Tanla Platforms vs Route Mobile: Which IT stock is Better?

The Covid-19 pandemic redefined our way of thinking and our way of living. It compelled organisations to digitise their processes and services, to not only thrive but also survive.

Every single line of business, be it retail, BFSI (banking, financial services, and insurance sector), healthcare, or transportation, is today stirring towards digitisation with the help of modern technology.

A big part of going digital is the way we all communicate.

Emails and messages are now the primary forms of communication in every field. They are not just interpersonal - from sensitive intimations from our banks' (OTPs - one time passwords etc), and government services to the string of endless marketing messages, every notification is in a digital form.

This is where Tanla Solutions and Route Mobile come into the picture.

Referred to as CPaaS (Communications Platform as a Service) players, these companies play a pivotal role in the expanding digital communication genre.

So what is it that they do?

As the name suggests, a CPaaS company develops communication platforms for large organisations to connect with their customer base.

This means they take information from companies and send it to the customer base via telecom networks (like Airtel, Vodafone Jio etc). They offer it as an application. Apart from facilitating communication, it also safeguards sensitive information via encryption.

The CPaas industry is expected to grow leaps and bounds with a CAGR of over 30% over the next few years.

Keeping this in mind, we compare two players from the Indian CPaas industry well-poised to ride this trend - Route Mobile and Tanla Platforms.

Background

Tanla Platforms

A leading player in the in cloud communication platform services (CPaas), Tanla Platforms enjoys a 42% market share in India. What started as a small group of mobile messaging experts, in Hyderabad is now a 500 people organisation with operations in Singapore, London, Colombo, and Dubai.

Route Mobile

A global information technology firm, Route Mobile also specializes in cloud communication platform services (CPaas). Along with this, it also runs a relatively small business process outsourcing (BPOs) unit.

The company has an expansive product portfolio which includes smart solutions in messaging, voice, email, and SMS filtering, analytics and monetisation. It caters to enterprises, over-the-top players, and telecom operators.

The company has been meeting the needs of a diverse clientele across geographies since 2004, enabling enterprises and mobile operators to deliver efficient services to their customers.

Revenue growth

An important indicator, the past revenue growth rate, speaks volumes of a company's potential.

Tanla Platform's revenue has grown at a CAGR of 40% over the past five years. While Route Mobile's CAGR for the same period has been lower than Tanla's at 31%, it is still admirable.

Tanla Platforms vs Route Mobile Revenue Growth (2016-2020)

	2016	2017	2018	2019	2020	2021
Revenue (Rs m)
Tanla Platforms	4,315	5,793	7,916	10,040	19,428	23,415
Route Mobile	3,636	4,576	5,049	8,447	9,563	14,062
Growth YoY%
Tanla Platforms		9.8%	8.3%	9.7%	7.1%	18.6%
Route Mobile		25.9%	10.3%	67.3%	13.2%	47.0%

Source: Equitymaster

Apart from the messaging services in CpaaS, Tanla Platform's robust growth comes on the back of the company's two newly developed platforms, also functioning within the CPaas ecosystem.

The company's latest innovation is the Trubloq software that allows customers to block unsolicited communication.

The second is Wisely, a cutting-edge digital marketplace for enterprises and mobile carriers offering private, secure, and trusted experiences. Tanla sells these platforms to telecom operators in the country.

Route Mobile's other line of work, apart from CPaaS business, is the relatively small BPO business which has also been growing well.

Revenue Mix

A well-diversified revenue stream is of utmost importance for an IT company. So for some reason, if a company loses a client or business in a particular segment or region, the impact on the business will be minimal.

While Tanla Platforms and Route Mobile both enjoy a healthy client roster, their level of client concentration, i.e., the percentage of revenue that comes from larger clients, varies.

For Tanla Platforms, the top 10 clients account for 50% of the total revenue.

For Route Mobile, the top 5 clients account for 50% of the total revenue. So for the same amount of business, Tanla has twice the number of clients. This implies that Tanla Platforms has a well-diversified clientele compared to Route Mobile.

Tanla Platforms vs Route Mobile Revenue Mix - Regional (2021)

Route Mobile		Tanla Platforms
India		India	94%
Asia excluding India	4,945	Rest Of the World	6%
Africa	3,253
Middle East
Americas	85.4%
Europe	71.1%

Data Source: Company Annual Reports

However, unlike Tanla Platform, Route Mobile is not just dependent on India for its revenue stream. It also enjoys a strong reach world-over with exposure to 5 different continents. In addition to diversifying its revenues, this robust network allows it to stimulate further growth.

Moreover, Route mobile relations with over 200 telecom operators world-over, gives it an edge. Apart from helping it expand faster and cross-selling products, it can also help them apply the learnings in different countries.

Profitability

A company's profitability is best reflected in its operating margin, which is the operating profit (earnings before interest depreciation tax - EBIDTA) divided by the total earnings.

Simply put, this ratio measures the level of profit a company makes on one rupee of sales from its core operations (before interest and depreciation).

A higher operating margin is centered around two crucial factors; either the company is generating higher revenues or keeping a tight lid on its costs.

The CPaaS business is not a high margin but a volume game, as a large chunk of the revenue goes into paying the telecom operators. Therefore, these CpaaS players don't yield high margins, as evident in their reported margins.

Tanla Platforms vs Route Mobile Profit Margins (2017-2021)

	2017	2018	2019	2020	2021
Operating Profit (%)
Tanla Platforms	9.8%	8.3%	9.7%	7.1%	18.6%
Route Mobile	17.7%	14.2%	10.3%	9.0%	12.4%

Source: Equitymaster

However, both companies have other verticals, contributing to the operating profitability.

