TM

Angel Broking
Service Truly Personalized India Research

OnMobile Global Avoid

Harit Shah Strong ‘growth’, but less ‘value’

Tel: 022 - 4040 3800 Ext: 345
E-mail: harit.shah@angeltrade.com OnMobile Global (OMGL) is a leading provider of telecom value-added software
products and services in India. The company was incorporated September 2000
by parent company, OnMobile Systems, Inc (OMSI), which is a start-up company
of Infosys Technologies, India’s second-largest software company.
Issue Open: January 24, 2008
Objects of the Issue
Particulars Amount Estimated schedule of deployment
Issue Close: January 29, 2008 FY2009 FY2010 FY2011
Purchase of equipment 180.5 55.5 60.0 65.0
Working capital requirements 5.0 5.0 0.0 0.0
Repayment of loan 35.0 35.0 0.0 0.0
Issue Details General Corporate Purposes 242.8
Total 463.3
Face Value: Rs 10 Source: Company RHP

Rationale for our ‘Avoid’ view

Present Equity Capital: Rs48.8cr
We have compared OMGL with Tanla Solutions, a company operating in a similar
line of business but with greater focus on global markets. However, it should be
Post Issue Equity Capital: Rs57.4cr
noted that Tanla’s business model is slightly different from that of OMGL. While
Tanla has a primarily service-oriented business, OMGL’s business model is
Issue size (shares): 1.09cr*
product-led. It is clear that on most operating metrics, Tanla comes out on top vis-
à-vis OMGL. Consider, Tanla’s EBITDA Margins, Asset Turnover ratio and Return
Issue size (amount): Rs463.3cr** Ratios stack up better compared to OMGL. Tanla earns higher percentage
revenue share per transaction than OMGL as the former operates mainly in
Issue Price: Price Band of Rs425 – 450 developed markets like the UK and Ireland, where mobile operators get a lesser
share and the usage of mobile value-added services (VAS) is also much more.
Promoters holding pre-issue: 72.4% OMGL’s Return Ratios will also be lower than Tanla’s on account of the
significant rise in its Book Value post the IPO.
Promoters holding post-issue: 57.5%
Exhibit 1: Comparative Analysis
* Including 22.9lakh shares as offer for Parameters OMGL Tanla Solutions
sale by promoters
** Assumed at the lower end of the price Revenues (FY2007, Rs cr) 137 222
band EBITDA Margins (FY2007, %) 45.8 49.8
Fixed Asset turnover ratio (FY2007, x) 2.4 4.2
Book Building RoE (%)* 15.6 26.6
QIBs At least 60% RoCE (%)* 13.1 31.2
P/E ratio (x)** 40.0 21.7
Non-Institutional Up to 10%
Source: Company RHP, Angel Research; * RoE and RoCE calculated on expanded equity capital post
Retail Up to 30% the Issue on annualised 1HFY2008 numbers for OMGL; for Tanla, we have taken our FY2008
Estimates for comparison purposes; ** P/E ratio has been calculated on fully diluted equity capital post
the Issue at the lower end of the price band (Rs425) for OMGL on annualised 1HFY2008 Net Profit;
for Tanla, it is calculated on our FY2008 Estimated EPS at the closing stock price as on Wednesday,
January 23, 2008.

Post Issue Shareholding Pattern
Promoters Group
MF/Banks/Indian
FIs/FIIs/Public & Others
On the valuation front, the OMGL Issue comes at a significant 85% premium to
Tanla, based on annualised 1HFY2008 numbers and our FY2008 Estimates
respectively. This is despite the fact that OMGL’s Operating metrics do not
compare favourably with Tanla. OMGL’s business model should command better
57.5%
metrics than Tanla being product-based, while Tanla operates through a Services
model. But this is not the case. Hence, we believe that this premium is not
42.5%
justified, even after taking into account higher growth rates going ahead.

