IGI Logo

Ambitious targets, but needs to tread carefully

TCOM’s analyst webinar provided a detailed deep-dive into the global enterprise growth opportunity, management’s growth focus, margin outlook, and investment requirements.

Key insights are:

Strong focus on growth

TCOM’s achieved its double-digit EBITDA growth target last year, despite weak low single-digit Data revenue growth, thanks to margin improvement due to an impact of COVID-19 on revenue. The management reiterated its renewed growth focus, with a medium term double-digit Data revenue growth target, on the back of three key factors: a) a shift to platform from a product-based approach for NextGen Connectivity, Collaboration, and Cloud and Hosting business; b) strong focus towards the engagement program for its top 1,000 customers and account planning; and c) positioning as a digital ecosystem enabler, with a revamped operating structure for a greater business focus. It has managed to leverage the global shift towards digital by moving towards platform-based delivery.

Products to platform approach to leverage growth opportunity in global enterprise data

Despite the weak industry growth outlook in its traditional Core Connectivity segment, with declining market size (-2% CAGR), the management’s target of double-digit Data growth stems from its focus toward new growth areas like: a) Next-Gen Connectivity, with on demand connectivity solutions, IZO platform, and integrated WAN management, where the market is expected to grow at 15% CAGR over FY20-24; b) Collaboration and Connected Solutions, which is expected to see steady industry growth of 15-25%; and c) Cloud Hosting and Security business, given the huge demand for multi-Cloud adoption, with 24% market growth over FY20-25, TCOM’s innovative IaaS/PaaS offerings, and trends of vendor consolidation towards an integrated provider of Cloud + Security + Network Services.

Targets double-digit revenue growth, with 23-25% margin; capex may go up

While near-term Data revenue growth trends remain challenging, with the impact of COVID-19 on usage-based sectors like Media and Aviation seeing weak growth and the second COVID wave taking a severe toll both internally and externally, the management is still relying on growing its new order funnel, innovative solutions, and strong market demand towards digitization and new solutions. Yet we see two key challenges. a.) Until new product categories in the Innovation segment achieve scale of over 10x from a current revenue base of a mere INR1.3b, it may continue to lag along with a weak growth outlook in its subsidiaries.

Hence, the management has kept its margin guidance at 23-25%, despite already being at 24.9% in FY21. b.) It plans to maintain leverage at current levels, despite a strong FCF, as is looking at increasing capex or exploring inorganic opportunities to front load the investment cycle in the near term, even before it sees it translating in a meaningful Data revenue growth rate. The increase in RoCE target to 25-30% in the medium term underscores the management’s consciousness towards right investments. But given its past record of high capital investment in multiple noncore areas like Neotel (South African market) and the ATM business, we see risk to FCF generation.

Key highlights from the analyst webinar

* The management displayed increased vigor and reiterated double-digit Data growth in the near term, despite weak FY21 earnings. It guided at an EBITDA margin of 23-25%, though COVID-related growth headwinds continue to linger in the near term.

* RoCE target revised upward to 25-30% from 20% earlier. The same stood at 25% in FY21 v/s 11.5% in FY20. Near term capex intensity and higher investment in organic/inorganic avenues to fuel growth.

* Leverage to remain at current levels, despite higher growth, due to the use of cash flows to fund additional capacity. The company faced headwinds during the 2HFY21 from impacted segments like Media and Aviation, which will see a slow recovery in FY22.

Valuation

* The stock has risen over 2.5x in the last one year. At our estimated EBITDA CAGR of 9.9% over FY21-23E, the stock is trading at FY23E EV/EBITDA of 7.6x, with a limited margin of safety.

* Its performance in the last couple of years has been commendable, with EBITDA growing to INR42.6b in FY21 from INR32.9b in FY20, thanks to 565bp margin improvement. But with a limited potential for margin improvement, near-term growth headwinds, and an increase in investment possibilities, earning growth and FCF generation could moderate over FY21-23E.

* We maintain our cautious stance on TCOM and would keenly watch execution of its stated strategies to drive healthy revenue/EBITDA growth with new product portfolios.

* We value TCOM at INR1,142 using SoTP valuation and assign a 7.8x/2.5x multiple to FY23E Data/Voice EBITDA. Maintain Neutral.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer