Equity Research

March 7, 2021
INDIA
BSE Sensex: 50405
Affle India HOLD
ICICI Securities Limited
is the author and
distributor of this report Navigating privacy and technology challenges
will be the key Rs5,876
Initiating coverage Privacy being a more central value proposition, than ever, to some big-tech
companies (Apple, Microsoft etc.), regulators and governments, internet industry
Technology will likely undergo a paradigm shift - from largely an ad-driven to subscription-
driven one. Apple’s forthcoming app tracking transparency measures can catalyse
Target price Rs5,610 this change. Eventual catch up by Android (e.g. like in case of third party browser
cookies) should impact data quality and CPCUs for Affle. In addition, (1) insourcing
by end clients and (2) ad agencies sprucing up digital capabilities can potentially
Shareholding pattern deflate Affle’s volumes. Churn / disruptive innovation inherent to the business
Jun
'20
Sep
'20
Dec
'20
model and M&A integration are the other key risks to a sustainable high growth
Promoters 68.4 68.4 63.8 expectation over medium to long term. Current valuations (120x FY22E EPS) are led
Institutional by the ‘high growth staple’ perception and do not provide the margin of safety for
investors 18.5 18.7 23.3
MFs and other 9.0 8.9 7.2 above risks. It should be noted that global ad-tech giants (Facebook and Alphabet)
FIs and Banks 0.0 0.0 0.0 trade at significantly lower multiples (20-26x, 1yr forward P/E). Deployment of funds
Insurance Cos. 0.0 0.0 0.0
FIIs 9.5 9.8 16.1
from the proposed fund raise (Rs 10.8bn) will be the key near term monitorable. We
Others 13.1 12.9 12.9 initiate coverage with HOLD rating and TP of Rs 5,610.
 Apple vs Affle. Global ad-tech industry is replete with examples of policy change by a
Price chart dominant player (e.g. Apple) materially disrupting ecosystem partners (e.g. Criteo).
6500 Buckled under political / regulatory pressure and limited by the incremental scope for
5500
technology upgrades, privacy is becoming a more central value proposition, than ever,
to some big tech firms (e.g. Apple, Microsoft). Apple’s forthcoming app tracking
4500
transparency is a step in this direction. Even as global ad-tech (e.g. Facebook) raised
3500 alarm about its impact on ad-based internet, it is discounted by Indian markets so far.
(Rs)

2500
We believe, this has the long-term potential of altering internet business paradigm –
1500
from largely ad-driven to subscription-driven one. iPhone usage in core geographies of
500 Affle is limited to ~10-20%. However, in the likelihood of Android eventually catching
Aug-19

Aug-20
Nov-19

Nov-20
Feb-20
May-20

Feb-21

up (e.g. in case of 3rd party cookie policy), data quality and CPCU of Affle are at risk.
 ‘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.
Industry structure is currently agency led. However, we see likelihood of both end
clients / agencies becoming more aggressive (through insourcing / capability
acquisitions – e.g. Dentsu Aegis / IPG / Publicis buying Merkle / Axiom / Epsilon)
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.
Market Cap Rs150bn/US$2.1bn Year to Mar FY20 FY21E FY22E FY23E
Reuter/Bloomberg AFFL.BO/AFFLE IN Revenue (Rs bn) 3,338 5,061 6,484 8,295
Shares Outstanding (mn) 25.5 Rec. Net Income (Rs bn) 655 1,024 1,262 1,589
52-week Range (Rs) 6004/947 EPS (Rs) 25.1 40.2 49.5 62.4
Free Float (%) 37.2 % Chg YoY 24.7 60.3 23.2 26.0
Research Analysts: FII (%) 16.1 P/E (x) 235.3 146.8 119.2 94.6
Daily Volume (US$'000) 6,263 P/B (x) 64.6 45.4 32.8 24.4
Hardik Sangani Absolute Return 3m (%) 52.3 EV/E (x) 171.5 117.6 91.3 72.3
hardik.sangani@icicisecurities.com
+91 22 6637 7504 Absolute Return 12m (%) 241.2 Dividend yield (%) 0 0 0 0
Sudheer Guntupalli Sensex Return 3m (%) 12.0 RoCE (%) 40.2 27.2 25.2 29.7
sudheer.guntupalli@icicisecurities.com
+91 22 6637 7573 Sensex Return 12m (%) 32.7 RoE (%) 43.5 36.5 32.0 29.6

Please refer to important disclosures at the end of this report

Affle India, March 7, 2021 ICICI Securities
 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. Deployment of funds of the proposed raise (Rs 10.8bn) will be the
key near term monitorable. We expect 28%/25% revenue / earnings CAGR over
FY21-23E. Initiate coverage with HOLD rating with DCF-based TP of Rs 5,610.

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Affle India, March 7, 2021 ICICI Securities

TABLE OF CONTENT

Key Topics of Debate ...................................................................................................... 4

Strengths and differentiation .......................................................................................... 9
Financial performance ................................................................................................... 11
Valuation and view ......................................................................................................... 13
Financial summary ........................................................................................................ 15
Index of Tables and Charts ........................................................................................... 17

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Affle India, March 7, 2021 ICICI Securities

Key Topics of Debate

Can Apple’s app tracking transparency measures pose a challenge?
Global ad-tech industry is replete with examples of a policy change by a dominant player
in the ecosystem (e.g. Apple or Android) materially disrupting the entire business case.
In 2017, Criteo’s retargeting model was impacted due to Safari (Apple’s web-browser)
blocking third-party cookies. This policy change hindered data collection and ad
placement by Criteo. In that context, the forthcoming app tracking transparency of Apple
is a key risk to monitor the ad-tech industry.

Now, privacy is becoming a more central value proposition for Apple than in the past.
As part of its forthcoming app tracking transparency measures, Apple will soon start
asking iOS users for consent to track their digital activity across apps and web pages.
A significant number of privacy conscious users will likely deny the consent.
Directionally, Apple seems to be trying to shift internet’s business model from a pre-
dominantly ad-supported one to a largely subscription-driven one. Potentially, this can
impact a wide range of businesses including the likes of Facebook, Google and Affle.

For user intelligence, Affle primarily relies on appographic data (apps used by a user),
intent data (clicks by user), behavioural data (in-app actions) and user transactions,
without personally identifying them. This data acquisition is primarily through clients or
vide ad exchanges. The company does not rely much on browser-based cookies for
user intelligence.

Given its primary geographic base of India and South East Asia, iOS is relatively less
relevant for Affle (vs Android). iPhone usage in these geographies is limited to 10-20%
of the overall mobile users. To that extent, Affle’s business model may be insulated from
any imminent risks related to Apple’s app tracking transparency measures. However,
given the increasing importance being attached to user privacy and the political pressure
around it, Android will likely follow some of these policy changes. For instance, post
Apple decided to block third party cookies in Safari in 2017, Google, too, announced
plans to eliminate these from Chrome by 2022.

In the scenario of Android eventually catching up with Apple on app tracking

transparency, quality of data acquired and potential increase in Cost Per Converted
User (CPCU) are the key things to watch out for.

Is insourcing of spends by end clients a concern?

Affle’s Top-10 clients contributed 45% of revenues in FY20. Recent surveys by agencies
like IAB hint at a good possibility of clients incrementally taking the programmatic media
buying in-house / or in hybrid approach. This is a risk to the agency model (direct clients
of Affle), in-turn impacting their spend patterns.

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Affle India, March 7, 2021 ICICI Securities
Chart 1: Agencies globally trying to bring Chart 2: Most advertisers now also use their own
programmatic capabilities in-house trading desk

2013 2014 2016 2019

90 81 84
No plans to bring in-house 15%
80 74
70 72 71
70
Tried to bring in-house, but 60
16%
outsourced to partners 46
50

(%)
40
Partially moved in-house and 28
48% 30 21
plan to continue
20
8
10 3 2
Completely moved in-house
21% 0
and plan to continue
Agency Trading Independent In-house ‘Brand
Desk (ATD) Trading Desk (ITD Trading Desk’ or
0% 10% 20% 30% 40% 50% 60% or DSP) ’Hybrid’ Model
Source: WFA, I-Sec research Source: WFA, I-Sec research

Further, we noticed a trend of ad agencies sprucing up their digital capabilities. Notable

examples include - Dentsu Aegis buying Merkle for US$1.5bn in 2016, IPG buying
Axiom Marketing Services, and Publicis buying Epsilon for US$4.4bn. Both the above
trends have the potential of deflating the volumes for companies like Affle.

On the positive side, if the company is able to monetise its relationships with end
advertisers (bypassing ad agencies), it can materially reduce client concentration.

Chart 3: Client-mix shifting from agency to direct Chart 4: Top 10 verticals now comprise 90% of
revenues
Top 10 Non Top 10 Top 10 verticals Non Top 10
100% 100%
10%
90% 90% 24%
80% 36% 80%
70% 55%
70%
60% 60%
50% 50%
90%
40% 40% 76%
30% 65%
30%
20% 46%
20%
10% 10%
0% 0%
FY19 FY20 Q4FY20 Q3FY21
Source: Company, I-Sec research Source: Company, I-Sec research

Inherent churn in business model will be a key growth headwind

Affle’s business model primarily relies on converting new users for its advertisers. In
effect, Affle’s journey with the user ends once the transaction is complete. Growth, in
that context, implies that the company has to backfill the users converted in prior periods
plus incrementally convert more users. This drawback inherent to the business model
makes ‘scalability’ and ‘growth’ tougher asks relative to annuity and / or staples kind of

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Affle India, March 7, 2021 ICICI Securities
business models. Historical precedent suggests this is one of the key reasons why not
many ad-tech companies globally were able to scale up big.

