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Seasonality/Deal closure delays impact performance

Tata Communication Q3FY21 revenues were weak sequentially largely due to seasonality and COVID related weakness in deal conversion impacting data revenues growth. Topline came in at | 4223 crore, flattish YoY & down 4% QoQ with data revenues (forming ~84% of the revenues) up 3.8% YoY (down 2.6% QoQ). Consolidated EBITDA came in at | 1046 crore, up 37.5% YoY with margin at 24.8% (up 678 bps YoY) but down 153 bps QoQ as Q2FY21 one-off gain of | 43 crore and there was also an impact of | 31 crore, due to timing difference of revenue & cost recognition in Voice segment. The company reported a PAT of | 309 crore, (up 4.3x YoY, down 20% QoQ) with beat owing to lower depreciation and tax rate.

Growth segment revenues slows down...

The Growth segment was up 2.6% YoY and declined 10.8% QoQ. The company attributed the muted YoY growth to slower deal conversion in wake of business uncertainties due to COVID (especially media and mobility segment), while sequential decline was due to seasonality and lower usagebased revenue due to holidays. However, the company indicated that demand outlook is robust in the medium/long term and recovery is likely over the next couple of quarters. The company continues to target network transformation deals and called out Mobility and IOT as the future growth driver in the long term.

Data margins normalise as one-offs benefits wanes off

The company stated that it had benefited by ~| 50 crore per quarter due to covid-19 costs deferral. However, some of these have normalised as business cost now released which was held back. Going into Q4FY21, more cost normalisation is likely. However, we highlight that the margins expansion YoY (~678 bps YoY) is largely aided by structural cost rationalisation (~| 100 crore quarterly), favourable mix of services, and lower losses in innovation services. We bake in 8.5% revenue CAGR in FY20- 23E in the overall data segment. We expect data margins at 27.3% in FY23 vs. 22.1% in FY20, given the structural cost rationalisation benefits and improved profitability in transformation/innovation segments.

Valuation & Outlook

The company’s strategic growth plan, focused approach and structural improvement in data segment margins has driven multiple re-rating, which is visible in the price run up in last 3 quarters. While deal closures delays could have near term weakness in revenues, demand outlook is robust in the medium/long term. With stable performance and improved cash flow generation, deleveraging possibilities (already reduced net debt by | 1204 crore over the last 3 quarters) bode well for the company. Thus, we maintain BUY with a revised SoTP target price of | 1210/share, rolling over our valuations to FY23E.

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