Connect with us

Daily News

Tata Com- Upping its game to position as global player, ICICI Securities  

Digital transformation is a great theme, particularly considering that India has very few good ICT enterprise enablers. TCom has been working on transforming into a global digital solutions provider from a ‘data pipe’. It has taken huge efforts and time to reach inflection point. New CEO and CFO come from software background, which shows Board intent, and are likely to catalyse creation of a ‘solution mindset’. TCom is also engaging with SIs (TCS) to fast expand its reach, which should add to growth, in our view. FY21 was a dud year on revenue front, but should recover in the near future. We see EBITDA growth at a CAGR of 14% and EPS growth at 36%, over FY21-FY23E, on low base and financial leverage. We value the stock at 18x FY23E EPS at Rs1,461 (from Rs1,232). We have changed the valuation metrics from the earlier SOTP-based methodology. Upgrade to BUY (from Add).

  • Focus on six platforms. TCom has disclosed it would focus on six services for future growth and that it has built capabilities for ‘right to win’: 1) MOVE IoT, 2) Network++, 3) InstaCC, 4) collaborations, 5) Media, and 6) The market size for each of these services is staggeringly high, but the addressable market for TCom is much lower. However, the addressable market is expanding due to technological evolution (e.g. internet-based services), or TCom’s own innovations / product launches.
  • Internet opening up the global market. Internet services are becoming important for WAN transport, helped by adoption of cloud, but it is also increasing the complexity of network architecture. We see internet opening up a huge opportunity for TCom, which earlier suffered from weak presence in the developed markets for its traditional WAN services. We see TCom winning new large-scale network transformation deals due to: 1) it being among the largest internet backbone; 2) level playing field in the emerging market for managed network services such as SD-WAN; 3) NetFoundry, wholly owned subsidiary, could be a game changer; and 4) partnership with SIs such as TCS.
  • Unified communication – focus is on managed services and CCaaS. SIP trunking was a volume-driven market with large share of revenues coming of video conferencing companies such as Teams, Webex, etc. TCom is shifting focus to more managed services and cloud-based UC solutions, where demand from enterprises is rising (has a component of fixed fee). It also plans to grow InstaCC, which provides cloud-based contact centres (CCaaS). UCaaS and CCaaS are growing in mid-teens globally.
  • Media services and managed cloud services. Media is a niche service and TCom has made huge inroads in the market of live events and video CDNs. This segment was most impacted from the covid situation. Opening of the economy and multi-channel broadcasting should help TCom grow its media services. Company offers managed cloud services only in India, nonetheless the opportunity is huge. We therefore expect more efforts from TCom to drive growth in managed private cloud services in the coming years.

TCom sees six platforms for future growth with huge market opportunity for each
Tata Communications (TCom) in its analyst meet (Jun’20) disclosed that it would focus on six key services for future growth and that it has built capabilities for ‘right to win’. The services include:

  1. MOVE IoT (Internet of Things), deployed on the strength of TCom’s MVNE (mobile virtual network enabler) services where it provides network infrastructure and related services, such as business support systems, administration, and operations support systems to a mobile virtual network operator, and e-SIM which goes into machine. TCom has recently acquired majority stake in France-based eSIM company, Oasis Smart SIM Europe SAS (Oasis). Oasis develops and provides advanced technologies to enable deployment of eSIM and SIM technologies. MOVE is platform that enables intelligent, agnostic and network independent global IoT connectivity. TCom is concentrated on three industries to drive growth in MOVE IoT – automobile, airlines, and semi-conductors (which would drive demand from industrials).
  2. Network++, a portfolio of services for network transformation to enable enterprises to adopt cloud, internet and SD-WAN. These services would help simplify network architecture and have much better control over network to deliver good and consistent performance for applications.
  3. InstaCC and collaborations, two services from portfolio of unified communication services. InstaCC is a cloud-based digital solution to provide good customer care experience across multiple channels. Collaboration includes fully managed collaboration services in partnership with Cisco Webex and Microsoft Teams. It also provides wholesale SIP trunking services.
  4. Media (Video Connect), where the company has strong relationship with broadcasters to deliver seamless and dedicated video over content delivery networks. Company has strong track record of broadcasting one of the world’s fastest sports Formula-1, and it has now associated with many other media majors.
  5. MMX is an omni-channel mobile messaging service for A2P services.

