OTT Pricing And Authentication Shifts Will Pressure Messaging Economics Yet Leave Long Term Upside

Catalysts

About Tanla Platforms

Tanla Platforms provides communications platform as a service and related messaging solutions to enterprises and telcos.

What are the underlying business or industry changes driving this perspective?

• Although WhatsApp and broader OTT messaging volumes are expanding and Tanla has been recognized as Meta partner of the year, frequent pricing changes from Meta and withdrawal of certain incentives can compress unit economics and limit the uplift to revenue and earnings if enterprises resist higher costs or slow adoption.
• While UPI and other digital transaction flows are supporting SMS notifications and OTP traffic, potential shifts toward passkeys and alternative authentication methods over time could erode a key use case for A2P SMS and cap long term growth in enterprise communication revenue and gross margins.
• Although Tanla is adding net new enterprise customers and working to increase wallet share in existing accounts, the 3 to 4 quarter ramp up cycle, together with active pricing pressure in a competitive CPaaS market, can delay meaningful contribution from these cohorts to top line and restrict operating margin expansion.
• While Wisely.ai, RCS and other platform offerings give Tanla exposure to higher value digital engagement, the long sales and deployment cycles with telcos and large enterprises, along with regulatory delays such as the pending ValueFirst International approval, may slow the conversion of this opportunity into recurring revenue and earnings growth.
• Although government and state level projects such as the Tamil Nadu e governance rollout and NIC related WhatsApp traffic can support transaction volumes, tender related uncertainties, strict eligibility norms and potential loss or delay of key contracts can create volatility in this stream and limit visibility on future revenue and net margins.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more pessimistic perspective on Tanla Platforms compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Tanla Platforms's revenue will grow by 10.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 11.5% today to 10.2% in 3 years time.
• The bearish analysts expect earnings to reach ₹6.1 billion (and earnings per share of ₹46.02) by about June 2029, up from ₹5.1 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as ₹6.9 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 13.1x on those 2029 earnings, down from 13.5x today. This future PE is lower than the current PE for the IN Software industry at 30.3x.
• The bearish analysts expect the number of shares outstanding to decline by 1.71% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.77%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Meta's history of volatile pricing and incentive changes for WhatsApp traffic could compress unit economics for Tanla's OTT messaging business, which may limit growth in enterprise communication revenue and reduce the support that higher margin OTT volumes provide to earnings and net margins.
• If global banks and financial institutions steadily adopt passkeys and other non SMS authentication methods, OTP use cases on SMS could gradually shrink, which may cap long run transaction volumes from UPI and digital channels and weigh on both revenue and gross margins from the enterprise communication segment.
• Long sales and deployment cycles for large platforms such as ATP and Wisely.ai with telcos and enterprises, combined with regulatory delays on deals like the ValueFirst International acquisition, could slow the conversion of the current product pipeline into billable volumes and delay the contribution that higher value platforms are expected to make to earnings growth and margin expansion.
• Intensifying competition in CPaaS, including from telco backed platforms and global players that remain active, may keep pricing pressure elevated, which can restrict Tanla's ability to expand wallet share at attractive rates and may weigh on operating margins even if overall transaction volumes stay healthy.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Tanla Platforms is ₹423.0, which represents up to two standard deviations below the consensus price target of ₹571.5. This valuation is based on what can be assumed as the expectations of Tanla Platforms's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹720.0, and the most bearish reporting a price target of just ₹423.0.
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be ₹60.2 billion, earnings will come to ₹6.1 billion, and it would be trading on a PE ratio of 13.1x, assuming you use a discount rate of 14.8%.
• Given the current share price of ₹520.05, the analyst price target of ₹423.0 is 22.9% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.