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MOSL : TATA COMMUNICATIONS: Growth in Data revenue and healthy FCF yield continues

TATA COMMUNICATIONS: Growth in Data revenue and healthy FCF yield continues

(TCOM IN, Mkt Cap USD4.2b, CMP INR1210, TP INR1100, 9% Downside, Neutral)

• Revenue/EBITDA grew 2.8%/4.9% QoQ after modest growth (of 1% each) in the last few quarters, backed by healthy Data revenue/EBITDA growth of 4.6%/3.9%. Margin improved by 50bp to 25.5%, way above the management’s guidance of 23-25%. FCF remains strong at INR6.2b, with RoCE healthy at 28%.
• We have marginally cut our consolidated EBITDA, factoring in a moderate revenue/EBITDA CAGR of 9%/10% over FY22-24. While growth in Data segment has been soft, healthy FCF generation and continued deleveraging remain the silver lining, aiding valuation. We maintain our Neutral rating.

Revenue/EBITDA grew 3%/5% QoQ (in line) led by the Data business; FCF generation healthy

• Consolidated revenue grew 2.8% QoQ to INR44.3b (in line), led by a 4.6% QoQ improvement in the Data segment (which constitutes 79% of revenue) after a soft growth in the last few quarters. Revenue from the Voice segment fell 6.6% QoQ, while the same from Others grew 1%.
• EBITDA increased by 4.9% QoQ to INR11.3b (in line) led by the Data segment EBITDA for the Data segment grew 3.9% QoQ (which constitutes 89% of total EBITDA). This increased consolidated EBITDA margin by 50bp QoQ to 25.5%.
• Adjusted PAT (adjusting for an exceptional item) fell 16% QoQ to INR4.6b (a 15% miss) due to DTA and high interest cost of INR978m v/s INR799m in 1QFY23.
• Committed capex grew 22% QoQ to INR4.2b in 2QFY23, led by a capex of INR500m in Digital Platform and Services (DPS). Cash capex for 2QFY23 stood at INR3.2m v/s INR3.3m in 1QFY23.
• FCF reduced sequentially to INR6.2b in 2Q from INR9.6b in 1QFY23, which was the highest in the last five years, yielding an annualized FCF yield of 7%. TCOM generated an FCF of INR21.8b in FY22, a yield of 6%.
• It reported a RoCE of 27.7% in 2QFY23 from 29.1%/26% in 1QFY23/FY22. Total capital employed grew INR73b in 2Q from INR67b in 1QFY23

Key takeaways from the management interaction

• The management aims to achieve double-digit revenue growth and 23-25% EBITDA margin v/s 25.2% in 1HFY23.
• TCOM plan to improve its international revenue share is in sync with its long-term goals.
• It disposed of two land parcels and targets to maximize the value of its land bank by either leasing or selling the same.
• The improvement in the funnel, order book, and win rates continue, and will rise once supply-chain constraints abate.