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Long term growth prospect intact…

Tata Communication’s Q4FY21 revenues were weak largely due to Covid related weakness in deal conversion and tapering down of UCC traffic impacting data revenues growth. Topline came in at | 4073 crore, down 7.4% YoY, 3.5% QoQ as data revenues (forming ~86% of revenues) declined 2.2% YoY (down 0.9% QoQ). Consolidated EBITDA came in at | 1015 crore, up 16.8% YoY, down 3.1% QoQ. The consequent margin was at 24.9% (up 517 bps YoY, 15 bps QoQ). Data EBITDA margin was at 27.9%, up 500 bps YoY (down 100 bps QoQ, impacted by one-off catch-up costs). PAT came in at | 299 crore.

Growth segment witnesses decline...

Data growth segment revenues came in at | 774 crore, down 9.6% YoY, 3.9% QoQ. The company attributed the decline to slower deal conversion in the wake of business uncertainties due to Covid and tapering down of UCC traffic after the bump-up last year. However, the company indicated that demand outlook is robust in the medium/long term and the funnel has improved by 4% YoY in FY21 with large deal sale funnel up by 12%. It maintained the long term trend of double digit growth outlook in data business. Another positive change is that the company is looking to increase business disclosures and simplify the segmental definitions.

Debt reduces sharply in FY21

For FY21, net debt reduced by | 1390 crore to | 7786 crore, driven by robust FCF with margins improvement seen during the year (from 19.3% in FY20 to 24.9% in FY21). Consequent RoCEs have also gone up to 16.2% in FY21 vs. single digit historically. Net debt to EBITDA on a TTM basis was 1.8x vs. 2.8x in Q4FY20. We bake in 9.3% revenue CAGR in FY21-23E in the overall data segment, driven by likely acceleration in growth from H2FY22 onwards. We expect data margins at 27.5% in FY23 vs. 28.6% in FY21, as FY21 had certain Covid led benefits aiding margins.

Valuation & Outlook

The company’s strategic growth plan, focused approach and structural improvement in data segment margins has driven multiple re-rating. While deal closures delays could have near term weakness in revenues, demand outlook is robust in the medium/long term and recovery is likely over the next couple of quarters. Furthermore, stable performance and improved cash flow generation, deleveraging possibilities (already reduced net debt by | 1390 crore over FY21) and improved return ratios bode well for the company. Thus, we maintain BUY with a revised SoTP target price of | 1290/share (vs. 1210/share earlier), as we raise our data segment target multiple to 9x EV/EBITDA vs. 8x earlier.

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