Tanla : Q1 FY 2018 Transcript of Investor call

Tanla Solutions Limited

Q1 FY18 Earnings Conference Call Transcript July 28, 2017

Nishid Solanki Good afternoon and welcome to Tanla Solutions Q1 FY18 earnings conference call. Today, we are joined by senior members of the Management Team including Mr. Uday Reddy - Chairman and Managing Director; Mr. Srinivas G. K. - Chief Financial Officer; Ms. Seshanuradha Chava - Company Secretary; and Mr. Rajesh

N. - Head (Accounts).

We will begin the call with opening remarks from the management following which we will open the forum for question and answers. Before we begin, I would like to highlight that certain statements made in today's conference call may be forward looking in nature and a disclaimer to this effect has been included in the investor update shared with you earlier. The company does not undertake to update them publicly. I would now hand the conference to Mr. Uday Reddy for his initial remarks.

Uday Reddy Good afternoon everyone. I hope you had a chance to go through our investors update. What I would like to clarify now is, we normally do not announce the results during the market hours and also we do not normally do the investor call the same day, but because of certain reasons like one of our independent directors is not available on certain days, so we are forced to do both today and sorry for inconvenience and I am sure by end of today you will have a very detailed note from us and meanwhile I would like to give you the quick financial updates before you hit the Q&A.

Overall revenue, we did achieve 185.5 crore from 178 crores of last quarter. If you look at year-on-year, corresponding quarter of last year, we did clock around 98 crores, so there is a growth of almost 90% year-on-year. When it comes to business revenues, this quarter we did 180 crores, a growth of almost 8% quarter- on-quarter and almost 90% growth year-on-year. In terms of EBITDA, we are at

16.4 crore, where we have grown from 15.6 crore of last quarter, so there is a growth of 5% quarter-on-quarter and 47% on year-on-year. In terms of the quarterly EPS, we are at 1.11, a growth of almost 180% year-on-year.

I now request Mr. G. K. Srinivas to give some explanation on depreciation. Now, I request Mr. G.K. to explain about the depreciation.

G. K. Srinivas Hello everyone, good afternoon. Basically, we have capitalized assets that were deployed during the last year i.e., at the end of March 2017. On account of the capitalization of these assets based on the deployment into various projects, the overall depreciation has increased over the last quarter. If you compare the last quarter with the current quarter, it stands at around 12 crores, 11.9 crore to be exact, against 3.8 crore during the previous quarter. This is in effect, the depreciation that we will be having going forward for the current year and also for

the ensuing quarters for the next financial year. As per the new Ind-AS guidelines for depreciation, we would be required to test the assets for impairment at the end of each financial year which we would be doing at the fag-end of the financial year for 2017-18 and if there is any impairment, that would be brought into financials as and when required.

All this depreciation is based on the assets that we already had in capital work in progress, which have been capitalized and this would be the depreciation that would be charged going forward. Based on our application of the Ind-AS depreciation method for fixed assets, we are charging depreciation for an average period of 5 to 10 years for all the intangible assets and that is the useful life of the assets which are being carried in the books., That is the period over which the economic benefits are expected to be realized, that is 5 to 10 years for the majority of the assets that we have. With that, I would like to hand over the procedure to Mr. Uday.

Uday Reddy I also would like to give the revenue breakup by geography, so out of 186 crores for this quarter, domestic revenue stands at Rs. 155 Crores against Rs. 134 Crores of last quarter and international revenues have seen a bit of dip, they have dropped to Rs. 25 crores from Rs. 33 crores of last quarter. In terms of property, we had Rs. 11 crores of revenue in Quarter-4 as against the 5 crores in this quarter. I would now like to hand over to Nishid who can help us with Q&A. Moderator Thank you. Ladies and Gentlemen, we will now begin the question and answer session. We take the first question from the line of BN Bhatt. Please go ahead. BN Bhatt I am having some sizeable holding of shares of the company, for the last two years I am holding, so no doubt turnaround of the company extremely are doing well, but it is not a market darling. For the last quarter, your performance is outstanding, but market it has come down like anything, even this quarter also because of the depreciation, the PAT has come down, my request is how the management will support the investors like me? Uday Reddy To answer your question, as you rightly said company has been doing good for the last couple of years and we are trying to do all right things, we brought in E&Y, earlier we had KPMG, now E&Y are the internal auditors, then we started having the investors call and we encouraged each one of you to attend the AGM personally, so that you have a chance to interact with management, so we are trying to do all the things right, Mr. Bhatt, in fact we appointed CDR as our IR consultant and we are trying to do all right things quarter-on-quarter. Moderator Thank you. The next question is from the line of Vipul Shah from Sumangal Investments. Please go ahead. Vipul Shah Please accept my apologies because I have just joined the call, so if I ask any question what you have answered, please accept my apologies. Why is the depreciation gone up so much? G. K. Srinivas As explained just before the first call, we had capitalization of assets due to further deployment into various verticals for the year ended March 31, 2017. Now, these assets have been deployed basically to take care of our new contracts both in cloud communication and the regular business that we have. These assets have a life of 5 to 10 years; as of March 31, 2017, and as of the close of the current quarter also. The estimated useful life is revisited at the end of every year, the assets are checked for impairment and if there is any impairment claim that needs to be accounted for, it will be accounted, but in the normal course they are all

useful assets which have been in the company's books which have been put to use now. That is the basic reason why the depreciation has gone up from 3.8 to 11.9 crore during the current quarter. If you look at the assets as of March 31, 2017, we carry all the assets now in a capitalized position, all are under fixed assets and they are being depreciated in the normal course as per Ind-AS guidelines.