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Company Background

OnMobile Global (OMGL) is a leading provider of telecommunications value added software

products and services in India. The company was incorporated in India in September 2000 by its
parent company, OnMobile Systems, Inc (OMSI), which was an incubated start-up company of
Infosys Technologies, India’s second-largest software company.

A lion’s share of OMGL’s revenues comes from the Indian telecom market. The company also
has a fast-growing international business portfolio in the Emerging markets of Asia. OMGL’s
products and applications are delivered by its carrier customers to their end-user subscribers.
These products include ring-back tones, voice portals, ringtone downloads, contests, music and
missed call alerts, among others. Thus, the company enables a better user experience.

OMGL clients include India’s Top-six mobile service operators, viz. Bharti Airtel, Reliance
Communications (RCOM), Vodafone-Essar, BSNL, Tata Teleservices and Idea Cellular. Through
these operators, the company had a market reach of over 232mn mobile subscribers in India as
on September 30, 2007. OMGL also has over ten international telecom operators in over eight
countries with clients including SingTel Optus in Australia, Sheba Telecom in Bangladesh, Maxis
in Malaysia, Bakrie Telecom and PT Indosat in Indonesia. As on June 30, 2007, OMGL had a
market reach of over 81mn international mobile subscribers.

Exhibit 2: Financial Performance

(Rs cr) Sales Net Profit EBITDA margins (%, RHS) (%)
150 65

120 55

90 45

60 35

30 25

0 15
FY04 FY05 FY06 FY07

Source: RHP, Angel Research

OMGL works principally on a revenue-share model. The company has long-standing relationships
with its clients and operates through revenue-share arrangements. Service deployments involve
complex hardware systems and software applications embedded within the carrier’s network
infrastructure and integrated into its billing, customer care and other core network systems. The
company constantly makes investments in research and development (R&D) to keep its products
relevant.

OMGL was ranked as the top value-added services (VAS) company in FY2007 by Voice & Data
magazine. The company’s Net Revenues have grown at a CAGR of 82.7% over FY2005-07, to
touch Rs136.7cr in FY2007. OMGL has grown its Net Profits at a CAGR of 57.9% over the
mentioned period to Rs34.9cr in FY2007. For 1HFY2008, OMGL clocked a Topline of Rs112.5cr
and Bottomline of Rs30.5cr, reflecting strong growth.

Industry Overview

The Indian Telecom Industry has been one of the best examples of the success of the Indian
government’s reforms programme. The sector has grown at a scorching pace over the past few
years, aided by enabling regulations, heightened competition resulting in across-the-board
lowering of telecom tariffs, higher disposable income due to India’s strong GDP growth rates and
greater coverage of India’s landscape by mobile service operators.

Earlier, the telecom sector was a government-controlled monopoly, wherein just 3 players viz.,
MTNL, VSNL and the Department of Telecommunications (the earlier name of BSNL), provided
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telecom services in the country. MTNL was licensed to provide fixed basic telecom services in
Mumbai and New Delhi, while BSNL was licensed to provide services to the rest of the country.
BSNL also provided national long distance (NLD) services. VSNL, on the other hand, provided
international long distance (ILD) services. However, in 1994, the sector was opened up to
competition and cellular licenses were issued, as the government woke up to the need to develop
robust telecom infrastructure in the country, necessary to aid high GDP growth rates.

Initially, due to the prohibitively high cost of licenses, telecom services were expensive and saw
few additions to the mobile subscriber base. At the end of FY1998, there were a mere 880,000
cellular subscribers in the country, with over half of them being from the Mumbai and Delhi
circles. However, things changed dramatically with the advent of the National Telecom Policy
(NTP) 1999, which envisioned a shift in the license fee payment mechanism, from a fixed regime
to a revenue-sharing regime. Other initiatives such as the allotment of the third and fourth cellular
licenses, the unified access licensing regime, implementation of the Calling Party Pays (CPP)
regime, making incoming calls free and consistent initiatives to reduce regulatory costs to telecom
operators also resulted in a quantum jump in the cellular subscriber base.

