Verdict: Good company in a high growth industry

IPO Snapshot:

Affle India is entering the primary market on Monday 29^th July 2019, to raise Rs. 459 crore - Rs. 90 crore via fresh issue and up to Rs. 369 crore via an offer for sale (OFS) of up to 49.5 lakh equity shares of Rs. 10 each by the promoter, both in the price band of Rs. 740 to Rs. 745 per share. 75% of the issue is reserved for institutional investors, with only 10% allocation for retail (lower than usual 35%) and 15% for HNIs. Issue represents 21% of the post issue paid-up share capital and closes on Wednesday 31^st July, with listing likely on 8^th August.

Objects of Issue and Shareholding:

Rs. 90 crore fresh issue proceeds will be used for working capital funding of Rs. 69 crore and balance for general corporate purposes and IPO expenses. OFS accounts for 80% of the total issue size and comprises sale by corporate promoter Affle Holdings, a Singapore registered company, counting Microsoft, NTT Docomo, Dentsu, Madison and Times Group amongst its investors. Current promoter holding of 92.17% will contract to 68.38%, post the IPO.

Company Background:

Gurgaon and Singapore based Affle India provides B2C digital advertising services in the mobile space, undertaking customer acquisition, engagement and transactions through mobile advertising. It serves clients across e-commerce (Amazon, Flipkart, Jabong, BoomMyShow, Meesho, Goibibo), mobile app (Wynk, Zee) and traditional consumer industries (J&J, Reckitt Benkiser, McDonalds, Air Asia, Axis Bank, Nissan) etc. Over the past 13 years of existence, company has accumulated 2.02 billion customer profiles, including 300 billion data points, across India, developed geographies (America, Europe, Japan, Australia, Korea) and emerging geographies (South East Asia, Middle East, Africa). These consumer profiles and data points form company’s primary building blocks for operations. Majority of company’s Rs. 270 crore revenue in FY19 was earned through client campaigns undertaken on ‘cost per converted user / CPCU’ basis, for which, nearly 50-55% of revenue is incurred as data cost.

Being a data-driven company, business model is asset-light and scalable, albeit margin expansion being moderate from here on (28% EBITDA margin). To widen service offering, deepen geographical reach and increase cross-sell, Affle has made 3 acquisitions in the past 12 months (i) w.e.f. July 2018: Vizury engaged in re-targeting services in Middle East and Africa, (ii) wef Feb 2019: Shoffr undertaking online to offline conversion of customer, (ii) Jun 2019: RevX, a US based adtech for new user acquisition and re-targeting. 

Financials:

FY19 revenue (including Vizury but excluding Shroff, RevX) stood at Rs. 269 crore, up 60% YoY on 49% higher converted user count of 55 million. Approximately 41% revenue was generated from India and 59% internationally, mainly from US, Singapore, Indonesia, Europe. PAT surged 88% YoY in FY19 to Rs. 52 crore, reporting net margin of 19% (up from FY18’s 17%) while EPS stood at Rs. 21.32, on an equity of Rs. 24.29 crore. Historic financials between FY14 to FY17 are not comparable as only standalone (India) financials are presented for the earlier years.

Company’s net worth stands at Rs. 72 crore, with gross debt of Rs. 9 crore and cash equivalents of Rs. 30 crore. While internal accruals and cash profits are sufficient to meet working capital objects for which fresh issue is being undertaken, company wants to preserve the former for inorganic growth opportunities. Thus, IPO is essentially structured only for part exit to the promoter entity. 

Growth Potential:

Indian adtech market is projected to grow at 39% annually, with number of e-commerce shoppers forecasted to grow at 34% till 2022. Only 25% of India’s internet users have shopped online in past 2 years, indicating huge potential to expand beyond tier 1 cities. India is considered a hard market, even for participants who are globally successful. Since Affle has developed India expertise with 40% of its revenue being generated domestically and 28% of its customer databank in India, this becomes a high entry-barrier and key strength for the company.

Internationally, the industry is very large and expanding, with a Nasdaq-listed peer Tradedesk being as large as over USD 12 billion in market capitalisation. Close home, competitor inMobi is a unicorn (unlisted firm with USD 1 billion valuation) with backing from Softbank. Thus, Affle, pursuing both organic and inorganic growth, looks capable to increase customer profile and its client base going forward.  

Business Risks:

1. Adtech world is dominated by the likes of Google and Facebook. While the industry is still very fragmented, any disruptions from these giants can have far-reaching implications for players across the board.
2. Data being the new oil, regulations surrounding its use, privacy and storage is a sensitive topic for most governments globally. While Affle has been complaint with current data protection regulations in Europe and Singapore, risk remains high as its business is completely data-driven and future regulatory environment still uncertain.

Valuation:

At Rs. 745, company’s market cap will be Rs. 1,900 crore, which leads to FY19 PE multiple of 35x, which seems aggressive. However, considering earnings growth of 34% for FY20, PE multiple works out at 26x for the current year and 21x for FY21E, which are not aggressive given high growth industry, healthy revenue surge, superior RoE on asset light business model and experienced management team.

Malabar Fund acquired 7.8% stake in the company in Sep 2018 for an estimated Rs. 130 crore via secondary buy from promoter entity, translating into price per share of Rs. 690. Current IPO price is only 8% premium to the last transacted price undertaken 10 months ago, during which company’s topline and bottomline have grown 60% and 87% respectively. In this backdrop, the price is not expensive.

Weak secondary market sentiments and underperformance of mid and small caps over the past 16 months are not very conducive for the issue. Hence, rightly so, OFS size has been trimmed by 10% from DRHP filing (last July), as also, price expectation has been moderated by 10-15%. Healthy listing of IndiaMart InterMesh early this month may also have some positive rub-off on this issue, with both companies being ‘new-age’ businesses.

Conclusion:

While company will possess the ‘small cap’ tag post listing, its presence in the new age tech and high growth industry (with both mobile and advertising here to stay) make it attractive buy. Thus, one can apply in the IPO.

Grey Market Premium (GMP) of Affle India: Grey Market Premium of Affle India is an unofficial figure, against guidelines of SEBI. We strongly recommend investors against following the grey market premium. To know more about grey market premium and how it operates, read our article on ‘grey market premium’ in Pathshala column.

Disclosure: No Interest.