Q1FY24 Review: Tata Communications: Revenue growth at a faster clip; margins dip

21 Jul 2023 , 11:45 AM

TCOM’s Ebitda, after removing one-off M&A related costs, grew 3.5% QoQ, inline with analysts of IIFL Capital Services estimates. Reported Ebitda declined 1%. Stellar organic revenue growth (albeit partly aided by FX tailwinds) was the highlight. As expected, Ebitda loss at recently acquired Switch resulted in Ebitda margin dipping below 23-25% medium-term guidance. On the earnings call, management was bullish on capabilities and new deals in the funnel though it called out recent delay in conversion of pipeline into orders due to macro factors. TCOM reiterated that Ebitda margin would dip below 23-25% in the near-term on investments and M&A. Analysts of IIFL Capital Services trim FY24/25ii Ebitda estimates by 2%/1% and project 12% Ebitda Cagr over FY23-25. The stock trades at 11.5x 1YF EV/Ebitda. They maintain REDUCE considering integration risks around Kaleyra though this acquisition makes the management aspiration of doubling data revenue between FY23 and FY27 realistic. Their TP rises from Rs1518 to Rs1550 on rolling forward to Sep-24.

Robust revenue growth; Adjusted Ebitda inline: 

Organic Data Portfolio revenue growth of 28%/8.5% YoY/QoQ was the highest in a long-time and indicates TCOM getting its execution right on the revenue growth front. While reported Ebitda margin was subdued at 21.5%, there was 60bps drag since Switch is mildly Ebitda loss making and another 100bps drag from one-off costs related to M&A. If analysts of IIFL Capital Services remove the latter (i.e. one-off cost), Ebitda growth of 3.5% QoQ was inline with estimates. While Switch’s implied annualized revenue run-rate at US$71mn is lower than US$82mn reported for CY21, the company attributed this to seasonality.

Sanguine management commentary: 

Key takeaways from the earnings call: 1) TCOM called out healthy traction across businesses in Digital Portfolio. 2) Deal funnel has been quite healthy but conversion time from funnel into firm order book is longer than what it used to be two quarters back. 3) While Switch and Kaleyra acquisitions will cause a short-term dip in margins, the endeavor is to take it back to 23-25% in the medium term.

Trimming FY24/25ii Ebitda by 2%/1%: 

Based on these results, analysts of IIFL Capital Services marginally prune Ebitda estimates. Analysts of IIFL Capital Services also factor in higher D&A inline with Q1 results. I-T refund related interest income in Q1FY24 ensures that FY24 EPS is maintained despite the Ebitda cut. Analysts of IIFL Capital Services cut FY25 EPS by 2%.