The Hindu Business Line : Tanla Solutions: Hold

Investors with a high risk appetite may retain their exposure in the Tanla Solutions stock. At the current market price, the stock trades at a price earnings multiple of 20 times its 2006-07 per share earnings.

Our `Hold' recommendation on the stock is predicated on the fact that the company was only recently listed with a relatively short earnings history and its concentrated exposure to the non-voice mobile segment.

We had recommended investors to subscribe to the initial public offering made by Tanla Solutions in the price band of Rs 230-265 per share in mid-December and remain sanguine about its prospects. This is also evident from the strong financial performance of Tanla for the latest quarter and the year ended March 31, 2007. Investors can use any weakness in the broad markets to step up exposure in small lots.

The company's core strength lies in catering to a cross-section of the mobile messaging market, which has robust growth potential.

The company aims to capitalise on the multi-year growth potential of the non-voice mobile market that is broadly segmented into short messaging service (SMS) and multimedia messaging services.

Tanla offers telecom-signalling products to mobile operators; aggregation services (by acting as a single point interface between content developers and mobile network operators) and offshore services in the area of application hosting and infrastructure management. Its blue-chip clients include leading mobile operators in the UK such as 3G, Vodafone and Virgin Mobile.

Several research outfits have projected that messaging services will be a crucial experimental ground for mobile companies and Tanla's principal growth engine over the next few years. At the same time, the company has also indicated that it is conducting research in the area of telemetry and telematics. The company is likely to start marketing some of these technologies and products in the coming years.

The key risks, as we had spelt out in the IPO analysis, stem from high client concentration, slowdown in growth of 3G services if the price points for service prove to be too high, penetrating the new growth markets such as the US, and margin pressures arising from stiff competition in the aggregation services market in UK.

Of the Rs 420 crore raised through the IPO, the company has set aside a chunk for general corporate purposes, which include acquisitions that will provide it the beachhead in the US/Asia-Pacific markets.

Identifying the right acquisition target/s and integrating the acquisition with its offshore centre in India can prove a risky proposition.

Financial pep

In the latest quarter ended March 31, 2007, the company recorded consolidated revenues of Rs 78 crore and post-tax earnings of Rs 34 crore. On a sequential basis, the former have grown 37 per cent and the latter 47 per cent.

In the latest quarter, the operating profit margin dipped to 46.4 per cent from 52.2 per cent on a sequential basis. For the full year 2006-07, the operating profit margin was 49.8 per cent, down from 55.7 per cent.

Since the margin continues to be robust, there is no near-term concern, but over the next year maintaining the operating margin broadly in the 40 per cent range holds the key to sustaining post-tax earnings growth.

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