In-line with the recent consolidation within CPaaS space as highlighted in our Initiating Coverage note, Route Mobile (RML) has announced the acquisition of Phonon Communications. Phonon is engaged in customer experience solutions by providing Contact Centre as a Service (CCaaS) platform to its clients. In addition to broadening RML's offerings, this acquisition also helps the company with a foot-in-door of various marquee accounts (leading banks and airliners), providing a cross-selling opportunity. Further, this acquisition should be margin accretive as CCaaS typically operates at higher margins. We estimate the payback of the acquisition to be 5-6 years without factoring in any potential synergies. Maintain ADD with unchanged TP of Rs 1,710.
- Salient points of the deal. RML will acquire Phonon for Rs290mn in an all-cash deal. Phonon's revenue in FY20 was Rs 170mn and the transaction is estimated to close by May'21. We estimate revenues of Phonon in FY21E to be impacted due to lower throughput by travel clients.
- Marquee client list and leadership positioning in Indian travel segment. Phonon serves marquee customers such as Citibank, HDFC Bank, Yes Bank, HDFC Life Insurance, Royal Sundaram General Insurance, Air Asia (India), GoAir, IndiGo, Vistara, Yatra, ITC Hotels and Sodexo. Further, the company is one of the key players in automated interaction space within Indian airline working 4 of top 5 players as clients. Phonon has carried out 1bn+calls in FY21 with a capability to reach the end customer via voice, email, SMS or rich media.
- Maintain ADD. We believe Phonon acquisition will provide both revenue and margin synergies as RML will have access to the wide pool of Phonon clients enabling cross-sell opportunities for RML with higher margins to come from a better product mix. Considering the aforementioned, we estimate the IRR of the transaction to be ~15% (ex-synergies) with a payback period of 5-6 years. Given its size, we believe, though Phonon acquisition will be a tuck-in, it will provide a meaningful value proposition to RML's product offering. Key risk includes integration of Phonon offerings to Route CPaaS platform. Maintain ADD with a target price of Rs1,710.