The market size for each of these services is staggeringly high, but we believe the addressable market for TCom is much lower (probably a fraction!). However, the addressable market is fast expanding for the company due to technological evolution (e.g. internet-based services) for borderless growth, or its own innovations and new services additions (NaaS, and MOVE).

Company has multiple other services that have exciting growth profile such as managed cloud services, and allied services wrapped around these key services such as security, AI, etc.

Internet opening global market for TCom
Enterprise network architectures (individual or combination of MPLS, VPN, Ethernet, internet, etc.) are not purpose built for cloud-based digital world. Tata Communications (TCom) and Gartner have both highlighted that internet services are becoming increasingly important for WAN transport, which is not only helping adoption of cloud / IoT faster, but is also increasing the complexity of network architecture. Further, rise in internet usage requires service providers to own strong internet backbone, and local partnerships to expand access.

Also, this is reducing the importance of MPLS network scale, as providers can exploit carrier hubs and internet access, to the source access that is distance-insensitive at the national or even regional levels. Points of presence are increasingly acting as gateways between access and backbone network services, cloud services, and extranets. Gartner predicts, by 2025 40% of all enterprise locations will have only internet WAN transport, compared with ~15% in 2020.

We see the internet opening huge opportunity for TCom as it earlier suffered from weak presence in traditional WAN services in large geographies of the developed world, e.g. the US and Europe, due to strong local competition, and the handicap of not owning on-net MPLS network. TCom’s IZO internet WAN provides enhanced internet service with end-to-end SLAs in 125 countries (along with access from local partners) while competition like AT&T has presence in 67 countries.

We see a twin opportunity for TCom: 1) expansion in addressable market with opening of newer geographies; and 2) enhanced capability of TCom, which would make it eligible for large contracts in network transformation deals. Company has highlighted that it is now participating in large contracts with 500-600 sites (from earlier 50-60), which can lead to huge jump in orderbook if TCom manages to win a few good large deals in the immediate future.

We see probability of deal win rising as it plans to engage with SIs such as TCS, where TCom can go as partner for network transformation. We are yet to see any material outcome of these developments, but are keeping faith for now.


SD-WAN: Large emerging opportunity
SD-WAN simplifies the management of WAN fabric with a controller-first overlay independent of transport layers – MPLS, Ethernet, internet, leased lines, DSL, and LTE networks. SD-WAN controllers intelligently choose among the available transport mediums to deliver the best application performance as per defined SLA.

The technology provides methods to prioritise mission-critical business traffic and take advantage of internet connections, which was previously used for backup and redundancy, to connect directly to multi-cloud resources.

Like other global peers, TCom offers SD-WAN solutions from multiple vendors such as VMware, Cisco Viptela and others, but it also has its own offering using Cisco routers, which is unique among peers in leadership category.

SD-WAN is the fastest growing service among enterprise connectivity solutions with global total addressable market at less than US$1bn in 2018, but expected to rise at a CAGR of 76% over 2018-23 to US$6bn (Gartner). This is a huge opportunity for TCom. We see the company having higher market share in SD-WAN compared to its global market share in other services such as Ethernet, MPLS and others due to: 1) level playing field in technology, 2) services portfolio offering evolution along with global peers (who had headstart earlier), 3) expansion in its reach, and 4) partnership model with India-based SIs, who have large market share in IT services.

Domestic market continues to grow
‘Strategy&’, part of PWC network, estimates India enterprise connectivity market in 2019 at US$2.3bn across Layer 2 and Layer 3 solutions. It estimates the market size to grow to US$2.6bn in 2020 with Layer 2 reaching US$1bn while Layer 3 market is seen at US$1.6bn.

Layer 2 (OSI model) consists of Ethernet, domestic leased circuit (DLC), international private leased circuit (PLC), etc. Layer 3 comprises MPLS, SD-WAN, and alternatives such as internet leased line.

We see the India market for TCom offering good growth opportunity even in traditional connectivity services unlike the global market where traditional connectivity continues to fade out.

