Affle India Rating: hold: Valuations do not factor in risks to business

By: |
March 9, 2021 3:30 AM

‘High growth staple’ view on stock needs to be revisited; coverage initiated with Hold and target price of Rs 5,610

We expect 28%/25% revenue/earnings CAGR over FY21-23e. Initiate coverage with Hold rating.

Privacy being a more central value proposition, than ever, to some big-tech companies (Apple, Microsoft etc.), regulators and governments, internet industry will likely undergo a paradigm shift – from largely an ad-driven to subscription-driven one. Apple’s forthcoming app tracking transparency measures can catalyse this change. Eventual catch-up by Android (e.g. in the case of third party browser cookies) should impact data quality and CPCUs for Affle.

In addition, (i) insourcing by end clients and (ii) ad agencies sprucing up digital capabilities can potentially deflate Affle’s volumes. Churn/disruptive innovation inherent to the business model and M&A integration are the other key risks to a sustainable high growth expectation over medium to long term.

Current valuations (120x FY22e EPS) are led by the ‘high growth staple’ perception and do not provide the margin of safety for above risks. It should be noted that global ad-tech giants (Facebook and Alphabet) trade at significantly lower multiples (20-26x, 1yr forward P/E). Deployment of funds from the proposed fund raise (Rs 10.8 bn) will be the key near term monitorable. We initiate coverage with Hold rating and TP of Rs 5,610.

‘High growth staple’ perception needs to be revisited: As the converted user base rises, inherent churn in the business (viz. matrimony) will make incremental growth (> 25% CAGR)/ scalability more challenging. Relatively, this also weakens the investment case vs staples/annuity kind of businesses. Historical precedence and Affle’s own evolution suggests ad-tech industry is more vulnerable to the risk of disruptive innovation / obsolescence vs staples where incremental innovation is more prevalent.

We see likelihood of both end clients /agencies becoming more aggressive, potentially eating into Affle’s volumes over medium term. Back ended risks emanating from M&A integration cannot be ruled out. Meaningful synergies/optionality benefits from acquired platforms are yet to be seen.

Some of the above risks may challenge the current lofty multiples. Stock is currently trading at 120x FY22e EPS. For Indian internet based stocks, we notice a trend of investors attaching valuation premiums for scarcity and Fear of Missing Out (FOMO) factors. The scarcity premiums for existing listed stocks may come off over the next 1-2 years, as more internet based businesses find their way to public markets. Contrary to the popular narrative and for the reasons highlighted above, we do not perceive this business model to be a ‘high growth staple’.

While the current near zero interest rates may translate into lower COE and elevated multiples for some time, their sustainability over the long term is to be seen, especially in the context of global ad tech giants (Facebook and Alphabet) themselves trading at relatively lower multiples (20x-26x, 1-year forward P/E basis). In the likely event of some of the above risks playing out, multiples may correct sooner. We expect 28%/25% revenue/earnings CAGR over FY21-23e. Initiate coverage with Hold rating.

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