Stock Review: OnMobile Global

The cut-throat competition in the domestic circuit is pushing OnMobile Global more and more to foreign shores. The share of overseas revenues is creeping up, thanks to a higher exposure to exports and deeper push into newer markets

 

Telecom value-added service provider OnMobile Global, which has been grappling with the sluggish trend in the Indian telecom sector, is stepping up its exposure to exports in an effort to cope with the depressed trend in the domestic market. Exports contribute nearly onethird of the company's total revenue and are seen rising in coming quarters, taking into account its increasing presence in other emerging telecom markets. Also, its content innovation, particularly in the third generation (3G) space, makes the stock attractive for investors with over a 2-year horizon.

BUSINESS:

OnMobile Global offers value added services such as mobile commerce, streaming video, music, interactive television, and social networking to over 105 million mobile telephone users across 52 countries. In the year ended December 2010, its revenue stood at 527 crore. On-Mobile's business model is non-linear and revenue growth is independent of employee addition. In the past two years, its net sales grew around 30% when staff base expanded by a mere 12%. This implies that the company's incremental revenue growth improved utilisation of existing employees and to some extent, shields the company from cost escalations related to new hiring.

FINANCIALS: OnMobile's revenue grew at a compounded annual growth rate (CAGR) of 52% in the past three years. Its net profit grew 58.2% year on-year to 19.9 crore in the quarter ended December, on revenue growth of 28.7%, to 148.6 crore. The enhanced focus on exports has helped the company improve profitability after a span of four quarters. In March, the company announced a 1:1 bonus share issue.

GROWTH PROSPECTS:

OnMobile's overseas operations are growing fast, though its domestic business is expected to remain sluggish for a few more quarters as the Indian telecom sector continues to be weighed down by tariff war. It plans to increase penetration in its six existing Latin American markets to 10% in the next five years from 2% now.

   In October 2010, the company acquired Dilithium, which is the leading global provider of mobile video infrastructure solutions, enabling multimedia services from any network to any device. Dilithium acquisition has enabled OnMobile to access 21 new countries and makes it well-positioned to expand in India's 3G market. The company has reported traction in Europe, Asia and Africa. This, along with its fast-rising presence in Latin America, will reduce its dependence on domestic market.

VALUATIONS:

At the current level of 264, the stock trades at a trailing 12-month price-to-earnings (P/E) ratio of 21. The company sees year-on-year sales growth of 25% in the next 12 months due to an expected 150-basis point increase in margin to 14.5%. The stock trades at a 1-year forward P/E of 16.3, much lower than its historical P/E of over 30. It looks attractively priced at the moment with an investment horizon of two years.