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Strategy anchored at driving faster and durable growth

Tata Communications (TCom) organised its annual investor day on 14th June 2022 where it shared certain lead indictors that helped appreciate the company’s efforts to drive revenue growth, which was constrained by externalities particularly supply of equipment. It stated the company will continue adding to funnel, and improve conversion which should aid accelerate revenue growth as supply normalises. International market is the key focus area where it sees significant opportunity to drive growth; it would continue with its efforts to cement India market position. Though data services revenue growth was disappointing in FY22, we continue to keep faith as management strategy is anchored at driving faster and durable growth. Our estimates remain unchanged with target price at Rs1,600 (20x FY24E P/E). Maintain BUY. Risks: 1) Extended chip shortage which can constrain TCOM’s revenue growth; higher than expected compression in margin and 3) higher capex outlay not having the desired results.

Though data revenue growth disappoints in FY22, lead indicators are encouraging.

Data services revenue grew at a CAGR of 5% over FY19-22 to Rs128bn, and in FY22 it was just 1.4%, which was a major disappointment in TCom’s performance. This was on the back of double-digit revenue growth guidance shared by the company in previous 2 years’ investor day presentation. However, lead indictors provide enough confidence, and we continue to maintain faith in acceleration in revenue growth for future. Key lead indicators include - 1) rising contribution from million-dollar club (MDC). TCom has added 33 new logos to MDC, and now contributes 75% of enterprise revenue, which is up 800bps. Average revenue per customer was up 33%, while churn reduced by 20%; 2) steady improvement in NPS, now at 84; 3) funnel add continues with large deal funnel growing by 13% (45% of total funnel), and win rates (conversion) have improved; and 4) more voice for TCom products which will help educate customers.

However, FY22 revenue was impacted by few factors – 1) drop in usage-based revenue including SIP; and 2) chip shortage has led to increase in equipment prices and lead time for delivery which has slowed deal decision making and execution. Easing equipment supply will be key to watch out for acceleration in revenue growth.

Thrust to grow international revenue

. International revenue was just under 51% in FY22, while rest came from India. This is unimpressive considering the global scale telecom infrastructure for TCom. It is significantly increasing efforts to drive faster revenue growth from international market. It has increased product offerings, thereby, becoming more relevant for global enterprises particularly in 1) network transformation (IZO portfolio), 2) customer experience, 3) collaboration and 4) media. It plans to significantly increase feet-on-the-street in international market and aggressively hire technical sales personnel, and broaden analyst coverage, which has increased to 18 in FY22 from just 2 in FY20. International revenue has the potential to contribute ~2/3rd of company’s revenue in the long run.

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