Home >Markets >Mark To Market >Route Mobile sets the right tone, but valuations aren’t cheap

Route Mobile Ltd investors can hardly complain. The cloud communication platform service provider has seen stellar appreciation in its stock price since the listing on the bourses in September 2020. The issue price during the initial public offering (IPO) stood at 350 apiece. On Friday, its shares closed at 1,525.50 on the National Stock Exchange. That’s a stunning 336% jump.

The surge in Route’s shares suggests investors are likely factoring in continued high earnings growth momentum in the near to medium term. “Valuations are not cheap. But note that some of the global peers are also trading at premium valuations due to accelerated digitization trends owing to covid that benefited the CPaaS industry," said an analyst requesting anonymity. CPaaS is communications platform as a service.

As such, near-term upsides in the stock may well be limited. “Given the strong up move in the past three months, the stock may see some near-term consolidation, but Route remains a key beneficiary of the continuing industry tailwinds and ongoing consolidation of the fringe competition in the highly competitive CPaaS industry," said JM Financial Institutional Securities Ltd analysts in their March quarter results update.

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Satish Kumar/Mint

To be sure, Route ended FY21 on a good note with consolidated operating revenue at 1,406 crore, up 47% year-on-year. What’s more, notwithstanding a high base, the company has guided for 20% revenue growth for FY22.

Some analysts are more optimistic on this front though.

“We estimate Route Mobile to deliver healthy growth of 25% in FY22 (versus guidance of 20%). This should be driven by healthy net-revenue retention (of 120%) as the company focuses on mining (of existing clients) and cross selling; and geographic expansion into US and Europe," ICICI Securities Ltd wrote in a report on 19 May.

Cross-selling opportunities exist in RCS (rich communications service) and CCaaS (contact centre as a service).

One worry is that revenues increased at a comparatively slower pace of 36.4% to 362 crore in the March quarter, slightly lower than some analysts’ expectations. Even so, gross profit margin expansion of 430 basis points year-on-year to nearly 22% was encouraging. Gross margin is higher vis-à-vis the December quarter as well.

Route has passed on DLT (distributed ledger technology) charges to customers, which was the key reason that boosted gross margin in the March quarter. Stronger gross margins helped operating margin expansion as well.

Meanwhile, Route appointed John Owen as chief executive officer in Route Mobile (UK) Ltd for Europe and the Americas. Owen was earlier the group CEO of Mastek Ltd. Analysts view the appointment as a positive from a growth perspective.

Hereon, for investors, key monitorables remain margin trajectory and stagnation in top 10 client spends.

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