So far, Affle has been able to show impressive growth in user conversions (charts 1 &
2), partly aided by a low base. As the base of converted users increase, scalability (i.e.
consistent growth of >25%) over medium to long term may prove challenging.

Chart 5: Converted user trends

Converted users % growth (RHS)

80 75.7 70
72.3
70 65 65
60
60 55
55
50 50
37.2 48
40 45
30 40
22.5
35 35
20
31 30
10 25
0 20
FY17 FY18 FY19 FY20 9MFY21

Source: Company, I-Sec research

Higher incidence of disruptive innovation (v/s incremental innovation)

Structure and dynamics of digital advertising industry changed meaningfully over the
previous decade with the launch of smartphones and ‘appification’ of businesses. As
business models for providing better RoI and transparency come to the fore, clients
have been migrating to performance-based pricing for placing their ads. Affle in its
current form derives ~90% of its revenue from performance-based pricing.

It is key to note that Affle started off as an SMS-based marketing company in 2006.
Over the years, it was able to evolve with the changing dynamic of the industry. The
company improved its revenue profile by moving into programmatic advertising along
with acquiring app recommendation and DSP skills over the previous five years. To
navigate the disruption better, Affle in its 2.0 strategy envisaged to broaden its product
portfolio in newer and complementary areas of business (e.g. app recommendation,
keyboard-based advertising, retargeting).

Juxtaposing the evolution of global ad-tech industry with that of IT services / staples, it
appears that the former is more prone to disruptive innovation vs the trend of
incremental innovation noticed in the latter. While companies on the right side of
disruptive innovation frequently re-inventing their business models gain
disproportionately, investors should also take cognisance of the disproportionately high
risk of obsolescence inherent to such business models.

Case studies of technology companies, which were more vulnerable to disruptive

innovation (e.g. Nokia, Motorola, IBM, Microsoft, Oracle, Criteo), suggest despite being
champions in some technology cycles, companies at times can find it challenging to
adapt / cope up with such disruptions.

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Affle India, March 7, 2021 ICICI Securities
Chart 6: Pricing model has evolved over the years Chart 7: Players like Affle are leading the change
Revenues by Pricing Model Affle revenue profile
100%
90% (CPC/CPM1 Enterprise
type platfrom, 2%
80% 41% advertising),
70% 62% 63% 15%
60%
50%
40%
46%
30%
20% 35% 35%
10% CPCU, 83%
13%
0% 3% 2%
2005 2018 2019

Hybrid CPM Performance

Source: PwC-IAB Internet advertising report, I-Sec research Source: Company, I-Sec research

M&A – Trade-off between portfolio breadth and integration risks

Over the previous three years, Affle acquired eight entities in white spaces such as app
recommendation, retargeting, omni-channel marketing and DSP. A common theme
across the acquisitions has been good product reference-ability, but with lower/negative
margins. These acquisitions helped in getting a foot in the door of new clients and larger
areas of spend. A case in point is Appnext, which added OEM client base to Affle. It
also helped in gaining multiple touch points to users outside the apps and exclusive
access to inventories with Appnext’s key clients.

Table 1: Summary of recent acquisitions

Sr. Date Entity Business description Purchase Stake
No consideration acquired
(Rs mn)
1 January Discover Discover Tech is an Out of Box Experience (OOBE) mobile device Upto ~330 100%
26, 2020 Tech marketing platform providing a major consumer touchpoint in the
mobile device lifecycle through initial device customisation (dynamic
app discovery and recommendation at initial boot or reset of a device,
welcome wizards, etc.) through its platform integrations with original
equipment manufacturers (OEMs) and mobile network operators
(MNOs).
2 August, Bobble AI# Bobble AI is the conversational media platform offering indigenous 198 8%
13, 2020 social keyboard with investments from Xiaomi and SAIF Partners.
Bobble AI’s flagship product – ‘Bobble Indic Keyboard’ allows real-
time content creation and personalisation through its AI technology. It
includes speech-to-text capabilities and is accessible in multiple Indian
languages.
3 July 02, Indus OS*# Indus OS is a mobile app and content discovery platform, operating ~210 8%
2020 ‘Indus App Bazaar’ which is India’s largest independent indigenous
app store. Indus OS platform is designed to help users discover digital
content and services in the language of their choice.
4 June, Appnext Appnext’s app discovery and recommendation platform integrates with 1,242 ~67% ^
2020 mobile handset manufacturers (OEMs) and app developers to deliver
app recommendations to mobile users globally.
5 Feb, 2020 Mediasmart Mediasmart is a self-serve mobile programmatic platform. It provides 401 100%
Mobile advertisers, trading desks and agencies an integrated mobile
advertising platform with unique incremental impact measurability for
Proximity and app marketing campaigns.
6 Apr, 2019 RevX RevX platform offers services and solutions that enable marketers to 340 100%
engage, acquire and retain consumers through personalised dynamic
ads.
7 Feb, 2019 Shoffr Shoffr is an online to offline (O2O) omni-channel marketing platform 42 100%
for retail brands. It allows shoppers to discover offline stocks across

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Affle India, March 7, 2021 ICICI Securities
any retail brand's online channels – website, chat bots, or social
media. Shoffr also enables retail associates to scan arrival codes to
track footfall and learn about the shopper's visit intent.
8 Sep, 2018 Vizury Vizury is primarily engaged in retargeting. Retargeting is a type of 300 100%
digital marketing activity that focuses on getting lapsed/interested
users to transact online by targeting them with personalised product
ads after they have shown interest in those products by either
browsing about them or adding them to the shopping cart.
#acquired a Minority stake
*Divested minority stake to parent company with an option to buyback in next 1-2 years.
^Will increase stake to ~95% in near-term
Source: Company, I-Sec research

Historically, ad-tech industry is replete with examples of post M&A integration

challenges. For instance, Sizmek failed to integrate some of its big-ticket acquisitions
(e.g. RocketFuel), which eventually led to its bankruptcy. Given the high working capital
costs in its managed services business, Rocketfuel had put pressure on the liquidity
position of Sizmek. Besides, Sizmek also faced challenges in integrating tech stack.
Other examples of acquisition failures include Videology by GroupM (reliance on partner
to drive business), AT&T’s acquisitions of Xandr / Appnexus, and Microsoft’s acquisition
of Aquantive (scaling issues).

As highlighted earlier, expanding portfolio breath / potential synergies is a key upside

associated with M&A in this industry. Nevertheless, as witnessed in the case study of
Sizmek, this comes with the risk of integration failures which may surface few years post
the acquisition. Unlike in the case of Sizmek, healthy balance sheet (net debt / EBITDA
< 0.3x) is a key comforting factor in case of Affle. At the same time, meaningful synergies
/ optionality benefits from integration of acquired platforms is yet to be seen. While Affle
was able to show margin improvement post the integration of some acquired entities
(e.g. RevX, Vizury), cost / margin structures of other entities need to be closely
monitored.

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Affle India, March 7, 2021 ICICI Securities

Strengths and differentiation

Outcome-based business model
Affle primarily earns revenues from ‘consumer platform’ on a CPCU basis. This entails
user conversions based on 'consumer acquisition' and 'transaction' models. This model
focuses on acquiring new customers for businesses, usually in the form of a targeted
user downloading and opening an app or engaging with an app after seeing an ad
delivered by the company.

Thus, Affle earns revenue only if it is able to successfully convert its audience into
customers. This invariably leads to advertisers being more incentivised to allocate their
spends to Affle as RoIs are more attractive than in CPM/CPC based advertising.

Marquee customers mix

Affle runs mobile campaigns for some of the world’s largest advertising and e-commerce
companies. Its clients include Amazon, Flipkart, Jabong, BookMyShow, Wynk, ALT
Balaji, PhonePe, Gojek, Airtel, Reckitt Benkiser, Johnson & Johnson, McDonalds,
Datsun, Nissan, Air Asia, Axis Bank, Citibank, and Tourism Australia.

Affle works with all global ad agencies - WPP {GroupM}, Publicis, Omnicom (OMG),
Dentsu Aegis Network (DAN), Interpublic Group (IPG) Mediabrands, and Havas.
(Source: Frost & Sullivan Report). Top 10 clients comprise four of the leading ad
agencies. The company has exposure to broad-based areas of spend, especially within
the ad agency client base.

Breadth of offerings across value chain

For 12 months ending Dec-20, Affle has been able to reach ~2.2bn devices with >550bn
data points collected. The company has seen consistent enhancements to its value
proposition from being a SMS marketing company a decade back to being an ad-tech
platform. In-house capabilities like fraud detection (MFaaS), retargeting (RexX), app
recommendation (Appnext) added to the breadth of its offerings across the value chain.
For instance, using fraud detection capabilities, Affle is able to determine whether the
conversion event was genuine. This helps in weeding out duplicitous inventory and
conversion optimising publisher cost which invariably improves pricing.

