affle india may 18, 2020 -...

Stock Tales are concise, holistic stock reports across wider spectrum of sectors. Updates will not be periodical but based on significant events or change in price.

Stock_____

TALES

May 18, 2020

ICIC

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Retail E

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Stock T

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May 18, 2020

CMP: | 1275 Target: | 1530 (20%) Target Period: 12 months

Affle India (AFFIND)

BUY

Unique play on digital ad tech…

Incorporated in 2006, Affle is a technology platform that enables advertisers

to do targeted advertising. It helps advertiser to measure the effectiveness

of advertisement as it charges only when a user downloads an app or

completes a transaction. In FY19, consolidated revenues rose 49.1% YoY

while PAT increased 75.4% YoY. Despite this robust growth, revenues are

just a fraction of the overall mobile advertisement market, representing

tremendous scope for growth. Going forward, we expect revenues and PAT

to increase at a CAGR of 32% and 31%, respectively, over FY19-22E.

Shift to mobile advertisement imminent

Mobile advertisement has seen tremendous growth at 41% CAGR in 2016-

19 led by rising smartphone penetration, low data tariffs and young

demographics. Going forward, mobile advertising is expected to increase at

a CAGR of ~35% in 2019-25. Further, in a post Covid world, we expect a

significant shift among consumers to adopt digital technology across the

world especially in India & other emerging markets. Further, within verticals,

we expect e-commerce to witness robust growth. It will be a key segment

driving digital ad spend in future. Affle generates ~75% of its revenues from

India & Emerging markets. Within verticals, it generates more than ~50% of

revenues from e-commerce making it a key beneficiary of changing digital

trends in future.

Unique business model makes Affle preferred ad tech partner

Affle, through its various platforms like data management platform, fraud

detection platform and real time inventory buying ad inventory helps

advertisers deliver more relevant & engaging experiences to consumers,

which is more likely to lead to the desired action, such as downloading of an

app or the purchase of a product or service. This differentiates Affle from its

cost per click peers and helps advertisers generate higher return on

investment (ROI). We believe this is a unique business model and expect the

market to move towards such performance-based advertising making Affle

a preferred ad tech partner.

Valuation & Outlook

Affle has an asset light business model while its marketing efforts and more

precisely targeted & personalised advertisements has bought in higher

revenues while cost have remained relatively unchanged. This network

effect has led the EBIT margins to improve from 1.9% in FY17 to 24.1% in

FY19. Going forward, we expect the network effect to continue to impact

revenues and profitability over a sustained period leading to an RoIC of more

than 60% over a long period. Hence, we have a BUY recommendation on

the stock with a target price of | 1,530/share.

Key Financial Summary s

| Crore FY18 FY19 FY20E FY21E FY22E CAGR (FY19-22E)

Net Sales 167 249 355 460 574 32.1%

EBITDA 45 70 93 117 155 30.2%

EBITDA Margins (%) 27.2 28.2 26.2 25.5 27.0

Net Profit 28 49 69 81 111 31.3%

EPS (|) 11.5 20.1 27.1 31.9 43.4

P/E 111.3 63.4 47.0 40.0 29.4

RoNW (%) 91.4 67.4 30.4 26.3 26.4

RoCE (%) 119.3 72.8 32.2 31.1 32.1

Source: Company, ICICI Direct Research

Particulars

Particular Amount

Market Capitalization (| Crore) 3,250.8

Total Debt 9.0

Cash and Investments (| Crore) 30.5

EV (| Crore) 3,229.3

52 week H/L 2296/751

Equity capital 25.5

Face value 10.0

Price Performance

0

500

1,000

1,500

2,000

2,500

3,000

5,000

7,000

9,000

11,000

13,000

15,000

Mar-17

Jun-17

Sep-1

7

Dec-17

Mar-18

Jun-18

Sep-1

8

Dec-18

Mar-19

Jun-19

Sep-1

9

Dec-19

Mar-20

Nifty (L.H.S) Price (R.H.S)

*listed in August 2019

Key Highlights

Robust growth in mobile advertising,

unique business model coupled with

high margins and return ratios

makes us positive on the stock from

a long term perspective

Assign BUY rating to stock with

target price of | 1,530

Research Analyst

Devang Bhatt

[email protected]

