Affle India: Information Analysis

The mainstream IPOs have been few this year, with just five being reported in the past seven months. Several factors, including the ongoing slowdown and liquidity crunch, can be held responsible for this. At the time of writing this report, the Sensex has already fallen by more than six per cent from its all-time highs seen during the general elections.

Affle (India) has come up with a Rs 459-crore IPO as the first ad-tech company to be listed in India. An ad-tech company generates traffic for clients. Think an entertainment portal like Alt-Balaji. An ad-tech company that it engages, brings users and traffic to its app and contents.

This one-of-a-kind company has expertise in various aspects of digital advertising, with its clients present in India and abroad. This provider of mobile advertising solutions has two business segments - the consumer platform and the enterprise platform. The consumer platform provides services like attracting new customers through mobile advertisements, retargeting existing customers for e-commerce clients and increasing customer base for online to offline businesses. Driven by the cost per converted consumer model (CPCU), this segment accounted for 97 per cent of the company's consolidated revenues in FY19.

The second segment provides end-to-end solutions for enterprises, such as developing apps and providing enterprise-grade data analytics for online and offline businesses. During the same period, this segment accounted for a mere three per cent of the company's revenues.

Over the past one-and-a-half-year, Affle has acquired three companies, namely Vizury, RevX and Shoffr to consolidate its consumer platform. The company has run mobile advertising campaigns for some of the largest e-commerce brands and mobile apps in the world, such as Amazon, Flipkart, Goibibo, BookMyShow and also domestic players like ALTBalaji, among others.

The company has no direct listed peers in India. In such a situation, we have made a peer comparison with other digital advertising firms like InfoEdge, Just Dial and IndiaMart.

Strengths

• The company provides ad-tech solutions across the value chain of digital advertising, fraud detection and ad network.
• The business is built on a low-cost, asset-light model, which gives room to generate profits and scale its business.
• With a vast range of services, the company can cater to a large customer base in India and abroad through its international subsidiaries.

Weakness

• The company's revenues are highly concentrated by the top 10 customers, which account for more than 64 per cent of its total revenues in FY 19.
• The company operates in a highly competitive market and the business model can easily be replicated.
• The company may not be able to collect data about users in the future if there is any regulatory change in data protection rules.

Risks and concerns
The company faces the risk of not keeping up with technological changes relevant to the industry it operates in, with big giants like Google and Facebook investing heavily in future-focused technologies. Besides, if it fails to keep pace with evolving trends in digital technology, its existence will be at stake.

Total IPO size: Rs 456-459 crore

Fresh Issue: Rs 90 crore
Purpose of Issue:
Funding incremental working capital requirement: Rs 69 crore
General corporate purpose: Rs 21 crore

Offer for Sale: Rs 367-369 crore
Additional details
Price band: Rs 740-745
Subscription dates: July 29-31 July
ROE (FY19): 95.2 per cent
Revenue (FY19): Rs 249.4 crore
Post-IPO, promoter holding: 68.37 per cent (including the promoter group)
Post IPO valuation: Rs 1887-1899 crore
Total debt : Net debt free
Equity (Post IPO): Rs 162 crore

Company / Business
1. Are the company's earnings before tax more than Rs 50 cr in the last twelve months?
Yes, the company's earnings before profit stood at 59.8 crore in FY19.

2. Will the company be able to scale up its business?
Yes. Increasing internet penetration and the growing demand for smartphones have led to the growth of the e-commerce market in India, thereby raising the popularity of digital advertisements to attract new users and re-target old users.

3. Does the company have a recognisable brand/s truly valued by its customers?
No, the global advertising technology market is highly competitive with multiple regional and global players. However, very few companies have products that span the entire value chain of digital advertising.

4. Does the company have high repeat customer usage?
Yes, on the unconsolidated basis, the company had 80 per cent recurrence of the top 10 customers for FY18. However, the top customer alone accounted for more than 46 per cent revenue during the said period, which could be an area of concern because of overdependence.

5. Does the company have a credible moat?
No, the company operates in a highly competitive market with multiple regions, global players and low prices.

6. Is the company sufficiently robust to major regulatory or geopolitical risks?
No, any change in data protection laws can significantly affect the company's operations and restrict the company's ability to collect, process, use, transfer and pool data collected from customers.

