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Un-lockdown to aid revenue growth

Tata Communications’ (TCom) Q1FY22 EBITDA (excl. real estate revenue) came in at Rs9.4bn (down 5.3% YoY), 3% below our estimates, and was impacted by provisioning for license fees on pure internet. The expectation was modest, which does not reflect the company’s ambition to drive double digit revenue growth; however, TCom continues to hold on to high margins, which is comforting. It remains confident of delivering higher revenue growth next quarter onwards. It is likely to see significant traction in H2FY22.

TCom is now aggressively pursuing small deals for quicker turnaround of revenue without diluting margins. Further, un-lockdown should help in faster closure of sale funnel and deal execution along with rise in usage-based revenue adding to growth. We have cut EPS for FY22/FY23 by ~2% each factoring license fees. We raise our target price to Rs1,750 (earlier: Rs1,671) as we increase our PE multiple to 22x (from 20x). BUY.

* Data net revenue dipped 0.6% YoY / 2.2% QoQ: We would hereon closely track net revenue (total revenue minus direct cost), which is more representative of the underlying performance for TCom (like AGR for mobile services). Data net revenue dipped 0.6% YoY (down 2.2% QoQ) to Rs22bn due to 1) India revenue dip of 3% QoQ (up 3.5% YoY) to Rs17bn from lockdown and 2) international revenue dip of 8.2% YoY (down 5.1% QoQ) to Rs14bn impacted by lower SIP revenue which was high in base. Core connectivity net revenue rose 0.5% YoY, but was down 3.8% QoQ to Rs18bn; digital services were down 4.3% YoY, but up 4.7% QoQ. Voice revenue dipped 26% YoY but grew 5.5% QoQ to Rs5.9bn.

* Data EBITDA dipped 2.4% YoY, but up 0.4% QoQ to Rs9.3bn: TCom’s margin expansion benefit is now in base, thus we can see normalisation of EBITDA, and base also had lower spend benefit on lockdown. Data EBITDA has also been impacted by provision for license fees of Rs330mn on pure internet services on change in regime, which has stay order from TDSAT. Within data, core connectivity EBITDA continues to grow at 0.3% YoY (down 2.9% QoQ) to Rs9.5bn, while digital services EBITDA dip of 30% YoY (up 34% QoQ) is uninspiring probably on lower revenue on continued investment. Incubation losses are steady at Rs944mn. Voice EBITDA dipped 61% YoY (26% QoQ) to Rs264mn.

* Company is confident of revenue growth in coming quarters: TCom remains confident of revenue growth from 1) winning smaller deals, which are bundled service with little customisation and can have quick turnaround. These deal make same margins for TCom; and 2) usage-based revenue contributes 25% of data revenue, which has significantly moderated. Unlocking is helping drive usage-based revenue, which will add to growth.

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