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Margins outperform; revenue growth is the missing ingredient

* TCOM posted 1.1% QoQ/5.1% yoy revenue growth in Q1FY23, largely in line with estimates. However, lower other opex led to 9% yoy growth in EBITDA, with margins at 25%. Unusually high EBITDAM in the voice business also contributed to EBITDA growth.

* Growth in digital platforms was steady at 12.3% yoy, while core connectivity grew by 3.6%. This led to 7.6% yoy growth in the data segment. Collaboration was the only segment to see a yoy decline. Cloud hosting and Media services saw strong revenue growth

* Net debt fell further to Rs61.3bn from Rs67.4bn in Q4FY22. Despite higher capex guidance for the year, capex declined 9% yoy/20% qoq. We believe that both capex and opex will see a gradual pick-up, which should support revenue recovery going ahead.

* We broadly maintain FY23-25 revenue and EBITDA estimates, given that capex and opex are likely to be back-ended. Maintain Buy with a revised TP of Rs1,210 (8x Sept’24E EBTIDA) as we roll forward valuations to Sept’24E.

* Revenue growth – the only missing ingredient: TCOM’s revenue grew by 1.1% qoq and 5.1% yoy to Rs43.1bn, in line with estimates. The data segment saw steady growth of 7.6% yoy, led by 12.6% yoy growth in the digital platform and services (0.9% qoq). Unexpectedly, voice revenue grew by 4.6% qoq, with margins expanding to 11% from 7% in Q4. We believe that some sequential INR depreciation would have also partially supported revenue growth. Other operating expenses declined 4.4% qoq (7% below estimates), leading to 3% qoq growth in EBITDA. EBITDA margins stood at 25%, above our estimate of 23.3% and at the higher end of management’s guidance. Finance costs decreased 11% qoq, thanks to the fall in net debt, as well as lower weighted average cost of debt. Depreciation also declined 8.8% qoq to Rs5.4bn. Other income remained elevated at Rs2.3bn, attributable to higher tax refunds for the second quarter in a row. ETR was lower at 22.9% vs. 38.6% in Q4FY22. These factors led to a 41% jump in RPAT qoq. FCF rose to Rs9.5bn from Rs7.5bn in Q4FY22 on account of lower capex, while net debt declined further to Rs61.3bn from Rs67.4bn

Outlook: While, the management has been highlighting improving funnel rates, deal conversions and new product launches, double digit revenue growth timelines still remain elusive. We reiterate that for any meaningful re-rating of the stock, revenue pick-up and consistency in guidance are essential. A key positive is the healthy balance sheet, which has seen a sharp improvement in the last few years. The strong balance sheet should support in tapping both organic and inorganic opportunities. We believe that both capex and opex will see an acceleration ahead, in line with the company’s guidance. FCF should also be limited in next three quarters. We have broadly maintained our revenue and EBITDA estimates for FY23-25, while the higher RPAT in FY23 is due to higher other income. Key risks: 1) increased losses in incubation services; 2) inability to close large deals; 3) continued delays in revenue recovery despite higher investments; and 4) higher competitive intensity.

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