NetFoundry, next-gen networkas a service
NetFoundry Inc., a wholly-owned subsidiary of Tata Communications (TCom), is headquartered in Charlotte, North Caroline, US. NetFoundry is ‘beyond SD-WAN’, software-only networking solution providing application-specific performance, security, reliability and agility across any set of networks and clouds. It gives businesses control of the networks without needing to build or manage the underlying infrastructure.

This is while legacy network infrastructure is preventing digital transformation. Legacy networks are expensive, inflexible and often impossible to provision for private telco circuits and SD-WAN CPE into every edge of SaaS, cloud, mobility, IoT, B2B extranet, and B2C.

NetFoundry provides web consoles and APIs to spin up global networks on-demand similar to web consoles from Amazon AWS and Microsoft Azure to spin up virtual machines and storages. NetFoundry’s web-based orchestration console / APIs help design and instantly deploy cloud-native, application-specific networks (AppWANs). AppWAN is created when an endpoint or group of endpoints (virtual gateways, virtual machines, IoT devices, smartphones, laptops, etc.) is assigned permission to access a set of services / applications. The console and APIs enable the administrator to enforce policies, without needing to manage the infrastructure itself.

Each AppWAN is managed by a NetFoundry controller, enabling the administrator to benefit from NetFoundry’s network fabric. Controllers interact with business and application systems such as IAM (identity and access management), IoT identity, and cloud policies to enable each AppWAN to be programmatically controlled by the application contexts and needs.

The most interesting use cases for AppWANs is in multicloud connectivity. AppWANs are designed for multiclouds, which enable instant creation of cloud-to-cloud and cloud-to-edge private network fabrics over existing internet circuits. NetFoundry virtual gateways connect AppWANs to cloud instances, which come pre-built to integrate quickly and seamlessly with popular CSPs such as AWS, Microsoft Azure, Google Cloud Platform, and IBM Bluemix.

AppWANs designed for multicloud connectivity make stubborn, legacy applications cloud-portable with a layered security architecture that isolates and protects data flows through a data stream fragmentation (aggregation and disaggregation) and military-grade encryption. The result is a private, dark, zero-trust network.

The addressable market for NetFoundry is very large and, for showcasing the opportunity, we have taken Cloudflare services as proxy, where NetFoundry’s share significant overlaps. Clearly the addressable market is very big and expected to grow at a fast pace.

Chart 5: Total addressable market for Cloudflare, which has significant overlapping with NetFoundry

Unified Communications–managed services is key focus area
Unified Communications and Collaboration (UCC) refers to solutions that unify enterprise communications, including messaging, audio, video, and meetings, into a consistent user experience. By design, these are digital platforms and tightly integrated ecosystems that serve as the foundation to a digital transformation strategy.

Tata Communications (TCom) offers three solutions under its UCC portfolio, viz. 1) Unified Communications as a Service (UCaaS) based on Microsoft Teams solutions and UCaaS Cisco-based solutions; 2) voice solutions, which house Global SIP connect; and 3) Contact Centre as a Service (CCaaS) using Amazon Connect, Cisco Webex contact centre, and InstaCC Global (proprietary).

Global SIP Connect – much steam for growth
Research and Markets estimates global SIP trunking market size at US$13.4bn in 2019, and anticipates it to reach US$30.2 in 2027, which implies a CAGR of 10.8% over 2019-27. SIP trunk supports voice and video communications over the internet; thus, companies are using such solutions for high business performance.

TCom Global SIP Connect, a white label service offering, opens up exciting opportunities for telecommunication providers and conferencing service providers – strengthening existing portfolios with cost-effective, fully managed global voice services. It helps enterprise customers extend global voice reach and save 55% on legacy trunk costs. The solution integrates with existing PBX.

Employees can make / receive calls via PC’s UC client while retaining the legacy direct number.

TCom offers one of the world’s largest international voice networks – integrating with over 1,600 carrier partners, 780 mobile providers and 700 VoIP operators – with expansive interconnect options and service features combining flexibility, reach and high call quality.

Why then were SIP trunking revenues weak in the previous few quarters for TCom?
We understand three key reasons for SIP trunking revenues being weak for TCom in the previous few quarters: 1) work from home in its largest market of India had put pressure on enterprise voice segment (the voice calls which were earlier originating from office are now attended through mobile); 2) reduced demand from video conferencing apps such as Zoom, Microsoft Teams, Webex and others. Users are now comfortable using VoIP services built into apps, and are reducing usage over SIP trunking; and 3) rise in interconnect charges from India, which has impacted volumes. Besides, we think TCom’s pricing (aggressive and competitive) has also hurt its market share.

