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Digital business revenue growth accelerates significantly

Tata Communications’ (TCom) Q1FY24 data and digital services revenue (organic) grew 14.2% and 28% YoY, respectively, which is significant acceleration vs consensus estimates. It believes the growth is likely to sustain, and remains committed to achieving INR 280bn revenue by FY27E in data services. Though underlying data EBITDA margin has improved 60bps QoQ, reported EBITDA margin has been impacted by acquisition-related costs. We continue to like TCom’s determination to become a strong digital services player, which we believe may drive significant value creation. However, EBITDA margin can remain sub-optimal for 1-2 years due to merger of loss-making entities The Switch and Kaleyra. TCom remains committed on turnaround of these businesses, and potential synergy benefits to services offering. Maintain BUY.

Data revenue (organic) grew 14.2% YoY / 4% QoQ

Including The Switch Enterprises acquisition, data revenue rose 17.1% YoY / 6.6% QoQ to INR 39bn in Q1FY24. Data net revenue increased 4.6% QoQ / 12% YoY to INR 27bn. TCom has clarified that it had no one-off gains in revenue, and orderbook remains healthy. It is benefiting from ramp up in new products, including DIGO, Global Rapid, InstaCC and IZO variant, which is helping it accelerate revenue growth. It is also aided by significant sales force addition done in the past 12 months. Cloud adoption remains strong, which is also driving increased requirement network transformation. Core connectivity benefited from strong demand in APAC region.

Digital services revenue (organic) grew 28.1% YoY / 8.5% QoQ

Including The Switch Enterprises, revenue rose 37.5% YoY / 16.5% QoQ to INR 14bn. Net revenue improved 31.8% YoY and 15.5% QoQ to INR 6.9bn. Collaboration revenue increased 19.4% YoY / 13.5% QoQ to INR 4.4bn, which has benefited from strong traction in its CPaaS platform. Cloud, hosting and security grew 24% YoY / down 2.2% QoQ to INR 3.5bn. Next-gen connectivity was up 46.3% (+15.1% QoQ) to INR 2.2bn. Media services revenue (organic) grew 39.8% YoY (36.3% QoQ), and including The Switch merger, revenue was up 2.1x to INR 2.9bn. Incubation revenue grew 27.2% YoY (down 15.5% QoQ) to INR 1.1bn. Core connectivity net revenue was up 6.5% YoY / 1.4% QoQ to INR 20bn. Transformation business revenue rose 7.3% YoY to INR 3.4bn.

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