Growth, margin pressures for Tata Communications

Will take a few quarters to recoup revenue loss from customer churn, loss of business from Tata Teleservices

The Tata Communications stock shed nearly five per cent after it suffered a loss due to one-offs as well as a weak operating performance.

The company has reported a net loss of Rs 250 crore, largely due to a Rs 185-crore additional provision it made as part of a contractual obligation to Tata Sons. This is its remaining share (a total of Rs 1,058 crore) of the NTT DoCoMo arbitration award for which it had made a provision of Rs 872 crore in FY17. This, coupled with additional provisions for contingencies related to legal matters of Rs 15.4 crore, added to about Rs 200 crore of one-time provisions in the quarter.

The worry, however, is on the operational side. 

Consolidated revenues were down 6.5 per cent year-on-year (y-o-y) at Rs 4,218 crore on a muted performance of its two key segments — voice and data. The reported number was four per cent below the Street’s estimates. The company attributed its weak consolidated performance to a continuous fall in voice revenues as well as in the transformation services subsidiary on lower revenues from Tata Teleservices. 

The management indicated it would take at least two-three quarters to replace the revenue loss after the sale of Tata Teleservices’ consumer mobile services business to Bharti Airtel. 

Rumit Dugar of BOB Capital Markets said while the voice and payments business performed relatively better, the weakness in the data (traditional) business was worrying. The data segment accounts for 60 per cent of the company’s overall revenue and nearly 83 per cent of its operating profit.

In the near term, there are two news triggers for the stock. First, a demerger of surplus land assets, which analysts are valuing at Rs 106 a share. An announcement on this is expected shortly. Second, the progress on a deal, which will translate into buying out the enterprise part of Tata Teleservices by Tata Communications. Tata Communications’ management has indicated that an integration of the enterprise business would help cross-sell services.

The more important medium-term trigger will be the performance of the data segment, which includes the traditional and growth/innovation segments. 

The traditional business (70 per cent of data business) has been impacted by customer churn, while higher investments in the growth segment have impacted operating profit margins (down 320 basis points or bps y-o-y; 40 bps on a sequential basis to 16.6 per cent).

Margins in the data segment are expected to improve as the growth segment hits operating profit break-even by the end of FY18. As the company scales up its services and acquires new clients, it expects the traditional business to achieve operating profit margins of 29-30 per cent, from 27.6 per cent. 

The Street will keep an eye on both the company’s ability to improve the revenue growth of its traditional data business and the margin-accretive performance of the smaller but higher growth innovation segment.