SIP trunking revenues are linked to minutes of usage, which have been impacted due to above reasons thus adversely affecting TCom’s segmental revenues. TCom is trying to fix the last reason and we believe, in coming quarters, the company will fight for its minute market share in SIP trunking by fixing the pricing issue. We expect TCom’s SIP trunking services to witness healthy revenue growth on normalised basis due to the benefit of being in a faster growing market. However, minutes from video conferencing operators (such as Microsoft Teams, Cisco Webex etc) would remain highly price sensitive market compared to enterprise voice service.

UCaaS – higher growth potential and fixed pay model
TCom has partnership with Microsoft Teams solutions and Cisco collaboration services where in TCom offers fully managed collaboration solutions including calling, messaging, meetings and PSTN access. Under the partnership, TCom also provides global reach through regional data centres with in-country regulatory compliance, and supports migration from on-premise UC deployments to cloud.

Per Grand View Research, the global team collaboration software market size was valued at US$9.5bn in 2019 and is expected to grow at CAGR of 12.7% over 2020-27. Integrating web conferencing applications with other communication tools enhances the functionality of collaboration solutions and provides the ability to practice efficient communications. Also, organisations have started to realise the benefits of leveraging affordable video conferencing solutions, which is facilitating wide-scale adoption.

Unlike SIP trunking business, which is significantly dependent on minutes of usage growth, managed collaboration services has good fixed pay component which would ensure lower volatility in revenues.

Chart 6: Cloud-based team collaboration services are on rise vis-à-vis on-premise calls, which would help TCom grow its managed collaboration services
CCaaS – TCom betting on its InstaCC
Corporates are required to maintain customer experience by providing timely and accurate response. Customer satisfaction has become an important parameter in creating market differentiation and to remain on top of customer recall. Contact Centre as a Service (CCaaS) offer solutions that helps provide suitable customer services. These services aid agents / customer care desk to efficiently handle customer queries on real-time bases, e.g. tracking delivery parcels, availability, replacements, repairs, etc.

The interaction with customer care has evolved with multiple channels of communications such as emails, social media, SMS, calls, etc., and corporates are expected to be reachable across channels. These needs of corporates for enhanced customer servicing is driving growth for CCaaS.

Per Fortune Business Insights, global CCaaS market size was US$3bn in 2019, and is expected to grow at a CAGR of 16.5% to US$10bn over 2019-27. CCaaS solutions are used by customer service and telemarketing centres, employee service and support centres, help desk service centres, and other types of structured communication operations. CCaaS solutions are typically deployed as an integral part of a broader customer service and support technology ecosystem. The cloud-based services offer tools and solutions that would support the agents while completing customer query / information.

TCom offers services including InstaCC (global contact centre), Cisco Webex contact centre for cloud-based solutions, and Amazon Connect, which would complement TCom’s network and voice services.

Media –niche capability
Media industry is adopting technology as consumers demand multiple streams to assess content. Tata Communications (TCom) has been pioneering the industry with distribution management for >800 TV channels across the US, Europe and Asia. In terms of delivery, it is reaching >2bn sports fans with sports content delivered through 90% of all global sports broadcasters. It has delivered >5,000 live events, of which >750 were remotely produced. TCom has done content storage and transfer of >10,000TB.

TCom enjoys dominant leadership position in managed services for video services (Frost & Sullivan) and is in the leadership quadrant in Omdia’s global video CDN services scorecard. It is strongly placed in LIVE 4K tier-1 global sports contribution and distribution, global motorsports distribution (mostly in Europe), India sports market (IPL, PBL, PKL), and remote production for global sports events.

We believe managed services for media, and adoption of live events through multiple channels / screens, would keep the industry grow at a fast pace. However, the past one year has been very hard on media industry due to cancellation of many events, which hurt growth for TCom.

Managed cloud services–exciting runway for next decade
Unlike other services where TCom is participating in the global markets, the focus geography for managed cloud services is India. However, the emerging opportunity in this segment is huge for the company, thus justifying aggressive expansion.

