OnMobile Global Services: Buy

OnMobile's multi-year rollout deals with global players and substantial investments in Latin America and Africa are beginning to pay off.



Investors with a two-year horizon can buy the shares of OnMobile Global Services, given its expanding presence in high-growth international markets such as Latin America and Africa, in the mobile value-added services space.

Ongoing execution of large deals for top global customers such as Telefonica and Vodafone which enjoy higher revenues per user in international markets should translate into lucrative realisations for OnMobile.

At Rs 67.2, the share trades at seven times its likely per share earnings for FY12, which is much lower than the historic valuations that it has enjoyed. With the international pie of its revenue-mix increasing rapidly, margins too may expand significantly, giving scope for further upside.

In the first half of this fiscal, OnMobile's revenues grew by 14.2 percent over the same period last year to Rs 291.6 crore, while net profits rose 46 per cent to Rs 60.5 crore. After a difficult couple of years, due to slowing domestic telecom market and heavy costs incurred on rollout in new geographies, the company's turnaround seems to have gained pace from the second half of FY11 and in the current fiscal. In fact, on a trailing-four-quarters basis, revenues as well as operating and net profits have grown at a faster pace compared to the previous period.

Emerging markets deliver

OnMobile has multi-year rollout deals with players such as Telefonica and Vodafone, and substantial investments in Latin America and Africa over the past 12-18 months are beginning to pay off. Implementation has been done in around 13 key Latin American countries. OnMobile now claims to have a reach of 94 per cent of addressable subscriber base in that region. Within months of launching value-added services, there has reportedly been a substantial increase in subscribers for these mobile operators, indicating OnMobile's sound execution capabilities. Telefonica's subscribers in countries such as Brazil, Uruguay, Mexico, Chile, Argentina and Venezuela, its key markets, generate high ARPU of $10-25, which is substantially higher than the $3-4 levels that the Indian market generates.

Financial reports of Telefonica in the current fiscal suggest that the company is witnessing rapid growth in Latin American countries, with expanding ARPUs, rising margins and increasing value-added services offtake. OnMobile would stand to take a lucrative share of those revenues. With its forays in Latin America, Africa and in Europe, the company derived over 37 per cent of its revenues from overseas geographies and appears on course to achieve its target of deriving half its revenues from international operations. In fact international revenues have grown at 87.5 per cent in the first half of this fiscal.

Domestic markets stagnate

While still accounting for a major share of OnMobile's revenues, the domestic share of the pie is decreasing steadily for the company. In the first half, domestic revenues fell 8 percent. The tariff wars which resulted with the entry of new operators resulted in lower share of revenues from value-added services. Also, regulatory issues such as restricting the number of SMS' played their part. In recent times, though the ceiling on the number of SMS' has been doubled and tariff wars have largely abated, ARPUs continue to decline for domestic operators. Launch of 3G services has also not seen significant traction until now. Over the next 12-18 months, as operators take tariff increases, have viable 3G roaming arrangements and see newer services launched, the growth curve may return. Till such time, there may not be significant expansion domestically.

Risks

OnMobile has indicated that it has positive operating cash flows already in its Latin American operations in the first year of operations on a five-year contract. The danger, however, with increasing international revenues, including from geographies such as Europe is that if greater onsite deployment of manpower happens, the cost structure could increase significantly.

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