Exhibit 3: Mobile subscriber base - India calling!

(Mn)

180
160
140
120
CAGR 89.5%
100
80
60
40
20
0
FY02 FY03 FY04 FY05 FY06 FY07

Source: COAI, AUSPI, Angel Research; figures include fixed wireless phones (FWP)

At the end of December 2007, the total mobile subscriber base stood at 229.3mn, with GSM
subscribers standing at 172.2mn, while 57.1mn subscribers were CMDA customers. At these
levels, mobile teledensity in the country stands at around 21%, leaving as yet strong scope for
growth going ahead.

The Indian Data / VAS market – To grow by leaps and bounds

Data services revenues of the Indian Cellular Industry stood at US $858mn at the end of 2006,
according to industry analyst firm, Gartner. This implies a strong CAGR growth of 84.5% over
2002-06. These revenues are estimated to continue to grow at a healthy CAGR of over 45%
annually to hit a size of US $5.6bn by 2011.

Revenues from data services, as a percentage of mobile operators’ Topline, have also shown a
positive trend. Consider, in the latest quarter, VAS revenues as a percentage of sales of Bharti
Airtel’s Mobile Services Business stood at 9.8% (including person-to-person SMS revenues).
Excluding SMS, VAS revenues stood at 5.2% of Mobile Services revenues. This has seen a slight
increase over a couple of fiscals back, where the respective figures were 7.4% and 1.6%. The
company’s VAS revenues have grown at an outstanding CAGR of 118.2% over FY2003-07, from
just Rs85cr in FY2003 to Rs1,921cr in FY2007.

Thus, there is significant growth potential for mobile data services in the Indian markets. It should
be noted that in more advanced, developed telecom markets such as the UK, data services
account for a much more significant part of wireless revenue. For example, O2, a major operator
in the UK, records data revenues of as much as 33% of its sales, reflecting the strong scope for
growth in this segment.
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There are two major factors driving growth of the VAS market in India. Firstly, consumer demand
is increasing for services such as ring-back tones, ringtone downloads, multimedia messaging
service (MMS), music, games, mobile internet and video. Secondly, with mobile operators clearly
facing pressure on their average revenues per user (ARPUs), the need for increasing VAS
revenues becomes all the more paramount. VAS revenues enable telcos to increase revenues
with very little incremental capex, thus enabling ARPU sustenance.

International telecom markets

Apart from India, global telecom markets such as Indonesia, Thailand, Pakistan, Bangladesh,
Malaysia and Sri Lanka are also witnessing rapid growth. For example, GrameenPhone,
Bangladesh’s largest mobile operator, grew its subscriber base by 100% for the fiscal year ended
March 31, 2007. Maxis, Malayisia’s largest mobile operator by population penetration, grew its
subscriber base by 18% in 2006, while Sri Lanka Telecom saw a 111% increase in its mobile
subscriber base in CY2006. In these markets, with operators’ focus being primarily on rapid
subscriber growth, there is strong scope for external vendors to manage the VAS segment.

Investment Positives

Fast-growing Indian Telecom VAS market

The Indian Telecom Industry is the fastest-growing in the world, adding over 8mn users a month
for the past several months. With continuously falling minimum subscription costs, increasing
affluence, expansion of coverage area and the introduction of a greater number of low-cost but
feature-rich handset models in the market, the industry is expected to sustain the pace of net adds
in the near future. According to Gartner, the Indian cellular subscriber base is expected to grow at
a CAGR of 26.6% over CY2006-11E. According to our estimates, the Indian mobile subscriber
base will grow at a CAGR of 38.9% over FY2007-10E to hit 432.0mn, reflecting the strong growth
expected.

The Indian VAS market, on the other hand, is growing at a faster rate than the mobile subscriber
additions. Gartner estimates Indian data service revenues to grow at a CAGR of 45.7% over
CY2006-11E to achieve a size of US $5.6bn. Thus, significant growth is expected going forward.

