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Financially fit; now eyes on revenue delivery

* In its analyst meet today, TCOM management echoed its six key platforms (growth pillars) for revenue growth while continuing to highlight the emphasis on higher wallet share mining in Top-1,000 customers (out of +5000 customers) through targeted initiatives.

* The strategy to become a holistic solutions provider is moving in the right direction. Growth will be driven by deeper client engagement, new solution launches, focus on fixed + usagebased revenue model for digital platforms and tactical inorganic opportunities.

* After meeting 2 of the 3 financial targets outlined last year, it has upped RoCE goal to 25- 30% in the medium term from 20%, with EBITDA margins in the range of 23-25%. Capex intensity would rise with incremental growth opportunities, without diluting RoCE.

* We raise FY24E EBITDA by 5% on higher revenue growth and increase target EV/EBITDA multiple for the data segment to 10x from 9.2x to reflect improved RoCE and financial fitness. Maintain Buy with a revised SoTP-based TP of Rs1,480 on Jun’23E EBITDA.

Customer-centric approach and six key platforms to accelerate growth:

The company has reiterated its growth strategy being driven by six platforms: 1) cloud, edge & security, 2) NetFoundry, 3) MOVE & IoT, 4) collaboration, 5) next generation connectivity and 6) voice. TCOM also underscored its GTM approach of ‘Deeper with Fewer’ by focusing on Top-1,000 customers via Top-300 and Next-700 program, and deepening of product profile with focus on R&D spends in new-generation technologies.

This strategy has clearly been boding well for the company as the NPS (Net Promoter Score) has jumped from 44 in FY18 to 80 in FY21. In addition, it will widen its reach in the domestic market by targeting 5,000 mid-market enterprises with a clearly defined customer-centric strategy (Exhibit 4). Management also outlined customer behavior changes toward cloud shift, enhanced focus on digital, automation and Omni-channel experience.

Upward revision in financial goals is promising:

Management raised RoCE (pre-tax) guidance to 25-30% from 20% and narrowed the EBITDA margin target range to 23-25% from 22-25%. Unless there is a sizable increase in R&D spends, we believe that EBITDA margins could potentially surprise positively due to sustained focus on cost optimization and revenue recovery with sustained double digit data segment growth.

On the balance sheet front, management believes that it is at an optimal level with net debt/EBITDA of 1.9x and does not intend to deleverage further. Capex levels of USD250mn should be increased only once additional growth opportunities are visible, while it would not dilute the RoCE profile. Currently, we are not factoring this into our estimates. Although near term challenges persist on account of Covid-19, we are expecting revenue recovery in H2FY22E.

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