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Weakness in earnings persists, deleveraging continues

Weakness in TCOM’s earnings persisted, with a 3% QoQ fall in EBITDA (9% below our estimate), on lower Data usage. However, traction in FCF generation (INR26.2b) and deleveraging of the Balance Sheet continues (INR4.5b decline in net debt to INR67.4b) for third consecutive quarter.

We have cut our FY23 EBITDA estimate by 4% to factor in 16% EBITDA CAGR over FY22-24, in anticipation of a recovery in usage-based revenue and new orders. Our estimates factor in risk from the continuation of the downward revision cycle as our expectation of double-digit earnings growth is largely dependent on the Digital platform and Services, which contribute 20% to total revenue, and has grown at 10% over the last three years. We maintain our Neutral rating.

EBITDA declines 3.4% sequentially (8.5% miss) on higher back-end expenditure; healthy FCF and flat capex drive deleveraging

Consolidated revenue grew marginally by 1.9% QoQ to INR42.6b (in line), aided by a 2.1% growth in revenue from Data and 6.8% QoQ growth in other revenue. Revenue from the Voice segment continued to decline.

EBITDA fell for the second consecutive quarter, down 3.4% QoQ to INR10.5b (8.5% miss). Consequently, EBITDA margin contracted by 140bp to 24.5% due to higher expenses, which were back-ended in nature.

Adjusted PAT (adjusted for exceptional items of INR208.9m, attributed to provisions for litigation) stood flat QoQ at INR3.9b (7% miss). This was cushioned by other income, which grew by ~14x QoQ to INR2.6b (est. INR300m), but was partly offset by a 7.6% QoQ rise in interest cost.

Capex rose ~8% QoQ and 11% YoY to INR4.3b. In FY22, the same rose by 13% without translating into growth. The management said that majority of the capex will be linked to growth going forward.

It generated a FCF of INR6.1b/INR26.2b in 4Q/FY22 (v/s INR28.4b in FY21).

Net debt continued to decline (for the third quarter in a row) to INR67.4b, a fall of INR4.5b QoQ and INR10.4b YoY, backed by strong cash flows and healthy profitability in FY22.

The Board has recommended a dividend of INR20.7 per share.

Key takeaways from the management interaction

The order book remained flat, despite a healthy deal funnel, due to slowness in decision making on account of supply-chain constraints. The management is confident of achieving double-digit growth going forward.

It reiterated its margin guidance of 23-25%. Going forward, it will be operating at the lower end of this range as it invests in growth.

Capex guidance has been enhanced to USD300-325m from USD250m in FY22. A large part of the capex is linked to growth in sub-sea cable payments and is included in its guidance figures.

Valuation and view

TCOM delivered a strong 25% EBITDA CAGR over FY19-21, led by a sharp 830bp improvement in EBITDA margin. However, revenue growth remained tepid, as growth in the Digital was dragged down by other verticals.

We see improvement levers – 1) EBITDA margin by 300-400bp and 2) over 10% from the recovery in loss-making businesses, but the management aims to invest in growth. It has guided at EBITDA margin in the 23-25% range v/s 25.3% in FY22, underscoring the limited possibility of further margin-led earnings growth.

The recent rejig in business segments and focus on driving higher Digitalization deals are expected to translate into healthy growth. The management commentary on deal wins and demand for networking solutions has been bullish since the onset of the COVID-19 pandemic. However, revenue from Data (a major contributor) has seen muted growth in the last few quarters.

We expect lower revenue growth visibility as Connectivity (71% of revenue mix) has a low growth outlook. This, coupled with its flat EBITDA margin guidance of 23-25% v/s 25.3% in FY22 and overall double-digit EBITDA growth, could be challenging. Yet we factor in a margin improvement from the curbing of losses in the Incubation business and a favorable Data mix, building in 16% EBITDA CAGR over FY22-24E.

The continuous decrease in leverage should drive healthy PAT growth. However, the management’s guidance of a 20% increase in capex from USD250m in FY22 to USD300m-325m going forward could curb any improvement in FCF.

Deal wins and a deal-to-revenue conversion will be key monitorables going forward to achieve its double-digit earnings growth.

We have revised down our FY23/FY24 core EBITDA estimate by 4%/1% to INR44.9b/INR52.9b, given the sluggish growth in the high margin Data segment.

We maintain our Neutral rating with a TP of INR1,340/share (assigned 9x/3x EBITDA to the Data/Voice business).

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