Capitalising on the growing global share of nonvoice mobile telephony

Tanla Solutions (Tanla), an aggregator in the U.K. and Ireland, is expected to post a two-year revenue and EPS CAGR of 45.8% and 42.0% respectively.. This growth would be supported by its increasing market share in these geographies. We initiate coverage on the stock with a ‘BUY’ rating and a target price of Rs 533(33.2% upside), PER of 17.5x and 14.2x FY08E and FY09E earnings.

Key Investment Highlights

Benefiting from the expanding non-voice market in the U.K.:

Tanla is expected to benefit from the growing nonvoice mobile market in the U.K., estimated at GBP 1.6 billion in CY06. The market is expected to grow at 20-25% during the next few years.

Geographical expansion to fuel future growth:

Tanla plans to enter the U.S., Singapore, and Australia by the end of FY08E. This move, we believe, would enable the company in increasing its target market and attracting larger content providers.

Provides end-to-end solutions:

Unlike its competitors, Tanla offers end-to-end solutions to its clients. These solutions include network billing and delivery, application development, and infrastructure management.

Financials:

Tanla is expected to post an EPS of Rs 30.5 and Rs 37.4 in FY08E and FY09E respectively, implying a two-year EPS CAGR of 42.0%.

Valuations:

We have valued Tanla at a PER of 14.2x FY09E earnings. Our valuation is based on the average PER of its competitors who are listed in the U.K. At our target price of Rs 533, the stock would be quoting at FY08E PER of 17.5x and PEG of 0.31x. We initiate coverage with a buy.