Tata Communications: Growth in data revenue and healthy FCF yield continues

October 20, 2022

Revenue/EBITDA grew 3%/5% QoQ (in line) led by the Data business; FCF generation healthy

Consolidated revenue grew 2.8% QoQ to INR44.3b (in line), led by a 4.6% QoQ improvement in the Data segment (which constitutes 79% of revenue) after a soft growth in the last few quarters. Revenue from the Voice segment fell 6.6% QoQ, while the same from Others grew 1%.
EBITDA increased by 4.9% QoQ to INR11.3b (in line) led by the Data segment EBITDA for the Data segment grew 3.9% QoQ (which constitutes 89% of total EBITDA). This increased consolidated EBITDA margin by 50bp QoQ to 25.5%.
Adjusted PAT (adjusting for an exceptional item) fell 16% QoQ to INR4.6b (a 15% miss) due to DTA and high interest cost of INR978m v/s INR799m in 1QFY23.
Committed capex grew 22% QoQ to INR4.2b in 2QFY23, led by a capex of INR500m in Digital Platform and Services (DPS). Cash capex for 2QFY23 stood at INR3.2m v/s INR3.3m in 1QFY23.
FCF reduced sequentially to INR6.2b in 2Q from INR9.6b in 1QFY23, which was the highest in the last five years, yielding an annualized FCF yield of 7%. TCOM generated an FCF of INR21.8b in FY22, a yield of 6%.
It reported a RoCE of 27.7% in 2QFY23 from 29.1%/26% in 1QFY23/FY22. Total capital employed grew INR73b in 2Q from INR67b in 1QFY23.

Key takeaways from the management interaction

The management aims to achieve double-digit revenue growth and 23-25% EBITDA margin v/s 25.2% in 1HFY23.
TCOM plan to improve its international revenue share is in sync with its long-term goals.
It disposed of two land parcels and targets to maximize the value of its land bank by either leasing or selling the same.
The improvement in the funnel, order book, and win rates continue, and will rise once supply-chain constraints abate.

Valuation and view

Revenue from the Data segment (a major contributor to overall revenue) rose 4.6% QoQ v/s a muted growth over the last few quarters.
We have marginally cut our consolidated EBITDA estimate to factor in an overall revenue/EBITDA growth of 9%/10% on the back of lower double-digit revenue growth in the Data segment (79% revenue mix) and soft performance in Voice and Others. Deal wins and a deal-to-revenue conversion will be key to TCOM achieving double-digit earnings growth.
The continuous decrease in leverage should drive healthy PAT growth. Though the management’s guidance of a 20% increase in capex to USD300-325m can curb a potential improvement in FCF going forward, it can still garner a healthy (over 20%) RoCE and a high single-digit FCF yield.
We maintain our Neutral rating with a TP of INR1,100 (assigned 8x/3x EBITDA to the Data/Voice business). A sustained improvement in earnings growth visibility will be key to a re-rating in valuations.

CT Bureau