Q4FY24 Review: Tata Communications: Near-term headwinds persist

19 Apr 2024 , 01:40 PM

TCOM had a weak Q4 with organic digital portfolio revenue growth slowing down sharply to 5% YoY vs. double-digits in M9FY24 led by weak demand environment. QoQ widening of losses in recently acquired Switch and Kaleyra led to 7% Ebitda decline. On the call, management alluded to a cautious near-term demand outlook but maintained medium-term targets. After factoring in a revenue cut and a more gradual Ebitda margin recovery profile, analysts of IIFL Capital Services cut Ebitda estimates by 4-5% and their SOTP-based TP from Rs2,342 to Rs2,231. The stock trades at 11.7x EV/Ebitda and analysts of IIFL Capital Services estimate 17% Ebitda Cagr over FY24-27. Maintain ADD.

Weak Q4 performance:

The slowdown in digital portfolio revenue has been pretty stark at just 5% YoY in Q4, marking a deceleration from 28%/16%/11% in the preceding three quarters. Ebitda margin was 18.6%, down ~150bps QoQ due to losses in Kaleyra and Switch in Q4. The combined Ebitda of Switch and Kaleyra (ex-Campaign registry) swung from +Rs291mn in Q3 to –Rs820mn in Q4. Net debt-to-Ebitda declined slightly to 2.16x QoQ, but has seen a sharp rise YoY from 1.32x due to adverse WC movement, higher capex and M&A.

Cautiously optimistic management commentary:

Key takeaways from the earnings call: 1) the funnel remains robust but order book has been flattish as decision making cycle stays elongated; 2) while enterprise revenue grew in double digits in FY24, spending by telcos and hyperscalers has been lumpy; 3) TCOM reiterated its target of doubling data revenue between FY23 and FY27, and medium-term targets of 23-25% Ebitda margin, 25%+ ROCE and <2x net-debt Ebitda; 4) the company would focus on non-SMS channels and platforms in its CPaaS business; and 5) ~Rs1.1bn QoQ negative Ebitda swing in Switch and Kaleyra was due to seasonality, harmonisation of Kaleyra’s accounting with TCOM and one-off legal expenses (US$1mn).

Cutting Ebitda estimates by 4-5%:

While TCOM reiterated doubling data revenue between FY23 and FY27, this implies ~25% Cagr for digital portfolio revenue between Q4FY24 (annualised) and FY27. In analysts of IIFL Capital Services view, this looks stiff and may entail further M&A. Analysts of IIFL Capital Services build in 16.5% Cagr over this period. Analysts of IIFL Capital Services trim their Ebitda estimates and FY25/26 EPS sees 9%/4% cut. While TCOM’s story remains promising, an improvement in consistency of earnings delivery would go a long way in boosting investor confidence.