Tata Communications: Q4 disappoints, but scope for signals to improve

Tata Communications reported disappointing results for the January-March quarter (Q4) of financial year 2023-24 (FY24), with flat revenues and lower Eb­itda margins. The consolidated revenue grew 1 per cent quarter-on-quarter (Q-o-Q) to Rs 5,690 crore in Q4FY24. Data revenue too grew at 1 per cent Q-o-Q.
 

Adjusted for the acquisitions of Switch and Kaleyra, consolidated revenues and data revenues were flat Q-o-Q. For the last two quarters, adjusted data revenue has been flat Q-o-Q or sequentially. The acquired businesses’ revenue grew 4 per cent Q-o-Q to Rs 950 crore. Consoli­dated Ebitda declined 7 per cent Q-o-Q to Rs 1,060 crore (a 9 per cent miss), due to a loss in the data segment of acquisitions.

The Ebitda loss was Rs 82 crore in the data segments of Kaleyra and Switch. Adjusted for these two businesses, consolidated Ebitda grew 1.3 per cent Q-o-Q to Rs 1,040 crore and the margins stood at 21.9 per cent. Unadj­usted consolidated Ebitda margin declined 160bp Q-o-Q to 18.6 per cent while the long-term company guidance is 23-25 per cent margin.
 

In the October-December quarter of FY24, reductions in expenses and other cost synergies helped Kaleyra become profitable. But in Q4, Ebitda decreased to Rs 19.3 crore (from Rs 110 crore in Q3FY24) due to harmonisation of accounting principles and other integration-related charges.
 

The PAT (profit after tax) after minority interest grew 62 per cent Q-o-Q to Rs 370 crore, led by reversal of past tax losses of Tata Communications (Bermuda), which added back Rs 186 crore. The FY24 revenue grew 18 per cent Y-o-Y, while the Ebitda and Adjusted PAT declined 2 per cent and 30 per cent Y-o-Y respectively.

Data revenue, the key driver of revenue growth (82 per cent of consolidated revenue and Ebitda) increased 0.8 per cent Q-o-Q to Rs 4,660 crore. Adjusted for Switch and Kaleyra revenue, data revenue grew 0.4 per cent Q-o-Q to Rs 3,850 crore.

The data Ebitda declined 11 per cent Q-o-Q and margins stood at 18.4 per cent (down 240bp Q-o-Q). Adjusted for Switch and Kaleyra Ebitda, data Ebitda rose 0.6 per cent Q-o-Q to Rs 940 crore and adjusted margins stood at 24.4 per cent, which implies that turnarounds in Switch and Kaleyra would be critical to hitting the guidance for overall Ebitda margin of 23-25 per cent. Within the data segment, core connectivity (55 per cent contribution) grew 2.2 per cent Q-o-Q, while DPS (Digital Platforms & Services) with 45 per cent contribution declined 0.8 per cent Q-o-Q.
 

The voice segment was up 1.4 per cent Q-o-Q at Rs 430 crore but Ebitda declined 12 per cent Q-o-Q to Rs 44 crore, leading to 160bp margin contraction Q-o-Q to 10.3 per cent. Due to the acquisitions, net debt increased by Rs 3,400 crore Y-o-Y to Rs 9,100 crore in FY24. The net debt-to-Ebitda ratio increased to 2.4x (vs. 1.6x in FY23). The Operating Cash Flow declined 30 per cent Y-o-Y to Rs 2,800 crore, owing to Rs 1,100 crore blocked in working capital.

The capex increased by 40 per cent Y-o-Y to Rs 2,100 crore and investments in associates stood at Rs 1,300 crore, leading to a drop of Rs 520 crore in free cash. The RoCE (return on capital employed) ratio declined to 19 per cent in Q4FY24 vs 28 per cent in FY23 and 21 per cent in Q3FY24.
 

The management sees the following drivers for margin expansion: Lower inflation which will reduce other expenses. Turnaround in Kaleyra and Switch in near-term may add to margin. The firm has invested in people and platform, and it anticipates these investments to lead to better revenue growth through H1FY25.

 esults have led to 5.3 per cent drop in share price to Rs 1,755 on the BSE. According to Bloomberg, however, three of the seven analysts polled since Thursday are positive, one has a sell rating; two are neutral and one has not rated the stock. Their average one-year target price is Rs 1,973.