak.

Should I subscribe to this IPO ?

Given the current euphoric sentiments in the equity markets, company is expected to get listed at premium valuations. This means that investors might get listing gains. Company operates in a quite niche segment and has a elite clientele. However, promoter’s personal stake in unrelated businesses and chances of proceeds from OFS flowing into these businesses seem to be a red flag. Overall from a longer term perspective, company can give healthy returns however the risk involved seems to be higher.