Vipul Shah Sir, can you explain WhatsApp is giving you free service, use of messaging has been minimal, but our main revenue seems to be coming from messaging only, so what is the rationale, I cannot understand? Uday Reddy Mr. Shah, WhatsApp is mainly the P2P (Peer to Peer) messaging application. I do not think they are going to expose their API to enterprises to send out any communication to the user. the industry experts are saying is all these messengers, are not going to expose their API to any enterprises to send any notification. In fact, WhatsApp also uses our platform to send their OTP messages to their users. Vipul Shah In that A2P messaging vertical also, profitability has come down in this quarter, so what is the reason? Uday Reddy No, profitability has not come down, in fact we have grown from Rs.157 crore to Rs.171 crore. Vipul Shah That is revenue, I am talking about profitability, your net profit? Uday Reddy Net profit is across all the verticals. Vipul Shah From this particular vertical, what is the profitability? Uday Reddy In terms of the gross margins or EBITDA, it remains same, it is not affected in the last 4-5 quarters. Vipul Shah Here in messaging, how you are paid, you are paid per message or what is the billing criteria? Uday Reddy Per delivered message, yes. Vipul Shah Per delivery message Tanla Solutions is paid? Uday Reddy It all depends, we process different kinds of messages like, some of them are transactional, some of them are promotional, some of them are Government. In overseas, we normally process both the transactional and promotional, so depending on the type of message which adds the message, so the rate card is different from one message to another and also the rate card is different from India to other market. Moderator Thank you. We will take the next question from the line of Sameer Vithlani from Vithlani & Company. Please go ahead. Sameer Vithlani My question is that based on the provisions that we have, are you aware as what our future EPS is going to be, for the present year and next year? Uday Reddy Mr. Sameer, we would like to refrain giving any guidance that is what we mentioned even in our last investor call also. Moderator Thank you. We will take the next question from the line of Deepak Chokhani.

Please go ahead.

Deepak Chokhani Sir, congratulations on good numbers. I have couple of questions for the company, so Mr. Sabharwal 's exit, has there been any effect on the business because he used to head the marketing initiative? Uday Reddy Mr. Deepak, Mr. Gautam was heading international business for quite some time, but most of our revenues do come from domestic market so that way we do not see any challenge, and secondly, when Mr. Gautam was here, we brought in one very senior person from Vodafone who has taken over from Gautam in terms of International business, so we do not see any issue. Deepak Chokhani The next question Sir is we just heard that there has been increase in depreciation this quarter because of additional assets being deployed last quarter, now I guess there is a mismatch in terms of depreciation getting first and the revenues coming thereafter, is this assessment correct, and if yes, when do you expect that additional asset which has been deployed for the revenue to start flowing in? Uday Reddy Mr. Deepak as we discussed last time, we have gone live on our cloud communication platform, if you get a chance please I encourage you to look at our Tanla website, we went live and our offering is different now because this deployment is in the progress for the last 5 to 6 months, so yes, we see a bit of impact even in this quarter, but there is a long way to go. In the long-term, we would like to see a huge positive impact both in terms of top line and bottom line. For example, to answer your question slightly differently, this quarter we spent only 46 lakhs towards our deployment, so we have used all our existing assets and as mentioned in the investors update, one of our biggest deployment is in progress, it is little behind schedule, but it is expected to close by end of this December because our carrier is going to get one of the big 4 consultants to do the security audit and also DoT is going to conduct the audit on our platform, so the point I am trying to tell you is we have not spent any money this quarter on the CAPEX, in the sense we do not need to invest further money on any of the deployments, we are going to use our current platform to drive the different placement, revenues not only from India but also in International market, so we will have more of a centralized deployment. Deepak Chokhani I understand that there will not be further CAPEX, so coming to the deferred tax, are we then expecting this deferred tax because your depreciation is affecting PAT and I do agree that depreciation is a non-cash item, but it is affecting the PAT and investors do look at PAT, the profits this quarter has more or less been maintained because of deferred tax reversal, so would this continue going forward or no? G. K. Srinivas Mr. Deepak I am sure you understand how deferred tax works because we have explained the reversal and things like that, deferred tax reversal would continue till the difference persists between the tax depreciation and the companies tax depreciation and we expect that to go on for at least this financial year definitely and to a part in the next financial year also, post which both the depreciation will be on par and there would be a reversal of the deferred tax reversals that we are making as of now. Deepak Chokhani Now the question, if you may allow, is that the margins have been constantly going down, Q1 last year it was 11.4%, then 10, then 9, now 8.8 and I do remember you had a special mention that you will start focusing on increasing the margin, when do we expect that to start inching up?