Q4FY23 Review: Tata Communications: Investing to capitalize on growth opportunities

21 Apr 2023 , 11:43 AM

Tata Communications’ (TCOM) Q4 EBITDA declined 4% sequentially due to higher employee costs. Businesses with high growth potential (DPS + Incubation) growing 21% YoY led to the much-awaited double-digit data revenue growth in FY23, albeit aided by FX tailwinds. On the earnings call, management alluded to healthy demand outlook, solid traction in large deal wins and improving mix. In order to capitalize on growth prospects, TCOM would continue investments. Hence, management sees FY24 EBITDA margin closer to 23% versus 24.2% in FY23. 

Key takeaways from the earnings call: 

• TCOM has not seen any major pullback from international customers, despite challenging global macro conditions. 
• It has seen 50%+ growth in the funnel for large deals (US$1mn+), across India and international markets. 
• TCOM targets to take the contribution of DPS + incubation portfolio to total data revenue from the current 32% to 50% in the medium term.
• FY24 EBITDA margin seen closer to 23% versus 24% in FY23. 
• Capex is expected to rise YoY from a lower level in FY23.

Analysts at IIFL Capital Services have cut their FY24 EBITDA estimates by 4%, but have maintained their FY25 EBITDA estimates. TCOM trades at 8.7x 1-year forward estimated EV/EBITDA. Analysts at IIFL Capital Services expect 11.5% EBITDA CAGR over FY23-25. If the company surprises positively on revenue growth, there could be potential re-rating. Analysts at IIFL Capital Services have marginally tweaked their new SoTP-based June 2024 Target Price to Rs 1,375.