Tata Communications: Kaleyra deal: Execution key for long term value creation

30 Jun 2023 , 10:46 AM

Recommendation: Reduce

Target Price: Rs. 1,518

While Kaleyra was EBITDA loss making in CY22, TCOM targets EBITDA break-even in the near term and double-digit EBITDA margin in the medium term, led by revenue and cost synergies. Analysts at IIFL Capital Services believe that the deal would go a long way towards achieving TCOM’s FY27 Rs. 280 billion data revenue target. However, analysts at IIFL Capital Services estimate that in the first year post deal consummation (FY25), there would be ~8% EPS dilution and ~150bps ROCE dilution. They estimate EPS neutrality in FY26 based on estimated 8% EBITDA margin for Kaleyra. In their view, such a sizeable overseas acquisition entails execution risks. At 11.7x, TCOM’s 1YF EV/EBITDA is close to an all-time high. Analysts at IIFL Capital Services estimate 13% EBITDA CAGR over FY23-25. They have downgraded TCOM.

Kaleyra purchase at reasonable but not cheap valuation

TCOM has entered into an all-cash deal to acquire Kaleyra for US$100mn equity value (58% premium to last closing price). It will also assume US$150mn net debt of Kaleyra. This comes to 0.7x CY22 EV/revenue and 13x EV/EBITDA (ex-ESOP and one-off costs). Kaleyra made US$15mn EBITDA loss, including ESOP costs in CY22. TCOM expects the deal to close in 6-9 months after approvals (including from Kaleyra’s shareholders).

Kaleyra adds to TCOM’s CPaaS portfolio, strengthens US footprint

Kaleyra’s geographical revenue split was 54%/13%/18% revenue from US/India/Italy in Q12023. A strong talent pool and geographical complementarity (TCOM’s CPaaS offering is strong in APAC while Kaleyra is strong in the US) are positives. IIFL’s industry interactions suggest that Kaleyra has strong telco relationships in the US. Unlike the Indian CPaaS market where telcos are aggressive, US market offers higher gross margins for scale players.

Analysts at IIFL Capital Services estimate 8% EPS dilution in FY25

In its recent analyst meet, TCOM stated its target of doubling data revenue to Rs. 280 billion between FY23 and FY27. The Kaleyra deal makes this target appear realistic while keeping leverage ratio under 2x (net debt-to-EBITDA will rise from 1.3x to 1.8x). EBITDA margins would drop below the 23-25% medium-term guidance. TCOM’s ability to address Kaleyra’s bloated cost structure holds key.