India data centre industry, which accounts for 1-2% of the global market, is estimated to have grown at a CAGR of 15-20% since FY16 to touch ~US$1bn in FY19 and ~US$1.2bn in FY20. Growth was aided by increase in internet penetration from ~30% in FY16 to ~55% in FY19 (Crisil report). Industry capacity stood at ~360MW in FY20, and it is expected to expand >3x to reach 1,100-1,200MW by FY25 on the back of US$4-5bn investments announced over the past three years.

The data centre industry is growing at a very high pace lead to three factors: 1) growing number of hyperscalers such as Flipkart, Zomato, etc; 2) expansion of global public cloud presence in India, and enterprises of all sizes embracing cloudification; and 3) tightening of regulation and compliance, which are pressing for storing data within India.

Chart 8: Data centre services market size is expected grow >3x by FY25

Corporates are adopting hybrid cloud and multi-cloud strategies, and they would need service providers to manage cloud services for seamless integration and orchestration of applications and services. Further, we see rise in demand for private cloud, and community cloud for segments that don’t want to shift to public cloud for multiple reasons. Examples of such communities are: government community cloud, BFSI community cloud, and cloud for specialised applications such as SAP, etc.

TCom helps organisations on cloud migration to setting up private cloud (IZO Private Cloud), cloud storage, managed cloud, cloud containers, analytical platform and disaster recovery. Though the company has a suite of services, we are yet to see aggressive expansion of these services. TCom plans to create community clouds based on different industries thereby creating focused services similar to government community cloud, which it already operates. It is looking at other verticals such as BFSI, IT/ITeS, healthcare, etc.

TCom is also in partnership with major public cloud service providers – AWS, Microsoft Azure, Google Cloud Platform, Oracle, IBM, Salesforce and Alibaba Cloud.

The biggest strength for TCom is the undivided focus on driving higher managed cloud services, hosting and security services, while the real estate (passive infrastructure – data centre) business resides in ST Telemedia in which it owns 26% stake. ST Telemedia is a leading data centre player in India, and TCom leases space from it for its cloud services. Large competition like NetMagic, Nxtra and others are focused on driving business from hyperscalers.

Customer review through Gartner Peer Insights

Gartner states, ‘Peer Insights is Gartner’s peer-driven ratings and reviews platform for enterprise IT solutions and services covering over 300+ technology markets and 3,000 vendors. Every review is verified before publishing to ensure you only read completely authentic insights from your peers.

Product reviews by customers provide comfort on offering by each of TCom’s key services:

  1. Network services and managed SD-WAN rating has been encouraging, and it would be the biggest strength of TCom in our view.
  1. Unified communication and UCaaS also have strong rating from customers, and mostly all customers are ready to recommend
  1. Global CDN has strong rating, while in managed IoT connectivity services (MOVE) many need more improvement in services.
  1. We have highlighted that TCom has a long way to go in cloud hosting services, which is also reflected in its rating and recommendations. Managed security services has very few reviews to make any conclusive decision.

Clearly, revenue growth path for TCom is hugely exciting
Tata Communications’ (TCom) slow revenue growth in FY21 has large disconnect; while we are describing huge revenue opportunity with rising total addressable market, TCom new-age products competing with the best in the world, settling of legacy issues and new management. We believe the first mile is longest and that once the going begins, company should benefit from the entire ecosystem including better recognition from consultants such as Gartner, customers, partners and competition. It is at an inflection point in new-age services and we don’t want to lose faith because of a few initial battle losses.

Further, covid has hit the company by way of elongated deal conversion cycles, challenges in execution either on man/material movements or delay in client handing out sites. Further, a few services where TCom was betting high (such as media and airlines) were worst hurt from covid, and the company failed to convert a few larger deals.

On the positive side, we like the fact that TCom has started to participate in larger deals, which when accelerates, the growth would be much easy to come. We are yet to see SIs adding to revenues and that ocean of opportunity, and TCS, which is TCom’s sister company, would come handy.


