>ONMOBILE GLOBAL (IIFL)

Arvind Rao (CEO) and Sandhya Gupta (Head M&A – Investment & Strategy). Most questions were centred around OnMobile’s dilution plans and impact of falling voice revenues on VAS pricing. OnMobile’s 3QFY10 results have been in line with revenue growth of 6.3% (QOQ) and improved EBITDA margins. Key takeaways
from the presentation: 1) OnMobile is likely to raise capital to execute a ‘Telefonica-type’ deal or a big-ticket overseas M&A; 2) the company expects Telefonica revenues to add to topline by FY11 and execution is on-track. International revenue contribution should grow to 50% in 2 years; and 3) management expects some ‘rub-off’ effect of tariff wars to hit VAS pricing, but believes that volume growth should offset pricing decline, leading to revenue growth. We retain BUY with a target price of Rs620.

• Capital-raising plans to execute more ‘Telefonica-type’ deals and overseas M&A: Management said it may raise capital to expedite execution, and the board has already approved capitalraising to the tune of Rs10bn. Even with Rs3bn equity capital, the dilution would be 13-14%, which is very high.

• International execution on track; better cost management, dollar depreciation could hurt: The company further indicated that it is confident of bringing down content costs (which have been increasing over the last few quarters). OnMobile would complete the Telefonica roll-out in three countries by April and the rest by June 2011. The Vodafone roll-out will scale up to full potential over the next two years.

• VAS pricing could be the next source of tariff cuts by operators, but volumes to compensate: The management believes that while voice pricing has taken a severe hit over the years, falling from Rs25 per minute to Rs0.5 per minute, VAS has been fairly untouched. But with pricing cuts for VAS products, penetration of the products has enormous scope to grow and should be revenue-accretive.

To read the full report: ONMOBILE GLOBAL