STOCK IDEAS- Onmobile Global Limited

Onmobile Global Limited

BSE Code: 532944

NSE Code: ONMOBILE

Indian mobile industry with more than 280 million subscribers and the second largest market in the world is poised for the next big wave in the form of MVAS – mobile value-added services. Though the industry has grown in terms of subscriber base, telecom operators in order to arrest declining average revenue per user (ARPU) and to retain customers are looking at alternative revenue streams to differentiate themselves.

Onmobile Global Limited (Onmobile), a leading provider of telecom value added services (VAS) and products in India, would not only benefit from increasing subscriber base but also from huge growth expected in the VAS market.

Business:

Incorporated in year 2000, OnMobile is headquartered at Bangalore where it has a large research and development center and network operations centre. OnMobile also has offices in Mumbai, Delhi, Singapore, Paris, Jakarta, London, Kuala Lumpur, Seattle and Sydney, with employee strength of over 900.

Onmobile has market reach of more than 390 million users including more than 100 million users in international markets. The products of the company are targeted at mobile subscribers with an increasing focus on capitalizing on the convergence between wireless and wireline telecom services, media content distribution, internet, mobile marketing and mobile commerce.

Onmobile has a broad range of applications that are delivered by its customers – telecom operators, landline and media companies to their end-user subscribers. These products include ring-back tones, voice portals, ring-tone downloads, subscription manager, contests, music messaging, on-device client software, mobile radio, dynamic voicemail, voice short messaging service and missed call alerts which enable subscribers to personalize their mobile phones and thereby enhance user experience. It also delivers interactive media solutions to leading media companies, such as tele-voting, interactive programming and mobile auditioning; and to marketing companies for mobile advertising and lead generation. In addition, the company provides a range of mobile commerce solutions which enable subscribers to buy movie tickets, railway tickets, top up their prepaid mobile phone-cards and pay bills using their mobile phones.

Recently, Onmobile has launched 'first-of-its-kind' comprehensive phone backup product with Bharti Airtel, Maxis & Indosat which allows subscribers to effortlessly take a back up of all types of personal information including files, messages, videos, photos, music, contacts, calendar, events & tasks stored on their mobile. All the data is backed up safely 'over-the-air' to the operator network. Onmobile recently announced the deployment of an innovative Mobile Marketing offering, Ad RingBack Tones (AdRBT) where-in callers to an AdRBT subscriber will be presented with audio ads, which are personalized to the caller's profile.

OnMobile derives its revenues on a revenue sharing model from the revenues generated

by the carriers using the value added services provided by the company. OnMobile's

revenue share typically ranges between 15-40% averaging at 20-25%. This enables the company to earn recurring revenue over a long term period and to share in the benefits of growth in its carrier customers’ subscriber base and increased usage of its services.

Onmobile’s customers include major telecommunication operators in India such as Bharti Airtel, BSNL, Idea Cellular, Reliance Communications, Tata Teleservices, Vodafone and more than 10 international telecommunications operators in over eight countries, and media companies such as Star India, AOL Interactive, Buena Vista, ESPN and India Today.

Investment rationale:

Robust growth opportunity: Amidst strong growth in wireless subscriber base which is expected to touch 462 million by 2010, ARPU has been falling prompting mobile operators to focus on MVAS. The current VAS market pegged at Rs. 5800 crores is expected to grow at CAGR of 60% over next few years. Given that VAS in India is still in its nascent stages of adoption with contribution of only 12-15% to operator’s revenues, the scope for growth is significant. Some of the emerging revenue models are mobile advertising, commerce, subscriptions and off-deck services. With voice enabled services, the concept of VAS will also work in rural India because for such customers SMS is still a difficult task.

Onmobile having the first mover advantage with proven ongoing product innovations and strong customer relations catering to almost 95% of Indian mobile subscriber base is set to take advantage of rising demand for VAS.

International markets to further fuel growth: Onmobile is fast expanding in to various International markets, and is already operational in 20 countries. Onmobile currently gets about 15 percent of its revenue from overseas, which is expected to go up to 25 percent in the next 3-4 years, as the international operations expand organically and inorganically. In the last 12 months, Onmobile has acquired two French companies - Vox mobili SA, a global player in development of personal data management, wireless synchronization and embedded client solutions; and Telisma, a leading European speech recognition company. Onmobile would continue to pursue inorganic growth opportunities to widen its offerings and business growth by cross selling the products.

Concerns:

The challenge for Onmobile is to constantly create local, relevant and innovative content. Inability to innovate new solutions that are accepted by the market could affect its future growth. Onmobile’s revenue is subject to uncertainties that are beyond its control, such as market acceptance of its application services by end-user subscribers, subscriber churn rate, the pricing of services, product placement and marketing and promotion activities conducted by its customers.

Valuations:

With the Indian wireless telecom industry exhibiting robust growth and telecom operators quest for diversified revenue streams, the stage is set for OnMobile to capitalise on by providing innovative VAS solutions and enable telecom operators to gain a larger share of consumer spend. Onmobile’s revenues are expected to grow at CAGR of 69% over FY08A-FY10E and net profit at CAGR of 73% between FY08-10E. At CMP of Rs 519, it trades at a P/E of 39.92x its FY08 earnings and at 28.04x & 16.51x its FY09E & FY10E earnings respectively. Considering the strong revenue growth in VAS market in coming years, investors can keep long term perspective on the stock.

SALES AND PROFIT PROJECTIONS
		Annual	Annual	Annual
in Rs. Crore	Q4 FY08	FY08	FY09(E)	FY10(E)
Net sales	68.80	261.80	445.00	748.00
OP	17.10	104.80	178.00	302.94
PAT	4.50	60.30	106.80	181.39
Capital	57.40	57.40	57.71	57.71
EPS (Rs.)	1.00	13.00	18.51	31.43

PRICE AND VALUE RATIOS
Price	519.00	Date	25/7/2008
PE	39.92	PB	4.88
Book value per share	105.93	EV	2849.06
EV/EBIDTA	25.37	Mcap	2994.94

SHAREHOLDING PATTERN
Share holding	Jun 2008
Promoter owned	57.23
Public owned	13.49
FIIs owned	6.98
Others owned	22.3