New normal deserves an upgrade
TCom’s Q1FY21 EBITDA came in at Rs10bn, 17.5% beat to our estimate, largely due to expansion in traditional services margin to 42% vs 37% in Q4FY20. The margin expansion was driven by cost optimisation and automation. TCom sees only Rs500mn (220bps) of cost to come back on normalisation (benefit on account of lower travel, marketing etc). TCom also hinted at the significant rise in sales funnel, which increases our confidence on revenue growth acceleration in coming quarters. We have raised our EBITDA estimate for TCom by 13.4% and 14.2% for FY21 and FY22 and accordingly, we increase our target price to Rs830 (from Rs569). We have also increased our EBITDA multiple to 7.5x (from 6.5x) on expansion in ROCE to 16% in FY22. We upgrade TCom to ADD (from Hold).
* Why upgrade to ADD (from Hold)?
1) TCom in the past two years has expanded margins in traditional services by 640bps (adjusted from Ind-AS 116 and Rs500mn benefit of Covid-19). The large part of margin expansion can be attributed to cost optimisation efforts and internal digital transformation (automation); and revenue growth in this segment has been low; however, it is still growing faster than industry. Though we were factoring margin expansion in our estimates, magnitude of margin expansion has surprised positively. Further, company still sees headroom for more margin expansion; 2) TCom indicated its sales funnel looks extremely strong and the company has seen highest addition in Q1FY21. It has also seen traction for its innovative products MOVE and NetFoundary and 3) efforts to transform from being a connectivity provider to platform service provider.
* Right product at the right time:
Covid-19 outbreak has pushed enterprise to embrace work-from-home culture. Enterprises are faced with new challenges of managing productivity of scattered workforce, security risk, supply chain etc. They are restructuring business model with much higher integration of digital ecosystem to address rising business complexity. TCom, with its Secure Connected Digital Experience (SCDx), is well positioned to service these enterprises in post-Covid world. It helps enterprise in faster adoption of digital, which would aid in enhancing employee productivity, providing secure connectivity and cloud though NetFoundary. SCDx provides a fully integrated, consistent, and enhanced user experience across the enterprise value chain to help businesses adapt to new market requirements.
* GDS EBITDA CAGR of 21% over FY20-22E:
We have not increased our GDS revenue estimates, as we would wait to see signs of funnel turning into orderbook and revenue, which means there is an upside risk to our estimates. However, structurally, we see GDS margins remain high, and accordingly, we now see TCom’s GDS EBITDA CAGR of 21% over FY20-22E (vs 2.3% CAGR over FY17-19).
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