Exhibit 4: Indian Cellular Industry data service revenues – Strong scope for growth
(US $mn)
6,000 5,637

5,000 4,465
CAGR 45.7%
4,000 3,385

3,000 2,466

1,609
2,000
858
1,000 580
324
74 147
0
2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E

Source: Company RHP

The twin drivers of growth – Consumer demand and declining ARPUs

The strong growth in the Indian mobile VAS market is expected to result from two key drivers.
Firstly, there is ever-increasing demand for such services by consumers. Globally and in India
also, handsets are becoming more feature-rich and the software component is increasing to
improve phone data capabilities. Consumers are increasingly using cell phones not just as a
means of communication, but more as an integral part of their daily lives. Services such as music,
entertainment, games and information are being increasingly used and accessed through cell
phones. Mobile commerce services such as banking and payment of utility bills through mobile
phones are also witnessing growth, given the convenience factor. Thus, with this integration of
mobile phones into consumers’ daily lifestyles, the demand for VAS is witnessing strong growth.
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Further, ARPUs for Indian telecom operators are constantly on the decline. The Indian Telecom
Market is arguably the most competitive in the world and given the strong growth expected and
latent demand yet to be tapped, operators are constantly introducing cheaper schemes and call
rates to grab a greater share of the pie. This is leading to a consistently falling trend in ARPUs.
Increasing revenues from VAS is thus a very important requirement for telcos to arrest this
decline. As a result, operators are constantly introducing newer schemes to get a greater
proportion of their revenues from VAS leading to the ever-increasing demand for these services
from the operators’ end.

Exhibit 5: Industry ARPUs – On a declining trend, driving VAS demand

(Rs/user/month)
GSM CDMA
400

350

300

250

200

150
Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07

Source: TRAI

A leader in the Indian VAS market, with strong client relationships

OMGL has been ranked as the top VAS company in India in FY2007 by Voice & Data, a leading
publication for the Telecom Industry in India. The company has strong client relationships with
each of the Top-six Indian mobile service operators, viz. Bharti Airtel, RCOM, Vodafone-Essar,
BSNL, Tata Teleservices and Idea Cellular. Thus, through these six operators, OMGL has a
market reach of over 211mn mobile subscribers, which is the combined subscriber base of these
operators as on December 31, 2007 (excluding BSNL CDMA subscribers). Apart from telcos,
OMGL also counts media giants like AOL and Star as its clients.

Exhibit 6: Operator-wise marketshare

(%)
30
24.1%
25
17.9% 17.4%
20
14.3%

15
9.5% 9.2%
10

0
Bharti RCOM Vodafone-Essar BSNL Tata Teleservices Idea Cellular

Source: COAI, AUSPI, Angel Research; Note: The figures include fixed wireless phones (FWP) and exclude the CDMA
subscribers of BSNL and MTNL.

OMGL’s business model is product-based. The company’s service deployment process involves
hardware and software applications that are embedded within the operator’s network and are
integrated with its billing and other systems. Thus, OMGL’s products power the delivery of mobile
VAS to its carrier client’s subscribers, acting as the ‘Intel Inside’ that powers personal computers,
even as the services are branded in the operator’s name (white labeled).
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A scalable business model
While OMGL’s business model is intellectual property (IP)-led, the company operates through a
revenue-share model. Thus, even as the IP of the product remains with OMGL, it drives its
revenues through the highly profitable revenue-sharing model. Thus, for example, a user downloads
a ring tone and is charged Re 1, OMGL will get a share of this. Given the burgeoning growth in
these services, the profitability of the business is strong. As and when the company recovers its
fixed costs, all revenues over and above will flow straight through to the PBT. Thus, there is
significant scope for operating leverage. The company’s percentage revenue share ranges between
15% and 40%. On an average, 20-25% of revenues per transaction are earned by OMGL.