Table 2: Key product suite of Affle

Own platforms Acquired Minority Stake
MAAS Mobile advertising RevX Programmatic ad platform Bobble AI Mobile keyboard suite
mFaaS Fraud detection Vizury Engage 360 Omni-channel marketing Indus OS* App Store
Programmatic and proximity
mKr8 Rich Media and Video Mediasmart marketing
mDMP Data Management Platform Shoffr O2O Marketing platform
On-device app
ARC App development Appnext recommendation
Markt Multi-Channel Commerce Discover Tech OOBE
mCDP Audience Intelligence
*Transferred to holding company, with an option to buyback
Source: Company, I-Sec research

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Affle India, March 7, 2021 ICICI Securities
Asset light and profitable model
Key costs of the company are data and inventory costs - which account for ~58% of its
revenues. Given that programmatic advertising is a platform driven business model,
there is scope for operating leverage. However, as Affle looks to expand its India
business to target next 300-400mn online shoppers (primarily targeting tier-II / tier-III
cities), data acquisition cost should remain elevated. Further, integration of some of the
recent acquisitions with lower profitability (e.g. Appnext, Vizury, RevX) should keep the
prospects of margin expansion under check.

Chart 8: Margins primarily declined as company Chart 9: However, PAT margins improved as
acquired margin-dilutive acquisition company transitioned into lower ETR

EBIT (Rs mn) Margins (RHS) PAT (Rs mn) Margins (RHS)
1,200 1,093 25% 1,200 22%
24.1% 24% 1,024
1,000 1,000 21%
24% 19.6%
19.6% 20.2%
20%
800 746 23% 800
655
602 23% 19%
600 22.3% 600
22.1% 22% 488
18%
370 21.6%22%
400 400
276 17%
21% 16.5%
200 200 16%
21%
- 20% - 15%
FY18 FY19 FY20 FY21E FY18 FY19 FY20 FY21E

Source: Company, I-Sec research Source: Company, I-Sec research

Need for neutral platforms is a key demand driver

India’s digital ad spend is estimated to be ~US$1.8bn and is expected to increase at
20%+ CAGR in the near term (source: DAN). Facebook and Google are estimated to
control lion’s share of this spend (~65%). It is pertinent to note that even though these
companies are effective in addressing client needs, they have an inherent conflict of
interest (due to their own DSPs and SSPs) while serving their audience.

This incentivises advertisers to allocate a part of spends to neutral platforms like

Tradedesk, Criteo, InMobi and Affle. Customisation of campaigns and better
transparency are the key value propositions of these neutral platforms. Currently, ~30%
of Affle’s conversions come directly through OEMs, ~15% from premium inventory, and
the vast majority through real time bidding.

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Affle India, March 7, 2021 ICICI Securities

Financial performance
Chart 10: Organic-reported growth (YoY) Chart 11: Expect revenue growth of ~28% over
FY22-23E
Organic growth Reported growth Revenues (Rs mn) % chg (Reported)
66%
9,000 8,295 60%
60%
54% 8,000
52% 50%
49%
48% 7,000 6,484
42% 6,000 40%
5,061
36%
5,000 34%
30% 28% 30%
24% 4,000 3,338 28%
18% 3,000 2,494 20%
12% 2,000 1,672
6% 10%
1,000
0%
- 0%
-6%
FY18 FY19 FY20 FY21 FY22 FY23
Q4FY20 Q1FY21 Q2FY21 Q3FY21
Source: Company, I-Sec research Source: Company, I-Sec research

Chart 12: Programmatic to gain higher share of Chart 13: Mobile advertisements to be a key focus
digital ad spend going forward area of spend where Affle plays
Trends in digital m edia buying Digital Media Spends Across Devices
100% 100%
90% 90%
80% 80% 37% 43% 47% 47% 52%
70% 59% 56% 70% 59%
67% 64%
60% 74%
60%
50% 50%
40% 40%
30% 30% 63% 57% 53% 53% 48%
20% 41% 44% 20% 41%
33% 36%
10% 26%
10%
0% 0%
2019 2020f 2021f 2022f 2016 2017 2018 2019 2020f 2021f 2022f
Direct Programmatic Desktop Mobile
Source: DAN, I-Sec research Source: DAN, I-Sec research

Chart 14: Global digital ad spend now a major spend Chart 15: Programmatic to gain higher share of digital
area display ad spend – global

Digital ad spending (US$bn) Programmatic ad spend (US$bn)

