Result Update

May 19, 2010

Rating matrix
Rating : Buy Tanla Solutions (TANSOL)
Target : Rs 41
Target Period : 12 months Rs 37
Potential Upside : 11%
WHAT’S CHANGED…
Key financials PRICE TARGET ................................................................. Changed from Rs 52 to Rs 41
(Rs Crore) FY09 FY10 FY11E FY12E EPS (FY11E) ................................................................... Changed from Rs 7.4 to Rs 6.1
Net Sales 687.1 366.6 495.9 549.6
EBITDA 284.8 118.1 145.7 166.9 EPS (FY12E) ................................................................... Changed from Rs 8.7 to Rs 6.9
Net Profit 194.3 49.0 61.0 68.7 RATING.......................................................................................................... Unchanged
EPS 19.4 4.9 6.1 6.9

Rebound in core business segments…

Valuation summary
FY09 FY10 FY11E FY11E Tanla Solutions reported its Q4FY10 results, which were slightly above
PE (x) 1.9 7.6 6.1 5.4 our expectations. The topline stood at Rs 98.6 crore against our
Target PE (x) 2.1 8.4 6.8 6.0 expectation of Rs 97.3 crore. Revenues grew 6.7% QoQ while they
EV/EBITDA (x) 0.7 1.2 1.7 1.6 declined 30.8% YoY. The EBITDA improved 12.6% QoQ to Rs 32.0 crore
P/BV (x) 0.4 0.4 0.4 0.4 as compared Rs 28.4 crore in Q3FY10 on the back of lower cost of sales.
RoNW (%) 21.9 5.5 6.5 7.0 The EBITDA margin at 32.4% improved 168 bps QoQ and 101 bps YoY.
RoCE (%) 24.4 5.6 6.7 7.3 PAT stood at Rs 13.2 crore (I-direct estimate of Rs 14.6 crore).

Stock data ƒ Highlights for the quarter

Market Capitalisation Rs 370 Crore The post economic slowdown and regulatory changes in the UK
Debt-Cons. (FY09) Rs 0 Crore market have affected the company’s core segments (aggregation
Cash & Invst.-Cons. (FY09) Rs 169.4 Crore
and product services). These are key contributors to its total topline.
EV Rs 200.6 Crore
Nevertheless, the company reported revenue growth in both
52 week H/L 88 / 37
Equity capital Rs 10 Crore
aggregation and product services during Q4FY10. Revenues from
Face value Rs 1 aggregation and product services stood at Rs 52.1 crore and Rs 14.7
MF Holding (%) 0.3 crore growing 47.7% and 10.2% QoQ, respectively. Subscription
FII Holding (%) 21.2 and mobile payment revenues declined to Rs 3.9 crore and Rs 28.2
crore vs. Rs 4.0 crore and Rs 31.2 crore in Q3FY10, respectively. The
Price movement (Stock vs. Nifty) company reported a forex loss of Rs 7.9 crore during Q4FY10.
6,000 90 ƒ New customer acquisition
80
5,000 The company has signed a three-year deal with Sandisk for
70
4,000 60 preloaded memory cards with a suite of applications embedded
3,000
50 with Tanla License Manager. Applications will be loaded on a
40 minimum of 30 million cards distributed worldwide. It has also
2,000 30 signed another deal with FCC (Largest distributor of mobile phones
20
1,000
10
in the Middle East), to pre-load mobile phones in Kuwait, Saudi
0 0 Arabia and Egypt, with a suite of applications embedded with Tanla
May-09 Aug-09 Nov-09 Feb-10 May-10 License Manager.
Price (R.H.S) Nifty (L.H.S)
Valuation
Analyst’s name At the current market price of Rs 37, the stock is trading at 6.7x FY11E
Karan Mittal EPS of Rs 6.1 and 5.4x FY12E EPS of Rs 6.9. We value the stock at 6x
karan.mittal@icicisecurities.com FY12E EPS and arrive at a target price of Rs 41. We rate the stock as BUY.
Naval Seth
naval.seth@icicisecurities.com Exhibit 1: Valuation Metrics
(Rs Crore) Q4FY10 Q4FY10E Q4FY09 Q3FY10 QoQ (Chg %) YoY (Chg %)
Net Sales 98.6 97.3 142.4 92.4 6.7 -30.8
EBITDA 32.0 32.6 44.7 28.4 12.6 -28.5
EBITDA Margin (%) 32.4 33.5 31.4 30.7 168 bps 101 bps
Depreciation 18.3 16.9 20.9 15.6 17.6 -12.5
Interest 0.0 0.0 0.0 0.0 NA NA
Reported PAT 13.2 14.6 29.1 12.5 6.1 -54.5
EPS (Rs) 1.3 1.5 2.9 1.2 6.1 -54.5
Source: Company, ICICIdirect.com Research

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Tanla Solutions (TANSOL)

Result analysis
ƒ Deals and patent rights granted
Tanla Solutions added a number of new clients in its portfolio. The
company concluded deals with four new clients that include Sandisk,
FCC, Getjar and Netquin in the License Manager segment.

