Tata Communications: Ambitious revenue aspiration may entail M&A

8 Jun 2023 , 10:15 AM

In its analyst meet, TCOM set a lofty target of doubling its data revenue to Rs280bn by FY27. With core connectivity (~68% of data revenue) set to grow in low-to-mid single digits as per management, digital portfolio revenue (remaining 32%) would have to grow at ~40% Cagr to achieve the target. Analysts of IIFL Capital Services believe that TCOM would have to make a sizeable acquisition, which its comfortable leverage ratio (1.3x net debt/Ebitda) should support. Management stated that Ebitda margin would remain in the 23- 25% range in the next few years. Analysts of IIFL Capital Services marginally tweak their estimates (11% FY23-25 Ebitda Cagr) and raise their TP to Rs1527 from Rs1375 based on higher target multiple. While TCOM’s improved capabilities have led to a better revenue outlook, execution holds key. Maintain ADD.

New customer segments, buying centres and areas of participation to drive growth: 

With TCOM continuing to invest in platforms and capabilities, it has been able to target new customer segments such as food delivery and new areas of participation such as cloud migration. It is engaging with more buying centres in the same organisation (such as marketing departments as opposed to just IT/Tech departments earlier). In India, TCOM intends to gain a higher share of customer wallet by offering more solutions. With the ramp-up in salesforce in international markets and focus on partnerships with OEMs and System Integrators (SIs), TCOM sees market share gain opportunities. GTM initiatives have driven 84% large deal count growth and 50% digital portfolio funnel growth in two years.

M&A may be used to fill gaps; balance sheet remains strong: 

TCOM stated that it aspires to double its data revenue by FY27 with digital portfolio accounting for >50% of this vs. 32% in FY23, with 23-25% Ebitda margin, <2x net debt-to-Ebitda (which can rise to 2.5x-3x without breaching covenants) and >25% ROCE. M&A strategy would be driven by the need to fill gaps in capabilities, technology or geographical presence.

Analysts of IIFL Capital Services tweak estimates by raising revenue and cutting margin:

Considering the management’s sanguine revenue outlook, we raise revenue growth assumptions. Analysts of IIFL Capital Services build in 26% digital portfolio revenue Cagr over FY23-26 (including the boost from Switch acquisition) which implies 45% contribution from the same to data revenue. With management stating that FY24 Ebitda margin is likely to come below 23-25% guidance due to integration costs of Switch, they trim their margin assumptions.