Captains Speak     

Published: September 15, 2024
Updated: September 15, 2024

Tata Communications

Focus on 20% EBIDTA margin

Tata Communications has started deployment of the first set of artificial intelligence (AI) products. Revealing this at a conference call organised to review the performance of the company during Q1 of fiscal 2025, Amir Lakshminarayanan added that AI chip giant Nvidia has already started delivering its latest chips such as GH200 AI to its Indian partners which are building AI-closed infrastructure.

Summing up the company’s performance, Mr Lakshminarayanan said that overall, data revenues grew at 20% Y-o-Y and 0.8% Q-o-Q. Core Connectivity accounts for 54% of data revenues and Digital Services accounts for the remainng 46% — very much in line with the stated ambition. Core Connectivity revenues this quarter were affected by cable cuts in the Red Sea. According to him, the funnel continues to be robust. The funnel comprises 59% of digital platforms and services and 41% of core connectivity services. This quarter, win rates have seen a healthy jump for India operations and improved marginally for the International segment.

ORDER CHEER

The order book, which has been flattish for the past few quarters, has seen very good growth this quarter, largely driven by a couple of large deal wins. That said, macro challenges continue to exist. While opportunities exist in the market, decision- making at the enterprise level is slower, resulting in longer lead times. The order book from the OTT and SPs segments continued to be lumpy in the last couple of quarters. Separately, with the CIS becoming a large part of the digital portfolio, a good part of the revenues is usage revenues and they aren’t reflected in the order book.

To sum up, the management was very encouraged by the step up in the order book, win rates and the funnel looking good. Coming to the digital portfolio performance, this quarter, revenues came in at Rs 2,144 crore, up by 51.5% Y-o-Y. Sequential revenue growth improved from a negative 0.8% in the previous quarter to 2.9% this quarter. Overall, the DPS portfolio growth has been broad-based. There is a marginal decline in CIS, primarily driven by seasonality and muted growth in the global CPaaS market. Its incubation business revenues were up 20.4% Q-o-Q. One specific highlight has been the MOVE platform, which has grown 4x over the last years driven by good traction in the MVNO, MNO and auto OEM segments. The Embedded Connectivity segment is in its early days.

Maintaining that “the company is constantly adapting and realigning to market changes and trends in line with the same,” Mr Lakshminaryanan added that it has done a reclassification of its SASE business. Earlier, SD-WAN was part of Next Gen and Secured Service Edge (SSE) was part of Cloud & Security in reporting. With SD-WAN and SSE converging under SASE and SASE being an overlay security product, it is now including SASE under Cloud & Security. This aligns with its internal structure and review processes as well. It has provided re-cast numbers for the last 8 quarters. Cloud hosting and security revenues increased by 4.2% Q-o-Q and Next Gen revenues are flat due to the aforesaid reclassification and also some customer specific issues and delays.

The management expects this to pick up from the next quarter. A significant win in this quarter is in the BFSI space. This deal is the largest-ever enterprise deal that it has won. To add some more colour on this deal size, the ACV is nearly 4x the earlier largest enterprise deal. The company is working with the customer for SOC modernisation. The SOC will be built on the pillars of maximum automation and minimum disruption. This win reflects how being a B2B specialist is a deep moat for the company and helps differentiate it from competition, Mr Lakshminarayanan said.

T20 BUSINESS

Media business revenues grew 9.2% Q-o-Q. The ICC T20 World Cup in the Americas and the Caribbean was a coming together of Tata Comm and Switch capabilities. Its global delivery integrated with Switch local operations support was a value proposition that resonated well with the team at Star and ICC and they could appreciate the combined strength that it could offer in comparison to other providers.

The management remains confident about the data growth ambitions as it continues to be driven by its expanded portfolio of capabilities as well as increasing customer relevance. Its strategy and focused execution towards increasing customer relevance and expanding to multiple buying centres within the organisation is boding well. Acquisitions and organic capabilities have made its digital fabric more relevant to enterprises today as it helps them to solve challenges with their cloud strategies, helping them to deliver better customer experience and simplifying their network transformations.

According to Mr Lakshminarayanan, the management believes that its global digital fabric is a powerful concept which enterprises, particularly in the international markets, are beginning to realise. With its digital fabric, it is addressing numerous issues that businesses are facing. The management is confident about the larger opportunity and with this strong conviction will continue to improve and derive value from investments and continuously augment its capabilities.

Going forward, as it benefits from synergies from acquisitions and begins realising operating leverage from its organic investments, it sees meeting the EBITDA margin aspiration of 23% - 25%. Its focus continues to be on creating elbow room and capacity for multi-year growth as it readies to participate in new opportunities, including AI cloud. PAT for the quarter stood at Rs 333 crore and PAT margins were at 5.9%. PAT was up marginally by 3.6% Q-o-Q and lower by 12.8% Y-o-Y. PAT benefited positively from an exceptional gain worth Rs 84 crore this year.

Based on recent developments, there is a gain of Rs 186 crore from the reversal of provision the company took in the 3rd quarter of FY24 towards interest on tax of variable licence fee based on the Supreme Court of India’s judgment. This is negated to the extent of Rs 103 crore by a provision taken for impairment pertaining to investment in assets held for sale.

ROCE came in at 17.5%, a decline of 130 bps Q-o-Q, as capital employed has increased due to nine months of the Kaleyra acquisition.