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Deal conversions remain lackluster

* Tata Communications (TCOM)’s 4QFY21 revenue/EBITDA missed our estimates by 5%/8% on lower-than-expected revenues in both the Data and Voice segments – due to slower deal to revenue conversion cycles.

* We have marginally revised down our revenue/EBITDA estimates for FY22/FY23E on lower earnings expectations and slower traction in revenue. Maintain Neutral.

Revenue/EBITDA miss by 5%/8% due to subdued deal conversion

* Voice segment revenue was down 17.2% QoQ to INR5.6b, while Data segment revenue was largely in-line at INR35.2b (-1% QoQ) – due to slower deal conversions and moderation in UCC traffic.

* EBITDA was also down 3% QoQ to INR10.2b (8.3% miss) due to 4.6% decline in the Data segment to INR9.8b; this was partially offset by 80% growth in the Voice segment to INR360m. Voice EBITDA growth was attributable to recovery in segmental margins to 6.4% (v/s 2.9% QoQ). Subsequently, however, the overall EBITDA margin expanded 10bp to 24.9%.

* TCOM reported exceptional gains of INR12m in 4QFY21. Gains were attributable to insurance claims worth INR242.5m. This was partially offset by exceptional loss of INR41.6m toward interest on unpaid provisions for licensee fees and INR189.4m in staff optimization costs.

* Other income stood at INR577m in 4QFY21 v/s INR82m in 3QFY21. Subsequently, TCOM’s PAT decreased 3.2% QoQ to INR3b, and adjusted PAT (for exceptional items) was down 7% QoQ to INR2.9b (13% miss).

* Capex for 4QFY21 stood at INR3.9b v/s INR3.4b in 3QFY21. Full-year FY21 capex was at INR14.2b, down 11% v/s INR16b in FY20.

* Net debt declined by INR1.9b QoQ to INR78b. The company also made a payment of INR3.8b to DoT due to a difference in the accounting of costs.

* FY21 revenue/EBITDA increased 0%/30% YoY to INR171b/INR43b; FCF increased 77% YoY (on account of lower profits in FY20).

Highlights from management commentary

* The management targets double-digit data revenue growth in the medium term, and margins are expected to remain healthy.

* The revenue conversion cycle for larger deals has further stretched to 258 days in FY21 from 203 days in FY20 (due to COVID), but this is expected to be short-lived.

* Healthy growth of 4% is seen in the deal funnel, with a better quality pipeline; the share of large deals is up 12%.

* The company paid INR3.8b to DoT toward AGR dues, for which the company had made provisions in FY20.

* Capex in FY22 is expected to be ~USD250m.

Valuation and view

* The management commentary on deal wins and demand for networking solutions have been bullish since the onset of the COVID-19 pandemic in Mar’21. However, overall revenue has been flat YoY, while EBITDA has increased 30% YoY, led by cost optimization & operational efficiency, leading to EBITDA margin improvement of 560bps.

* Incremental margin improvement may be limited; therefore, deal wins and dealto-revenue conversions would be the key monitorables to achieve double-digit earnings growth going ahead in FY22.

* We have marginally revised down our revenue/EBITDA estimates for FY22/FY23E on lower-than-expected earnings. We maintain Neutral, with TP of INR1,045 (earlier INR950), marginally improving the multiple (7x/2x assigned to Data/Voice business EBITDA) – given the company’s improving leverage and return profile.

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