Q3FY24 Review: Tata Communications: Kaleyra springs a significant positive surprise

19 Jan 2024 , 12:43 PM

Analysts of IIFL Capital Services upgrade TCOM from REDUCE to ADD, as Q3 performance of the recently acquired Kaleyra largely addresses analysts of IIFL Capital Services key concern on the company’s ability to turn Kaleyra around. TCOM’s Ebitda grew 5%/12% YoY/QoQ to Rs11.3bn, and was 10% above IIFL and consensus. Analysts of IIFL Capital Services estimate that Kaleyra registered ~15% Ebitda margin in Q3 vs -4% in Q4FY23 — well ahead of TCOM’s original target. Management attributed this to cost synergies from lowhanging fruits. Even after attributing some of Kaleyra’s Q3 strength to seasonal tailwinds and a revenue cut on account of near-term demand weakness, analysts of IIFL Capital Services upgrade Ebitda estimates by 4-5%. Their SOTP-based TP, after rolling forward to March’25, is Rs2,026. The stock trades at 11.3x EV/Ebitda; they estimate 14% Ebitda Cagr over FY23-26. 

Kaleyra surprises positively on margins: 

TCOM’s Q3 Ebitda came well above estimates, with Kaleyra delivering an est. 15% Ebitda margin vs. analysts of IIFL Capital Services est. of ~1% margin. Even the core CPaaS business of Kaleyra clocked est. 5%+ Ebitda margin, tracking well ahead of the management’s targeted double-digit Ebitda margin in the medium term. That said, 11.4% YoY organic growth for digital portfolio was the lowest in eight quarters. Kaleyra’s acquisition has also effectively increased net debt by US$280mn to Rs93bn, with net debt/Ebitda crossing the 2x mark. 

Cautiously optimistic management commentary: 

Key takeaways from the earnings call: 1) Digital portfolio revenue now comprises 45% of data revenue vs. the medium term target of 50%. 2) On Kaleyra, TCOM has fasttracked cost synergies, which led to positive Ebitda. 3) On Kaleyra, there will be revenue synergies and further cost synergies over time. 4) There has been some deceleration in the underlying business due to challenging macro conditions. 5) There is no change to the medium-term Ebitda margin guidance of 23-25%. 6) Ebitda losses for Switch are narrowing. 

Raising Ebitda estimates by 4-5%: 

Kaleyra’s 15% est. Ebitda margin in Q3 marks significant progress on TCOM’s turnaround efforts and realisation of synergies; notwithstanding the seasonal strength. Analysts of IIFL Capital Services upgrade Ebitda by 4-5%. Q3 saw Rs1.85bn exceptional loss on the Supreme Court tax ruling in October. Hence, FY24 EPS sees 13% cut; but FY25/26 sees 6%/10% upgrade.