One97 Communication IPO Review and Analysis – Indian Mobile VAS Player Sees Slowing Growth due to Competition

One97 a Private Equity Backed Mobile Value Added Service (VAS) Company is raising Rs 120 crore ( $25 million) from the Stock Market in an IPO.The Company operates in India’s Telecom Sector which is the fastest growing in terms of subscribers and represents a good growth opportunity as 3G services starts to roll out.

Mobile VAS Market Facts

1) Mobile VAS market revenues in India constituted 5.4% of the total mobile services market revenues in fiscal 2009. It is expected to grow from Rs. 44.1 billion in fiscal 2009 to Rs. 129.2 billion in fiscal 2016 at a CAGR of 16.6%.

2) The Network VAS market is expected to grow from Rs. 1,345 million in fiscal 2010 to Rs. 2,236 million in fiscal 2012 at a CAGR of 29.0%.

Advantages

1) Long Relationships with Telecom Customers – The Company has been operating for a long time in the Indian market and has developed relationships with 11 Operators

2) Diversified Revenue Base in Fast Growing Sector– The Company derives more than 50% of its revenue from the fast growing Network VAS sector and another 35% from the Customer VAS Sector.BOth these sectors are fast growing and provide a diversifed stream of revenues.

3) Promoters – The Company has some top PE firms as promotes such as SAIF Partners,Intel Capital.Recently IDFC and Relaince bought a big chunk from one of the promoters as well.

4) Good Financials – The Company has show a sharp growth in the last 2-3 years with a good operating cash flow.The Net Margin for 2009 was 25% which is quite good as well.The Company has almost no debt with a NW of Rs 130 crores at end 2009.

Disadvantages

1) Customer Concentration – The Company derives almost 80% of its revenues from its top 5 customers.However its not a matter of huge concern as telecom operators which are the principal customers don’t exist in more numbers than that.However geographical concentration to India might be of a minor concerns

2) Competition from Mobile Companies and Telecom Operators App Stores – App Stores have become a popular revenue division for almost all the major handset vendors like Nokia (Ovi),Samsung,Apple,Google (Android) as well as Telecom Operators like Airtel,Aircel etc.These App Stores directly compete with One97 Products and are the biggest risk for the Company’s growth going forward

3) Associate Companies,Director Cases and Auditing – The Company has to integrate associates such as Tencube,Oorja etc in which it has bought substantial stakes.Statements of TenCube have  have some qualifications by auditors.Note TenCube has since been sold to Mcaffee.One of the Directors P.N.Vijay has also some cases pending against him by SEBI.

4) Growth is Falling on Increased Competition – The growth rate of the Company has fallen sharply since the 100% growth in 2008.This has been mainly due to increased competition.The Company also seems to have lost focus opening the One97 Fund for investing in telecom startups.For such a small company don’t think opening a VC Fund  makes much sense at this stage

Summary

The Company has not indicated the pricing of shares as of now ,only that it wants to raise Rs 120 crore.Note the VAS Category is seeing increasing competition with a number of new entrants.One97 has diversified into a combined VAS player cum Technology Investor makings its valuation difficult.Note the VAS sector is no longer a unique or fancied one as OnMobile has already listed sometime ago and its valuation has decreased dramatically since then despite improved profits.I would sit out on this one due to the complicated nature of the business,slowing growth and valuation difficulties.A higher risk investor probably might want to buy this one.