Can Affle India become the next multibagger? Affle India In-depth Fundamental Analysis

Have you noticed that the moment you visit an ecommerce website or google a product on your phone and then you visit any website or app and suddenly you see the ad of the product you were checking out on that ecommerce website or you just googled?
And they will keep showing you the ad until you end up buying the product. Welcome to the world of “Targeted Marketing”.
Earlier, there was a time when the marketing ads were placed on Billboards, Posters, Pamphlets, Newspaper, etc. But there was one problem. Let’s say, you have a personal finance academy and want to reach out to people who are interested in learning more about personal finance and investment. If you go with a traditional ad like pamphlet or billboard, you don’t know if that ad is going to your “target audience”. Moreover, you will never know if the person is coming from seeing your ad on a newspaper or billboard or pamphlet. Isn’t it?

But the time has changed my friend. Today, we live in a connected world where billions of devices are connected to each other generating humongous data points about our preference, interest and activities. And there are companies that use the data points, apply their algorithms to generate deep consumer insights which is one of the greatest assets of the 21st century. This has created an entire new marketing industry called digital marketing.

And the company that I am going to analyze today is exactly doing what we discussed. This company generates consumer insight and uses it for digital marketing. I am talking about Affle India. Honestly speaking, even I was not aware about this company a few weeks ago until someone commented on this company name on one of my videos. And when I researched it, I was blown away by the business and future potential of this company. I am myself an Ex Data Analytics consultant and I can tell you that the opportunity in data analytics is immense!
Hello everyone, my name is Sahil and this is my personal finance academy where I explain everything about money management in layman’s language.

I initially thought of covering Affle India last week but then I decided to cover Astral Poly. And within the last 5 trading sessions, Affle India has zoomed from Rs 4174 to Rs 5347. That’s 28% return in just 5 days. I wish I had covered it last week. Anyways, it's never too late. Let’s do it now.

As usual, we will start the fundamental analysis of Affle India by analyzing the company and its business, competitive strength, future growth prospect and the financial analysis to decide if Affle India is fundamentally strong or not. Then we will analyse the valuations of the company to decide if it is worth investing in Affle India at current levels.

Company and its business

  • Established in 2006, Affle India is a global technology company with proprietary consumer intelligence platform that delivers consumer acquisitions, engagements and transactions through relevant mobile advertising.
  • So basically, this company help global brands enhance return on marketing investment through contextual mobile ads and also by reducing digital ad fraud.
  • Here, contextual ad means the ads are placed as per the content of the page. For example, if you visit money control, you would see ads of companies like brokerage houses or a mutual fund house promoting their mutual fund. In addition to this, you would also see ads of companies whose page or website you visited recently.
  • Affle India uses artificial intelligence, machine learning and deep learning algorithms to generate customer insights for better targeted marketing.
  • Company has evolved their algorithms over the period of last 15 years with strong research and development.
Business Details

Consumer Platform Business

  • Their consumer platform business is all about helping brands in acquiring customers through relevant mobile ads.
  • Affle India holds a leading market position in India and a strong competitive advantage.
Enterprise platform Business
  • In this business category, they provide services like mobile app development for 3rd parties, building ecommerce websites and apps for businesses and also provide data analytics services to generate better insights.
In terms of revenue breakup, Consumer business contributed 97.2% in Affle India’s revenue in FY20 and enterprise platform contributed 2.8%. In terms of business model, CPCU i.e. Cost Per Converted User model contributed 91.4% in total business and rest from Non-CPCU business. Now what exactly is CPCU business? I will tell you when we will discuss the competitive strength of the company.

Key Facts

  • In FY20, Affle India global marketing reach touched 2.1 billion+ connected device. So there are high chances that the ads that you see on your phone are from Affle India.
  • Now company need to process data points for insight generation. In FY20, company processed 550 billion+ data points.
  • Company has filed 18 patents in FY20.
  • Company converted 72.3 million users in FY20.
Management
  • Mr Anuj Kahnna Sohum is the Chairman, MD and CEO of Affle India. He is a technopreneur for 20 years with vast experience in technology businesses. He has completed a bachelor’s degree in computer engineering from the National University of Singapore (“NUS”) on a full scholarship. He has also completed the Stanford Executive Program from Stanford University and the Owner/President Management Program from Harvard Business School.
Overall, on the company and its business, I would rate it 10/10.

Competitive strength

  • Proprietary & Real time insight generation model: Company has its own proprietary predictive and recommendation algorithm that operates in a real time and at a significant scale. It means, the moment a customer looks at the product or service, the relevant ads would be visible in real time. This is the key strength of the company. For a technology company, the core strength should be the algorithm. Rest everything is built around it. Affle India does not depend upon 3rd party for insight generation. They have their own proprietary algorithm to generate insights and that’s what give it a strong competitive advantage over others.
  • In-house cloud computing infrastructure: They have their own in-house cloud based platform to store the data and generate insights. Here we are talking about terabytes and terabytes of data and the company needs a lot of storage as this cloud infrastructure is one of the biggest assets of the company. Since they have their own in-house cloud platform, they are not dependent upon other players to store the data. This significantly reduces their cost and provides a competitive edge over the competitors.
  • Asset light & scalable business model: The best part of this company’s business model is that it is a technology based asset light company and hence the expenses are minimal. On the other side, due to technology, the scalability potential is immense.
  • CPCU business model: You remember we discussed about the CPCU model which contributed 91.4% in total business of the company. Now let’s understand what exactly is CPCU model. Affle India business model is based on CPCU i.e. “Cost per converted user” where they charge on conversion. While the current digital marketing industry is based on clicks, views and impressions, Affle India’s high ROI driven CPCU model sets them apart from the customers.
  • Proactive approach to data privacy: Affle India emphasises a lot on users privacy and data protection. One of their earliest patents filed and now granted in the US Patent Office was on 'Consumer Acceptable Advertising' and focuses on consumer consents and privacy. Company analyses only the behavioural data with no access to any personal and financial user information. So they are demonstrating credentials of being a responsible Company and already accredited as per the Singapore standards. This further enhances their scope for a cutting-edge technology play as they continue to establish new quality benchmarks.
Clearly, there is a strong competitive advantage for Affle India. But, if we discuss the competitors, it has strong competition from social media giant Facebook and search engine giant Google. Both are US based companies.. Other competitors include, inMobi which is a private company in India. So there is a good competition to Affle India.
Overall, on the competitive strength, I would rate it 8/10.

