Loud and clear

FPO REVIEW

Tanla Solutions could see rapid growth if it is able to sustain its product edge and retain customers.

For a company that started by licensing out its telecom products, Tanla Solutions has taken the acquisitions route to become an integrated solutions and services company. In the process, it has not only added the income sharing and pay per use revenue models to boost its top line but also new business lines with each acquisition.

Its three acquisitions""Techserv Teleservices, Smartnet Communications and Mobizar gave it a foothold in the services, software development and aggregator businesses.

The company's products and services act as technology enablers which help mobile operators and service providers deliver voice, data and multimedia content to customers. TSL has three business segments""signalling, messaging and billing application services and offshore development.

Telecom signalling solutions

The company started its operations six years ago by offering products based on the Signalling System 7 standard which is a secure and faster means of connecting two users.

The products include a short messaging service centre which sits on a mobile operator's network and controls the sending and receiving of messages, missed call alerts, multimedia messaging service centres and SIMM service which allows mobile operators to offer local numbers to frequent roamers within states and countries. While this business forms only 20 per cent of the revenues, operating margins are at 85 per cent.

Messaging applications and billing services

Also called aggregator services, these are designed to help content and service providers interact with mobile operators and users by offering a single point interface that takes care of content platforms, delivery mechanisms and billing solutions.

For content providers a single point of contact helps establish a relationship with many operators. Similarly for mobile operators who prefer to deal with bigger developers, an aggregator helps to bring in a wide variety of content while at the same time integrate that into the network.

To deliver third party content to users, TSL enters into an agreement with operators to access its networks for a fixed start-up fee. Revenues generated are split between the operator, TSL and content providers. This business forms the chunk (65 per cent) of the revenues for TSL and should be the key growth area in the future.

Operating margins in this business however range between 37 to 40 per cent. These agreements are non-exclusive and for a limited duration and give the operator a right to terminate the contract for various reasons. The services under this segment include gateways used in short, enhanced and multimedia messaging centres for faster connectivity, interactive TV services, content management .

Offshore development services

TSL offers infrastructure management, technical and customer support and offshore development and maintenance services to content providers and mobile virtual network operators (MVNOs).

The offshore services business will develop products which will cater to the requirements of telecom product customers, while support services will handle the back office requirements of MVNOs and service providers.

Customers and revenues

The company's customers can be divided into groups: mobile network operators and content providers. Mobile network operators use telecom signalling solutions and aggregator services and pay for them on a per message or per minute usage or revenue share basis unlike the outright license sale and AMC model used in the past.

Content providers are users of the aggregator services and pay TSL for facilitating the broadcast of their content. If the content services are subscribed to by the user, the revenues earned is divided between the aggregator (where Tanla comes in), operator and the content provider.

Funding expansion

To meet the infrastructure requirements in a rapidly growing wireless communications market, Tanla is planning to put up a Rs 77 crore development centre at Hyderabad, a Rs 12 crore disaster recovery and a backup centre in Bangalore, as also expand and upgrade its existing R&D facilities at a cost of Rs 22 crore.

The company's follow-on offer (it is listed on the Ahmedabad, Hyderabad and Madras exchanges) will fetch it Rs 368 crore at the lower end of the price band (Rs 230) and Rs 400 crore at the higher end (Rs 265). Part of the proceeds of the issue will be used to fund its global expansion plans and acquisitions.

Financials

The company has had a good run thus far with annualised growth rates in revenues and profits in excess of 200 per cent for the last three fiscals. Its revenues for FY06 stands at Rs 63 crore while net profit is at Rs 30 crore.

For the half year ended September 2006, it has churned out revenues and net profit of Rs 87 crore and Rs 36 crore respectively. Its operating and net profit margins for the half year FY07 are at 51 and 41 per cent respectively. On annualising its FY07 EPS of Rs 7, the stock would be quoting at 19 and 16 times its FY07 estimated earnings at the upper and lower price bands. 
 

FINANCIALS
Rs in crore	FY06	FY05	FY04
Net Sales	63.00	22.00	6.00
Y-o-Y growth (%)	186.36	266.67	200.00
Operating profit	35.00	8.00	3.10
Y-o-Y growth (%)	337.50	158.06	1450.00
OPM (%)	55.56	36.36	51.67
Net profit	30.00	7.00	3.00
Y-o-Y growth (%)	328.57	133.33	2900.00
NPM (%)	47.62	31.82	50.00

Analysts estimate that the company will be able to sustain a 70-80 per cent annualised growth rate over the next five years and considering that 98 per cent of its revenues come from the European markets where the revenue share favours aggregators like Tanla, the stock could see good appreciation over the next five years.

Issue Opens: December 11
Issue Closes: December 14