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Treading slowly toward complete revenue recovery

* TCOM reported a 5% EBITDA beat in Q2, adjusting for one-time benefits of Rs500mn. Revenue growth was in-line at 1.7% qoq, pointing toward a gradual recovery across businesses.

* The Digital Platforms & Services segment’s revenue grew 2.3% qoq, driven largely by cloud, hosting & security and media services. However, revenue fell 9% yoy, which can be attributed to the Collaboration portfolio (down 25% yoy) on high traffic in Q2FY21.

* Revenue prospects are improving, with a double digit rise in order book in Q2 on a qoq and yoy basis. But near-term challenges like chipset shortages & logistical issues shall impact network equipment availability negatively, resulting in execution delays.

* With the full-fledged revenue revival being pushed to Q4 from Q3, we have cut FY22-24E revenue by 3-4%. This remains the only stumbling block now, but is key to the next leg of up-move. Retain Buy with an SoTP-based Dec’22 TP of Rs1,700 (Dec’23E EBITDA).

One-time benefits boost EBITDA:

Revenue growth, at 1.7% qoq, was in line with expectations on a gradual pick-up in voice and data segments. However, revenue declined 5.2% yoy due to the moderation in collaboration traffic, coupled with a sharp decline in voice segment revenues. EBITDA grew by 7.8% qoq while margin expanded by 143bps, adjusting for one-time cost benefits of Rs500mn toward timing difference in hiring employees and the reversal of provisions for doubtful debts. Other income increased significantly from Rs134mn in Q1 to Rs364mn in Q2. There was an exceptional gain of Rs127mn stemming from the reversal of provisions due to previous staff optimization efforts and a final insurance claim. RPAT rose 44% qoq, aided by higher EBITDA and other income, and a lower ETR of 20.1%.

Outlook:

It was another quarter of gradual sequential revenue recovery accompanied by a deceleration in pace of yoy revenue decline. The quarter witnessed higher traction in deal wins, with the order book seeing a surge – both qoq and yoy. Management highlighted an uptick in orders from all international geographies, except for Europe and the UK. We continue to emphasize the need for a complete top-line rebound as it is crucial for re-rating. We expect Digital Platforms & Services revenue to recover with yoy growth from Q3FY22, supported by a lower base in terms of collaboration traffic, along with sustained performance of other subsegments. In addition, there should be a steady increase in the revenue contribution of the incubation segment and a revival in the performance of its subsidiaries that were impacted by the second Covid wave. H1FY22 FCF generation of Rs13bn and the fall in net debt to Rs78bn, after a rise in Q1FY22, were positives. Key risks: 1) any delay in scaling up the innovations segment, and continued and elevated losses; 2) poor deal conversion rate; 3) increased competitive intensity; and 4) another Covid-induced disruption.

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