What Onmobile has to say on current VAS scenario.

No structural impact seen on VAS due to 3G roll outs

OnMobile has deployed its infrastructure to supports 3G products like video on demand & IVVR on several operator networks. However, the initial 3G revenues consists of charges for mobile broadband and operators are yet to cover pan-India, which implies product usage (& hence revenues) would take some time to fructify for OnMobile. Moreover, telcos have diverted a sizable chunk of ad spends towards creating awareness on 3G services which has had an impact on VAS promotional activity. Company has indicated such a phenomenon has a temporary dampening effect on revenues, but is unlikely to lead to any long-term structural shift away from VAS. 

Int’l revs to help diversify India-centric business

OnMobile is now live in 6 Latin American countries, as part of its Telefonica deployment and covers 80-85% of population. It has achieved ~1.5% penetration rate in large markets like Brazil, Mexico & Argentina; encouragingly, Lat-Am RBT ARPUs are ~2-3x that for India. International revenues have also risen from 25% to 32% in the past 4 quarters, which helps diversify what is hitherto an India-centric business.

   

Q4 results an aberration; growth momentum likely to continue

Q4 FY11 domestic revenue fell 12% qoq due to a change in the contractual scope whereby content management was removed from its responsibilities at a major telco, leading to a ~10% qoq contraction in topline; Ex-such change, sequential revenue is flat-company attributed this to a seasonally lean period for capex orders at its European units and newly acquired Dilithium (video products) business as well as weakness in European economy. We believe Q4 results do not form part of broader trend and expect growth momentum to resume as international revs ramp up led by Telefonica deployments.

Attractive valuation supports our BUY

OnMobile is set to report increased traction in revenues driven by leadership in domestic business and upsides from Telefonica and Vodafone deals. It has guided for Rs600-800mn in capex in the current fiscal, comfortably supported by ~Rs1.9bn in operating CF in FY12. Stock trades at 9.8x FY13 PER which provides an attractive entry point, in our view; maintain BUY. 

Valuation summary

Y/e 31 Mar, Rs. m	FY10	FY11E	FY12E	FY13E
Revenues	4,544	5,372	6,598	8,246
yoy growth (%)	11.8	18.2	22.8	25.0
Operating profit	831	1,206	1,544	2,111
OPM (%)	18.3	22.4	23.4	25.6
Pre-exceptional PAT	423	867	1,085	1,383
Reported PAT	428	892	1,085	1,383
yoy growth (%)	(49.8)	108.5	21.7	27.4
EPS (Rs)	3.7	7.8	9.2	11.7
P/E (x)	31.5	15.2	12.5	9.8
P/BV (x)	1.8	1.6	1.4	1.3
EV/EBITDA (x)	14.0	10.8	7.8	5.5
ROE (%)	5.9	11.4	12.2	13.7
ROCE (%)	7.5	11.8	14.4	17.7

Source: Company, India Infoline Research