ICICI Securities | Retail Research 2

ICICI Direct Research

Stock Tales | Affle India

Company Background

Incorporated in 2006, Affle helps customers improve return on investment

(RoI) on each dollar spent on advertising. The company only charges

customer for conversions and does not charge on clicks. It helps advertisers

to measure the effectiveness of advertisement as it charges only when the

user downloads an app or complete a transaction or a user does the

intended job. Affle has developed a proprietary consumer intelligence

platform to deliver consumer engagement, acquisitions and transactions

through relevant mobile advertising. The platform aims to enhance returns

on marketing investment through contextual mobile ads.

The company broadly divides its business into two categories 1) consumer

platform (~97% of revenues) and 2) enterprise platform (~3% of revenues).

Consumer platform primarily provides the following services: (1) new

consumer conversions (acquisitions, engagements and transactions)

through relevant mobile advertising; (2) retargeting existing consumers to

complete transactions for e-commerce companies through relevant mobile

advertising; and (3) an online to offline (O2O) platform that converts online

consumer engagement into in-store walk-ins. In the enterprise platform

primarily, the company helps enterprises to develop apps (enabling offline

to online commerce) and provide data analytics.

Affle generates revenues through cost per converted user (CPCU) in which

the company charges for advertisement only if user 1) downloads & opens

an app or engages with an app after seeing an advertisement delivered by

the company, 2) submitting a lead acquisition form or purchasing a product

or service after seeing an advertisement delivered by the company. The

company also earns revenues through awareness and engagement type

advertising, which comprises cost per thousand impressions (CPM), cost

per view (CPV) and cost per click (CPC) models.

Exhibit 1: Average converted cost per converted user (CPCU) across regions

Region/Country

Consumer profiles

(in millions)

Converted users in

FY19 (in millions)

Conversion factor for

FY19

Average CPCU for

FY19

Revennues (Converted

user * Average CPCU in

millions)

India 571 39.3 6.9% 25.3 994.3

Other Emerging

Markets

582 10.6 1.8% 60.2 638.1

Developed Markets 867 5.2 0.6% 114.1 593.3

Total 2225.7


As of May 2019, the company employs 236 full-time employees (including

51 employees in sales & marketing and 100 employees in research &

development). Key clients of Affle are top six advertising agencies in the

world WPP (GroupM), Publicis, Omnicom, Dentsu Aegis Network,

Interpublic Group (IPG) Mediabrands, and Havas), which together control

~70% of the global advertising spends. It also works with mobile

advertising-focused agencies like M&C Saatchi Mobile and local agencies in

India such as Interactive Avenues and Madison. In terms of geography, the

company generates ~50% of revenues from India and ~50% outside India.

Affle’s key focus geographies are India and South East Asia) like Indonesia,

Philipines, Saudi Arabia, Malaysia UAE and Singapore), which are highly

under penetrated and have tremendous scope for digital advertising to

witness robust growth.




Investment Rationale

Rapid growth in internet, ecommerce to drive digital advertising

With upgrades to the cellular infrastructure, proliferation of smartphones

and availability of several content options, there has been a steady growth

in consumers using the internet. Lower data prices and availability of almost

unlimited content for entertainment, multimedia, information and business

applications has led to an impulsive usage of the internet, leading to

significant growth in mobile data traffic. India has been mirroring similar

trends with an increasing share of data revenue vis-à-vis traditional voice

services. The share of data wallet saw an increase of 81% compared to a

drop of nearly 19% in voice revenue, in 2013-16. According to Trai, almost

77% of urban and 92% of rural users consider the mobile phone the primary

device for accessing the internet. A mobile phone user in India spends an

average of 2,844 minutes on the device every month (or ~94 minutes a day).

Of this, 92% of the time is spent on apps. This has led to proliferation of

various apps like e-commerce apps, banking apps, digital payment apps,

gaming apps and other financial apps. This, in turn, has led to tremendous

growth in digital advertising, especially on mobile in India. Digital advertising

has increased at a CAGR of 30% in India in 2016-19.

