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Driving growth

TCOM hosted an analyst meet to highlight its new age capabilities and growth opportunities. Below are the key takeaways:

* The management guided at double-digit growth, but indicated that the near term order-to-revenue cycle continues to remain stretched. a. The core connectivity segment (71% of revenue) should grow in low single-digits, despite gaining market share, given the low industry growth. b. It expects the shift to platform from product in the Digital segment (21% contribution) should enable it to meet its double-digit growth targets.

* It plans to accelerate its capex to USD300m from USD200m and restrict margin improvement to invest on growth, which may put near term FCF and RoE under pressure.

* We expect 16% EBITDA CAGR over FY22-2E. A revival in growth will be key to garnering better valuation. We maintain our Neutral rating

Shifting from product to platform

TCOM has changed its strategy to a platform/solution-based company, providing Cloud, IoT, and other next gen solutions, from being a product company offering network and related products. The IZO WAN and IZO Cloud services offer bandwidth on demand and scalable Cloud enablement. The newly launched DIGO services, along with MOVE and InstaCC, offer Automations services. The strategy is to focus on deepening its relation with larger customers (million dollar club) to increase its revenue potential, which is reflected in the strong (28% CAGR over FY19-22) fixed revenue from Digital platforms, even though the usage-based business has diminished.

Core Connectivity – A key forte

It has a dominant position (32.3% share) in Core Connectivity, which contributes 75% to the Data segment. It clocked a 200bp gain in the large enterprise market in FY22, thanks to TCOM’s legacy advantage in deep network connectivity, thus making it the first choice in most public and private lease line products. However, industry growth remains modest at 2- 5%, leaving limited scope for growth. It continues to expand its network coverage in T3/T4 markets and also leverage the market opportunity in the nascent IZO SDWAN segment (an USD3b market). The latter is expected to clock 35% industry CAGR over FY21-24E as against 3% industry CAGR for the IZO Hybrid WAN segment.

Digital platform – A growth opportunity

* TCOM’s thrust to drive double-digit growth is dependent on leveraging the capabilities of its Digital platforms. The management feels it has an edge as customers prefer a Managed Services provider over a pure-play communication provider and system integrators.

* Cloud, Hosting, and Security Services are expected to benefit from the doubling of the Indian market over the next three-to-four years,

* Collaboration and Connected Solutions should benefit from its Cloud applications like DIGO, InstaCC, Move, and GlobalRapide. In Media Services, it should benefit from its deep relations with the organizers of large global sporting events.

Disciplined financials

Despite a tepid growth over FY19-22, EBITDA margin improved by 830bp, driving strong FCF generation (INR26b) in FY22, v/s a negative FCF earlier. This has allowed it to deleverage and achieve a healthy (+25%) RoE. It aims to accelerate capex to USD300m from ~USD200m at present to propel growth. This can weigh on FCF generation and RoE in the near term until growth returns to double-digits.

Valuation and view

Despite the Connectivity Business being a dominant (71%) revenue contributor, it has a low growth outlook. Growth in Digital platforms has to accelerate to achieve the management’s double-digit growth guidance. It reiterated that the order funnel is strong, but the revenue conversion cycle remains slow. We expect moderate revenue growth (10% CAGR) over FY22-24E. The management plans to restrict EBITDA margin improvement to invest in growth. However, we see an opportunity for margin improvement as scale reduces losses in the incubation business. We expect a margin improvement of 270bp, factoring in 16% EBITDA CAGR over FY22-24E. We maintain our Neutral rating with a TP of INR1,100/share (assigned an EBITDA multiple of 7.4x/2.5x to the Data/Voice business)

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