600 63% 120 80%
% of total media ad spend 518 % of digital display ad spend
479 61% 98 70%
500 100
436 59% 59% 84
61%
385 60%
400 57% 57% 80 70
333
55% 50%
57
300 54% 60
53% 43 40%
200 51% 40 31
50% 30%
49% 20
100 20 9 20%
47% 4
0 45% 0 10%
2018 2019 2020f 2021f 2022f 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: Pubmatic, I-Sec research Source: Pubmatic, I-Sec research

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Affle India, March 7, 2021 ICICI Securities

Our near-term estimates

Organically, we estimate a revenue CAGR of ~28% p.a. over FY22-23E. At 30%
revenue CAGR, Indian geography is expected to outgrow the overall company while
South-East Asian geography is expected to deliver 25% CAGR. We expect revenue
growth to be largely led by incremental user conversion even as pricing remains flat (at
~Rs41) on blended basis.

EBIT margins are estimated to be largely stable (21.5%-22%) over this horizon.
Operating leverage and profitability improvement at acquired entities will be key margin
tailwinds. Key margin headwinds include (1) pressure on CPCUs and (2) need for
continued investment in platforms as the company ventures into newer markets.

Over the past couple of years, OCF / EBITDA of Affle improved from 68% (in FY19) to
83%/95% (in FY20/9MFY21). This was primarily driven by – (1) improving working
capital profile in acquisitions (e.g. Vizury) and (2) improved collections during Covid-19
crisis in-line with the broader industry. In steady state, we expect DSO to remain in the
range of 90-95 days with a healthy cash conversion (OCF / EBITDA = 80%).

Chart 16: EBIT margins to remain broadly stable Chart 17: OCF conversion to remain ~80%

EBIT (Rs mn) Margins (RHS) OCF (Rs mn) OCF/EBITDA (RHS)
2,000 25% 1,850 110%
1,786 1,702
1,800 24.1% 24% 100%
1,650
100%
1,600 1,418 24%
1,450 1,377
1,400 1,275
23% 90%
1,093 1,250 83% 83% 82%
1,200
23%
1,000 22.3% 1,050 80%
22.1% 22%
746 21.9%
800 850 68%
602 730
22% 70%
600 21.6%
370 21.5% 650
400 21% 478
60%
200 21% 450

- 20% 250 50%

FY18 FY19 FY20 FY21E FY22E FY23E FY19 FY20 FY21E FY22E FY23E

Source: Pubmatic, I-Sec research Source: Pubmatic, I-Sec research

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 Affle India, March 7, 2021 ICICI Securities

Valuation and view

Stock is currently trading at 120x FY22E EPS. For Indian internet based stocks, we
noticed a trend of investors attaching valuation premia for scarcity and Fear of Missing
Out (FOMO) factor. The scarcity premia 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 street narrative and for the reasons highlighted above, we do
not perceive this business model to be a ‘high growth staple.

Table 3: Internet-based businesses in India are currently trading at multiples, which are unsustainable
Revenue growth (%) EBITDA Margin (%) EV/Sales (x) P/E (x)
FY21 FY22 FY23 FY21 FY22 FY23 FY21 FY22 FY23 FY21 FY22 FY23
Infoedge* -10.5 27.3 20.1 29.5 34.7 37.3 54.2 42.5 35.4 155.6 102.5 80.5
Indiamart 5.4 21.4 20.4 49.2 45.7 43.2 35.5 29.2 24.3 83.3 76.7 62.3
JustDial -26.5 24.7 13.3 23.4 25.2 29.2 7.9 6.3 5.6 25.5 24.0 19.2
Affle# 51.6 28.1 27.9 25.3 25.5 25.1 29.7 23.1 18.1 146.2 118.7 94.2
*Infoedge on standalone basis and valuation excludes Zomato, Policybazaar, 99acres and Jeevansathi.
#Based on I-Sec estimates
Source: Bloomberg estimates, I-Sec research

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 reasonable 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. Deployment of
funds of the proposed raise (Rs 10.8bn) will be the key near term monitorable. We
expect 28%/25% revenue / earnings CAGR over FY21-23E. Initiate coverage with
HOLD rating with DCF-based TP of Rs 5,610.