Earnings model assumption

  • Unlike in past three years where headline revenues grew at a CAGR of only 0.5% due to 19.3% p.a. decline in GVS revenues, the coming two years will see growth of 5.9% on lower contribution from GVS and acceleration in GDS revenue growth.
  • We are factoring-in GDS revenue CAGR of 9.8% in the next two years (FY21- FY23E), which is lower than management guidance of double-digit growth. Company has high probability of beating our estimates. However, considering low visibility of timing in acceleration of revenues, we have maintained conservative estimates.
  • GDS revenue growth is driven by 21% CAGR in Growth + Innovation services, which has huge addressable market. And if the company executes well, we see this portfolio outperforming over the next decade.
  • Traditional services growth has been kept at the historical average, assuming these services continue to grow in India where TCom is market leader.
  • TCom’s EBITDA is expected grow at a CAGR of 14.4% over FY21-FY23E driven by GDS EBITDA growth at 15.5% CAGR.
  • Significant growth in GDS is expected to come from Growth services, where we have built an incremental EBITDA margin of ~45%.
  • Healthy balance sheet will allow the company to invest in Growth services and expand in the international market.

Changing path for good;stock warrants valuation upgrade
Digital transformation is a great theme, and we have very few good ICT enterprise enablers in India. Though telecommunication and data services are backbone of the digital ecosystem, these services have become highly commoditised. We are implying commoditisation as telecom companies failed to monetise (RoCE-accretive) volume growth in data.

TCom has been working on transforming to become a digital solutions company from being just a data pipe (sub-sea cable) company. It has taken huge efforts and time to reach this inflection point, probably timing could not have been better considering the growing importance of digital ecosystems (due to covid situation).

The recent hirings also point towards board of directors focus for the company. Mr Amur Lakshminarayanan, MD & CEO, has come from TCS, and Mr Kabir Ahmed Shakir, CFO from Microsoft Corp India. They would be catalysts to induce a solution-driven mindset into the organisation. Management in the recent earnings call has highlighted significant change in deals they have been now participating in, which are multifold bigger and focused on providing solutions. They are collaborating with system integrators such as TCS who should help TCom expand its global reach and addressable market. Also, rising internet-based solutions have significantly reduced TCom’s disadvantage of not owning terrestrial fibre in developed markets.

Company saw 12% growth in large deals sales funnel in FY21 and we see this accelerating in the coming times and, more importantly, we expect rise in the portion of sales funnel converting into orderbook and revenues. TCom has shared guidance of double-digit revenue and EBITDA growth, >20% RoCE and significant reduction in net debt over the next three years (FY21-FY24), which has not panned out in FY21 (a dud year of revenue growth) though profitability rose on cost optimisation.

TCom’s revenue growth disappointment in FY21 can be attributed to transition hiccups, but we believe it is in the right direction. Management remains confident of delivering strong revenue-led earnings growth for next few years and, we believe, if it delivers on revenue growth, then potential upside could be significantly higher in the stock. Company has started to deleverage the balance sheet and has already reached comfortable a ‘net debt to EBITDA’ of <2x.

Considering that the company’s focus is to drive higher revenues from solutions business, and adoption of internet-based services by enterprise, capex for the company would remain steady thus aiding higher FCF generation. Further, the exit of government from shareholding should give the promoters (Tata Sons) more control over the company, and help implement organisational changes faster, and increase agility of decision-making.

We conservatively believe the company’s EBITDA can grow at a CAGR of 14% over FY21-FY23E, and EPS by over 36%, on low base and financial leverage. Annual reduction of net debt could be Rs10bn-15bn, which will add 4-5% to market cap. Company is trading at a valuation of 14.1x FY23E EPS and 7.0x FY23E EBITDA, and we see significant rerating catalyst for the stock.

We now value stock at 18x FY23E EPS at Rs1,461 (from Rs1,232). We have changed the valuation metrics from earlier SoTP-based valuations (wherein core business was valued at EV/EBITDA, and additional value was assigned to real estate revenue and profit from associates and data centre business). This is to reflect the changing fabric of the company and we would like to see its earnings generation potential, similar to midcap IT companies. And it has lot of start-up kind of businesses, which can independently drive very high sales multiples.

We upgrade to stock to BUY (from Add); TCom is among our top pick in India telecom space with Bharti Airtel.
Financial summary


CT Bureau

Click to comment

You must be logged in to post a comment Login

Leave a Reply

Copyright © 2024 Communications Today

error: Content is protected !!