ValueFirst acquisition a good fit, EPS-accretive: Tanla Platforms

12 Jun 2023 , 11:46 AM

Recommendations: Buy; Target price: Rs 977

 

Tanla’s acquisition of ValueFirst’s (VF) India and international operations offers complementary strengths, provides cross-selling opportunities and diversifies geographical footprint. The all-cash deal of Rs3.7bn will be financed through cash on the B/S (Rs7.1bn). The deal multiple of 7x FY23 EV/Ebitda is reasonable and potential Ebitda synergies could make it more attractive. Analysts of IIFL Capital Services raise FY24/25 EPS by 5%/8% as Ebitda synergies offset the higher amortization and lower interest income, post the deal. They estimate 18% EPS Cagr over FY23-26. Their new TP of Rs977 is based on 20x target PE. While pricing has been stable for a year, pricing disruption from large telcos remains the biggest risk. Maintain BUY.

VF: Complementary strengths, reasonable valuation:

 The deal has 2 Parts — purchase of VF India from Twilio at Rs3.5bn (should close in early July); acquisition of VF International with ops in the UAE, Saudi Arabia and Indonesia at Rs0.2bn (should close in Sep-23). VF management team will be retained and will receive RSUs worth Rs500mn over the next 24 months. VF’s strength in mid-sized enterprises complements Tanla’s prowess in the large enterprise space. Customer footprint is complementary as ~40% of VF revenue comes from customers that are new to Tanla. The merge-co will have 35% RMS in overall CPaaS and 45% RMS in the NLD SMS space.

Management sees significant synergy benefits: 

Key takeaways from the management call: 1) Synergies will be driven by better bargaining power in sourcing, cross-selling and up-selling opportunities, and efficiency improvements. 2) While pro-forma Ebitda margin will initially see ~2ppt dilution given VF’s ~6% Ebitda margin (vs Tanla’s 17.5% in FY23), Tanla expects to mitigate this impact through synergies since VF’s low Ebitda margin also offers low-hanging fruit. 3) There could be 140-150bps Ebitda margin synergies in the next 12-18 months. 4) Significant headroom to scale up overseas revenue.

Analysts of IIFL Capital Services estimate 8% EPS accretion in FY25:

They believe that a more diversified geographical presence would make Tanla less vulnerable to disruptive pricing episodes. That being said, its exposure to the India SMS segment would remain reasonably large in near term. Analysts of IIFL Capital Services estimate that a combination of synergy benefits and attractive deal valuation should drive 5%/8% EPS accretion in FY24/25.