Table 4: Relative Valuation

Revenue growth EBITDA Margin P/S P/E EV/EBITDA
CY21E CY22E CY23E CY21E CY22E CY23E CY21E CY22E CY23E CY21E CY22E CY23E CY21E CY22E CY23E
Alphabet 29.0 17.4 15.8 43.2 43.3 41.2 7.2 6.1 5.3 26.3 22.4 19.2 15.3 13.0 11.8
Facebook 28.0 19.3 16.9 51.1 50.4 50.7 6.7 5.7 4.8 20.8 17.8 16.1 12.3 10.4 8.9
Twitter 32.0 21.0 20.2 30.1 32.1 33.7 11.9 9.8 8.1 85.9 57.9 45.8 37.3 28.9 22.9
Tradedesk 38.6 30.4 35.2 33.9 35.1 36.9 29.4 22.6 16.7 133.8 98.8 69.8 85.9 63.6 44.7
Criteo 7.8 4.1 5.2 30.6 30.3 30.6 2.4 2.3 2.2 15.8 15.3 14.4 6.4 6.3 5.9
Mobvista 23.5 17.6 n.a. 11.2 11.3 n.a. 13.7 11.7 n.a. 141.7 123.3 n.a. 15.1 12.8 n.a.
Pubmatic 30.1 20.1 20.1 26.8 28.1 29.1 15.2 12.6 10.5 227.8 183.1 100.6 56.8 45.0 36.2
Source: Bloomberg estimates, I-Sec research

We value the stock using DCF analysis with cashflow projected over FY22-37E and a
terminal growth rate assumption of 5% beyond that. We factor in WACC of 10% (in-line
with the current low interest rates). With a TP of Rs5,610, we initiate coverage on the
stock with HOLD rating.

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Affle India, March 7, 2021 ICICI Securities
Table 5: Key assumptions
FY22-27 FY27-32 FY32-37 FY22-37
Revenue 27% 21% 15% 21%
EBIT 27% 21% 15% 21%
EBIT margin 21.9% 22.1% 22.1% 22.1%
NOPAT 27% 21% 14% 21%
Capex as % of sales 6% 3% 3% 3%
FCFF 35% 23% 14% 24%
WACC 10.0%
Terminal growth rate 5%
Source: Company data, I-Sec research

Table 6: Sensitivity of our TP to revenue growth and margin estimates

Revenue CAGR (FY22-37E)
20.4% 20.9% 21.4%
21.6% 5,070 5,340 5,640
Avg EBIT margin
22.1% 5,320 5,610 5,910
(FY22-37E)
22.6% 5,570 5,870 6,190
Source: Company data, I-Sec research

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Affle India, March 7, 2021 ICICI Securities

Financial summary
Table 7: Profit and loss statement
(Rs mn, year ending Mar 31)
FY19 FY20 FY21E FY22E FY23E
Revenue from operations 2,494 3,338 5,061 6,484 8,295
Operating expenses 1,791 2,459 3,780 4,833 6,211
EBITDA 703 879 1,282 1,652 2,084
% margins 28% 26% 25% 25% 25%
Depreciation & amortisation 101 133 189 233 299
EBIT 602 746 1,093 1,418 1,786
% margins 24% 22% 22% 22% 22%
Other Income (net) (4) 47 36 24 30
Recurring PBT 598 792 1,129 1,442 1,816
Less: Taxes 110 137 104 180 227
Recurring Net Income 488 655 1,024 1,262 1,589
Add: Extra ordinaries Inc/(Exp) - - - - -
Reported Net Income 488 655 1,024 1,262 1,589
Source: Company data, I-Sec research

Table 8: Balance sheet

(Rs mn, year ending Mar 31)
FY19 FY20 FY21E FY22E FY23E
LIABILITIES
Share Capital 243 255 255 255 255
Reserves and Surpluses 481 2,037 3,061 4,323 5,912
Shareholders' funds 724 2,292 3,316 4,578 6,167

Borrowings 90 638 638 638 638

Other non-current liabilities 18 152 216 271 340
Current liabilities 751 919 2,168 2,010 2,174
Total Liabilities 1,583 4,000 6,338 7,496 9,318

ASSETS
Fixed Assets 591 1,676 3,600 3,886 4,251
Other non-current assets 1 4 4 4 4
Total non-current assets 592 1,679 3,604 3,889 4,254
Current Assets 991 2,321 2,734 3,607 5,064
Total Assets 1,583 4,000 6,338 7,496 9,318
Source: Company data, I-Sec research

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Affle India, March 7, 2021 ICICI Securities
Table 9: Cashflow statement
(Rs mn, year ending Mar 31)
FY19 FY20 FY21E FY22E FY23E
Operating Cashflow before W Cap changes 616 866 1,177 1,471 1,857
Working Capital Inflow / (Outflow) (138) (135) 98 (93) (154)
Capex (151) (311) (405) (519) (664)
Free Cashflow 327 420 870 859 1,040
Cash Flow from other Invst Act (Ex Capex) (351) (1,327) (800) (335) (117)
Proceeds from Issue of Share Capital - 858 - - -
Inc/(Dec) in Borrowings 90 548 - - -
Others (6) (9) (32) (41) (53)
Increase/(Decrease) in Cash 60 490 38 483 870
Source: Company data, I-Sec research

