Tanla Solutions: Creating a Niche



The woes of the middle market companies in the software segment
never seem to end. After the dotcom bust and the waves of consolidation in the
industry, the recent fall of the dollar against the rupee has been crippling for
many small players. It could not really have come at a worse time as the
industry is going through a massive shortage of people and rising salaries.

Yet amidst these trying times, there are success stories from
mid market and even small companies that have taken up the challenge and built
defensible business models that can withstand the ever changing business
environment.

Among such companies is Hyderabad-based Tanla Solutions that has
focused on a few areas where, due to its domain knowledge and intellectual
properties, it has been able to create a small niche for itself in specific
markets.












FACT
SHEET

Website:www.tanlasolutions.com
Tanla Technology Center
Hitech City Road, Madhapur, Hyderabad 500081
Tel: +91-40-40099999
Fax: +91-40-23129999

Area
of Specialization:

Provider of telecom signaling solutions to MNOs, MVNOs
and MVNEs, and offshore services
Consolidated
Revenues
:
Rs 229.21 crore (Year ended March 31, 2007)
Offices:
India and UK
Listing
(Stock Exchanges):
National,
Mumbai, Hyderabad, Madras, and Ahmedabad
Face
Value:

Rs
2 per share
Current
Market Price:
Rs 469.69
52-Week
High/Low:
Rs 521.95 / 269.80
BSE
Code:
532790
NSE
Code:
TANLA

Founded in 1999 by a group of professionals, Tanla Solutions is
a profit making company with its software development center in Hyderabad and
Andhra Pradesh in India, and worldwide marketing office in the UK. The founder
and CMD of the company, D Uday Kumar Reddy, is an MBA from UK and leads the
management team. The promoters of the company hold 35.53% shares of Tanla.
Private corporates own 12.47% while foreign institutional investors holding
stands at 34.49%. The Indian public and others hold 15.9% and 1.61%
respectively.

The company specializes in developing mobile applications and
platforms for the mobile telecom, media, and digital communications sector. The
company has partnership with mobile operators across Asia and Europe to deliver
and bill mobile content over SMS, WAP, MMS, and video applications. Tanla
Solutions claims to be Indias first company to make short message service
center (SMSC) and voice mail server (VMS). Its clientele includes leading
cellular operators from India and abroad. Their SMSC has been deployed with
clients like Reliance, BPL, Hexacom, Airtel, and Essar. Even as telecom remains
the companys core area, the company has diversified into new areas using both
the organic and inorganic route to include offshore development and maintenance,
and infrastructure management services in its portfolio.

The financial results for the year ended March 31, 2007 reflect
the significant progress the company has made in penetrating new markets and
clients, though at the cost of margins. Turnover for the year was up 252% at Rs
222 crore against Rs 63 crore last year. Net profits grew by 207% to Rs 93 crore
against Rs 30 crore last year. The main growth driver was the mobile transaction
and billing aggregation business, which grew from Rs 33 crore in fiscal 2006 to
Rs 157 crore in fiscal 2007. The offshore services business, which grew from Rs
8 crore last year to Rs 26 crore this year. The operating profit came at 110.5
crore. The operating profit margins stood at 49.8% against 56% achieved in the
previous year.

Financials

Year ended 31st March

2006

2007

2008*

Sales

63

222

388

Other Income

0

7

5

Operating Profit

35

111

155

Operating Profit (%)

56

50

40

Net Profit

30

93

120

Equity

7

10

10

EPS (Rs)

9

19

24

*Projection
All figures in Rs crore unless indicated otherwise. All figures are
rounded-off

The company announced substantial profit growth for the first
quarter ended June 30, 2007. Tanla reported total revenues of Rs 94.5 crore
against Rs 39.7 crore for the corresponding quarter of 2006 on a consolidated
basis, a rise of 138%. Net profits have jumped 107% to Rs 33.3 crore on an
annualized basis.

The company has also reported that it is conducting research in
the area of telemetry and telematics to start marketing some of these
technologies and products in the coming years. The company has utilized Rs 77
crore approximately of the follow-on-issue proceeds of Rs 421 crorethe rest
of Rs 344 crore remains unutilized. The company is evaluating companies in the
US for acquisitions or joint ventures to enter the US market.

Given the inductions into the senior management team as well as
the continued focus on the niche mobile solutions markets with newer products
and services, we believe that Tanla would be able to maintain its momentum in
terms of sales growth. Given the early stage of the company, sales would,
however, continue to be lumpy across quarters. Further, increasing marketing and
administrative overheads are likely to impact margins in the short and medium
term.

The shares of Tanla Solutions trade at Rs 470 discounting its
estimated earning of 2008 by 19.6 times. While this may seem high given the
small size of the companys operations, the high growth and the promise of
high margins of the products business has resulted in a higher valuation of the
company vis–vis its peers. As the company increases its exposure to the
services business, its margins are likely to come down further in the medium
term. We, therefore, do not expect any substantial change in the valuations in
the medium term. Longer-term success of its product line would determine the
direction the stock will take. Market Performer.

Sushanto Mitra

The author is director, Techcap India
sushanto@techcapIndia.com

The views reflected here are of the author and not of this publication.
No liability is accepted for losses based on the information presented here

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