Exhibit 2: Indian digital advertising spend to grow 27% CAGR over 2019-25

6228

13683

58550

0

10000

20000

30000

40000

50000

60000

70000

2016 2019 2025

in | crore

Digital Advertising Industry in India (in | crore)

Source: Dentsu Agies Network, ICICI Direct Research

Going forward, digital advertising is expected to increase at a CAGR of 27%

in India over 2019-25. Digital advertising is expected to account for 44% of

overall advertisement in 2025 vs. 20% in 2019. Within digital advertising,

mobile advertisement is expected to gain traction among various digital

media.

Exhibit 3: Mobile share of digital advertisement to rise from 47% in 2019 to 64% in

2022

37

43

47 47

52

59

6463

57

53 53

48

41

36

0

10

20

30

40

50

60

70

2016 2017 2018 2019 2020E 2021E 2022E

in %

Mobile Desktop





Mobile advertisement has seen tremendous growth of 41% CAGR over

2016-19 vs. 23% for desktop. Going forward, mobile advertising is expected

to increase at a CAGR of ~35% over 2019-25.

If we consider digital ad spend by vertical, the top spenders are FMCG

(accounts for 27% of digital spends), e-commerce (19%), consumer

durables (11%), BFSI (10%) and telecom (9%).

Exhibit 4: Digital media spend across verticals

FMCG

27%

E-commerce

19%

Consumer Durables

11%

BFSI

10%

Telecom

9%

Auto

7%

Media &

Entertainment

6%

Retail

5%

Others

6%


Considering, the recent Covid-19 pandemic, we believe there will be a

significant shift among consumers to adopt digital technology. Among

these, we believe e-commerce will witness robust growth and be a key

segment driving digital ad spend in future. Affle (primarily a mobile ad tech

player) generates more than ~50% of its revenues from e-commerce and

has worked with marquee e-commerce companies like Amazon and Flipkart

making it a key beneficiary of digital trends in future.

RoI focused advertisement to make it preferred ad tech partner

Affle has ~2.02 billion consumer profiles (571 million consumer profiles in

India, 582 million in other emerging markets and 867 million in developed

markets) and over 300 billion data points through its data management

platform. This unique insight enables it to make a predictive algorithm to

recommend mobile users who are most likely to engage with a particular

advertisement. This, coupled with mFaaS (a fraud detection platform) and

acquisition of RevX (helps in real time buying and selling of advertisement

inventory) enables Affle to provide an end to end digital advertising solution.

Further, it also enables the company to cost effectively match users’ intent

or interest with relevant advertisements, deliver more relevant and engaging

experiences to consumers, which is more likely to lead to the desired action,

such as downloading of an app or the purchase of a product or service. This

differentiates Affle from its cost per click peers and helps customers to

generate higher return on their investment. It also helps it to have higher

customer retention. Affle has seen 80% and 100% of customer recurrence

in the past two years, respectively, while six of its top-10 clients have been

with the company for more than three years. It generates 90% of its

revenues through cost per converted user (CPCU) in which the company

charges for advertisement only if user gets converted. We believe this is a

unique business model and expect the market to move towards such

performance based advertising making Affle a preferred ad tech partner.




Acquisition key to growth, differentiation and to build capability

The company has historically done acquisitions to (a) have complementing

teams, technology and data to strengthen expansion into other emerging

markets, (b) to increase growth and to increase recurrence & retention of

customers and 3) for revenue and profitability growth. Some of the recent

acquisitions by the company are Vizury (helps re target users to transact

online by targeting them with personalised product ads), RevX (an analytics

and artificial intelligence platform that enables Affle to make real time

decision), and Shoffr (helps in online to offline conversion). All these

acquisitions have enabled Affle to provide an end to end solution for digital

advertising. The company plans to invest its residual cash flow for

acquisition for next few years. This will lead to growth through inorganic

route. We believe profits will be ploughed back for acquisitions. We have

not modelled any acquisition except the one that are already made.

Cross sell opportunities for offline business in India & growth

outside India

The company’s enterprise solution helps offline business to have online

commerce by helping them build an e-commerce business. We believe this

can be a huge potential in the long term considering there are many offline

retailers in India that may need an online presence. Globally also e-

commerce revenue was US$2.29 trillion in 2017, which comprised only 10%

of total global retail sales, thereby providing significant opportunity in the

medium to long term to enable the shift to e-commerce global.