Future growth prospectsIf we look at the future growth prospects, the future is digital and digital marketing is the future of marketing. I am sure you all know the importance of digital marketing. On top of that, the future is mobile. So Affle is well placed with its business of mobile based digital marketing.
According to research, digital economy in India has crossed the inflexion point and is now on rapid growth trajectory. Let us look at some of the key drivers of growth in digital marketing:

  • Young and aspirational population: Today, India has a majority of population in the age bracket of 18-30 and these people prefer smartphones to communicate. Clearly, this has created immense growth opportunities for companies like Affle India.
  • Increased adoption of smartphone: Today, more and more consumers are preferring to use smartphones to interact with digital platforms across e-commerce, OTT/entertainment, fintech, online gaming, healthcare, telecom, education, and others. This, in turn, is driving the need for advertisers to reach consumers on smartphones and adopt omnichannel marketing strategy. According to report, around 410 million additional smartphone users are expected in India by 2025.
  • Increasing focus from traditional to digital marketing: Today, every company is exploring the digital marketing channel to promote their products and services. And this trend would continue to grow in the future.
If you look at the digital advertising industry in India, it has increased exponentially from Rs 47 billion in Fy15 to Rs 160 billion by FY19 and expected to reach Rs 539 Billion by FY24 representing a CAGR growth of 27% in the next 5 years!Indian digital advertising channel is set to become the largest amongst all media channels including TV, print, radio, Out-of-Home, etc. as ad spends are expected to be increasingly redirected towards digital formats. A segment that is fuelling growth for digital advertising segment is mobile advertising which is driven by 4G penetration, cost-effective data packages, proliferation of the mobile apps and social media, m-commerce and rapid growth in smartphone penetration. According to KPMG, Mobile advertisement spend is projected to reach a share of 64% of total digital ad spends by 2022.Last year, Affle India has also set up a new R&D centre in Bangalore to enhance their continued focus on mobile technology innovations using Artificial Intelligence (AI) & Machine Learning (ML) technologies. This new centre would contribute to building newer technology innovations which are expected to further strengthen the Consumer Platform business. Overall, there is a bright future growth prospect for Affle India and on future growth, I would rate it 10/10.

Financials

  • Growth Ratio: Affle India revenues have grown from Rs 167 Cr in Mar 2018 to Rs 455 Cr by Dec 2020 at an exceptional CAGR of 44% and Profits have grown from Rs 28 Cr to Rs 92 Cr at a brilliant CAGR of 54%. These are unbelievable growth numbers both for revenue and profits. Hence, on growth ratio, I would rate it 10/10.
  • Profitability Ratio: Since 2018, the operating margin of the company has been consistently above 20%. The latest operating margin stoof at 25% which is great! Now if we look at the return on equity and return on capital employed which are key parameter to gauge the profitability of the company, both ROE and ROCE of Affle India are great. The latest ROE is and 33.8% and ROCE is 28.2%. You might see a fall in ROE and ROCE but do not confuse it with poor performance. A company with both ROE and ROCE above 20% is great. Affle India latest ROE and ROCE are above 25% which is brilliant. Hence, on profitability, I would rate it 10/10.
  • Debt to equity: If we look at the debt to equity of the company, it is well under control and currently at 0.37. It signifies that the company is comfortable with its debt obligations which is again great. Hence, on debt to equity, I would rate it 10/10.
  • Reserves: If we look at the reserves of the company, it has increased exponentially from Rs 6 Cr in Mar 2018 to Rs 246 Cr in Dec 2020 which is again brilliant.
  • Promoters shareholding: If we look at promoters shareholding, it is 63.8% which signifies the trust of promoters in the company. Over the years, FII have increased their shareholding in this company from 8.78% in Sep 2019 to 14.85% in Dec 2020 which signifies trust of foreign financial institutions in this company. However, DII have reduced the shareholding from 11.27% in Sep 2019 to 8.49% in Dec 2020
Valuations

Affle India recently had an IPO in Aug 2019 at a price band of Rs 745 it was listed at a premium of 25% but then fell down to the low of Rs 899 during March 2020. But since then Affle India has seen a dream run where its share price is currently trading at the level of Rs 5347 at a PE ratio of 149. Since inception in Aug 2019, it had a median PE of 65. So clearly, Affle India is trading much above its median PE which makes it overvalued.

But this is one gem of a stock with immense growth potential. You will never find it at the PE ratio of 25-30. It has a latest EPS i.e. earning per share of 35.98 and face value of Rs 10. This is one company that would grow at an exponential growth rate and would always command premium valuations. The better strategy at current level would be to make an entry and buy periodically or buy on dips. In the future, if there is correction in the share price then it is a must have stock in the portfolio.

PS: If you want to learn every aspect of fundamental analysis of stock and other important concepts of personal finance, you can explore my video course on "Everything about money management".
Disclaimer: This article is only for education purpose. Consult your financial Advisor before investing your money.

Powered By Spayee