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Why is Tanla Services falling after its Q1FY23 results?

[/vc_column_text][vc_separator][vc_column_text css=”.vc_custom_1659067468881{margin-top: 20px !important;margin-right: 10px !important;margin-bottom: 10px !important;margin-left: 10px !important;}”]Tanla Solutions Limited (TSL) an end-to-end solutions provider catering to customers worldwide in the telecom infrastructure telecom services (products and custom development) offshore software development and maintenance sectors. Tanla was incorporated in 28th July of the year 1995 and has its software development centre in Hyderabad Andhra Pradesh India and worldwide marketing office in U.K. Telecom Infrastructure Solutions have been at the core of Tanla’s operations. Tanla has the distinction of being one of the first few companies in India to focus on integrated solutions and products for the wireless world.

Tanla had witnessed tremendous growth over the years and had completed two acquisitions acquired two companies as wholly owned subsidiaries namely Tanla Solutions (UK) Limited (formerly known as Techserv Teleservices) and Smartnet Communication Systems of Delhi in December of the year 2004.

Tanla recently came out with its Q1 results of FY23. Tanla reported a weak quarter, revenue was down due to seasonality and margin dropped due to client-specific issues and higher competition. The enterprise business gross margin slipped 640bps to 16.4% due to a pricing cut in one large client, currency impact and higher technology investments. The management doesn’t see any EBITDA impact from the upgradation of service infrastructure in the coming quarters. Revenue came in line, down 6.2% QoQ due to softness in the enterprise business (-4.2% QoQ) while the platform segment was stable.

The management is confident about expanding the EBITDA margin to ~19-20% in the next two quarters and believes that the disruptive action by the competitor was a one off event as they have not seen any other client reducing volumes. The enterprise segment (92% of revenue and 65% of gross profit) declined 6.7% QoQ to INR 7.3bn and gross margin contracted 639bps QoQ to 16.4%, as a result of volume drop, given the steep discount from the competition. ~64 new clients were added in Q1FY23 (73 in Q1FY22). Platform revenue (8% of revenue and 35% of gross profit) declined 1.0% QoQ to INR 0.68bn, owing to seasonality, while gross margin expanded 142bps to 96.0%. The VI and the Truecaller deal will start contributing from Q2FY23. The client concentration is coming down and Top 20 clients contribute 59% of revenue. The margin impact was ~100bps due to cross currency, ~100bps due to investments, and ~440bps due to client issues. Company’s organic revenue growth of 28% YoY was a multi-quarter low.

CONSOLIDATED RESULTS:

• Revenue – Rs. 8,001 mn, 28% growth
  • Income from operations declined 6.2% QoQ but grew 27.7% YoY
• Gross Profit – Rs. 1,850 mn, 7% growth
• EBITDA – Rs. 1,307 mn, 16% margin
• PAT – Rs. 1,004 mn, a 13% margin
• Cost of Service declined 0.2% QoQ and increased 36.5% YoY
• Net Profit declined 28.6% QoQ and 3.9% YoY
• EPS fell to ₹ 7.38, down 28.7% QoQ and down 4% YoY

STANDALONE RESULTS:

• Income from operations declined 10.6% QoQ and gained 42.5% YoY
• Cost of Service declined 7.6% QoQ and rose 59.2% YoY
• Net Profit declined 39.2% QoQ and 38.4% YoY

Highlights from Tanla’s Investor Presentation Q1FY23:

• Expanding globally with a main focus on UAE and Saudi Arabia
• Signed an exclusive multi-year partnership with Vodafone India Ltd (VIL) and Truecaller
• Deepened customer relationships (Number of customers):
  • Rs. 10 mn – Rs. 100 mn: Growth of 48%
  • Rs. 100 mn – Rs. 500 mn: Growth of 15%
  • C Above Rs. 500 mn: Growth of 23%
• Decreased customer concentration: Revenue contributions from top 20 customers fell by 7% YoY from 66% to 59%
• Grew its revenue led by increased volumes in domestic business and faster growth in OTT channels.
• Gross Profit grew by 7% YoY driven by increase in Platform business.

 Technical Outlook:

Tanla started its meteoric rise in the year 2014 and saw a long period of consolidation from 2016 to 2019 and resumed its journey upwards. However, as we can see in the chart below, it has lost close to 70% from its January 2022 highs and is still trending downwards. The management has a positive outlook on business and believe to get back to 20% EBITDA levels by the end of this year.[/vc_column_text][vc_single_image image=”70801″ img_size=”full” alignment=”center” css=”.vc_custom_1659067595408{margin-top: 20px !important;margin-right: 10px !important;margin-bottom: 20px !important;margin-left: 10px !important;}”][vc_column_text css=”.vc_custom_1659067624003{margin-right: 10px !important;margin-left: 10px !important;}”]However, technically speaking, the chart tells a different story. Price has broken past its support zone and the downtrend is showing no sign of easing. The nearest discernible support zone is around 400-450 levels which is confirmed both by Pivot points as well as Fibonacci levels on a logarithmic scale.

We advise investors to stray away from this counter until a green confirmation candle is formed as technically it is looking very weak.[/vc_column_text][vc_zigzag][vc_column_text css=”.vc_custom_1659068184728{margin-top: 10px !important;}”]

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