Table 10: Key ratios

(Year ending Mar 31)
FY19 FY20 FY21E FY22E FY23E
Per Share Data (Rs)
Earnings per share (Diluted reported) 20.1 25.1 40.2 49.5 62.4
Earnings per share (Basic Reported) 20.1 25.1 40.2 49.5 62.4
Cash earnings per share 24.3 31.4 47.6 58.7 74.1
Dividend per share - - - - -
Book Value per share 30 91 130 180 242

Growth Ratios (%)

Operating Income (Sales) 49.1 33.8 51.6 28.1 27.9
EBITDA 54.5 25.0 45.8 28.9 26.2
Recurring Net Income 76.8 34.2 56.4 23.2 26.0
Diluted Recurring EPS 76.8 24.7 60.3 23.2 26.0
Diluted Recurring CEPS 63.0 29.6 51.3 23.3 26.3

Valuation Ratios (x)

P/E 293.5 235.3 146.8 119.2 94.6
P/CEPS 243.2 187.6 124.0 100.6 79.7
P/BV 197.9 64.6 45.4 32.8 24.4
EV / EBITDA 214.4 171.5 117.6 91.3 72.3
EV / Sales 60.4 45.2 29.8 23.2 18.2
EV / FCF 461.4 359.1 173.2 175.4 145.0

Operating Ratios
Operating Expense/Sales (%) 71.8 73.7 74.7 74.5 74.9
Other Income / PBT (%) 0.7 7.7 6.0 4.5 4.6
Effective Tax Rate (%) 18.4 17.3 9.2 12.5 12.5
Fixed Asset Turnover (x) on average 82.6 39.1 28.5 32.5 37.4
Receivables (days) on average 70.1 81.4 68.0 69.0 72.0
Payables (days) on average 75.7 82.0 76.0 74.0 72.0
D/E Ratio (x) 0.1 0.3 0.2 0.1 0.1

Return/Profitability Ratios (%)

Recurring Net Income Margins 19.6 19.6 20.2 19.5 19.2
RoCE (Based on Avg) 79.7 40.2 27.2 25.2 29.7
RoNW (Based on Avg) 94.9 43.5 36.5 32.0 29.6
Dividend Payout Ratio 0.0 0.0 0.0 0.0 0.0
Dividend Yield 0.0 0.0 0.0 0.0 0.0
EBITDA Margin 28.2 26.3 25.3 25.5 25.1
Source: Company data, I-Sec research

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Affle India, March 7, 2021 ICICI Securities

Index of Tables and Charts

Tables
Table 1: Summary of recent acquisitions .............................................................................. 7
Table 2: Key product suite of Affle ........................................................................................ 9
Table 3: Internet-based businesses in India are currently trading at multiples, which are
unsustainable ................................................................................................................ 13
Table 4: Relative Valuation ................................................................................................. 13
Table 5: Key assumptions ................................................................................................... 14
Table 6: Sensitivity of our TP to revenue growth and margin estimates ............................ 14
Table 7: Profit and loss statement ...................................................................................... 15
Table 8: Balance sheet ....................................................................................................... 15
Table 9: Cashflow statement .............................................................................................. 16
Table 10: Key ratios ............................................................................................................ 16

Charts
Chart 1: Agencies globally trying to bring programmatic capabilities in-house .................... 5
Chart 2: Most advertisers now also use their own trading desk ........................................... 5
Chart 3: Client-mix shifting from agency to direct ................................................................. 5
Chart 4: Top 10 verticals now comprise 90% of revenues ................................................... 5
Chart 5: Converted user trends............................................................................................. 6
Chart 6: Pricing model has evolved over the years .............................................................. 7
Chart 7: Players like Affle are leading the change ................................................................ 7
Chart 8: Margins primarily declined as company acquired margin-dilutive acquisition ...... 10
Chart 9: However, PAT margins improved as company transitioned into lower ETR ........ 10
Chart 10: Organic-reported growth (YoY) ........................................................................... 11
Chart 11: Expect revenue growth of ~28% over FY22-23E ............................................... 11
Chart 12: Programmatic to gain higher share of digital ad spend going forward ............... 11
Chart 13: Mobile advertisements to be a key focus area of spend where Affle plays ........ 11
Chart 14: Global digital ad spend now a major spend area ................................................ 11
Chart 15: Programmatic to gain higher share of digital display ad spend – global ............ 11
Chart 16: EBIT margins to remain broadly stable ............................................................... 12
Chart 17: OCF conversion to remain ~80% ........................................................................ 12

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Affle India, March 7, 2021 ICICI Securities

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