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Data segment yet to recover, but strong FCF yield and deleveraging continues

* TCOM’s consolidated EBITDA grew 3%, led by a 63% jump in Voice EBITDA, even as Data EBITDA, the key valuation driver, remained muted. FCF remained strong, coupled with a healthy 9% deleveraging of INR6b.

* We have marginally reduced our consolidated EBITDA, factoring in 13% CAGR over FY22-24 and reduction in losses in the Incubation segment over time, even as the Digital Platform and Services has seen modest growth in the last couple of years. FCF generation and deleveraging remains the silver lining, aiding valuation. We maintain our Neutral rating

EBITDA up 3% QoQ (in line) in the Voice business; strong FCF generation-led deleveraging continues

* Growth in consolidated revenue remained soft, inching up marginally by 1.1% QoQ to INR43.1b (2% miss), aided by a 4.6%/1.2% growth in revenue from Voice/Data. Other revenue declined by 3.7% QoQ.

* EBITDA increased by 3% QoQ to INR10.8b (2% miss), with a 50bp margin improvement to 25% on a sharp 64% QoQ jump in Voice EBITDA as Data EBITDA continued to remain flat in the last six quarters.

* Adjusted PAT (for exceptional items) increased by 39% QoQ (5% below our estimate), led by higher other income of INR2.3b, coupled with lower interest and depreciation cost.

* Healthy FCF post interest (adjusted for other income) of INR7.2b on strong EBITDA growth and lower capex down 34% QoQ to INR3.5b. This has continued to translate into a healthy deleveraging of INR6b, i.e. 9% with a net debt of INR61.3b.

* The company has reported an increase in RoCE to 29.1% in 1QFY23 from 26%/24.7% in 4QFY22/1QFY22.

Key takeaways from the management interaction

* The order book remains strong and grew by double-digits YoY, which led to a healthy funnel. The management expects the same to stay strong growing forward.

* It reiterated its margin guidance at 23-25%, despite a higher operating cost expectation in FY23.

* Capex was deferred in 1QFY23 due to supply-chain issues and delivery delays. However, capex spends will accelerate going forward.

* Monetization of 10-11 properties held for sale, with a book value of INR1.5b, should occur over the next 12 months

Valuation and view

* The management’s commentary on deal wins and funnel growth has been buoyant. However, revenue from Data (a major contributor to overall revenue) has seen muted growth in the last few quarters.

*  We expect lower revenue growth visibility for the Connectivity segment (71% revenue mix). This, coupled with its flat EBITDA margin guidance of 23-25% v/s its FY22 high of 25.3% and overall double-digit EBITDA growth, may be challenging. We factor in an improvement in margin from the curbing of losses in the Incubation business and a favorable Data mix, building in 16% EBITDA CAGR over FY22-24.

* The continuous decrease in leverage should drive healthy PAT growth. However, the management’s guidance of a 20% increase in capex to USD300-325m can curb an improvement in FCF going forward

* Deal wins and a deal-to-revenue conversion will be key to it achieving doubledigit earnings growth.

* We have marginally reduced our consolidated EBITDA estimate, factoring in 13% CAGR over FY22-24 and reduced losses in the Incubation segment over time

* We maintain our Neutral rating with a TP of INR1,100/share (assigned 7.5x/3x EBITDA to the Data/Voice business).

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