End-to-end solution provider

OMGL offers its clients end-to-end turnkey solutions including hardware and software platforms,
application development, infrastructure management and customer support. The company provides
content aggregation services through content planning and procurement from content developers
such as ESPN. The company also provides software applications and platforms that power VAS
usage. Thus, this suite of end-to-end services enables OMGL to act as a ‘one-stop-shop’ for its
clients.

Exhibit 7: OMGL - End-to-end solution provider

Content Telcos
owners Content Application Platform (Airtel,
(ESPN, aggregators service providers RCOM,
Star, providers Vodafone,
Disney) BSNL)

OMGL’s end-to-end suite of solution offerings

Source: Company, Angel Research

Expanding International presence

OMGL has a rapidly expanding international presence, and international revenues accounted for
around 4% of the company’s total revenues in 1HFY2008. The company is present in over eight
countries with clients such as SingTel Optus in Australia, Sheba Telecom in Bangladesh, Maxis in
Malaysia, PT Bakrie Telecom and PT Indosat in Indonesia. As on June 30, 2007, OMGL had a
market reach of over 81mn mobile subscribers internationally. The company also recently acquired
a company called Vox mobili SA to expand its product portfolio in data and to get access to markets
in Europe and North America. Thus, apart from the strong growth in the Indian telecom market, the
company’s expansion into global developing and developed markets, where percentage revenue
share tends to be higher than in India (specially in developed markets like the UK and the US),
provides strong revenue visibility.

Concerns

Low percentage revenue share

The average percentage revenue-share that OMGL earns is in the range of 20-25% per transaction.
This is considerably lower than is the case in developed markets like the UK, where aggregators
and platform providers typically get 40-60% revenues per transaction. In India, the telecom operator
gets the maximum share of around 50-70% per transaction. Going ahead, it seems unlikely that this
share will change dramatically, given that telcos would tend to have greater bargaining power, since
they would be using a number of VAS providers. Thus, until consolidation pervades the industry, it is
highly likely that the operators would continue to have greater bargaining power.

Continuous investments required in R&D

OMGL, to keep its products relevant and compete effectively in the market place, will need to make
constant investments in R&D. Even so, there may not be any guarantee of success after
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making these investments, as competitors may bring out better products, resulting in the company
losing business. Also, with the Telecom Sector characterised by rapid technological change, any
inability to keep pace with such changes could lead to slowing growth and a loss of clients.

High debtor days

OMGL’s days’ sales outstanding in FY2007 stood at as many as 144 days, or nearly five months
of sales. This could lead to the company facing significant cash constraints, though the sales
cycles in this industry tends to be long. Nonetheless, it remains one of the factors that potential
investors should keep in mind before considering the Issue.

Outlook and Valuation

At the lower end of the price band of Rs425, the OMGL IPO comes at a P/E of 40.0x annualised
1HFY2008 Earnings. Going forward, the Indian Mobile Telecoms sector is likely to grow at a rapid
rate and as per our estimates, the mobile subscriber base is likely to hit 432.0mn by FY2010E,
growing at a CAGR of around 39% over FY2007-10E. The Indian mobile VAS business is likely to
grow at an even faster rate, as demand from subscribers and falling ARPUs of mobile operators
are likely to be the twin drivers of business growth going ahead. OMGL with its well-entrenched
position in the Sector and with all the Top-six Indian mobile operators as its clients seem well-
poised to benefit from this growth. Its international business portfolio is also growing at a fast clip
and we expect this business to contribute strongly as well. Thus, revenue visibility is strong and
we believe the company can maintain a CAGR growth of around 50-55% in EPS over the next
three years.

However, we believe the company’s valuations are very demanding and even adjusting for strong
growth going ahead, the Issue does not come at reasonable valuations. Given that Tanla
Solutions, a company in a similar line of business, is available at more reasonable valuations
even after factoring in slower growth, we believe investors are better off staying away from the
issue. Investors should note that we are enthused by OMGL’s business model and believe
it will record strong growth over the next few years. However, we believe the IPO is
aggressively priced and recommend investors to ‘Avoid’ the Issue purely on the basis of
valuations.

