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Aim – 2x data revenue by FY27 (18% CAGR)

Tata Communications (TCom) has shared an upbeat revenue growth outlook for FY23-27E in its investor meet (on June 7, ’23). The company expects its data revenue to grow by 2x to Rs280bn by FY27 at a revenue CAGR of 18%. This will be driven by >35% growth in its digital services revenue during the same period, and its mix will rise to >50%. This is a significant acceleration in digital services revenue growth vs 19% in the past three years, and data revenue growth which was under 10%. It expects international revenue to grow faster where it has good lead indicators. Despite the rise in low margin digital services, company anticipates EBITDA margin to be stable at 23-25%, with RoCE >25%. We believe acceleration in revenue may start showing in the next 12-18months as the company reaps benefits of the rise in execution of order wins, and international business starts firing. We are yet to factor The Switch acquisition in our estimates, and our data revenue growth forecast is conservative at 12% over FY23-25E. However, we have increased our target price to Rs1,665 (from Rs1,510) as we raise our FY25E PE multiple to 22x (from 20x). Maintain BUY. Risks: 1) Lower than expected revenue growth; and 2) higher-than-expected capex.

* Inching-up expectation bar – 2x data revenue by FY27. TCom, in the past 3-4 years, has significantly improved its margins from mid-teens to 23-25%; low single digit RoCE to >25% and net debt / EBITDA to <1.5x. Company is aiming to expand its revenue growth trajectory, and has set ambition to grow data revenue from Rs140bn in FY23 to Rs280bn in FY27 at a CAGR of 18%. Core connectivity is expected to grow in mid-single digit which means digital revenue has to grow at a CAGR of >35% over the next four years (vs 19% in the past three years). This will be driven by four key factors – 1) maintaining leadership position in India; 2) growing in international markets with rise to market challenger position from being peripheral player currently; 3) growing revenue contribution of million-dollar accounts from 35% to >50%; and 4) digital and platform services revenue contribution rise from 32% to >50%.

TCom is seeing increased traction in international markets, notwithstanding its historical performance, driven by strong next-gen connectivity services and solution- based approach. It expects to benefit from the rise in foot-on-the-street with increased manpower (where it has added >1,000 employee in the past one year), rise in analyst coverage and successful execution of complex projects / solutions. TCom has seen 50% growth in new international logos in the past two years and its alliance with SIs will also aid. It has also seen 50% growth in digital platform and services sales funnel in the past two years in international markets.

TCom expects margins to remain stable at 23-25% despite rise in contribution from low margin digital services, and RoCEs to remain above 25%. It will not shy away from investing but expects net debt to EBITDA to be lower than 2x. Near-term capex is expected at US$300mn, but it will rise with growth in revenue. The company believes margins in the near term may fall below 23% with the acquisition of The Switch, which is a loss-making business.

* Good lead indicators. Though underlying data revenue growth in the past two years was much below expectations, TCom has shared some exciting lead indicators which provide comfort to achieve / accelerate revenue growth over the next few years. 1) TCom has seen large deal count grow by 84%; 2) product penetration ration (PPR) has increased by 10%; 3) acceleration of million-dollar customer addition which has grown by 33 to reach a total 233 and has added >10 customers in US$5-mn club. It has significantly changed its product portfolio, but was still able to maintain its NPS score which is in top quartile.

TCom is undergoing the phase of evolution where it is transforming from product- to-platform based services, evolution from platform to digital fabric and increasing customer relevance quotient. Its digital fabrics include connectivity services with extended portfolio offering under IZO services, platforms such as MOVE, IoT, private networks, etc that are wrapped with zero trust security and enabled by analytics and reporting.

* Connected infrastructure market size is huge. TCom remains excited about connected infrastructure services, which include IZO Internet WAN, IZO Multi-cloud connect, Managed Wi-Fi and LAN; and SD WAN + Network security. Its offerings in these services have seen an increased off-take while drop in legacy services is hitting incumbents. This is a large market with revenue size of >US$115bn, growing at 1.4-17%. The company is benefiting from full spectrum of product and services, single policy ownership and transparency.

* The Switch has a huge opportunity to unlock. TCom has completed the acquisition of The Switch for US$59mn for 100% stake. This will help TCom’s media business, which has revenue base of Rs5.8bn, and has grown at a CAGR of 33% in the past three years. It is largely global-to-global video transport with market share of 25%. The Switch acquisition will help in growing in regional market, US is its largest market, with market size of US$800mn (global) and US$250mn in the US. The opportunity size in video production is US$1bn. The Switch is strong incumbent with production penetration in a large number of stadiums. TCom’s global reach will complement the regional strength of The Switch.

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