Company News

Tata Communications: Revenue growth disappoints again, ICICI Securities

April 25, 2022

Tata Communications’ (TCom) Q4FY22 data business net revenue grew only 5% YoY (+0.7% QoQ) which is below expectations. This should be partially weak from orderbook of Q3; while orderbook funnel has sequentially improved, management commentary does indicate gradual recovery in revenue growth. TCom revenue growth faced headwinds from fewer feet on the street, delay in decision making and under-performance of usage-based services. It is hopeful of acceleration in revenue in FY23; showing willingness to invest both in capex and opex to drive growth implies huge commitment. We would wait for early signs of an uptick in revenue. Data business EBITDA grew only 4.2% YoY (dipped 7.1% QoQ) on cost inflation including higher repair cost and reversal of covid benefits. We have cut our EPS estimates by 5-12% over FY23-24E, and accordingly, reduced our target price to Rs1,600 (from Rs1,680; 20x FY24E EPS). Maintain BUY.

Data net revenue rose 5% YoY / 0.7% QoQ to Rs23.7bn: We are closely tracking net revenue (total revenue minus direct cost), which is more representative of the underlying performance for TCom. Revenue growth was impacted by slower closure of deals, chipset shortage leading to delay in equipment availability, and slower growth in usage-based revenue (SIP & MMX), which contributes 34-35% of digital services revenue. TCom’s feet on street were impacted by high attrition, and it has hired a large workforce, which should drive sales funnel / orderbook in FY23.
Digital platform & services revenue grew 14.6% YoY / 3.3% QoQ to Rs9.3bn. This was helped by growth in collaboration revenue which improved 7.3% YoY / 3.2% QoQ, while cloud, hosting and security disappointed with growth of just 4.7% YoY / dip of 1.9% QoQ. Next gen connectivity and media revenue are gaining traction (up 37% and 41% YoY, respectively). Incubation revenue rose by a strong (on low base) 2.2x YoY to Rs810mn. Core connectivity revenue rose 2.3% YoY / 0.5% QoQ to Rs22.9bn, which is disappointing. Transformation business revenue improved 6.7% QoQ to Rs3.3bn.
Orderbook growth has improved sequentially, but still not encouraging. In Q3FY22, company orderbook has declined due to large workforce exit and change in business managers. In Q4FY22, orderbook (both medium and large size) has grown, and it is anticipated sales funnel and order book will benefit from new hiring which will start adding to new sales particularly in international segment. It has seen encouraging adoption of MOVE IOT products, and believes momentum may continue even in FY23. Further, TCom remains hopeful on the relaunch of IZO products, and new variants introduction which should help capture large market.
Data EBITDA margin at 29.3%, down 290bps QoQ. Data business EBITDA grew 4.2% YoY (down 7.1% QoQ o) to Rs9.7bn. Core connectivity and digital platform & services EBITDA margin dipped by 190bps and 580bps QoQ, respectively, from rise in repair cost and reversal of covid benefit. The company has maintained its EBITDA margin guidance of 23-25%, and it wishes to invest margin back into business to drive revenue growth.
FCF conrsion remains healthy. TCom capex was Rs16bn for FY22 which is lower due to delay in shipment of equipment on chipsveet shortage. It has guided for capex envelop of US$300-325mn FY23 onwards which is partially driven by fibre replacement. The company believes 50% capex is due to successful deal win which should help drive revenues. It has reduced net debt by Rs10bn to Rs67bn in FY22. It has announced dividend of Rs20.7/sh for FY22, and has guided for dividend pay-out policy of 30-50%, which is positive.
Other highlights. 1) TCom estimates more fixed monthly charges deal win in pipeline, and expects to correct some of its usage-based revenue issues. It expects SIP revenue to bottom out, and MMX has had some new customer wins; 2) deal win rates have improved, and >50% of deal wins are in digital services; 3) in core connectivity, TCom is focusing on adding new logos which should help it drive faster revenue growth; 4) next gen connectivity had good traction, and new variant of IZOs should help add to revenue growth; 5) within CPaaS, teams offering has growth >100%; 6) revenue conversion has been impacted due to delay by OEMs on shipping equipment; and 7) partnership with SIs has not benefited as expected probably due to the same reasons as faced by TCom.