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Exhibit 8: Profit and Loss Account (Consolidated)

Y/E March (Rs cr) FY2004* FY2005 FY2006 FY2007 FY2008E
Net Sales 17.3 40.9 82.6 136.7 225.0
% chg 137.2 101.8 65.4 64.6
Total Expenditure 10.3 14.5 35.5 74.1 128.0
EBIDTA 7.0 26.5 47.1 62.6 97.1
(% of Net Sales) 40.5 64.7 57.0 45.8 43.1
Other Income 0.1 0.1 0.1 4.5 7.6
Depreciation 0.9 4.5 8.5 14.4 20.0
Interest 0.0 0.0 0.0 0.0 0.4
PBT 6.3 22.2 38.7 52.7 84.3
(% of Net Sales) 36.2 54.1 46.9 38.6 37.4
Tax 1.9 8.1 14.1 17.8 23.2
PAT 4.3 14.0 24.7 34.9 61.0
% chg 224.7 76.0 41.6 74.7
Source: Company RHP, Angel Research; Note: FY2008E = 1HFY2008 annualised; * FY2004 = 15-month period ending
March 31, 2004.

Exhibit 9: Balance Sheet (Consolidated)

Y/E March (Rs cr) FY2004 FY2005 FY2006 FY2007 1HFY2008
SOURCES OF FUNDS
Equity Share Capital 2.3 2.3 2.3 3.7 48.8
Reserves & Surplus 3.5 17.5 42.3 160.7 173.2
Minority Interest 0.0 0.0 0.0 0.0 0.0
Shareholders' Funds/Net worth 5.8 19.8 44.6 164.3 222.0
Loan Funds 0.0 0.0 0.0 0.0 30.0
Deferred Tax Liability (Net) 0.8 1.1 2.3 3.0 2.2
Due to erstwhile shareholders of ITFINITY Soln. 0.0 0.0 0.0 19.2 0.0
Deferred Payment Liability 0.0 0.0 0.0 0.0 25.4
Stock options outstanding account 0.0 0.0 0.0 0.0 0.1
Total Liabilities 6.6 20.9 46.9 186.5 279.6
APPLICATION OF FUNDS
Goodwill on consolidation 0.0 0.0 0.0 0.0 133.9
Gross Block 11.5 18.1 35.6 58.1 93.2
(Less) Acc. Depreciation 1.3 5.8 14.3 28.9 39.7
Net Block 10.2 12.3 21.3 29.1 53.5
Capital work-in-progress 0.0 0.5 0.0 4.3 18.9
Investments 0.5 1.0 2.6 102.4 10.5
Current Assets, Loans and Advances 8.3 29.6 61.7 123.0 184.3
Current Liabilities & Provisions 12.4 22.5 38.7 72.3 121.4
Net Current Assets (4.2) 7.1 23.0 50.7 62.9
Total Assets 6.6 20.9 46.9 186.5 279.6
Source: Company RHP, Angel Research; Note: 1HFY2008 = as on September 30, 2007.

Exhibit 10: Valuation Summary

Y/E March FY2004 FY2005 FY2006 FY2007 FY2008E
EPS (Rs)* 0.8 2.4 4.3 6.1 10.6
P/E (x)** 564.9 174.0 98.9 69.8 40.0
RoE (%)# 149.3 109.6 76.6 33.5 15.6
RoCE (%)# 108.1 111.8 86.9 32.1 13.1
Source: Company RHP, Angel Research; Note: FY2008E = 1HFY2008 annualised on the diluted equity capital; * EPS
calculated on the expanded equity capital post the issue; ** P/E ratio calculated at the lower end of the price band of Rs425;
# RoE and RoCE calculated on the expanded net worth after the IPO issuance.

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TM

Angel Broking Limited

Research Team Tel: 4040 3800 E-mail: research@angelbroking.com Website: www.angeltrade.com

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