On the mobile aggregation and billing platform it added a couple of

clients both in domestic and international markets. Tanla would provide
mobile payments platform connectivity to enable premium SMS billing.
Further, it would provide mobile payments platform connectivity to
enable billing and aggregation for the South African market. It has an
agreement with Sony Television in the domestic market for the
management of ShortCode Platform and connectivity with mobile
operators for management of mobile services for popular TV
programmes such as KBC, Das Ka Dum and Indian Idol.

The company has also launched voice services with a couple of telecom
operators in the domestic market. It launched Karaoke services with
Reliance Communications and IVR and VAS IVR in a few circles for Aircel.

The company has been granted patent rights for its “Automatic Meter
Reading System and method thereof” in Singapore. The technology has
been developed for efficient, accurate and cost effective sensor/meter
readings. This technology enabled ad hoc wireless framework provides
an easy mechanism for third-party system integrators to integrate with
many kinds of meters. This includes water, gas, electricity or any other
sensor networks like defence perimeter, environmental monitoring and
stress monitoring.

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Tanla Solutions (TANSOL)

Outlook and Valuations

Outlook
The financials still exhibit that some improvement has been seen in the
UK market. However, the near term scenario for the company remains
challenging. Post the economic slowdown and implementation of new
regulations in the Europe region, the growth journey of the company has
dampened. The revenues from the core segments (aggregation and
product services are expected to grow gradually.

Tanla has adopted a cautious approach for expansion into newer

territories as compared to aggressive strategies for overseas expansion
adopted earlier. The company has been continuously deploying IVR
services in the domestic market. It has started gaining traction in the
domestic market. The company has signed with a couple of new clients in
the last quarter. On the offering sides, it has put more emphasis on
mobile payment solutions. The recent deal with Nokia would enable Tanla
Solution to increase revenues from this stream and successfully reduce
its dependence on premium SMS services. However, revenues from this
are still expected to contribute to the topline.

Nevertheless, UK remains the primary market for the company. The

ongoing recession in the UK would impact the performance of the
company and the near term future looks bleak. The deal with Nokia and a
couple of deals signed during Q4FY10 look promising but the full impact
remains to be seen.

Valuation
At the current market price of Rs 37 the stock is trading at 6.7x FY11E EPS
of Rs 6.1 and 5.4x FY12E EPS of Rs 6.9. We value the stock at 6x FY12E
EPS and arrive at a target price of Rs 41. We rate the stock as BUY.

Exhibit 2: Valuation table

Sales Growth EPS Growth PE EV/EBITDA RoNW RoCE
(Rs cr) (%) (Rs) (%) (x) (x) (%) (%)
FY09 687.1 49.5 19.4 16.7 1.9 0.7 21.9 24.4
FY10 366.6 -46.6 4.9 -74.8 7.6 1.2 5.5 5.6
FY11E 495.9 35.3 6.1 24.6 6.1 1.7 6.5 6.7
FY12E 549.6 10.8 6.9 12.6 5.4 1.6 7.0 7.3
Source: Company, ICICIdirect.com Research

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Tanla Solutions (TANSOL)

Exhibit 3: One year forward P/E chart

500

400

300

200

100

0
Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09 May-10

Price PER 13 PER 10 PER 7 PER 4 PER 1

Source: Company, ICICIdirect.com Research

ICICIdirect.com | Equity Research

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 Tanla Solutions (TANSOL)

RATING RATIONALE
ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns
ratings to its stocks according to their notional target price vs. current market price and then categorises them
as Strong Buy, Buy, Add, Reduce, and Sell. The performance horizon is two years unless specified and the
notional target price is defined as the analysts' valuation for a stock.

Strong Buy: 20% or more;

Buy: Between 10% and 20%;
Add: Up to 10%;
Reduce: Up to -10%
Sell: -10% or more;

Pankaj Pandey Head – Research pankaj.pandey@icicisecurities.com

ICICIdirect.com Research Desk,

ICICI Securities Limited,
7th Floor, Akruti Centre Point,
MIDC Main Road, Marol Naka,
Andheri (East)
Mumbai – 400 093

research@icicidirect.com

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