Apart from India, the company has a significant presence in South East Asia

(SEA) that is also an under penetrated market in terms of digital advertising.

Digital advertising in SEA has grown at a CAGR of 19% in 2016-19. We

believe it will grow at a similar pace over the next few years. Further, the

company has a presence in developed markets (that comprise North

America, Europe, Japan, Korea and Australia) through advertising agencies.

We believe the company in a post-Covid world can virtually gain higher

market share in these countries at minimal cost. Hence, we believe Affle has

tremendous potential to grow business within and outside India.

Asset light business, network effect keeps return ratios healthy

The company has an asset light business where its consumer platform is the

result of over 13 years of focused research & development and investment.

Affle Consumer Platform is supported by a flexible and scalable

infrastructure, built in-house using cloud computing infrastructure keeping

the company asset light. Further, over the past few years, its marketing

efforts and more precisely targeted & personalised advertisements have

brought in higher revenues while employee benefit expenses, depreciation

and amortisation expenses and other expenses have remained relatively

unchanged. This network effect has led the EBIT margins to improve from

1.9% in FY17 to 24.1% in FY19. Going forward, we expect the network effect

to continue to impact revenues and profitability over a sustained period,

leading to an RoIC of more than 60% over a long period.




Key Risk

Competition from large technology giants like Google, Facebook

Google and Facebook contribute about 80% of ad tech revenue. With their

respective native platforms that have access to billions of user profiles

worldwide they can do targeted advertisement as per likes & dislikes of

customers. Google and Facebook dominate not just in market share but also

user practices, pricing policies and general terms and conditions. Apart from

Google and Facebook, there are over a hundred companies around the

world who offer one or more components of this solution. However, only a

few companies operate internationally, including, among others, Affle India,

InMobi, Criteo, Tradedesk, Freakout, Mobvista and YouAppi. Some of these

companies could leverage their positions to make changes that could be

significantly harmful to its business and results of operations, cash flows and

financial condition. A few of these companies also have access to a

significantly larger pool of data than Affle India. This larger pool of data may

allow them to foreclose opportunities that may otherwise be available to the

company. Any of these developments would make it more difficult for the

company to sell its solutions. This could result in increased pricing pressure,

reduced gross margins, increased sales and marketing expense and/or the

loss of market share, any of which may have a material adverse effect on its

business.

Developments regarding data protection may impact business

The legal, regulatory and judicial environment around data protection and

other matters is constantly evolving and can be subject to significant

change. Various governments have enacted, considered or are considering

legislation or regulations that could significantly restrict the company’s

ability to collect, process, use, transfer and pool data collected from and

about consumers and devices. Trade associations and industry self

regulatory groups have also promulgated best practices and other industry

standards relating to targeted advertising. Such losses could adversely

impact the company’s financial performance in future.

Revenue concentration around key customers

Revenue from top 10 customers constituted | 160.8 crore, which

represented 64.5% of revenue in FY19. Revenue from top customer during

the same period were at | 54.8 crore, 22% of revenue. Although the

company has reduced top 10 customer concentration in H1FY20 to 49.7%

from 64.5% it still remains higher. Inability to keep these customers or failure

to attract a broader range of customers, would have a material adverse effect

on its business, results of operations, cash flows and financial condition.




Financial Summary

Exhibit 5: Profit & loss statement (| crore)

(Year-end March) FY19 FY20E FY21E FY22E

Total operating Income 249 355 460 574

Growth (%) 49.1 42.3 29.5 25.0

COGS (employee and Inventory) 155 238 310 379

Other expenses 24 24 32 40

Total Operating Expenditure 179 262 342 419

EBITDA 70 93 117 155

Growth (%) 54.6 32.2 26.0 32.4

Depreciation 10 12 16 20

Other Income (net) (0) 3 1 4

PBT 60 84 103 140

Total Tax 11 15 22 29

PAT 49 69 81 111

Growth (%) 75.4 41.6 17.6 36.1

EPS (|)* 20.1 27.1 31.9 43.4

Growth (%) 75.4 34.9 17.6 36.1

Source: Company, ICICI Direct Research,* FY20E EPS is post issue from IPO proceeds