7. Is the company's business immune to easy replication by new players?
No, the company operates in a highly competitive, price-sensitive market.

8. Are the company's products able to withstand being easily substituted or outdated?
No, the company operates in a very dynamic industry due to evolving technological trends.

9. Are the customers of the company devoid of significant bargaining power?
No. Owing to the highly competitive price-sensitive market, its customers could shift to other competitors offering low prices and higher quality of services.

10. Are the suppliers of the company devoid of significant bargaining power?
No, the company's access to mobile advertising inventory through publishers or ad exchanges is readily available to competitors.

11. Is the level of competition the company faces relatively low?
No. The advertising technology market is highly competitive and dominated by digital giants such as Google and Facebook.

Management

12. Does any of the company's founders hold at least a five per cent stake in the company? Or do promoters totally hold more than 25 per cent stake in the company?
Yes, the promoters hold 92.17 per cent prior to the issue and will hold 68.37 per cent, post the issue.

13. Do the top three managers have more than 15 years of combined leadership at the company?
Yes. The promoter, Mr. Anuj Khanna Sohum and chief operating officer, Mr. Anuj Kumar have been associated with the company since 2006.

14. Is the management trustworthy? Is it transparent in its disclosures, which are consistent with Sebi guidelines?
Yes, we have no information which suggests otherwise.

15. Is the company free of litigation in court or with the regulator that casts doubts on the intention of the management?
Yes. Total litigation amounts to less than rupees one crore. This will not have any material impact on its overall business.

16. Is the company's accounting policy stable?
Yes, we have no significant reason to believe otherwise.

17. Is the company free of promoter pledging of its shares?
Yes, none of the promoter shares was pledged as of July 2019.

Financial

18. Did the company generate the current and five-year average return on equity of more than 15 per cent and return on capital of more than 18 per cent?
Yes. The company generated current ROE of 95.2 per cent in FY19 and a five-year average of 35.2 per cent. The company generated current ROCE of 108.7 per cent and the five-year average ROCE of 49.8 per cent. These figures look inflated because of the consolidation of one of the subsidiaries in FY19.

19. Was the company's operating cash flow-positive during the previous year and at least four out of the last five years?
Yes. The company's operating cash flows have been positive the last five years from FY 15 to FY 19.

20. Did the company increase its revenue by 10 per cent CAGR in the last four years?
Yes. The company has increased its revenue by 58.56 per cent CAGR in the last four years on a consolidated basis. However, on a standalone basis, the revenue grew by 31.42 per cent compounded annually in the last four years.

21. Is the company's net debt-to-equity ratio less than one or is its interest coverage ratio more than two?
Yes. The company is debt-free on a net debt basis (cash and bank less total debt).

22. Is the company free from reliance on huge working capital for day-to-day affairs?
Yes. The company follows an asset-light model and its working capital requirements have been stable in the past.

23. Can the company run its business without relying on external funding in the next three years?
Yes. The company follows an asset-light model and has sufficient cash and bank balances and generates positive free cash-flows, which are sufficient for operations.

24. Have the company's short-term borrowings remained stable or declined (not increased by greater than 15 per cent)?
Yes. The company is free from any short-term debt on a net debt basis.

25. Is the company free from meaningful contingent liabilities?
Yes. The company stated contingent liabilities of less than a crore as on March 31, 2019.

The Stock/Valuation

26. Does the stock offer operating earnings yield of more than eight per cent on its enterprise value?
No. The stock at the upper price band offers an earnings yield of 3.23 per cent.

27. Is the stock's price to earnings less than its peers' median level?
Yes. Post-IPO, the stock will be priced at 39 times its FY19 earnings as compared to the median price to earnings of its peer group at 45 times.

28. Is the stock's price to book value less than its peers' average level?
No. The stock's post IPO, price to book value is 11.7 times as per FY19 financials, as compared to a median price to book of industry peers at 5.6 times.

Book running lead managers - ICICI Securities, Nomura & Karvy Fintech
All Calculations done on the basis of consolidated financials for FY19 and standalone financials for FY15-FY18
* The lower the score you find here, the riskier the stock
Disclosure: Author may be an applicant in this Initial Public Offering.