Tanla Platforms launched a couple of new platforms in 2021 servicing the CPaaS ecosystem which helped it expand margins. Although the company is confident of the emergence and growth of this new vertical, it remains to be seen how it will perform going forward.

Barring the last financial year, Route Mobile's operating margins have been higher than that of Tanla's.

In 2021, new platforms brought in higher revenues and increased profitability for Tanla.

A primary lever is the type of clients the companies serve. While Route Mobile offers products to independent developers, Tanla Platforms services large enterprises. This disparity gives Route Mobile a much higher bargaining power propelling operating margins, justifying the distinction in margins.

Cost of Service

The biggest cost head for a CPaaS player is the payments to telecom operators. This component comprises service transaction fees paid to telecom operators and other suppliers.

A fundamental variable, the payments are a function of the data volume generated by the company. This structure limits the company's ability to benefit from economies of scale.

However, these costs are predominantly applicable to the CPaas business. So a rise in contribution to revenue from other segments will tame these costs, boosting profitability.

Tanla Platforms vs Route Mobile Revenue Per Employee (2017-2020)

	2017	2018	2019	2020	2021
Cost of service (to telecom operators)
Tanla Platforms	4,945	6,954	8,659	15,517	17,638
Route Mobile	3,253	3,407	6,670	7,641	11,290
Cost of service as a % to Total Revenue
Tanla Platforms	85.4%	87.8%	86.2%	79.8%	75.3%
Route Mobile	71.1%	67.4%	78.9%	79.9%	80.2%

Data Source: Company Annual Report

Dividend

Dividend yield measures the additional income an investor can make, other than the appreciation in the value of the share. The higher the ratio, the better the return for the shareholders.

Most mature IT companies generate a lot of cash as the capital expenditure to grow is minimal. And so, they tend to be dividend paymasters.

Tanla Platforms vs Route Mobile Dividend Yield (2017-2020)

	2017	2018	2019	2020	2021	5Yr Average
Dividend Yield%
Tanla Platforms	0.5%	0.7%	1.0%	0.0%	0.4%	0.5%
Route Mobile	3.2%	2.7%	2.6%	4.3%	5.3%	3.6%

Source: Equitymaster

The five-year average dividend yield is not very different for both companies with Route Mobile's being higher at 3.6% compared to Tanla Platforms's negligible 0.5% and the current industry average of 1.47%.

Return on Equity (RoE)

Return on Equity is one of the most meaningful indicators of a company's profitability and efficiency.

An excellent tool for analysing the returns of a company, it tells you the amount of money a company can generate on the shareholder capital invested (shareholders equity).

Tanla Platforms vs Route Mobile Return on Equity (2017-2021)

	2017	2018	2019	2020	2021
Return on Equity%
Tanla Platforms	40.2%	47.7%	70.6%	75.7%	77.7%
Route Mobile	64.8%	65%	62%	69%	72%

Source: Equitymaster

The 5-year average RoE for Route Mobile stands at 17.6%, which is lower than Tanla Platforms' 21.2%.

A higher number indicates that Route Mobile is generating more returns by employing its capital efficiently. However, the number for Tanla Platforms seems to be improving, propelled by the company's rising net profit margin.

Valuation

The most common and effective ratio for comparative analysis and valuation is the price to earnings (PE) ratio. The PE ratio uses the company's earnings to find the value a shareholder is willing to pay for one rupee of earnings.

The PE ratio for Tanla Platforms currently stands at 39.8. This number is higher than its 15-year average and the current industry PE of 33.6. This indicates the stock is over-valued.

The PE ratio for Route Mobile is 58.1, which is much higher than Tanla Solutions and the current industry PE of 33.6. This difference indicates the stock is over-valued.

Impact of Covid-19 on business

The covid-19 healthcare crisis transformed nearly every aspect of your life. With social distancing becoming the new normal, it changed how we work and communicate.

The inevitable technological advancement stimulated the business for most IT companies, including Tanla Platforms and Route Mobile.

With the advent of digitization, both the companies reported increased orders from enterprises towards CPaaS. However, unlike Tanla, a small part of Route Mobile's business was affected, subduing margins.

Bright Prospects

The pandemic accelerated the switch to digitisation. From Zoom work calls to e-consultations with health experts, there has been a massive haul to technology. Companies want to adapt and digitise their core faster than before to survive and thrive in this emerging new economic order.

The seamless technological transformation will propel technology spending to astronomical highs.

Both companies witnessed high adoption of CPaaS across enterprises as a move towards digital transformation and expect this move to continue and generate new business.

As per Gartner, technological research and consulting firm based in the USA, by 2023 90% of global enterprises will leverage the CPaaS offerings to enhance their digital competitiveness, up from 20% in 2020.

Furthermore, Gartner estimates that the CPaaS market can grow at a CAGR of 33%.

The rapid adoption of smartphones, not only for communication but also for commerce, along with value-added services offered by the CPaaS platforms (chatbots, data analytics), will drive this robust growth momentum.

This transition puts established players like Tanla Platforms and Route Mobile in a sweet spot.

Tanla Platforms or Route Mobile: Which is better?

With a strong outlook for the CPaas industry, the long-term view for both the established players, Tanla Platforms and Route Mobile, seems bright.

While both the companies have grown their sales over the years, Route Mobile is the only one that has consistently expanded its profit margins. But Tanla Platforms is not far behind. With the launch of their new platforms, they expect to replicate this year's growth over the near term.

But when it comes to the return on equity, Route Mobile has been consistently reporting higher numbers than Tanla Platforms, offering investors more bang for their buck. However, if the business mix leans towards its new platform business, the return profile of Tanla Platforms can be remarkably higher.

From a valuation perspective, the shares of Route Mobile are trading at a premium to Tanla Solutions. However, both companies are trading at a premium to their industry PE of 33.6.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...