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Business integration impacts EBITDA

* Tata Communications (TCOM) reported 1% growth QoQ in revenue (in line) and a 7% decline QoQ in EBITDA (9% miss) in 4QFY24 due to higher integration expenses. Adjusting for the acquisitions, data revenue and data EBITDA was flat QoQ.

* The management's endeavor to drive growth, including the loss-making acquisitions, has resulted in margin contraction. However, the long-term focus on margin-accretive growth remains intact. We estimate a CAGR of 14%/20% in revenue/EBITDA over FY24-26. At P/E of 22x and EV/EBITDA of 9.1x on FY26E, we see limited upside. We reiterate our Neutral rating on the stock.

EBITDA down 7% QoQ (9% miss)

* Consol. revenue grew 1% QoQ to INR56.9b (in line) in 4QFY24. Data revenue also reported slow growth of 1% QoQ.

* Consol. EBITDA declined 7% QoQ to INR10.6b (9% miss), led by a loss in the data segment of the Kaleyra and Switch businesses.

* Consol. EBITDA margin declined by 160bp QoQ to 18.6% (150bp miss).

* Adj. PAT after minority grew 62% QoQ to INR3.7b (25% miss), led by the reversal of past tax losses of Tata Communications (Bermuda), totaling INR1.86b.

* In FY24, revenue grew 18% YoY and EBITDA/adj. PAT fell 2%/30% YoY. ? TCOM has proposed a dividend of INR16.7 per share vs. INR21 in FY23.

Key takeaways from the management interaction

* Guidance intact: The management reiterates the long-term target of 23- 25% EBITDA margin, but in the short-term, margin may remain under pressure. It aims to double data revenue by FY27 at 15%-20% CAGR.

* Gradual ratio improvement: The company expects the first improvement should be in leverage, followed by improvement in ROCE and then EBITDA margins. It expects the net debt-to-EBITDA ratio to fall below 2.0x in FY25, while ROCE is expected to see further dilution for the next couple of quarters and then slowly improve.

* Robust funnel: The order book has been flat, while the funnel continues to be robust. In the order book, the enterprise part has been robust both domestically and internationally while OTT has been lumpy for the last few quarters.

* Strategy: Medium-term structural drivers for TCOM include: leadership in India market, expansion in international markets, and increase in customer relevance by portfolio expansion and new product rollouts such as AI cloud.

Valuation and view

* We estimate a CAGR of 14%/20% in revenue/EBITDA over FY24-26. We have increased our EBITDA estimates by 7% in FY26, factoring in improvement in Kaleyra and Switch margin.

* The company has set an ambitious revenue growth target of INR280b by FY27 in the digital portfolio, which would be supported by both organic and inorganic initiatives.

* Net debt jumped 60% YoY to INR90b due to inorganic acquisitions. However, TCOM’s strong FCF of ~INR20b annually would allow it to scout for growth opportunities with a healthy RoCE target of over 20%.

* At P/E of 22x and EV/EBITDA of 9.1x on FY26E, we see limited upside. Margin improvement and data revenue growth should be the key catalysts for further valuation re-rating. We maintain our Neutral rating with a revised TP of INR1,910, assigning 10x/3x EBITDA to the Data/Voice businesses.

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