Exhibit 6: Cash flow statement (| crore)


Profit after Tax 60 84 103 140

Add: Depreciation 10 12 16 20

(Inc)/dec in Current Assets (42) (51) (35) (39)

Inc/(dec) in CL and Provisions 28 45 36 39

Taxes paid (9) (15) (22) (29)

CF from operating activities 48 71 96 126

(Inc)/dec in Investments (5) 0 4 4

(Inc)/dec in Fixed Assets (45) (76) (48) (35)

CF from investing activities (50) (75) (44) (31)

Interst expenses (1) (1) (3) -

Others 9 104 (9) (19)

CF from financing activities 8 103 (12) (19)

Net Cash flow 6 99 40 77

Exchange difference - - - -

Opening Cash 15 21 119 160

Closing Cash 21 119 160 237


Exhibit 7: Balance Sheet (| crore)


Equity Capital 24 25 25 25

Reserve and Surplus 48 202 283 394

Total Shareholders funds 72 227 309 419

Total Debt 9 27 19 -

Long term provisions 2 2 3 4

Deferred Tax Liability 0 9 11 14

Total non current liablity 2 11 14 18

Total Liabilities 83 265 341 437

Assets

Property,plant and equipment 1 3.9 6 6

Goodwill 33 59.5 60 60

Intangibles 24 57.5 88 103

Intangible assets under development 2 6.0 6 6

Other assets 0 0.1 0 0

Cash 21 119 160 237

Bank 10 10 10 10

Trade receivables 48 78 101 126

Unbilled revenue 13 31 40 50

Prepayment & O.fin.assets 5 7 10 12

Other current assets 2 3 4 5

Total Current Assets 99 248.8 325 441

Trade payables 52 74 95 119

Unearned revenue 1 1 1 2

OCL & provisions 23 36 47 58

Total Current Liabilities 75 111 143 179

Net Current Assets 24 138 182 262

Application of Funds 83 265 341 437


Exhibit 8: Key ratios


Per share data (|)

EPS 20.1 27.1 31.9 43.4

Cash EPS 24.3 31.8 38.0 51.0

BV 30 89 121 164

DPS - - - -

Cash Per Share 13 51 67 97

Operating Ratios (%)

EBITDA margin 28.2 26.2 25.5 27.0

EBIT margin 24.1 22.8 22.1 23.6

PAT Margin 19.6 19.5 17.7 19.3

Debtor days 70 80 80 80

Unbilled revenue 19 32 32 32

Creditor days 77 77 77 77

Return Ratios (%)

RoE 67.4 30.4 26.3 26.4

RoCE 72.8 32.2 31.1 32.1

RoIC 118.3 62.3 61.4 73.6

Valuation Ratios (x)

P/E 63 47 40 29

EV / EBITDA 46 34 26 19

EV / Net Sales 13 9 7 5

Market Cap / Sales 13 9 7 6

Price to Book Value 43 14 11 8

Solvency Ratios

Debt/EBITDA 0 0 0 -

Debt / Equity 0 0 0 -

Current Ratio 1 1 1 1

Quick Ratio 1 1 1 1





RATING RATIONALE

ICICI Direct endeavors to provide objective opinions and recommendations. ICICI Direct assigns ratings to its

stocks according to their notional target price vs. current market price and then categorizes them as Buy, Hold,

Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined

as the analysts' valuation for a stock

Buy: >15%

Hold: -5% to 15%;

Reduce: -15% to -5%;

Sell: <-15%

Pankaj Pandey Head – Research [email protected]

ICICI Direct Research Desk,

ICICI Securities Limited,

1st Floor, Akruti Trade Centre,

Road No 7, MIDC,

Andheri (East)

Mumbai – 400 093

[email protected]




ANALYST CERTIFICATION

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securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. It is also confirmed that above mentioned Analysts of this report

have not received any compensation from the companies mentioned in the report in the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in the report.

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affle india may 18, 2020 -...

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